Press Release No. 13/84

Press Release No. 13/84
March 19, 2013

A staff team from the International Monetary Fund (IMF) visited San Salvador during March 5-19, 2013 to hold discussions on the 2013 Article IV consultation with El Salvador. The mission met with Technical Secretary Alex Segovia, Finance Minister Carlos Cáceres, Central Bank Governor Carlos Acevedo, other senior officials, and representatives of political parties, congress, and the private sector.

At the end of the visit Mr. Mario Garza, the IMF mission chief for El Salvador, made the following statement:

“Following the 2008-09 crisis, the Salvadorian economy has grown at a slow pace reflecting low domestic investment and the impact of weather shocks. In 2012, real gross domestic product (GDP) grew at an estimated 1½ percent, lagging behind the pace of the region, and inflation remained subdued. The external current account deficit widened to 5 percent of GDP due largely to lower export prices. Despite income tax revenue efforts, the overall fiscal deficit, on an accrual basis, stayed at the level of 2011 (4 percent of GDP), indicating that the fiscal stimulus used during the crisis has not been fully reversed yet. The net public debt reached 55 percent of GDP at end-2012, of which 10 percentage points have accumulated to cover past pension payments. The banking system appears well capitalized and liquid.

“The authorities and the mission concurred that the main challenges facing the economy are achieving higher sustained and more inclusive growth, ensuring fiscal sustainability, and rebuilding defenses to deal with future shocks. Under a passive scenario, the mission projected that real GDP will grow at 1½ percent in 2013-14, the fiscal deficit will remain unchanged in 2013 and beyond, and the debt-to-GDP ratio will increase further. The authorities noted that the strengthening of macroeconomic policies will become challenging with the approach of a prolonged period of presidential and congressional elections and in an environment of low growth.

“In this context, the mission urged the authorities to stage a national dialogue with political parties and key stakeholders to agree on the basic policies that will safeguard macroeconomic stability during the transition to a new government. To this end, the mission encouraged the authorities to reduce the overall fiscal deficit to 3 percent of GDP in 2013 and budget a fiscal deficit of 2 percent for 2014 to stabilize the debt ratio and reduce financing risks. To cement confidence in the banking sector, liquidity buffers should be reinforced by activating the lender-of-last-resort facility at the central bank or temporarily increasing liquidity requirements.

“The national dialogue should also help build consensus on the fiscal, investment, and banking reforms over the medium term. The authorities and the mission agreed that a desirable goal would be to reduce the public debt ratio to pre-crisis levels by the end of the decade. This will entail reforms to lower current expenditure relative to GDP and make it more flexible, and raise the tax effort closer to that of countries of similar income, while allowing room for needed social investment. As part of the consolidation strategy, a broad reform is needed to put the pension system on a strong financial footing, which will require substantial support of the civil society.

“The mission agreed on the need to reverse the downward trend on potential growth, which now is estimated at some 2 percent per year. This would require raising investment and competitiveness, which for several decades have been below regional levels. The authorities should move decisively in adopting the envisaged growth strategy for 2013-14, particularly to foster private investment in key infrastructure sectors (airport, port, public transportation, and electricity generation), while avoiding fiscal contingencies. The mission agrees that further progress towards risk-based supervision, strengthening the bank resolution framework, adopting Basel III standards, and developing private investment funds would further increase the resilience of the financial system and deepen intermediation.

“Upon its return to Washington the mission will prepare a staff report for the consideration of the IMF’s Executive Board in May 2013. The mission thanks the authorities for the open and fruitful discussions.”