Press Release No. <a name="P16_75"></a>05/272

The following statement was issued in San Salvador by Mario Garza, Deputy Division Chief in the Western Hemisphere Department of the International Monetary Fund (IMF) on December 11, 2005:

"An IMF mission visited El Salvador during December 5-8 for discussions on recent economic developments and the outlook for 2006. The mission met with the Technical Secretary of the Presidency Eduardo Zablah, Finance Minister Guillermo López Suárez, Economy Minister Yolanda de Gavidia, the Central Bank President Luz María Serpas de Portillo, and other senior officials.

"The economy has performed well this year despite sharply higher oil prices and the adverse effects of recent natural disasters. Real GDP growth is expected to pick up to 2½ percent in 2005, while the external current account deficit is expected to remain at around 4 percent of GDP. Inflation has declined to 4½ percent despite increases in domestic petroleum prices. The fiscal deficit has been broadly in line with the budget, helped by a strong revenue performance after key tax measures taken in late 2004.

"For 2006, the mission welcomed the government's plans to maintain sound macroeconomic policies and place priority on social spending, with the objective of spurring higher economic growth and improving social conditions. The mission praised the authorities' efforts to deal with the social impact and damage to infrastructure after tropical storm Stan and volcanic eruptions. The mission welcomed the authorities' commitment to maintain a fiscal stance that would keep inflation low and safeguard the external position of the economy in the face of the continued high oil prices, while allowing for infrastructure repairs after Stan and keeping the public debt/GDP ratio stable.

"El Salvador faces the major challenge of further raising the economy's growth potential, and reducing its vulnerability to shocks. To address this challenge, the mission agreed with the authorities on the need to strengthen fiscal revenue with a view of setting the public debt/GDP ratio on a firm downward path, while raising social spending. The mission also welcomed plans to further strengthen the banking system—particularly, the recent decision to gradually align prudential rules with international best-practice—improve the business climate, and address infrastructure bottlenecks, which should foster private investment. This strategy should support further trade and financial integration, including under the initiation of CAFTA-DR in 2006.

"The authorities agreed with the mission on efforts to develop a code of conduct to be adopted by all the countries of the region to avoid using fiscal incentives competitively to attract foreign investment, since it would weaken the fiscal position of all countries. We also agreed on the importance to strengthen cooperation and the ability to conduct consolidated supervision as financial systems integrate regionally.

"The IMF will continue a close dialogue with the authorities as they implement their economic program. The next Article IV consultation mission with El Salvador is scheduled to take place in April 2006."