According to the International Monetary Fund's (IMF) Financial Sector Assessment Program of 2000, the Guatemalan authorities - with assistance from the World Bank, the IMF and the Inter-American Development Bank - embarked on a financial sector reform program aimed at comprehensively addressing problems in Guatemala's financial sector. Since then, newly enacted laws have given Guatemala a state of the art financial sector legal framework, including the 2002 Central Bank Law that establishes the maintenance of price stability as the fundamental objective of the central bank. The law also redefines the instruments of monetary policy and addresses most of the shortcomings of previous legislation, but, even though the law increased its autonomy, the Bank of Guatemala is still not fully independent of the government. Nonetheless, the IMF's 2006 Article IV Consultation commended the Guatemalan authorities for having increased transparency in monetary policy. Still, the publicly available information is insufficient to rate Guatemala's compliance with the IMF's Monetary Policy Transparency standard.

General Overview

A 2004 report by the World Bank stated that the Guatemalan authorities had embarked on a comprehensive financial sector reform program aimed at addressing the sector's problems. The program involved financial sector regulatory reforms aimed at improving the monetary policy legal framework, and included the enactment of the 2002 Central Bank Law. According to the 2004 World Bank report, this legislation redefines the instruments of monetary policy, which include open market operations and exchange operations. The law also defines the main objective of the central bank - to achieve and maintain price stability - and addresses most of the shortcomings of previous legislation. In addition, a new Monetary Law was enacted that upgraded the policy framework to facilitate foreign exchange convertibility, capital mobility, and domestic intermediation.

Still, according to IMF's 2006 Report on the Observance of Standards and Codes (ROSC) for Fiscal Transparency, the Central Bank of Guatemala (CBG) is not fully independent from the government, even though provisions of the Central Bank Law increased its autonomy. Although the CBG has not financed government's operations, it has been involved in other quasi-fiscal activities and has not paid interest on government deposits. The Monetary Board is in charge of determining the monetary, exchange, and credit policy, while the CBG has technical autonomy with regard to implementation.

The Public Information Notice for the IMF's 2006 Article IV consultations states that "the central bank has made important progress preparing for the implementation of an inflation targeting regime, reducing discretion, and increasing transparency in the conduct of monetary policy" (p.1). In the prior year's Article IV consultations (2005), the IMF had noted that the monetary framework in Guatemala was strained by the "weakening of the U.S. dollar, strong inflows of private capital and remittances, and the cost-push from higher oil prices." As a result, according to the 2005 report, the authorities "chose a policy mix of moderate monetary tightening, tight fiscal policy, and central bank intervention in the foreign exchange market to prevent excessive appreciation of the quetzal" (p. 18). This, they explained, was done mainly to avoid short-term volatility.

According to the 2006 preliminary overview for the Latin American economies published by the United Nations Commission for Latin America and the Caribbean (ECLAC) "the authorities raised the monetary- policy interest rate by 0.25 percentage points three times during the year, such that in November the rate stood at 5%" in order to reduce inflationary pressures and achieve the inflation target, for which a range of 5%-7% was set for 2006 (p. 95)

The Principles

Clarity of roles, responsibilities and objectives of central banks.

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The World Bank's 2004 report does not directly address Guatemala's compliance with this principle. However, the report did state that the Central Bank Law of 2002 redefines the instruments of monetary policy (e.g., open market and exchange operations) in order to establish the main objective of the central bank - to achieve and maintain price stability. The report further noted that the Monetary Board (MB) must determine the monetary, credit, and exchange rate policy of Guatemala, but that the CBG retains the capacity to implement such policies. The Central Bank Law further establishes that the President of the Republic nominates candidates for the positions of President and Vice President of the CBG. Appointees serve for a period of four years, and their straddle two successive government terms. The IMF's 2006 ROSC notes that the determination of monetary, exchange, and credit policy, and the definition of policy objectives are the responsibility of the Monetary Board. The CBG is technically autonomous to execute this policy through an execution committee comprised of authorities from the CBG who have been appointed by the Monetary Board at the proposal of its chair. The board chairperson is appointed by the President of the Republic to serve a four-year term and reports to congress twice a year. The bank is a decentralized, autonomous institution that prepares and approves its own budget.

The IMF's 2006 ROSC noted that, according to the Guatemalan Constitution, the CBG is not allowed to finance the government. However, the IMF staff cautioned that the bank had been forced to bail out some domestic banks without government compensation. This violates the terms of Guatemalan law, according to the IMF: "The law establishes that the government must cover the CBG losses, [but] in practice it has only done so to a minor extent" (p. 19). The World Bank (2004) noted that, in order to strengthen the CBG's capacity to implement monetary policy, the Central Bank law also establishes that the State will guarantee the maintenance of the central bank's capital over time.

Open process for formulating and reporting monetary policy decisions.

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The 2004 World Bank report noted that the 2002 Central Bank Law highlights the importance of complying with internationally accepted norms and principles of transparency. It further stipulates the obligation to submit to external audits; the semi-annual appearance of the President of the CBG before Congress to give account of the results of the monetary, exchange rate, and credit policies; and the periodic publication of the CBG's activities, general balance and financial statements, as well as summaries of the debates of the Monetary Board with respect to the determination of monetary, exchange rate, and credit policies. The CBG website discloses the specific functions of the Monetary Board. However, the report does not directly address Guatemala's compliance with this principle.

Public availability of information on monetary policy.

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The IMF's 2005 ROSC on Data Quality in Guatemala reported that "the legal framework for statistical activity in Guatemala is broadly adequate, and institutions display a commitment to disseminate macroeconomic statistics, largely through the Internet" (p. 4). However, the report does not directly address Guatemala's compliance with this principle.

The 2004 World Bank report notes that he 2002 Central Bank Law stipulates the importance compliance of CBG's financial statements with internationally accepted norms and principles concerning transparency; the need to submit to external auditors; the appearance of the President of the CBG before Congress twice a year to give account of the results of the monetary, exchange rate, and credit policies; and the publication of the CBG's activities, general balance and financial statements, as well as summaries of the debates of the Monetary Board with respect to the determination of monetary, exchange rate and credit policies.

A March 2007 inflation report by the CBG noted that, in 2007, the board has facilitated access to their monthly conclusions. The board remains focused on maintaining interest-rate stability (receiving support in this regard from fiscal policy) and on normalizing the demand for currency. The Board asserted that its monetary policy will help to consolidate macroeconomic stability gains and will create a trust-worthy environment that will facilitate decision-making in the areas of consumption, investment, and saving, thus achieving greater economic growth and development.

Accountability and assurances of integrity by the central bank.

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The 2004 World Bank report noted that the Central Bank Law of 2002 highlights the importance of compliance with internationally accepted norms and principles concerning transparency, and stipulates the central bank's obligation to submit to external audits. However, the report does not directly address Guatemala's compliance with this principle.