IMF Executive Board Concludes 2013 Article IV Consultation with El Salvador

Public Information Notice (PIN) No. 13/59
May 22, 2013

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 May 20, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with El Salvador.1


The economy recovered slowly from the 2008-09 global financial crisis. Output growth was sluggish in 2010-12, owing to low rates of private investment, declining competitiveness, and weather-related shocks. Inflation remained low, firmly anchored by the fully-dollarized regime. Despite weak economic activity, the external current account deficit widened to 5.25 percent of Gross Domestic Product (GDP) in 2012, partly due to lower export prices. This deficit exceeded the underlying capital account surplus. The foreign reserve position as of end-2012 may not be sufficient to absorb large adverse shocks.

The overall fiscal deficit in 2012 remained close to 4 percent of GDP, broadly the same level as in 2010-11. The revenue gain from income tax measures taken early in 2012 and strict control over current expenditures were offset by higher public investment and spending on security, health, and other social projects. Generalized subsidies and pension payments continued to place a burden on the public finances. The government’s financing needs were large, amounting to nearly 8 percent of GDP in 2012. The stock of public sector debt continued to grow, reaching 54.25 percent of GDP at end-2012.

The banking system appears well capitalized and liquid. At end-2012, the average capital adequacy ratio was 17 percent, while overdue loans declined to under 3 percent of total loans, with provisioning fully covering these loans. During 2012, total bank deposits increased by just 2.5 percent, while credit to the private sector grew by 4 percent.

El Salvador faces presidential elections in early 2014 and congressional elections one year later. The long electoral period may reduce the scope for corrective fiscal policies. Output growth would remain subdued as investment would remain low due to long-standing structural weaknesses. The overall fiscal deficit will likely stay at 4 percent of GDP in 2013 and beyond, increasing the public debt further, keeping government’s financing needs high, and elevating external vulnerabilities.

Executive Board Assessment

Directors noted that, while El Salvador enjoys low inflation and a resilient financial system, output growth is weak, and vulnerabilities from the fiscal deficit and debt are high. They urged the authorities to build a broad consensus on a short- and medium-term strategy to ensure fiscal and debt sustainability and bolster the economy’s resilience and growth potential.

Directors concurred that the short-term priority should be to maintain macroeconomic stability and investor confidence during the electoral period. They encouraged the authorities to exercise restraint on public sector wages and poorly-targeted subsidies, and broaden the scope of envisaged revenue measures. Over the medium term, a gradual reduction in the public debt ratio to pre-2009 levels by the end of the decade should anchor El Salvador’s macroeconomic strategy. This would strike an adequate balance between restoring fiscal buffers and supporting priority infrastructure and social spending. Directors emphasized that fiscal consolidation should encompass revenue and expenditure, including improving the targeting of subsidies, lowering the earmarking of revenues, reducing tax expenditure and evasion, and increasing the rate of the value-added tax. Directors also stressed the need for pension reforms to ensure sustainability and reduce inequalities in the system.

Directors noted that a temporary increase in banks’ liquidity buffers would help safeguard financial stability during the election cycle. They welcomed the authorities’ plans to make progress in implementing risk-based and cross-border consolidated bank supervision. They stressed the importance of adopting the outstanding recommendations of the 2010 Financial Sector Assessment Program (FSAP) Update, including activating the newly-created lender-of-last-resort facility, facilitating bank resolution, and raising the reserves of the deposit insurance fund. A gradual implementation of key Basel III standards would also be important.

Directors emphasized that a sustained increase in investment is necessary to raise El Salvador’s potential growth. They saw broad consensus on a medium-term strategy aimed at bolstering competitiveness and improving the business climate as critical. In this regard, they supported the authorities’ initiatives to promote private investment in key infrastructure areas, set up an effective framework for public-private partnerships, and reduce red tape.

El Salvador: Selected Economic Indicators
I. Social Indicators

Rank in UNDP Development Index 2012 (of 186)


Population (million)


Per capita income (U.S. dollars)


Life expectancy at birth in years


Percent of pop. below poverty line (2010)


Infant mortality (per 1,000 live births)


Gini index


Primary education completion rate (percent)

II. Economic Indicators
            Prel.   Projections
    2008 2009 2010 2011 2012   2013 2014











  (Annual percent change, unless otherwise stated)

Income and Prices


Real GDP

  1.3 -3.1 1.4 2.0 1.6   1.6 1.6

Consumer prices (end of period)

  5.5 0.1 2.1 5.1 0.8   2.3 2.6

GDP deflator

  5.3 -0.5 2.3 5.7 1.5   1.7 2.4
(Percent of GDP, unless otherwise stated)

Money and Credit


Credit to the private sector

  43.0 42.4 40.9 39.8 40.1   39.6 38.9

Broad money

  45.0 47.3 47.2 43.7 43.2   42.8 42.1

Interest rate (time deposits, percent)

  4.2 4.5 2.9 1.8 2.5  

External Sector


Current account balance

  -7.1 -1.5 -2.7 -4.6 -5.3   -5.0 -4.8

Trade balance

  -21.8 -15.0 -16.5 -18.4 -18.7   -19.1 -19.1

Exports (f.o.b. including maquila)

  21.9 19.0 21.4 23.4 23.0   23.0 23.1

Imports (f.o.b. including maquila)

  -43.8 -34.1 -37.8 -41.8 -41.7   -42.1 -42.3

Services and income (net)

  -2.8 -3.1 -3.0 -2.9 -3.3   -2.9 -2.8

Transfers (net)

  17.5 16.7 16.8 16.6 16.8   17.0 17.1

Foreign direct investment

  3.8 1.8 0.5 1.7 2.2   1.0 1.1

Nonfinancial Public Sector


Overall balance

  -3.2 -5.7 -4.3 -3.9 -3.9   -3.9 -3.8

Primary balance

  -0.8 -3.1 -1.9 -1.7 -1.6   -1.4 -1.3

Public sector debt 1/ 2/

  42.4 51.0 52.2 52.3 54.3   56.4 58.0

Of which: external public debt 1/

  24.5 30.0 30.3 28.8 31.7   31.3 30.8

External public debt service


(Percent of exports of goods and services)

  8.2 10.2 9.4 18.4 9.4   8.1 7.9

National Savings and Investment


Gross domestic investment

  15.2 13.4 13.3 14.4 14.6   14.6 14.6

National savings

  8.1 11.9 10.6 9.8 9.3   9.5 9.8

Net Foreign Assets of the Financial System 3/


Millions of U.S. dollars

  2,208 3,028 3,378 2,811 3,370   2,708 2,797

Percent of deposits

  24.4 32.4 34.5 28.8 34.0   26.1 26.2

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.

2/ Excludes sovereign debt placed in November 2012 (3¼ percent of GDP) to pre-finance amortizations of short-term debt in 2013.

3/ Beginning in 2010, gold in international reserves is valued at the price determined by the London Bullion Market (resulting in a valuation gain of US$170 million).

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:


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