IMF Survey: IMF Makes $800 Million Available to El Salvador

IMF News, January 16, 2009

Source details

The IMF's Executive Board approved an $800 million precautionary Stand-By Arrangement for El Salvador.
The arrangement covers a 14½-month period.
The Salvadoran authorities do not intend to draw on the resources made available under the arrangement unless the need arises.
The arrangement is described as precautionary and aimed to bolster confidence amid electoral uncertainty and fallout from the global financial crisis.

El Salvador has strong economic fundamentals, a moderate public debt-to-GDP ratio, and is not currently facing balance of payments pressures.
The global financial turmoil, the U.S. recession, and election-related uncertainty prompted proactive measures by the authorities to reduce potential impact.
So far, the impact of the global financial crisis on El Salvador has been limited, but there are signs of a significant slowdown in growth.
Remittances have been adversely affected and strong remittance growth is not likely to resume soon; this will impact the most vulnerable.
Exports have been holding up quite well despite the U.S. recession.
The financial system is described as highly liquid and well-capitalized.
Overall assessment: 2009 is expected to be a difficult year, but El Salvador is in a good position to weather the storm.

The IMF's new Short-Term Liquidity Facility cannot be used as a precautionary arrangement; members accessing it are expected to draw on Fund resources immediately.
El Salvador sought a precautionary arrangement because it wishes to bolster defenses without immediately drawing Fund resources.
By approving a precautionary Stand-By Arrangement, the IMF demonstrates flexibility in tailoring assistance to member countries' needs.

The authorities sought reasonably priced external financing from multilateral institutions, negotiating loans with the World Bank and the Inter-American Development Bank for budget support and to increase bank credit supply.
Measures taken to increase resilience to shocks:
- Continue pursuing a sound fiscal policy to keep public debt on a sustainable path.
- Increase the liquidity buffer of the financial system.
- Upgrade the regulatory and supervisory framework for the financial sector.
- Secure financing from the World Bank, the Inter-American Development Bank, and the IMF to shore up resilience.

Presidential elections are scheduled "this March."
The two leading presidential candidates publicly expressed support for the main elements of the economic program and reiterated commitment to maintaining macroeconomic stability and dollarization.
Broad political consensus on maintaining economic stability is cited as helping ensure policy continuity through the political transition.

Interview with Alfred Schipke; IMF Survey online, January 16, 2009.