## Press Release: IMF Approves Stand-By Credit for El Salvador

_IMF News, September 24, 1998_

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## Bibliographic details
- Published: September 24, 1998

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### 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).*

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## References

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