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IMFSurvey Magazine: Countries & Regions

El Salvador Seeks Precautionary Arrangement from IMF

Textile market in San Salvador, El Salvador where, IMF says, financial system is well capitalized, liquid (photo: Yuri Cortez/AFP/Getty Images)

GLOBAL FINANCIAL CRISIS

El Salvador Seeks Precautionary Arrangement from IMF

IMF Survey online

December 23, 2008

  • Country's economic fundamentals sound, economy has performed well
  • Global crisis could constrain authorities' ability to respond to shocks
  • Policy measures boost government's capability to address financial stress

El Salvador and the IMF staff have reached agreement on an $800 million arrangement that the authorities do not intend to draw on, but to hold on a precautionary basis during this period of global financial turmoil.

The agreement is subject to approval by the IMF's Executive Board, which could consider the country's request for a 15-month Stand-By Arrangement in January.

Alfred Schipke, IMF mission chief for El Salvador, said in a statement that El Salvador's economy has performed well in recent years: sound macroeconomic and structural reforms have delivered high economic growth, a declining public debt-to-GDP ratio, and low and stable inflation.

"While El Salvador's economic fundamentals are solid, the global financial turmoil has tightened financing conditions," Schipke said in a statement released December 22. "This difficult external environment may constrain the authorities' capacity to respond to transitory confidence shocks, including election-related uncertainty,"

The country has congressional and local elections on January 18, 2009, and presidential elections in mid-March. During the last election, uncertainty about policy continuity among some foreign and domestic investors led to deposit outflows. An IMF-backed program could help allay investor concerns.

Schipke said the IMF mission "has met with the main presidential candidates and is comforted by their endorsement of the main elements of the program, and their commitment to maintaining macroeconomic stability."

Prudent fiscal stance

The mission chief said that El Salvador's authorities have designed a strong program to preserve macroeconomic and financial stability. The program is anchored on maintaining a prudent fiscal stance during 2009, and adopting financial sector measures to enhance the system's preparedness and resilience to shocks.

The IMF mission, which concluded its annual consultation with El Salvador on November 12, 2008, noted that the financial system is well capitalized and liquid and that authorities have taken steps to buttress the system's strength, including "augmenting liquidity requirements and stepping up supervision," Schipke said. "These measures increase the authorities' capability to respond to financial stress should it materialize."

In addition, the authorities have secured a $400 million loan from the Inter-American Development Bank to sustain private sector credit.

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