El Salvador and the IMF
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The International Monetary Fund (IMF) today approved a 14-month stand-by credit for El Salvador totaling the equivalent of SDR 37.7 million (about $58 million) in support of the Government's 1995-96 economic reform program.
El Salvador has been implementing an economic stabilization and reform program with financial support from the IMF since 1990. The program has succeeded in sharply reducing financial imbalances and has led to a reduced rate of inflation, a recovery in economic activity, a strengthened balance of payments, and an alleviation of poverty. In addition, structural reforms have increased reliance on market forces and established a solid basis for sustained growth and medium-term balance of payments viability.
The signing of the Peace Accord in early 1992 put an end to 12 years of armed conflict, paving the way for accelerated economic development and improving the economic welfare of the population. The National Reconstruction Plan, currently under way, will focus on rehabilitating damaged infrastructure and bringing large segments of the population into the economic mainstream. Nevertheless, the authorities face pressures stemming from increased peace-related expenditures. Also, private demand is projected to strengthen further while inflation remains higher than international levels.
The Program for 1995
The Salvadoran authorities are committed to ensuring that the reconstruction efforts are conducted within a framework of macroeconomic stability. The economic program for 1995 seeks to reinforce the adjustment strategy implemented since 1989 and aims at reducing inflation to 6-8 percent, achieving real GDP growth of 6-7 percent, and maintaining a strong balance of payments.
To these ends, the program envisage reducing by half the central government deficit to 1 percent of GDP, reflecting a savings increase of 1.5 percent of GDP. Tax revenue is projected to rise to 12 percent of GDP, reflecting improved tax administration, windfall proceeds from the coffee sector, and tax increases that more than offset the reduction in import tariffs. Monetary policy will be consistent with the program's macroeconomic objectives.
The program will broaden structural reforms in order to facilitate sustained economic growth, and provide additional incentives for increased public saving in the medium term. To further modernize the financial system, the Government will introduce legislation to modify the Banking System Law to reduce credit risks and further strengthen the regulatory framework. The National Assembly approved in February modifications to the Securities Law, and will soon consider related provisions in the Commercial Code.
The authorities will implement a comprehensive privatization plan during the next three years to open up areas of the private sector previously reserved for the state. Also this year, the Government will complete the privatization of state-owned financial institutions with the sale of the Mortgage Bank.
Addressing Social Costs
The social safety net will be expanded by enhancing the role of municipalities and nongovernment organizations. The Social Investment Fund (FIS) will increase its investment program by more than 20 percent in 1995, almost a quarter of which will be financed by external grants. The social development strategy gives priority to the most needy sectors and includes actions to develop human capital, support families and vulnerable groups, and increase access to housing, credit, and land.
The Challenge Ahead
The policies supported by the current stand-by credit should provide a framework for continued access to concessional financing from the international community and help guard against macroeconomic disruptions resulting from the potential volatility of capital flows. Vigilance and discipline are necessary, however, to moderate the impact of increased peace- time expenditure on public finances. El Salvador joined the IMF on March 14, 1946, and its quota1 is SDR 125.6 million (about $195 million). It has no outstanding use of IMF credit.
El Salvador: Selected Economic Indicators
Source: Salvadoran authorities; and IMF staff estimates * Program.
1. A member's quota in the IMF determines, in particular,the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT