Press Release: IMF Staff Concludes 2014 Article IV Mission to El Salvador

October 29, 2014

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

Press Release No. 14/489
October 29, 2014

An International Monetary Fund (IMF) mission, headed by Uma Ramakrishnan, visited San Salvador during October 14−28 to conduct the country’s 2014 Article IV consultation. At the end of the discussions, which included talks with senior officials from the government’s economic team, members of congress and representatives of the private sector, Ms. Ramakrishnan issued the following statement in San Salvador:

“A broad social and political consensus has emerged in El Salvador to strengthen economic growth, address fiscal imbalances, and deepen efforts to support the poor. To achieve these goals and build on the progress made by the government, the authorities agree that policy priorities are to: (i) address the growing macroeconomic vulnerabilities; (ii) create an environment for higher private-sector led growth; (iii) restore fiscal and debt sustainability while protecting social spending; and (iv) improve the financial sector’s institutional framework.

“El Salvador’s GDP growth has been sluggish for the last 15 years due to structural weaknesses. The weak external environment since the 2008/09 global crisis has exacerbated the problem. The current account deficit widened in recent years and the fiscal deficit has remained at around 4 percent of GDP since 2010, with pension-related spending accounting for about 2 percent of GDP. Public debt rose to 58 percent of GDP in 2013, largely due to the increase in pension-related debt which amounted to 11 percent of GDP.

“Reflecting the expected private and public investment projects, including Fomilenio II, the mission expects growth to increase to about 2 to 2.25 percent in 2014 and 2015 and average about 2.4 percent in the medium term. The mission also projects the budget deficit to be 4 and 4.4 percent of GDP in 2014 and 2015, respectively. In the absence of additional fiscal measures, the deficit could increase to almost 5.5 percent of GDP by 2019, with public debt reaching 70 percent of GDP. There are significant downside risks to the outlook as global economic uncertainties interact with domestic vulnerabilities. Specifically, the external environment could be affected by the expected normalization of U.S. monetary policy and weaker growth in other large economies. Domestic risks include the fiscal and external current account imbalances, weak implementation of investment projects, and continued political fragmentation.

“The authorities’ goal of reaching 3 percent growth on a sustained basis and reducing inequality is achievable if supported by additional far-reaching structural reforms. The draft 2014−19 Plan Quinquenal seeks to promote job creation, education, and security. The government also envisages further steps to bolster public investment, and promote economic transformation through diversifying the energy matrix, strengthening the manufacturing industry, and tradable service sectors. Reforms to reduce red-tape and bureaucracy, increase access to finance for SMEs, lower the access and costs of energy, and improve security are essential to attract private investment. Fomilenio II offers an opportunity to accelerate these structural reforms to help raise productivity, competitiveness, and growth. In addition, better targeting of subsidies and reallocating savings to well-targeted and high priority social programs are also important to lower inequality.

“The authorities rightly recognize that higher growth alone will not be enough to address the fiscal imbalances. To this end, the government has recently adopted tax measures, and is taking steps to lower tax evasion, and restrain spending, aiming to limit the deficit for 2015 to 4 percent of GDP. The government’s intention in the draft fiscal responsibility law to pursue a cumulative fiscal adjustment of 1.5 percent of GDP in 3 years and reduce non-pension related debt to 42 percent of GDP in 10 years is a step in the right direction. However, the mission considers a cumulative adjustment of 3.5 percent of GDP over a 3-year period as necessary to achieve debt sustainability. This would entail lowering the public debt ratio (including pension-related debt) to below 50 percent of GDP in 10 years. Significant pension reform is also essential for long-term fiscal sustainability. The mission encourages a wide debate across Salvadoran society to achieve broad agreement on these reforms.

“The banking system is highly liquid and reports strong capital positions. The mission welcomes steady progress in modernizing banking supervision and El Salvador’s participation in several regional supervisory initiatives. The mission encouraged further building the financial safety net, as well as upgrading resolution and crisis management frameworks, in line with prior Financial Sector Assessment Program and technical assistance recommendations.”

During the visit, the mission met with Vice President Oscar Ortiz, Technical Secretary Roberto Lorenzana, Finance Minister Carlos Cáceres, Central Bank President Oscar Cabrera, Economy Minister Tharsis Solomon López, Minister of Public Works, Gerson Martinez, Minister of Justice and Security, Benito Lara, Minister of Agriculture Orestes Ortez, as well as other senior government officials, members of congress, and representatives of the private sector. The mission greatly appreciates the frank and productive discussions and the warm hospitality of our Salvadoran counterparts.


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