Press Release No. 07/45

Press Release No. 07/45

The following statement was issued on March 13 in San Salvador by Mr. Dominique Desruelle, Mission Chief for El Salvador of the International Monetary Fund (IMF):

"An IMF mission visited El Salvador during March 6-9 to discuss recent economic developments and macroeconomic policies. The mission met with Technical Secretary of the Presidency Eduardo Zablah Touché, Finance Minister William Hándal, Economy Minister Yolanda de Gavidia, Central Bank President Luz Maria Serpas de Portillo, and other senior government officials. The mission thanks the authorities for the warm welcome and close cooperation it has received during its stay in El Salvador.

"The Salvadoran economy has strengthened during the last year, with output growth of 4¼ percent in 2006. Inflation rose to 5 percent, reflecting a sharp mid-year increase in the prices of petroleum products. Robust growth in nontraditional exports and remittances offset a decline in maquila exports, a higher oil import bill, and rising capital goods imports, thus maintaining the current account deficit at 4¾ percent of GDP.

"The outlook for 2007 is favorable, with growth expected to be supported by investment and non-traditional exports. Lower oil prices should help bring along a reduction in inflation. The external current account deficit would be stable, with a reduction in the oil import bill compensating higher imports of investment goods.

"The mission concurred with the authorities that a core challenge is sustaining a high rate of economic growth over the medium term and bringing about a marked reduction in poverty, while concurrently enhancing the economy's resilience to shocks. To achieve these objectives, the Salvadoran authorities are appropriately focusing on strengthening public finances and the financial system, boosting El Salvador's integration in the global economy, and promoting innovative social programs.

"The mission commended the authorities for the steps taken in 2006 in line with this medium-term strategy, including the important efforts made to enhance tax administration and focus subsidies on the most vulnerable segments of the population. The mission pointed out that the current favorable economic conditions provided an ideal environment to make further progress in implementing this strategy.

"The mission welcomed the authorities' intention to achieve a primary surplus of public finances in 2007, thanks to a further expansion of the tax base, focus of subsidies, and strengthened tax administration. It stressed the need to build on this progress in coming years, with a view to continue putting public debt on a firm downward path and increasing the scope for a fiscal policy response in the event of adverse external shocks.

"The authorities' efforts to reduce poverty are highly welcome. In this context, the mission noted the important benefits that could accrue from the projects to be financed from the Millennium Challenge Account and pending loans from multilateral development banks. The mission discussed the potential for boosting private investment and the government's plans to boost infrastructure and human capital, reduce red tape, tackle crime, and create new trade opportunities. It also stressed the importance of pressing ahead with steps to enhance the regulation and supervision of the financial system.

"The mission encouraged the authorities to move ahead with plans to streamline the fiscal incentives regime, to complement the proposed regional code of best practices on tax incentives. Such measures would help improve the investment climate and avoid erosion of the tax base. The authorities and the mission also reaffirmed that strengthening cross-border consolidated supervision and harmonizing regulatory practices was essential to facilitating regional financial integration and enhancing its benefits.

"The Fund will maintain a close policy dialogue and technical assistance effort with El Salvador. Later this year, a mission will return to El Salvador for the Article IV consultation on economic developments and policy."