IMF Executive Board Concludes 2010 Article IV Consultation with El Salvador

Public Information Notice (PIN) No. 10/134
September 23, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 15, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with El Salvador.1


The Salvadoran economy was severely affected in 2009 by the global economic slowdown. International trade flows, remittances, and private capital flows declined, taking a heavy toll on domestic economic activity and tax collections. Economic activity declined by 3.5 percent in 2009, and inflation was zero. As a result, tax revenue declined sharply, and the non-financial public sector deficit widened to 5.5 percent of gross domestic product (GDP). Bank deposits continued to increase despite the global crisis and election-related uncertainty. Asset quality deteriorated and bank profitability declined as a result of the economic downturn, but the financial system weathered the shock well.

Economic recovery is underway. Exports, imports, and remittances are all increasing, and economic activity has been growing since early this year. Economic growth is expected to reach 1 percent in 2010, and inflation is forecasted to remain low at around 1.5 percent. The current account deficit is expected to widen modestly to 2.75 percent of GDP from

1.75 percent of GDP in 2009, as domestic demand recovers. Tax revenue is rising and the fiscal deficit is narrowing. Most bank indicators have improved in 2010, as deposits continue to rise, profitability is recovering, non-performing loans have leveled off, and liquidity and capital ratios remain well above their pre-crisis levels. In this light, the authorities are treating their 36-month Stand-By Arrangement as precautionary.2

Fiscal policy has focused on mitigating the impact of the economic downturn on the most vulnerable, within the context of maintaining a sustainable medium-term debt path. Savings from reform of electricity, transportation, and water subsidies have been redirected toward the authorities’ anti-crisis plan, which entails spending of about 1 percent of GDP per year to improve social conditions and poverty alleviation. Tax revenue has increased, owing to the effects of the December tax package and the economic recovery, while spending has remained contained. The non-financial public sector deficit is expected to end the year at 4.75 percent of GDP, and narrow further in the medium term as fiscal consolidation efforts and the economic recovery take hold.

As required by IMF procedures for cases of exceptional access, an Ex Post Evaluation (EPE) of El Salvador’s experience with the exceptional access Stand-By Arrangement approved in January 2009 was also reviewed by the Executive Board. The EPE focused on program objectives and design, as well as key lessons from the experience. The report found that the Stand-By Arrangement, which the authorities treated as precautionary, contributed to preventing a crisis at the time of political transition, while acknowledging the program quickly went off track due to the global crisis. Lessons learned include that large precautionary financing packages, where appropriate, can help to prevent crises; and that an approach that includes the candidates’ public endorsement of the program’s main objectives can help maintain confidence around the time of elections.

Executive Board Assessment

Executive Directors commended the authorities for their economic strategy and good performance under the Stand-By Program. Directors noted that El Salvador’s economy is gradually recovering after having been severely affected by the global crisis and that the medium-term outlook is also generally favorable. Further strengthening the economy’s growth prospects and reducing poverty will depend on a durable fiscal consolidation effort and improvements in the investment climate through continued commitment to macroeconomic and financial stability. Timely implementation of structural reforms will also be important.

Directors supported the authorities’ strategy of gradually consolidating the public finances as the economic recovery takes hold, while striking a reasonable balance between starting fiscal consolidation and supporting the recovery, while maintaining adequate social and public investment spending. Undertaking determined revenue-raising measures, including strengthening tax administration, and accelerating the reform of energy subsidies will be consistent with these objectives.

Directors emphasized the need to place debt-to-GDP ratio on a firm downward path and stressed the importance of the timely enactment of a fiscal pact and continued expenditure restraint. They welcomed the authorities’ efforts to develop a medium-term expenditure framework and encouraged them to strengthen debt management practices.

Directors noted that dollarization has served the economy well and helped maintain macroeconomic stability. They also noted staff’s assessment that the real effective exchange rate is broadly in line with fundamentals and stressed that it is important to take measures to boost competitiveness.

Directors were encouraged that the Salvadoran banking system is liquid and well-capitalized but noted that further reforms aimed at enhancing its stability will be critical to strengthen its resilience. They called for swift approval of the Financial Sector Supervision and Regulation Law and supported the plans to bolster the corporate governance of banks and to upgrade the bank resolution framework. Directors encouraged the authorities to limit the fiscal risks involved in increasing the role of public banks in the provision of credit.

Directors welcomed the opportunity to review El Salvador's experience with the 2009 exceptional access Stand-By Arrangement. They supported the key messages of the ex post evaluation report that the Arrangement contributed to reducing uncertainty during the political transition and that access to sizable external financing and the endorsement of program objectives by the leading presidential candidates, helped maintain depositors’ confidence and signal policy continuity.

El Salvador: Selected Economic and Financial Indicators

  2006 2007 2008 2009 2010

Income and Prices (change in percent)


Real GDP

4.2 4.3 2.4 -3.5 1.0

Consumer prices (end of period)

4.9 4.9 5.5 0.0 1.5

GDP deflator

4.5 4.2 5.9 -1.0 2.3

External Sector (change in percent)


Exports of goods and services, volume

5.4 6.9 5.5 -16.4 7.2

Imports of goods and services, volume

9.4 8.4 4.7 -23.3 8.9

Terms of trade

-0.9 -5.7 -10.2 11.8 -2.1

Real effective exchange rate (+ is appreciation)

0.4 -0.5 0.5 1.6
(Percent of GDP, unless otherwise stated)

Money and Credit


Credit to the private sector

42.8 42.8 41.3 41.3 39.6

Broad money

43.6 47.1 43.9 47.0 46.4

Interest rate (time deposits, percent)

4.4 4.7 4.2 4.5

External Sector


Current account balance

-4.2 -6.0 -7.6 -1.8 -2.8

Trade balance

-18.8 -20.1 -19.9 -13.5 -15.1

Exports (f.o.b. including maquila)

20.0 19.8 20.9 18.3 19.6

Imports (f.o.b. including maquila)

-38.9 -40.0 -40.7 -31.8 -34.7

Services and income (net)

-3.9 -4.3 -5.1 -5.2 -5.1

Transfers (net)

18.5 18.4 17.3 16.9 17.5

Foreign direct investment

1.4 6.9 3.3 2.7 1.7

Nonfinancial Public Sector


Overall balance

-2.9 -1.9 -3.1 -5.6 -4.8

Primary balance

-0.5 0.5 -0.7 -3.0 -2.4

Gross Public Debt 1/

41.7 39.1 41.2 49.5 51.2

Of which: external public debt 1/

27.3 24.3 23.8 26.3 27.0

Gross Nonfinancial Public Sector Debt

39.4 38.8 39.7 48.5 50.0

External public debt service 1/


(percent of exports of goods and services)

15.6 12.3 9.6 11.7 11.0

Domestic Saving and Investment


Gross domestic investment

17.0 15.9 14.9 13.1 12.8

Gross domestic saving

12.8 9.9 7.3 11.3 10.0

Net Foreign Assets of the Financial System


Millions of U.S. dollars

1,398 2,134 2,035 2,857 2,846

Percent of deposits

16.8 22.5 21.7 28.7 29.0

Sources: Central Reserve Bank of El Salvador; Ministry of Finance; and IMF staff estimates.

1/ Includes gross debt of the nonfinancial public sector and external debt of the central bank.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

2 The Stand-By Arrangement, with total access of SDR513.9 million (about US$777.5 million) was approved on March 17, 2010 (see Press Release No. 10/95)


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