Press Release: IMF Approves Stand-By Credit for El Salvador
IMF News, September 24, 1998
Source details
- Canonical URL
- Press Release: IMF Approves Stand-By Credit for El Salvador
Other formats
Bibliographic details
- Published: September 24, 1998
Approval and Program Terms
- The International Monetary Fund (IMF) approved a 17-month stand-by credit for El Salvador in an amount equivalent to SDR 37.68 million (about US$52 million).
- The credit is intended to support the government’s 1998-99 economic program.
- The government of El Salvador said it intends to treat the credit as precautionary.
Background and Recent Macroeconomic Performance
- Since mid-1989, the government of El Salvador has implemented an economic stabilization and reform program supported by five stand-by credits from the IMF and loans from other international financial institutions, supporting reconstruction and the resumption of economic growth after the 1992 peace accords.
- Financial imbalances and the rate of inflation were sharply reduced; significant progress was achieved in strengthening the balance of payments and poverty alleviation.
- Macroeconomic performance in 1997:
- Real GDP growth of 4 percent (after a sharp deceleration in 1996).
- Inflation declined to 2 percent from 7.4 percent in 1996.
- Fiscal deficit reduced to less than 2 percent of GDP through a sharp cut in current expenditure.
- External current account switched to a surplus, reflecting strong export growth.
Objectives and Macroeconomic Targets of the 1998-99 Program
- Program aims:
- Maintain macroeconomic discipline and momentum of structural reforms through the first months of the new administration scheduled to take office in June 1999 (following presidential elections in March).
- Maintain sustainable high rates of growth while containing inflation to that of trading partners, under a fixed exchange rate.
- Specific targets:
- Rate of growth of GDP: 4 percent in 1998 and 4.5 percent in 1999 (predicated on the assumption that turmoil in international markets does not have a significant adverse effect on exports or investment in 1999).
- Inflation: about 3.5 percent in 1998 and 3 percent in 1999.
- Net international reserves: expected to increase to the equivalent of seven months of imports.
Fiscal Program
- Fiscal stance:
- Widening of the overall deficit (before grants) of the nonfinancial public sector from about 2 percent of GDP in 1997 to less than 3 percent of GDP a year in 1998-99.
- The widening reflects in part an increase in the wage bill from adjustments to civil service salaries (frozen since July 1995) and additional increases to health workers.
- Revenue and expenditure management:
- Tax revenue projected to increase slightly, reflecting sustained recovery in activity and improved tax administration.
- To ensure fiscal targets are met, the government will not offset savings in expenditure with additional spending in different categories and will compensate any revenue shortfall with expenditure cuts.
Structural Reforms
- Reforms completed earlier in 1998 included:
- Sale of electricity distribution companies in January.
- Sale of the telephone company ANTEL in July.
- Planned measures:
- Further reform of the public sector and the pension system.
- Privatization of the sugar mill and of the Mortgage Bank.
- Strengthening of bank supervision and prudential regulations.
- Improvement in monetary policy instruments.
- Lowering of import tariffs.
- Expected outcomes:
- Improve productivity via larger public investment in infrastructure financed in part with privatization proceeds.
- Increase private sector participation and investment, especially in electricity and telecommunications.
- Reduce vulnerability of the financial system.
- Strengthen the domestic capital market.
Social Measures and Use of Privatization Proceeds
- The program supports partial use of privatization proceeds to provide a permanent source of revenue for expanded and improved social expenditure.
- Lending programs for El Salvador approved by the Inter-American Development Bank and the World Bank include expenditures on:
- A health sector reform program.
- A water and sewer program and sector reform.
- Rehabilitation and construction of schools.
- Primary and secondary education projects.
Challenges Ahead
- Despite an impressive turnaround since the end of the civil war in 1992, El Salvador continues to face significant challenges in laying the basis for sustainable growth.
- Consolidation of fiscal adjustment and implementation of structural reforms are crucial to maintain fiscal and external viability over the medium term and to provide assurances for adequate foreign financing.
Institutional and Membership Note
- El Salvador joined the IMF on March 14, 1946; its quota is SDR 125.6 million (about US$172 million); it has no outstanding use of IMF credit.
Selected Economic and Financial Indicators (as presented)
- Income and prices (annual percentage changes, unless otherwise specified)
- Real GDP: 1.8 (1996), 4.0 (1997), 4.5 (1999 Prog.)
- GDP deflator: 7.1 (1996), 4.6 (1997), 6.0 (Rev. 1998), 3.7 (1998 Prog.), 2.5 (1999 Prog.)
- Consumer prices (end of the year): 7.4 (1996), 2.0 (1997), 3.5 (1998 Prog.), 3.0 (1999 Prog.)
- Consumer prices (average): 9.8 (1996), 3.3 (1997)
- External sector (annual percentage changes unless otherwise specified)
- Exports, f.o.b.: 32.7 (1996), -5.5 (1997), -4.7 (1998 Rev.), 4.2 (1999 Prog.)
- Export volume: 9.6 (1996), 18.8 (1997), -3.9 (1998 Rev.), -5.2 (1998 Prog.), 6.7 (1999 Prog.)
- Imports, c.i.f.: -6.5 (1996), 11.3 (1997), 7.6 (1998 Rev.), 8.5 (1998 Prog.), 5.6 (1999 Prog.)
- Import volume: -9.9 (1996), 9.4 (1997), 5.0 (1998 Rev.), 7.8 (1998 Prog.), 2.8 (1999 Prog.)
- Non-oil imports, c.i.f.: -7.1 (1996), 11.9 (1997), 7.5 (1998 Rev.), 5.5 (1998 Prog.)
- Terms of trade: -10.4 (1996), 9.7 (1997), -4.0 (1998 Rev.), -0.1 (1998 Prog.), -4.9 (1999 Prog.)
- Nominal effective exchange rate (Average (depreciation -)): 4.1 (1996), ... (1997), 4.7 (1998 Prog.)
- Nominal effective exchange rate (End of period): 6.4 (1996), 1.5 (1997)
- Real effective exchange rate: 8.2 (1996), 5.1 (1997), 3.9 (1998 Prog.)
- Nonfinancial public sector
- Receipts (excluding grants): -3.1 (1996), 8.6 (1997), 5.2 (1998 Prog.)
- Expenditure: 21.7 (1996), -5.4 (1997), 16.7 (1998 Rev.), 14.6 (1998 Prog.)
- Financial system
- Domestic credit3: 14.4 (1996), 7.9 (1997), 3.4 (1998 Rev.), 7.3 (1998 Prog.)
- Public sector (net): 0.7 (1996), -0.2 (1997), -6.9 (1998 Rev.), -0.6 (1998 Prog.)
- Private sector: 13.1 (1996), 15.5 (1997), 10.8 (1998 Rev.), 9.5 (1998 Prog.)
- Liabilities to private sector: 17.3 (1996), 12.3 (1997), 11.1 (1998 Rev.)
- Velocity (GDP/money and quasi-money): 2.7 (1996), 2.6 (1997)
- Interest rate (annual rate, time deposits, 180 days)4: 12.0 (1996), 12.7 (1997), 10.0 (1998 Rev.)
- Fiscal and external balances (In percent of GDP)
- Overall fiscal balance (after grants): -2.5 (1996), -1.7 (1997), -3.0 (1998 Rev.), -2.7 (1998 Prog.)
- Current account nonfinancial public sector: 1.9 (1996), 1.2 (1997), 1.1 (1998 Prog.)
- Operational surplus public enterprises: 0.8 (1996), 0.9 (1997)
- Gross domestic investment: 15.3 (1996), 15.0 (1997), 16.8 (1998 Prog.)
- Gross national savings: 15.4 (1996), 15.1 (1997), 15.6 (1998 Prog.)
- External current account balance: -1.6 (1996), -1.9 (1997), -1.1 (1998 Rev.), -0.9 (1998 Prog.)
- External current account balance (excluding official transfers): -2.2 (1996), 0.4 (1997), -1.4 (1998 Rev.), -1.2 (1998 Prog.)
- Balance of payments and reserves (In millions of U.S. dollars)
- Overall balance of payments: 165 (1996), 362 (1997), 410 (1998 Rev.), 400 (1998 Prog.), 120 (1999 Prog.)
- Change in net international reserves (increase -): -165 (1996), -362 (1997), -410 (1998 Rev.), -400 (1998 Prog.), -120 (1999 Prog.)
- Gross official reserves: 1,100 (1996), 1,462 (1997), 1,872 (1998 Rev.), 1,862 (1998 Prog.), 1,982 (1999 Prog.)
- Gross official reserves (months of imports): 4.9 (1996), 5.9 (1997), 7.0 (1998 Rev.), 6.9 (1998 Prog.)
Sources: Central Reserve Bank; Ministry of Finance; and IMF staff estimates. EBS/98/19 (2/6/98).