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Press Release No. 98/43
September 24, 1998
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Stand-By Credit for El Salvador

The International Monetary Fund (IMF) approved a 17-month stand-by credit for El Salvador in an amount equivalent to SDR 37.68 million (about US$52 million), to support the government’s 1998-99 economic program. The government of El Salvador said it intends to treat the credit as precautionary.

Background

Since mid-1989, the government of El Salvador has been implementing an economic stabilization and reform program supported by five stand-by credits from the IMF and loans from other international financial institutions. These programs supported reconstruction and the resumption of economic growth in the context of macroeconomic stability following the peace accords in 1992. Financial imbalances and the rate of inflation were sharply reduced, while significant progress was achieved in strengthening the balance of payments, and poverty alleviation.

Macroeconomic performance was satisfactory in 1997. Following a sharp deceleration in 1996, real GDP grew by 4 percent in 1997, led by a strong rebound in exports, while inflation declined to 2 percent from 7.4 percent in 1996, helped by falling international prices of oil and cereals. The fiscal deficit was reduced to less than 2 percent of GDP through a sharp cut in current expenditure, and the external current account switched to a surplus, reflecting particularly the strong growth of exports.

The program seeks to maintain the macroeconomic discipline and the momentum of structural reforms in the period through the first months of a new administration scheduled to take office in June 1999, following presidential elections in March.

The Program for 1998-99

The authorities’ program for 1998-99 aims at maintaining sustainable high rates of growth, while containing inflation to that of the trading partners, in the context of a fixed exchange rate. The program aims at a rate of growth of GDP of 4 percent in 1998 and 4.5 percent in 1999, which is predicated on the assumption that the turmoil in international markets does not have a significant adverse effect on El Salvador’s exports or investment in 1999. Inflation is expected to be contained at about 3.5 percent in 1998 and 3 percent in 1999; and net international reserves are expected to increase to the equivalent of seven months of imports.

The fiscal program envisages a widening of the overall deficit (before grants) of the nonfinancial public sector from about 2 percent of GDP in 1997 to less than 3 percent of GDP a year in 1998-99, reflecting in part an increase in the wage bill, resulting from adjustments to civil service salaries following a freeze since July 1995, and additional increases to health workers. Tax revenue is projected to increase slightly, reflecting a sustained recovery in economic activity and an improvement in tax administration. To ensure that the fiscal targets are met, the government will not offset savings in expenditure with additional spending in different categories, and will compensate any revenue shortfall with expenditure cuts.

Structural Reforms

Following a significant progress in structural reforms earlier in 1998, which included the sale of the electricity distribution companies in January and the telephone company ANTEL in July, the program envisages further reform of the public sector and the pension system; privatization of the sugar mill and of the Mortgage Bank; a strengthening of bank supervision and prudential regulations; an improvement in monetary policy instruments; and a lowering of import tariffs.

The above measures are expected to improve productivity through larger public investment in infrastructure financed in part with privatization proceeds; increase participation and investment of the private sector in the economy, especially in the electricity and telecommunications sectors; reduce further the vulnerability of the financial system; and strengthen the domestic capital market.

Addressing Social Needs

The program supports partial use of the privatization proceeds to provide a permanent source of revenue for expanded and improved social expenditure. In addition, lending programs for El Salvador approved by the Inter-American Development Bank and the World Bank include expenditures on a health sector reform program; a water and sewer program and sector reform; the rehabilitation and construction of schools; and primary and secondary education projects.

The Challenge Ahead

Notwithstanding an impressive turnaround since the end of the civil war in 1992, El Salvador continues to face significant challenges as it seeks to lay the basis for sustainable rates of economic growth. Together with the structural reforms under the program, the steps taken to consolidate the fiscal adjustment are crucial to maintain fiscal and external viability over the medium term, while providing assurances for adequate foreign financing.

El Salvador joined the IMF on March 14, 1946; its quota1 is SDR 125.6 million (about US$172 million); it has no outstanding use of IMF credit.


El Salvador: Selected Economic and Financial Indicators










1998




Rev.


Rev.

Prog.


1996

1997

Prog.1

Prog.

1999








(Annual percentage changes, unless otherwise specified)







Income and prices






Real GDP

1.8

4.0

4.0

4.0

4.5

GDP deflator

7.1

4.6

6.0

3.7

2.5

Consumer prices (end of the year)

7.4

2.0

3.5

3.5

3.0

Consumer prices (average)

9.8

4.6

2.5

2.5

3.3







External sector






Exports, f.o.b.

2.0

32.7

-5.5

-4.7

4.2

Export volume

9.6

18.8

-3.9

-5.2

6.7

Imports, c.i.f.

-6.5

11.3

7.6

8.5

5.6

Import volume

-9.9

9.4

5.0

7.8

2.8

Non-oil imports, c.i.f.

-7.1

11.9

7.5

8.5

5.5

Terms of trade

-10.4

9.7

-4.0

-0.1

-4.9







Nominal effective exchange rate2






Average (depreciation -)

4.1

5.0

...

4.7

...

End of period

3.0

6.4

...

1.5

...







Real effective exchange rate2






Average (depreciation -)

8.2

5.0

...

3.7

...

End of period

5.1

4.7

...

3.9

...







Nonfinancial public sector






Receipts (excluding grants)

11.3

-3.1

8.6

8.6

5.2

Expenditure

21.7

-5.4

16.7

14.6

4.5







Financial system






Domestic credit3

14.4

7.9

3.4

4.6

7.3

Public sector (net)

0.7

-0.2

-6.5

-6.9

-0.6

Private sector

13.1

15.5

10.8

11.9

9.5

Liabilities to private sector

17.3

12.3

12.3

11.1

7.5

Velocity (GDP/money and quasi-money)

2.7

2.6

2.6

2.5

2.5

Interest rate (annual rate, time deposits, 180 days)4

12.0

12.7

...

10.0

...








(In percent of GDP)







Overall fiscal balance (after grants)

-2.5

-1.7

-3.0

-2.7

-2.5

Current account nonfinancial public sector

1.9

1.9

1.2

1.2

1.1

Operational surplus public enterprises

2.0

1.2

0.8

0.9

0.9

Gross domestic investment

15.3

15.0

17.3

16.8

16.8

Gross national savings

13.1

15.4

15.1

15.4

15.6







External current account balance

-1.6

0.9

-1.9

-1.1

-0.9

(excluding official transfers)

-2.2

0.4

-2.2

-1.4

-1.2








(In millions of U.S. dollars)







Overall balance of payments

165

362

410

400

120







Change in net international reserves (increase -)

-165

-362

-410

-400

-120

Gross official reserves






end of period

1,100

1,462

1,872

1,862

1,982

(months of imports)

4.9

5.9

7.0

6.9

7.0







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







1EBS/98/19 (2/6/98).

2For 1998, up to June.

3As percent of the stock of liabilities to the private sector at the beginning of the period.

4For 1998, rate at end-July.


1A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing , and its allocation of SDRs.


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