Press Release No. 06/109

Press Release No. 06/109

The following statement was issued today in San Salvador by Mr. Mario Garza, Mission Chief for El Salvador of the International Monetary Fund (IMF):

"An IMF mission visited El Salvador during May 8-19 for the annual Article IV discussions on recent economic developments and macroeconomic policies. The mission met with Vice President Ana Vilma de Escobar, Technical Secretary of the Presidency Eduardo Zablah, Finance Minister William Hándal, Economy Minister Yolanda de Gavidia, the Central Bank President Luz María Serpas de Portillo, other senior government officials, members of congress, and representatives of the private sector, labor unions, and analysts. The mission thanks the authorities for the warm welcome and close cooperation it has received during its stay in El Salvador.

"The economy has weathered well the oil price shock and the effects of tropical storm Stan. Real GDP grew almost 3 percent in 2005 and is running at a pace of 3½ percent for this year. Inflation has moderated after a brief increase last October due to the pass-through of higher oil prices and temporary food price increases caused by the tropical storm. The external current account deficit widened slightly to 4½ percent of GDP in 2005 due to a higher oil import bill, despite stronger workers' remittances and rising prices for traditional exports.

"The government's program for 2006 seeks to maintain sound macroeconomic policies, place priority on social spending, and deepen structural reforms, with the aim of enhancing economic growth and social prospects. The mission supported plans to strengthen tax revenue by further reducing evasion and bringing informal activities into the tax base. We encouraged the authorities to strengthen the envisaged fiscal stance to help protect the external position of the economy in the face of sharply higher oil prices, while preserving planned infrastructure and social projects, and achieving a small reduction in the public debt/GDP ratio.

"Looking ahead, the mission welcomed the government's medium-term priorities of boosting economic growth and reducing poverty through greater integration with the global and regional economy. We encouraged the authorities to continue strengthening tax revenue, broaden pension reform, and further prioritize public spending, with a view to placing the public debt/GDP ratio on a firmly declining path, while strengthening responses to critical social and infrastructure needs. We supported efforts to further strengthen the banking system, particularly recent initiatives to tighten prudential rules, and improve the investment climate, including easing infrastructure bottlenecks and reducing red tape. This strategy should help enhance productivity and competitiveness, opening the way to take full advantage of opportunities opened up by the free-trade agreement with the United States (CAFTA), and create new sources of growth based on private investment and exports.

"The mission agreed with the authorities' plan to streamline the fiscal incentives regime, in tandem with progress toward a regional code of tax incentives to help avoid tax competition in attracting foreign investment. The authorities and the mission also concurred on the importance of strengthening cross-border consolidated supervision and harmonizing regulatory practices to facilitate regional financial integration and enhance its benefits.

"El Salvador has the clear potential to attain faster growth and social progress in the coming years. In this connection, it will be important to broaden the national consensus on the needed reforms across all segments of society. The IMF will maintain a close policy dialogue with the authorities as they implement their reform agenda. Upon its return to Washington, the mission will prepare a report to the IMF's Executive Board, as a basis for a Board discussion tentatively scheduled for July 2006."