Press Release No. 02/16

Press Release: IMF Approves One-Year Stand -By Credit for Guatemala

April 1, 2002

The International Monetary Fund (IMF) today approved a one-year stand-by credit for Guatemala for SDR 84 million (about US$105 million) to support the government's economic program for 2002. The government of Guatemala will treat the stand-by credit as precautionary and does not intend to make any drawings.

In commenting on the Executive Board discussion, Eduardo Aninat, Deputy Managing Director and Acting Chairman, said:

"Guatemala's economic program aims at strengthening macroeconomic policies, improving the health of the banking system, and enhancing social conditions as specified under the 1996 Peace Accords. The improvement of the fiscal position and structural measures included in the program will be crucial elements to restoring macroeconomic stability and placing the economy on a sustainable higher growth path.

"The program for 2002 is framed around a further recovery in economic activity helped by the gradual improvement of the international environment, and a reduction in inflation to a 4-6 percent range. Net international reserves would be maintained at a relatively comfortable level, providing adequate cover for imports and short-term debt.

"The program targets a narrowing of the fiscal deficit by half to 1½ percent of GDP in 2002 through revenue-raising measures and improved expenditure control. Revenue would rise as a result of tax measures adopted in 2001-02—including the increase in the VAT rate—and the authorities' actions to strengthen tax administration and enforcement. Expenditure control will be enhanced with the full implementation of the presidential decree of February 2002 that guides a strict implementation of the budget. At the same time, to mitigate the impact of austerity on the government's Poverty Reduction Strategy the authorities will put in place the infrastructure needed to protect social expenditure, and avoid waste and duplication in social funds.

"Looking ahead, the authorities are urged to avoid further delays in bringing the tax ratio to the target of 12 percent of GDP under the 1996 Peace Accords. Further delays in reaching this target would make it difficult to improve the delivery of social services and raise Guatemala's low social indicators.

"The program contemplates the continuation of the tight stance of monetary policy to achieve the objectives on inflation and international reserves. The authorities will continue to implement a flexible exchange rate policy, which allows the exchange rate to reflect market conditions.

"The authorities are undertaking measures to address the weaknesses of the financial system. They are liquidating insolvent banks and financial companies, and in January 2002 Congress enacted a new banking law improving the prudential regulation framework and setting a new system for bank resolution. Guatemala has recently approved an anti-money laundering law. Furthermore, new laws on the central bank, banking supervision, and the monetary framework are expected to be approved in the near term.

"The authorities are taking steps to improve governance and transparency. Building on this, the program includes the approval of legislation on probity, the role of the comptroller general, and public sector procurement," Mr. Aninat said.

ANNEX

Program Summary

With the signing of the UN-sponsored Peace Accords of 1996, the Guatemalan authorities designed an ambitious program to mobilize domestic resources and external aid to address deep-rooted social problems, improve human capital, and raise productivity so that the economy could achieve the sustainable higher growth path required to reduce poverty. Uneven macroeconomic performance, low implementation capacity, inadequate tax collection, and lower-than-expected aid disbursements have hindered progress, and the tax ratio, at 9.7 percent of GDP in 2001, remained lower than the 12 percent projected in the Peace Accords for 2000.

The new administration, which took office in January 2000, sought to strengthen macroeconomic stability and to implement the Peace Accords, but an initial tightening of fiscal spending proved to be temporary, and with the adverse terms of trade and global slowdown in 2001, macroeconomic conditions have weakened again. A new effort is now under way, aimed at reducing the fiscal deficit and restructuring the financial system, while sustaining the higher outlays for social needs and basic infrastructure, as called for by the Peace Accords.

The authorities' program, which the stand-by credit supports, assumes an acceleration of real GDP growth to 2 ¼ percent in 2002 from 1 ¾ percent in 2001, and a reduction in inflation to the 4-6 percent range, from an estimated 9 percent in 2001. The program also envisages a decline in net international reserves to about 145 percent of short-term debt on a remaining maturity base at end-2002 from about 175 percent at end-2001.

To these ends, the fiscal program stipulates that the deficit of the combined public sector would be halved to 1½ percent of GDP in 2002, with a narrowing of the central government deficit to 1 ¼ percent of GDP, from 2 ¾ percent in 2001. This is to be achieved on the strength of revenue measures introduced in 2001 and 2002, and expenditure restraint, which includes a cut in central government outlays by 1 percent of GDP while maintaining social expenditure at about 5 percent of GDP. The government will also strengthen targeting and resource allocation in social areas. Monetary policy will be kept as tight as needed to achieve the inflation objective of the program.

In the structural area, the program seeks the approval of new laws affecting the central bank, banking supervision, and the monetary framework by mid-year 2002. New laws on probity, the role of the comptroller general, and government procurement will be presented to Congress during the program period.

Guatemala joined the IMF on December 28, 1945, and its current quota is SDR 210.2 million (about US$262 million); it has no outstanding use of IMF credit.