{
  "title": "IMF Survey: Central America Aims for Stronger Growth",
  "publication": "IMF News, August 2, 2007",
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  "summary": "After years of political and economic turmoil in many Central American countries, the region has made important economic advances against a backdrop of both improved political stability and favorable global economic conditions. Now it should work on raising its growth potential.",
  "authors": [
    "Alfred Schipke IMF Western Hemisphere Department August"
  ],
  "publishDate": "2007-08-02",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Author: Alfred Schipke, IMF Western Hemisphere Department; August 2, 2007.\n- Central America has made important economic advances after years of political and economic turmoil, aided by improved political stability and favorable global conditions.\n- Recent improvements:\n  - Real GDP has recovered.\n  - Inflation has remained under control despite the upsurge in oil prices.\n  - Exports have been strong.\n- Persistent challenges:\n  - Poverty remains persistent and widespread.\n  - The region remains vulnerable to economic events outside its control.\n- Conference context:\n  - Sixth annual regional conference held in San José, Costa Rica on June 29-30.\n  - Coincided with publication of IMF Occasional Paper No. 257, Economic Growth and Integration in Central America."
    },
    {
      "heading": "Reforms to reduce poverty and boost growth",
      "content": "- Central objective: reduce poverty, described as Central America's biggest challenge.\n- Growth performance:\n  - Average growth rates of the past decade have fallen short of records from the 1960s and 1970s.\n  - The region's growth has lagged more dynamic emerging market economies, especially in Asia.\n- Country outcomes:\n  - Only three countries—Costa Rica, Panama, and the Dominican Republic—have raised GDP per capita above levels observed in the late 1970s.\n  - Only Costa Rica has a substantially lower poverty level now than three decades earlier.\n- Sources of growth (1960-2005):\n  - Increases in output per worker reflected almost exclusively increased investment in capital equipment rather than productivity growth.\n  - Variations in growth across subperiods and countries were closely associated with differences in productivity growth.\n- Implication: improving productivity through reforms is paramount to raising living standards and reducing poverty."
    },
    {
      "heading": "Strengthening institutions",
      "content": "- Institutional improvements identified as key to raising productivity.\n- Simulation findings:\n  - Bringing institutional quality up to Chile's level could raise growth by:\n    - half a percentage point a year in Central American countries with relatively strong institutions (Costa Rica).\n    - 3 percentage points or more a year in countries with relatively weak institutions (Guatemala, Honduras, and Nicaragua).\n- Institutional dimensions cited: government effectiveness, control of corruption, political instability and violence, regulatory burden, voice and accountability, and the rule of law.\n- Trade agreements:\n  - A concerted effort to improve institutions and the business environment is paramount to ensure benefits from the Central American Free Trade Agreement with the United States and a potential Association Agreement with the European Union."
    },
    {
      "heading": "Fiscal sustainability and pensions",
      "content": "- Public finances:\n  - Macroeconomic policies have strengthened, but high debt levels and future contingent claims, especially pension benefits, leave public finances vulnerable.\n  - Debt levels (with the exception of Guatemala's) remain high, averaging 47 percent of GDP at the end of 2006.\n  - Authorities need to reduce debt levels and raise tax revenue further to meet social and investment needs in a fiscally responsible manner.\n- Pension systems:\n  - Demographics: the ratio of the working-age population to the elderly will fall from about eight today to less than three in 2050.\n  - Sustainability requires combinations of increased contribution rates, higher retirement ages, and lower benefits in most countries.\n  - Political support and reform design are both critical for success.\n- Debt structure:\n  - Sustainability depends on debt level and structure—currency denomination, maturity composition, capital structure, and solvency.\n  - Regional characteristics:\n    - On average, Central America has a lower share of short-term debt than the rest of Latin America but a higher share of foreign currency debt.\n    - More recently, Central America has reduced foreign currency exposure and lengthened maturity structure modestly.\n  - Recommendation: continue efforts to move toward \"safer\" debt structures."
    },
    {
      "heading": "Strengthening monetary policy and central bank credibility",
      "content": "- Achievements:\n  - Countries have succeeded in reducing inflation.\n  - Progress in strengthening institutional underpinnings for monetary policy: new central bank legislation has enhanced autonomy and focused mandates on price stability.\n  - Direct political intervention in central bank decisions and monetary financing of fiscal deficits has been curtailed.\n- Remaining shortcomings:\n  - Tension between maintaining price stability and preserving external value of domestic currency can cause policy conflicts (e.g., during strong capital inflows) and undermine credibility.\n  - The executive branch retains substantial leeway to remove central bank governors and directors, maintaining a potential link between the political business cycle and monetary policy decisions.\n  - Central banks generally lack financial autonomy because legal provisions to protect the integrity of central bank capital are often absent, undermining effectiveness and credibility.\n- Priority: make progress on legal and institutional features that enhance central bank independence and financial autonomy."
    },
    {
      "heading": "Development of financial systems and debt management",
      "content": "- Financial sector structure:\n  - Region's financial sector is dominated by banks.\n  - Substantial room for development, except Panama which has a bank-asset-to-GDP ratio of 250 percent.\n  - Capital markets are underdeveloped; equity and corporate bond listings are generally in the single digits.\n  - Institutional investors intermediate only a small share of national savings.\n- Public debt market development:\n  - Substantial room to develop public debt markets through institutional and operational improvements.\n  - Recommendation: transfer quasi-fiscal debts of central banks to the government to aid establishment of liquid public debt markets and a unified sovereign yield curve, addressing dual sovereign debt issuers.\n- Nonstandard and nontradable debt:\n  - Region has a large stock that should be restructured.\n- Debt management improvements:\n  - Important to develop and implement a medium-term debt management strategy and improve technical capacity of debt management units.\n  - Costa Rica, El Salvador, and Panama have made some improvements in recent years.\n- Policy linkage:\n  - Deeper and more liquid public debt markets would allow authorities in countries with their own currency to conduct monetary policy more effectively."
    },
    {
      "heading": "Policy message and timing",
      "content": "- Central message from IMF Deputy Managing Director Murilo Portugal: now is the time for Central America to reform and take advantage of the benign global environment.\n- Quotation highlighted: \"it is in the sunny days that we should fix the roof of the house.\"\n\n---\n\n Content in this bundle\n\n- 080207spdf (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- https://www.imf.org/en/News/country-focus\n- PRESS CENTER\n- IMF Country Focus\n- IMF Occasional Paper\n- Strengthening regional approach\n- Conference agenda\n- Conference communique\n- Murilo Portugal speech\n- communiqué\n- Occasional Paper No. 257\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar082b"
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    "Authors: Alfred Schipke IMF Western Hemisphere Department August",
    "Published: August 2, 2007",
    "Author: Alfred Schipke, IMF Western Hemisphere Department; August 2, 2007.",
    "Central America has made important economic advances after years of political and economic turmoil, aided by improved political stability and favorable global conditions.",
    "Recent improvements:",
    "Persistent challenges:",
    "Conference context:",
    "Central objective: reduce poverty, described as Central America's biggest challenge.",
    "Growth performance:",
    "Country outcomes:",
    "Sources of growth (1960-2005):",
    "Implication: improving productivity through reforms is paramount to raising living standards and reducing poverty.",
    "Institutional improvements identified as key to raising productivity.",
    "Simulation findings:",
    "Institutional dimensions cited: government effectiveness, control of corruption, political instability and violence, regulatory burden, voice and accountability, and the rule of law.",
    "Trade agreements:",
    "Public finances:",
    "Pension systems:",
    "Debt structure:",
    "Achievements:",
    "Remaining shortcomings:",
    "Priority: make progress on legal and institutional features that enhance central bank independence and financial autonomy.",
    "Financial sector structure:",
    "Public debt market development:",
    "Nonstandard and nontradable debt:",
    "Debt management improvements:",
    "Policy linkage:",
    "Central message from IMF Deputy Managing Director Murilo Portugal: now is the time for Central America to reform and take advantage of the benign global environment.",
    "Quotation highlighted: \"it is in the sunny days that we should fix the roof of the house.\"",
    "[080207spdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/survey/so/2007/esl/080207spdf.pdf){rel=\"external\" type=\"application/pdf\"}",
    "[https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[IMF Country Focus](https://www.imf.org/en/news/country-focus)",
    "[IMF Occasional Paper](http://www.imf.org/external/pubs/nft/op/257/index.htm)",
    "[Strengthening regional approach](https://www.imf.org/external/pubs/ft/survey/so/2007/CAR082A.htm)",
    "[Conference agenda](http://www.imf.org/external/np/seminars/eng/2007/centram/index.htm)",
    "[Conference communique](http://www.imf.org/external/np/sec/pr/2007/pr07148.htm)",
    "[Murilo Portugal speech](https://www.imf.org/external/np/speeches/2007/062807.htm)",
    "[communiqué](https://www.imf.org/external/np/sec/pr/2007/pr07148.htm)",
    "[Occasional Paper No. 257](https://www.imf.org/external/pubs/cat/longres.cfm?sk=19748.0)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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