Guatemalan Tax Reforms Praised By IMF

by Mike Godfrey, Tax-News.com, Washington

21 August 2009

The International Monetary Fund (IMF) has issued comments following the conclusion of a staff mission to Guatemala earlier this month, to review the 18-month SDR (Special Drawing Rights) 630.6m Stand-By Arrangement for Guatemala agreed in April.

Speaking in Guatemala City, Alejandro Lopez-Mejia, chief of the IMF mission to Guatemala, explained that:

“An International Monetary Fund staff mission visited Guatemala on August 3-14, 2009 to conduct the first review of the Stand-By Arrangement approved last April. The mission met with President Alvaro Colom; Minister of Finance Juan Alberto Fuentes Knight; Central Bank President María Antonieta de Bonilla; Superintendent of Banks Edgar Barquín; other members of the economic cabinet; and representatives of the private sector."

He went on to observe:

“The global financial crisis has had a negative impact on Guatemala and the region. Output growth is projected at around 0.4% in 2009, with some downside risks. The fall in exports, tourism receipts, and remittances has been more than offset by the decrease in imports. As a result, the external current account deficit is projected at 1.6% of GDP in 2009, significantly below the deficit of 4.8% observed in 2008."

“The authorities have adequately balanced the benefits of adopting a countercyclical fiscal policy with the importance of maintaining public debt at sustainable levels. Tax revenue decreased due to the economic slowdown and the fall in imports, and public capital spending would increase to avoid a more severe economic slowdown. As a result, the fiscal deficit of the central government could reach 3.4% of GDP in 2009 and 3.0% of GDP in 2010. In turn, the deficit of the consolidated public sector would reach 3% of GDP in 2009, and 2.6% of GDP in 2010. To ensure that public debt is on a sustainable path, the authorities are strengthening their efforts to increase the tax base. These efforts include the approval of the tax reform, currently being discussed in Congress."

The tax reform package in question proposes a reduction of the corporate income tax rate to 25%.

At the time that the Stand-By Arrangement was granted, the Guatemalan authorities announced their intention to treat the arrangement as precautionary, meaning that they do not intend to draw on the Fund’s resources unless the need arises, and Mr Lopez-Mejia revealed that this was reiterated during the IMF visit earlier this month.

Earlier this year, the country was also praised by the World Trade Organization (WTO) for its continuing commitment to trade liberalization, and for maintaining macroeconomic stability. In its Trade Policy Review, published in February, the WTO stated:

"Since its last review in 2002, Guatemala has continued to place trade liberalization at the core of its development strategy, taking measures such as the streamlining of customs procedures, lowering tariffs, and adopting new government procurement and intellectual property rights legislation; these measures have helped expand trade and investment ..."

"Economic expansion needs to be sustained and increased in order to achieve the improvements in living standards Guatemala seeks," the WTO review continued, "and this in turn means keeping up the ongoing efforts designed to achieve greater efficiency in the domestic market, including stronger competition policies, as well as the regulatory framework, in sectors such as telecommunications, financial services and maritime transport."

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