El Salvador and the IMF
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The International Monetary Fund (IMF) approved a 14-month stand-by credit for El Salvador, equivalent to SDR 37.68 million (about US$52 million), to support the government’s 1997 economic program.
Since the end of the 12-year long civil war in 1990, and through 1995, economic growth in El Salvador averaged more than 6 percent a year, fostered by the implementation of economic reform and structural policies supported by consecutive IMF stand-by credits. Significant progress was made in reforming the tax system, and the labor market and, recently, in privatization, as well as implementating of the peace accords in the context of strengthening the fiscal position. These achievements notwithstanding, there has been less success in reducing inflation to international levels.
Economic activity decelerated between mid-1995 and mid-1996, as a result of a burst in private consumption, the end of a construction boom, and the effect on external competitiveness of adverse external shocks. At the same time, inflation remained high, in part, because of the increase in the international prices of cereals and oil. As a result, the colón continued to appreciate in real effective terms, contributing to the erosion of external competitiveness. However, in the second half of 1996, there were signs of a turnaround: the pace of economic activity picked up, inflation decelerated, and external competitiveness improved.
Medium-Term Strategy and the 1997 Program
The program for 1997 aims at strengthening public finances, while accommodating larger outlays for infrastructure, maintaining an appropriate monetary policy, and continuing to advance structural reforms. It envisages a real GDP growth of about 4 percent in 1997, a reduction of the overall deficit of the nonfinancial public sector to 1.4 percent of GDP, a decline in inflation to 5-6 percent, and an increase in net international reserves to the equivalent of 5 months of imports.
To strengthen the public finances, in the context of modernizing the public sector and improving social expenditure, the authorities have stepped up efforts to contain current expenditure and increase tax collections. Along these lines, new positions will be offered only in priority sectors of the public administration, such as health and education. As a result of effortsmade to improve tax collections, the tax ratio is expected to rise from 11.1 percent of GDP in 1996 to 11.8 percent of GDP in 1997, despite a reduction in import duties.
Following the approval in September 1996 of the necessary legislation, the sales of 49 percent of the telephone company ANTEL and of the first of four electricity distribution companies are expected to be completed in the first half of 1997, with the other three companies to be sold by year’s end. It is also expected that the telecommunications system will be fully privatized in two years.
The physical and financial implementation of the public investment program will be prioritized, monitored, and controlled through a unit of administration of public investment, under the Ministry of Finance. Legislation was also passed in December 1996 to reform the pension system and substitute the current pay-as-you-go system with privately administered individual accounts.
Addressing Social Needs
Social expenditure increased from 3.5 percent of GDP in 1995 to 4.8 percent in 1996 and will be maintained at that level in 1997, while military expenditure was contained at 1 percent of GDP in 1996 and will be reduced to 0.9 percent in 1997. The government attaches great importance to expanding and improving basic health and educational services as well as ensuring public safety in order to facilitate the development of the economy.
The Challenge Ahead
El Salvador’s performance in the areas of public expenditure, monetary policy, and structural reform has been remarkable since the end of the civil war. However, a further tightening of fiscal policy and the continuing implementation of structural reforms to increase productivity are required to lay the basis for the recovery of private investment and growth. In addition, the attainment of the inflation objective is fundamental to prevent loss of external competitiveness.
El Salvador joined the IMF on March 14, 1946, and its quota1 is SDR 125.6 million (about US$174 million); it has no outstanding use of IMF credit.
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