IMF Executive Board Concludes 2019 Article IV Consultation with El Salvador
IMF News, May 24, 2019
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- Published: May 24, 2019
Background and recent performance
- During the past decade El Salvador made considerable strides in social development: poverty, inequality and migration to the U.S declined, especially after 2015, due to sustained social spending and a growing economy.
- Real GDP grew by 2½ percent in 2018, fueled by strong domestic consumption and investment.
- The primary fiscal surplus increased to about 1 percent of GDP in 2018, driven by strong import tax revenues and one-off tax measures; however, the rising interest bill offset the improvement in the primary balance, leading to a slight deterioration of the overall fiscal deficit.
- Public debt (including pensions) remained at about 70 percent of GDP at end-2018.
- The banking sector remained solid and used the remittance-fueled increase in deposits to expand credit to the private sector.
Outlook and risks
- Growth projections:
- Real GDP is projected to grow at 2½ percent in 2019 and converge to its potential of 2.2 percent over the medium-term.
- Inflation and remittances:
- Inflation is expected to remain anchored at 1 percent.
- Remittances growth will decline to its long-term rate.
- Fiscal trajectory:
- Public debt would drift upwards under the baseline as the fiscal balance will deteriorate due the expected loss in temporary revenues and a rising interest bill.
- Risks:
- Downside risks: weaker-than-expected global growth, rising protectionism, and domestic policy slippages, especially if spending measures are adopted without identifying appropriate funding resources.
- Upside scenario: global financial conditions may tighten less than expected.
Executive Board assessment and policy recommendations
- Overall assessment:
- Directors commended policies that contributed to strong macroeconomic performance and declines in poverty and inequality, but noted risks remain tilted to the downside.
- Fiscal policy:
- Emphasized the need for prompt fiscal adjustment to reduce high public debt.
- Called for adoption of frontloaded fiscal measures to put debt on a firmly declining path.
- Measures should be calibrated in a growth-friendly way without adversely affecting social outcomes.
- Stressed importance of improving revenue collection and tax administration.
- Growth-enhancing structural reforms:
- Recommended measures to combat crime, improve governance, and reduce poverty to raise potential growth.
- Suggested increasing investment in public infrastructure, including through public‑private partnerships, improving security, removing barriers to trade and investment, reducing informality, and reducing the gender gap in labor force participation.
- Commended improvements to the business environment and competitiveness, including implementation of the El Salvador Seguro plan and regulatory improvements to complete the Northern Triangle customs union.
- Financial sector and supervision:
- Noted banking sector is well capitalized and welcomed progress in risk‑based and cross‑border supervision.
- Encouraged approval of the bank resolution law, strengthening the emergency liquidity assistance framework, and ensuring full compliance with the risk‑based supervision framework.
- Recommended promoting financial inclusion, including expanding access to fintech services.
- Governance, anticorruption, and AML/CFT:
- Supported recently adopted measures to improve governance, anticorruption and AML/CFT frameworks, while calling for further strengthening.
- Recommended enhancing fiscal transparency of the 2020 budget law, improving the audit of fiscal operations, and establishing better spending controls.
- Recommended promptly implementing electronic invoicing.
- Noted that changes to the anticorruption legal framework should be comprehensive, ensure harmonization of laws and consider the impact on the budget.
Key statistics and selected economic indicators
- Social indicators:
- Per capita income (U.S. dollars, 2018): 3,701
- Population (million, 2017): 6.4
- Percent of pop. below poverty line (2017): 29
- Gini index (2017): 38
- Income and prices (percent):
- Real GDP growth (percent): 2015: 2.4; 2016: 2.5; 2017: 2.3; 2018: 2.2; 2019 (Proj.): 2.5; 2020 (Proj.): 1.1? [table shows consumer price inflation separately]
- Consumer price inflation (average, percent): 2015: -0.7; 2016: 0.6; 2017: 1.0; 2018: 1.1; 2019 (Proj.): 1.3
- Terms of trade, percent change: 2015: 12.4; 2016: -2.9; 2017: -2.1; 2018: -3.9; 2019 (Proj.): -0.9; 2020 (Proj.): 0.9; 2021 (Proj.): 0.1
- External sovereign bond spread (basis points): 2015: 497; 2016: 600; 2017: 520; 2018: 424
- Money and credit:
- Credit to the private sector (percent of GDP): 2015: 49.5; 2016: 50.6; 2017: 51.5; 2018: 52.4; 2019 (Proj.): 53.2; 2020 (Proj.): 53.1; 2021 (Proj.): 53.3
- Broad money (percent of GDP): 2015: 47.9; 2016: 48.0; 2017: 51.4; 2018: 52.0; 2019 (Proj.): 52.7; 2020 (Proj.): 52.8
- Interest rate (time deposits, percent): 2015: 4.2; 2016: 4.4
- External sector (percent of GDP unless otherwise indicated):
- Current account balance: 2015: -3.2; 2016: -2.3; 2017: -1.9; 2018: -4.8; 2019 (Proj.): -4.4; 2020 (Proj.): -4.5
- Trade balance: 2015: -21.2; 2016: -19.3; 2017: -19.4; 2018: -22.8; 2019 (Proj.): -23.1; 2020 (Proj.): -22.9
- Transfers (net): 2015: 18.6; 2016: 18.8; 2017: 20.2; 2018: 20.6; 2019 (Proj.): 21.2; 2020 (Proj.): 21.1; 2021 (Proj.): 21.0
- Foreign direct investment (percent of GDP): 2015: 1.7; 2016: 1.4; 2017: 3.6; 2018: 3.2
- Gross international reserves (millions of U.S. dollars): 2015: 2,787; 2016: 3,238; 2017: 3,567; 2018: 3,569; 2019 (Proj.): 3,728; 2020 (Proj.): 3,882; 2021 (Proj.): 4,039
- Nonfinancial public sector (percent of GDP):
- Overall balance: 2015: -3.6; 2016: -3.1; 2017: -2.5; 2018: -2.7; 2019 (Proj.): -3.4; 2020 (Proj.): -3.5
- Primary balance 1/: 2015: -0.2; 2016: 0.7; 2017: 0.4; 2018: 1.2
- Of which: tax revenue: 2015: 16.7; 2016: 17.2; 2017: 17.7; 2018: 17.9; 2019 (Proj.): 17.6
- Public sector debt 2/: 2015: 66.8; 2016: 68.8; 2017: 70.3; 2018: 69.8; 2019 (Proj.): 70.8; 2020 (Proj.): 71.2
- National savings and investment (percent of GDP):
- Gross domestic investment: 2015: 16.0; 2016: 16.6; 2017: 20.4; 2018: 19.0; 2019 (Proj.): 15.5
- Private sector 3/: 2015: 13.5; 2016: 14.2; 2017: 18.1; 2018: 16.8
- National savings: 2015: 12.8; 2016: 13.7; 2017: 14.8; 2018: 15.7; 2019 (Proj.): 14.5; 2020 (Proj.): 13.2; 2021 (Proj.): 13.1
- Private sector: 2015: 13.6; 2016: 15.2; 2017: 14.9; 2018: 12.9
- Net foreign assets of the financial system (Millions of U.S. dollars): 2015: 1,931; 2016: 2,021; 2017: 2,689; 2018: 2,771; 2019 (Proj.): 2,910; 2020 (Proj.): 3,043; 2021 (Proj.): 3,241
- Memorandum items:
- Nominal GDP (billions of U.S. dollars): 2015: 23.4; 2016: 24.2; 2017: 24.9; 2018: 26.1; 2019 (Proj.): 27.0; 2020 (Proj.): 28.2; 2021 (Proj.): 29.5
IMF Executive Board Concludes 2019 Article IV Consultation with El Salvador, Press Release No. 19/181, May 24, 2019.
