News Brief No. 02/103

News Brief: IMF Completes First Review of Stand-By Arrangement with Guatemala

October 3, 2002

The Executive Board of the International Monetary Fund (IMF) has completed the first review of Guatemala's performance under the program supported by a Stand-By Arrangement approved on April 1, 2002 (see Press Release No. 02/16). Completion of the review allows Guatemala to draw up to the equivalent of SDR 63.03 million (about US$ 83 million). So far Guatemala has not made any drawings under the arrangement.

In commenting the Executive Board's decision, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chair, said:

"The authorities are to be commended for adopting a medium-term strategy to promote faster real economic growth, improve social conditions, and reduce poverty. It will be crucial to implement the strategy on a sustained basis as it seeks to tackle deep-rooted problems in the economy. It will be particularly important to raise tax revenues to the announced target of 12 percent of GDP by 2004 to support further increases in social spending and to provide sufficient counterpart funds for externally financed capital expenditure.

"Performance under the Fund-supported program has been good and the review under the Stand-By Arrangement has been completed. The direction of fiscal policy has changed with a renewed emphasis on increasing the tax effort, to make room for social spending, and bring the overall deficit to a sustainable level. Expenditure policy has been kept tight, and there is some scope to allow for additional social spending if external financing on terms consistent with medium-term debt sustainability turns out higher than expected.

"Inflation has been higher than expected and this poses a threat to external competitiveness, particularly if it gives rise to wage pressures. The central bank has begun to tighten credit with a view to bringing inflation back on track. The flexible exchange regime is suitable for Guatemala, as it helps the economy adjust to shifts in external conditions. It is also important to support external competitiveness with a prudent minimum wage policy.

"The approval of four financial sector laws in April 2002 is an important step forward, as it greatly enhances the authorities' ability to improve financial supervision. Nonetheless, it will be crucial to follow through by adopting more effective regulations and carrying out closer supervision.

"The authorities are also making progress toward improving governance and transparency. The law that strengthens the office of the comptroller general has been approved, and legislation to strengthen public procurement has been submitted to the assembly. It will be important to continue to work closely with the World Bank and the Fund's Fiscal Affairs Department to improve expenditure management and reporting," Mr. Sugisaki said.