IMF Staff Concludes Visit to El Salvador

IMF News, November 8, 2019

Source details

End-of-Mission press release dated November 8, 2019.
Mission led by Ms. Alina Carare visited San Salvador during November 4-8, 2019.
Purpose: discuss the outlook, the 2020 budget and the government’s growth agenda, including structural reforms to promote investment.
Meetings held with: President Nayib Bukele; Chief of Cabinet Carolina Recinos; Finance Minister Nelson Fuentes; Central Bank President Carlos Federico Paredes; Superintendent of the Financial System Mirna Arevalo de Patiño; Minister of the Economy Maria Luisa de Hayem; Secretary of Commerce and Investment Miguel Kattan; Minister of Defense Rene Francis Merino Monroy; other senior government officials; members of the Legislative Assembly; and representatives of the private sector.

Recent performance and near-term projection:
- “The economy grew 2.2 percent in the first half of the year, and inflation hovered around zero.”
- “After dipping in the second quarter, remittances growth returned to its long-term rate of 4 percent.”
- “In 2019 real GDP growth is expected to be 2½ percent on the back of improving business confidence.”
- Over the medium-term and under current policies, economic growth will converge to the estimated potential.
Downside risks:
- Weaker-than-expected global growth.
- Domestic policy slippages, notably if spending measures are adopted without identifying appropriate non-borrowing funding resources.
Upside possibility:
- Global financial conditions may prove more supportive than presently expected.

Positive actions and support:
- Authorities are aggressively tackling crime and corruption and are starting to improve the business environment to support growth.
- Mission welcomes implementation of the “Plan of Control Territorial” to improve security.
- Mission welcomes elimination of the so-called “gastos reservados” for the office of the presidency to reduce corruption.
- Mission supports efforts to expedite processing of business permits, including by creating a red tape committee and improving information sharing among public agencies to streamline business registration.
2020 budget orientation:
- Higher spending on security, human capital, and infrastructure in the 2020 budget is welcomed as provision of public goods needed for economic growth.

Recent fiscal performance:
- “The primary fiscal balance has improved by 2¾ percent of GDP since 2013 but remains broadly unchanged over 2018-2019 at 0.9 percent of GDP.”
2020 draft budget:
- Envisages a further consolidation of 0.2 percent of GDP owing to better revenue administration.
Debt dynamics and recommended adjustment:
- Envisaged primary surpluses “of 1.2 percent of GDP on average during 2020-2021” would not be enough to offset the rising interest bill associated with the high stock of debt, absent sizeable frontloaded adjustment.
- Interest-growth differential remains considerable—about 4 percent—prompting continued recommendation for prudent fiscal adjustment.
- Further fiscal consolidation of about 2 percent of GDP by 2021 is recommended to ensure commitment to the fiscal responsibility law and put debt on a firmly declining path.
- Consolidation measures should be carefully calibrated, growth-friendly, and protect the poor and vulnerable.
Financing and market conditions:
- Market conditions currently remain favorable, but sizeable financing gaps are looming over the medium-term.
- Approving a strong budget and its financing on time will contribute to macroeconomic stability and enhance the investment climate.

Banking sector soundness:
- “Banks are solid with low NPLs, high capital buffers, and abundant liquidity.”
Staff support for authorities’ efforts to preserve financial stability through:
- (i) Adopting the bank resolution legislation in line with best practices.
- (ii) Ensuring that the reactivated interbank market functions smoothly to increase banks’ efficiency in managing liquidity.
- (iii) Ensuring that measures supporting credit growth fully comply with the risk-based supervision framework.
- (iv) Continuing to promote financial inclusion, including the recently adopted amendments to the financial inclusion law.

“The IMF greatly appreciates the frank and productive discussions and the warm hospitality of our Salvadoran counterparts.”

IMF Staff Concludes Visit to El Salvador — Press Release No. 19/404 (November 8, 2019).