IMF Executive Board Concludes 2021 Article IV Consultation with El Salvador
IMF News, January 25, 2022
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- Published: January 25, 2022
Consultation summary and context
- The Executive Board of the International Monetary Fund (IMF) on January 24, concluded the Article IV consultation with El Salvador.
- The pandemic interrupted ten years of growth, followed by a rapid rebound supported by:
- Robust external demand.
- Resilient remittances.
- A disbursement under the Rapid Financing Instrument (SDR287.2 million or US$389 million) approved in April 2020.
- Real GDP outcomes and projections:
- The economy contracted by 7.9 percent in 2020.
- Projected to grow by about 10 percent in 2021.
- Projected to grow by 3.2 percent in 2022.
Economic outlook and external sector
- Key macro projections and indicators (selected):
- Real GDP growth (percent): 2016: 2.5; 2017: 2.2; 2018: 2.4; 2019: 2.6; 2020: -7.9; 2021: 10.0; 2022: 3.2.
- Consumer price inflation (average, percent): 2016: 0.6; 2017: 1.0; 2018: 1.1; 2019: 0.1; 2020: -0.4; 2021: 3.5; 2022: 2.8.
- Terms of trade, percent change: 2016: 6.1; 2017: -4.3; 2018: -3.9; 2019: 0.8; 2020: 6.0; 2021: -5.4; 2022: 3.4.
- External sovereign bond spread (basis points): 2016: 599; 2017: 520; 2018: 424; 2019: 453; 2020: 760; 2021: 837.
- Current account balance (percent of GDP): 2016: -2.3; 2017: -1.9; 2018: -3.3; 2019: -0.6; 2020: 0.5; 2021: -2.5.
- Trade balance (percent of GDP): 2016: -19.2; 2017: -19.4; 2018: -21.7; 2019: -21.2; 2020: -21.1; 2021: -28.7; 2022: -28.4.
- Transfers (net, percent of GDP): 2016: 18.8; 2017: 20.2; 2018: 20.6; 2019: 21.0; 2020: 24.2; 2021: 26.1; 2022: 26.5.
- Gross international reserves (mill. U.S. dollars): 2016: 3,238; 2017: 3,567; 2018: 3,569; 2019: 4,446; 2020: 3,083; 2021: 3,510; 2022: 3,980.
- Nominal GDP (billions of U.S. dollars): 2016: 25.0; 2017: 26.0; 2018: 26.9; 2019: 24.6; 2020: 27.9; 2021: 29.4.
Fiscal vulnerabilities, debt, and public finances
- Fiscal outcomes and projections (percent of GDP unless otherwise indicated):
- The fiscal deficit is projected at 5¾ percent of GDP in 2021 and about 5 percent of GDP in 2022.
- Under current policies, public debt is expected to rise to about 96 percent of GDP in 2026 on an unsustainable path.
- Selected fiscal indicators from Table 1:
- Overall balance (percent of GDP): 2016: -3.1; 2017: -2.7; 2018: -8.2; 2019: -5.8; 2020: -4.9; 2021: -4.9 (table shows -4.9 for 2021 in earlier text and -4.9 in table—retain table values).
- Primary balance (percent of GDP): 2016: -0.2; 2017: 0.7; 2018: 0.9; 2019: -3.8; 2020: -1.1; 2021: 0.0.
- Of which: tax revenue (percent of GDP): 2016: 17.2; 2017: 17.6; 2018: 18.0; 2019: 17.7; 2020: 18.5; 2021: 20.4; 2022: 20.9.
- Public sector debt 1/ (percent of GDP): 2016: 68.8; 2017: 70.5; 2018: 70.4; 2019: 71.3; 2020: 89.2; 2021: 84.4; 2022: 84.8.
- Observations and policy emphasis:
- Persistent fiscal deficits and high debt service are leading to large and increasing financing needs.
- Directors cautioned that fiscal vulnerabilities have grown during the pandemic and need prompt action.
- Directors generally agreed on the need to implement a fiscal consolidation starting this year based on high-quality revenue and spending measures to restore fiscal sustainability and put public debt on a firm downward trajectory.
- Directors welcomed steps to modernize public financial management and assess fiscal risks.
- Directors urged further strengthening of fiscal transparency, accountability, anti-corruption, and AML/CFT frameworks, and recommended upgrading the statistical framework.
Financial sector, supervision, and inclusion
- Banking and financial stability issues:
- With the unwinding of exceptional measures introduced to support liquidity and provide debt relief to households and companies, Directors stressed the need to monitor banks’ recovery strategies.
- Directors welcomed plans to introduce a banking crisis resolution framework.
- Positive note taken on the decision to transition toward a forward-looking and risk-based financial supervision.
- Financial inclusion and digital payments:
- Directors agreed on the importance of boosting financial inclusion and noted that digital means of payment—such as the Chivo e-wallet—could play this role.
- However, Directors emphasized the need for strict regulation and oversight of the new ecosystem of Chivo and Bitcoin.
Bitcoin adoption: risks and recommendations
- Policy action taken:
- Since September 2021, the government has adopted Bitcoin as legal tender.
- Risks identified:
- The adoption of a cryptocurrency as legal tender entails large risks for financial and market integrity, financial stability, and consumer protection.
- It also can create contingent liabilities.
- Directors emphasized large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities.
- Some Directors expressed concern over the risks associated with issuing Bitcoin-backed bonds.
- Recommendations:
- Directors urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status.
- Directors emphasized the need for strict regulation and oversight of the Chivo/Bitcoin ecosystem.
Governance, transparency, and structural reforms
- Directors commended the authorities for timely and effective pandemic management, contributing to low COVID-19 infection and mortality rates in the region.
- Structural reforms and priorities highlighted by Directors:
- Implement structural fiscal reforms to address high and rising financing needs.
- Boost inclusive growth through reforms to reduce crime, cut red tape, reduce energy costs, and increase infrastructure and social spending, including on education and health.
- Strengthen anti-corruption and AML/CFT frameworks in line with international standards.
- Strengthen fiscal transparency and accountability; Directors welcomed publication of reports on the use of public funds for COVID-19 and audits of the Court of Accounts.
- Upgrade the statistical framework.
Key social and structural indicators (from Table 1)
- Per capita income (U.S. dollars, 2020): 3,799.
- Population (million, 2020): 6.3.
- Percent of pop. below poverty line (2020): 26.
- Gini index (2019): 35.
- Credit to the private sector (percent of GDP): 2016: 51.2; 2017: 52.2; 2018: 53.5; 2019: 55.3; 2020: 62.1; 2021: 57.6; 2022: 56.3.
- Broad money (percent of GDP): 2016: 50.0; 2017: 53.8; 2018: 54.8; 2019: 59.0; 2020: 70.2; 2021: 65.7; 2022: 65.1.
- Interest rate (time deposits, percent): 2016: 4.4; 2017: 4.2; 2018: 4.3; 2019: 4.1; 2020: 3.9.
- Foreign direct investment (percent of GDP): 2016: -1.4; 2017: -3.6; 2018: -3.2; 2019: -2.4; 2020: -0.8; 2021: -2.8.
- Net Foreign Assets of the Financial System (Millions U.S. dollars): 2016: 1,995; 2017: 2,645; 2018: 2,714; 2019: 3,424; 2020: 3,046; 2021: 3,303; 2022: 3,836.
- National savings and investment (percent of GDP): Gross domestic investment: 2016: 16.0; 2017: 16.7; 2018: 18.4; 2019: 16.9; 2020: 17.9; 2021: (not shown for 2021 in table cells beyond 2020); Private sector 2/ (percent of GDP): 2016: 13.5; 2017: 14.1; 2018: 15.7; 2019: 14.2; 2020: 15.8; 2021: 14.5; National savings: 2016: 13.7; 2017: 14.8; 2018: 15.1; 2019: 16.3; 2020: 15.2; Private sector (percent of GDP): 2016: 14.7; 2017: 16.4; 2018: 24.0; 2019: 17.3.
IMF Executive Board press release, January 25, 2022.
