Press Release: IMF Approves Stand-By Credit for El Salvador

IMF News, March 3, 1997

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The International Monetary Fund (IMF) approved a 14-month stand-by credit for El Salvador, equivalent to SDR 37.68 million (about US$52 million), to support the government’s 1997 economic program.

Since the end of the 12-year long civil war in 1990, and through 1995, economic growth in El Salvador averaged more than 6 percent a year, fostered by the implementation of economic reform and structural policies supported by consecutive IMF stand-by credits.
Achievements to date:
- Significant progress in reforming the tax system, and the labor market.
- Recent progress in privatization.
- Implementation of the peace accords in the context of strengthening the fiscal position.
Remaining challenges:
- Less success in reducing inflation to international levels.
- Economic activity decelerated between mid-1995 and mid-1996 due to a burst in private consumption, the end of a construction boom, and adverse external shocks affecting external competitiveness.
- Inflation remained high in part because of increases in international prices of cereals and oil.
- The colón continued to appreciate in real effective terms, contributing to erosion of external competitiveness.
Positive signs in the second half of 1996:
- The pace of economic activity picked up.
- Inflation decelerated.
- External competitiveness improved.

Program objectives and quantitative targets for 1997:
- Real GDP growth of about 4 percent in 1997.
- Reduction of the overall deficit of the nonfinancial public sector to 1.4 percent of GDP.
- Decline in inflation to 5-6 percent.
- Increase in net international reserves to the equivalent of 5 months of imports.
Fiscal policy and public finance measures:
- Strengthen public finances while accommodating larger outlays for infrastructure.
- Maintain an appropriate monetary policy.
- Continue advancing structural reforms.
- Contain current expenditure and increase tax collections as part of public sector modernization and improving social expenditure.
- New public positions will be offered only in priority sectors such as health and education.
- Tax ratio expected to rise from 11.1 percent of GDP in 1996 to 11.8 percent of GDP in 1997, despite a reduction in import duties.

Privatization and sectoral reforms:
- Following approval in September 1996 of the necessary legislation:
- Sales of 49 percent of the telephone company ANTEL and of the first of four electricity distribution companies are expected to be completed in the first half of 1997.
- The other three electricity distribution companies are expected to be sold by year’s end.
- Telecommunications system expected to be fully privatized in two years.
Public investment and pension reform:
- Physical and financial implementation of the public investment program will be prioritized, monitored, and controlled through a unit of administration of public investment under the Ministry of Finance.
- Legislation passed in December 1996 to reform the pension system and substitute the current pay-as-you-go system with privately administered individual accounts.

Social and military expenditure targets:
- Social expenditure increased from 3.5 percent of GDP in 1995 to 4.8 percent in 1996 and will be maintained at that level in 1997.
- Military expenditure was contained at 1 percent of GDP in 1996 and will be reduced to 0.9 percent in 1997.
Policy emphasis:
- Expanding and improving basic health and educational services.
- Ensuring public safety to facilitate economic development.

Continued priorities:
- Further tightening of fiscal policy.
- Continuing implementation of structural reforms to increase productivity to lay the basis for recovery of private investment and growth.
- Attainment of the inflation objective is fundamental to prevent loss of external competitiveness.

Real GDP (Percent change)
- 1993: 7.4
- 1994: 6.0
- 1995: 6.3
- 1996*: 2.0-2.5
- 1997**: 3.5-4.0
Consumer prices (end of period)
- 1993: 12.1
- 1994: 8.9
- 1995: 11.4
- 1996*: 5.0-6.0
Overall fiscal balance, excluding grants (deficit-)
- 1993: -3.6
- 1994: -1.9
- 1995: -0.9
- 1996*: -1.8
- 1997**: -1.4
External current account balance, excluding official transfers (deficit-)
- 1993: -4.4
- 1994: -3.7
- 1995: -5.1
- 1996*: -2.1
- 1997**: -2.8
Gross international reserves (Months of imports)
- 1993: 4.2
- 1994: 3.9
- 1995: 4.9
- 1996*: 5.1

*Estimate. **Program.

International Monetary Fund — Press Release No. 97/11