IMF Staff Statement on the 2007 Article IV Consultation with El Salvador

Press Release No. 07/223
October 5, 2007

An International Monetary Fund (IMF) staff mission led by Mr. Dominique Desruelle, Division Chief in the Western Hemisphere Department, today issued the following statement in San Salvador:

"An IMF mission visited San Salvador during September 24-October 5 for the 2007 Article IV Consultation with El Salvador to review economic developments and discuss the authorities' economic policies. The mission met with Technical Secretary of the Presidency Eduardo Ayala Grimaldi, Minister of Finance William Hándal, Minister of Economy Yolanda de Gavidia, Central Bank President Luz María Serpas de Portillo, other senior government officials, members of Congress, private sector and union representatives, and think tanks. The mission thanks the authorities for the warm welcome and close cooperation it received during its stay in El Salvador.

"Reflecting sustained reform efforts and a generally favorable global environment, El Salvador's economic performance has been strong over the past 18 months, with growth exceeding 4 percent. The economy remains on track for a solid performance in the second half of this year and in 2008, despite more challenging external conditions. Given the close linkages through exports, remittances, and the financial sector, the authorities and the mission discussed the risk posed by the possibility of a greater slowdown in the United States and possible policy responses.

"The mission welcomed the progress that the authorities have made in strengthening the fiscal position by further increasing tax revenue and reducing the fiscal deficit. The mission supports the authorities' medium-term target of a primary surplus of 1 percent of GDP to be reached by 2009, which would put the public debt firmly on a downward path. It also concurs with the objective of raising tax revenue to 15 percent of GDP by the same year. In light of international experience, the mission recommended a smooth adjustment toward these targets by continuing to strengthen tax administration, broadening the tax base, and further targeting spending in priority areas. The 2008 draft budget submitted to Congress represents an important step in that direction, although further measures may be needed to reach the desired tax revenue level.

"The mission agreed with the authorities on the need to keep reallocating spending toward health, education, infrastructure, and public safety, as envisaged in the draft 2008 budget. It also concurred with the government's emphasis on strengthening fiscal institutions. The mission discussed a number of specific measures, including the implementation of a medium-term expenditure framework, the establishment of a tax expenditure budget, and an enhanced framework for public-private partnerships. The mission recognized the progress that has been made in reforming the pension system but pointed out that additional reforms would be necessary, which would require broad public support.

"The recent entry of large international banks will further strengthen the financial system. It also presents new challenges for supervisors and regulators. The mission agreed with the authorities that, given these recent developments, the need to move forward with financial sector reforms is even more pressing. It was heartened by the recent signing of a regional memorandum of understanding to improve consolidated cross-border supervision. It also looked forward to the completion of the reorganization of the regulatory and supervisory authorities and the expeditious passage of laws related to the securitization of assets and mutual funds. The mission stressed the need to pay close attention to the evolution of consumer credit, which has been growing rapidly over the last year.

"Productivity-enhancing reforms are key to improving competitiveness. The mission recognized the important progress that has been made in improving the business climate and reducing the cost of doing business, and concurred with the authorities' strategy in this area. In particular, as intended, improving public safety, reducing red tape, enhancing the quality of the labor force through specialized training, and modernizing the legal framework for bankruptcy would be greatly beneficial.

"El Salvador's sustained reform efforts are starting to bear tangible results. The challenge now is to maintain the reform momentum to ensure sustained growth and further poverty reduction. The IMF will maintain a close policy dialogue with the authorities during the coming months, and continue providing technical assistance. 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 end-November."



IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6220 Phone: 202-623-7100