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Press Release: IMF Announces Staff-Level Agreement with El Salvador for a New Stand-by Arrangement of About US$ 800 Million
September 24, 2009
An International Monetary Fund staff mission and the authorities of El Salvador have reached preliminary agreement on a new economic program that could be supported by a three-year, SDR 513.9 million (equivalent to about US$800 million) Stand-By Arrangement. The new program will replace the 15-month Stand-By Arrangement approved on January 16, 2009 (see Press Release No. 09/10)
The agreement reached with the authorities is subject to approval by the IMF management and Executive Board, which could consider the request for the new Stand-By Arrangement in November. As with the current program, the authorities of El Salvador plan to treat the new arrangement as precautionary and do not intend to draw on it.
The staff-level agreement was announced in Washington by El Salvador’s President Mauricio Funes, Technical Secretary of the Presidency, Alexander Segovia, and Finance Minister Carlos Cáceres, who visited the IMF and met Deputy Managing Director Takatoshi Kato and the director of the Western Hemisphere Department, Nicolás Eyzaguirre.
El Salvador has been strongly affected by the global crisis, particularly through its linkages to the United States economy. These shocks have affected domestic demand in El Salvador by more than was anticipated and real GDP is now expected to decline by 2.5 percent in 2009 and then recover gradually over the coming years. The arrangement approved in January achieved its key objective of helping El Salvador weather the financial crisis and maintain macroeconomic and financial sector stability and investor confidence during the elections and transition to a new administration.
The main objectives of the new program are to safeguard fiscal and financial sustainability under the dollarization regime, catalyze resources from private investors and multilaterals, provide space for countercyclical measures aimed at buttressing domestic demand in 2009 and 2010, and support the administration’s development plan for 2009-2014.
The new arrangement will help El Salvador to continue protecting its most vulnerable citizens, through the redirection of nonpriority spending to social areas. The government is introducing a Universal Social Protection System, which includes expanding its conditional cash transfer program (Comunidades Solidarias), will set up a temporary employment program, and has started a special public investment program concentrated on health, education, and infrastructure, In total, with these initiatives, the authorities are expecting to redirect as much as 2 percent of GDP towards social spending.
“El Salvador was the first country in Latin America to seek financial assistance from the IMF to navigate the current global financial crisis,” said Mr. Eyzaguirre. “While this first program achieved its broad objectives, the effects of the crisis have been severe and challenges still remain. We are very happy that the administration of President Mauricio Funes has chosen to continue to rely on the Fund to support its economic program going forward.”
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