Press Release No. 08/114

Press Release No.08/114

An International Monetary Fund (IMF) staff mission, led by Mr. Alfred Schipke, issued the following statement in San Salvador on May 16:

"An IMF mission visited El Salvador during May 12-16, 2008 to review recent economic developments and discuss macroeconomic policies. The mission met with Technical Secretary of the Presidency Eduardo Ayala Grimaldi, Finance Minister William Hándal, Economy Minister Yolanda de Gavidia, Central Bank President Luz María Serpas de Portillo, other senior government officials, and private sector representatives. The mission thanks the authorities for their warm hospitality and for fruitful discussions during its stay in San Salvador.

"Against the backdrop of a slowing U.S. economy, the Salvadoran economy performed well in 2007. Real GDP growth reached 4.7 percent in 2007, its highest level in the last decade, and export growth rose to 10 percent in 2007. Fast import growth, in part explained by a higher oil import bill, led to a widening of the current account deficit to 5.5 percent of GDP in 2007. High fuel and food prices kept inflation at its 2006 level of around 5 percent in 2007.

"For 2008, the economic outlook is more subdued as the U.S. slowdown and pressures on food and oil prices continue. During the first quarter, the economy has remained resilient. However, remittance growth for the first four months of the year was lower than during the same period in 2007. Continued food and oil price pressures are expected to push inflation up to 6.5 percent and, coupled with slower export growth, a widening of the current account deficit by 1 percentage point. Higher-than-expected commodity prices, further global financial turbulence, and a more severe slowdown in the US economy pose downside risks to the outlook.

"The mission concurred with the authorities that, in light of external developments, a near-term policy priority is to cushion the most vulnerable groups from the economic slowdown and the rise in food prices while maintaining medium-term fiscal sustainability, and to continue to enhance the resilience of the financial system.

"In this sense, the mission commended the authorities for the continued improvement in fiscal performance in 2007, driven by strong revenue collection and expenditure restraint. This provides a basis for some fiscal expansion in 2008 to contain the impact of the U.S. slowdown and protect the poor. Considering the fiscal impact of continuously rising energy subsidies, the mission encouraged the authorities, instead, to redirect spending toward well-targeted transfer programs such as Red Solidaria, which do not create price distortions and have a much stronger poverty reduction impact. It also welcomed the authorities' continued commitment to enhancing revenue collection.

"The mission noted that the capital adequacy and liquidity levels of the banking system remain high. An increase in credit to the private sector has been financed by fast deposit growth, while lending rates remain stable. The mission welcomed the authorities' intention to introduce additional temporary and preventive liquidity requirements over the coming months in light of increased global uncertainty.

"The mission pointed out that current events in global financial markets provide an opportunity to press ahead with the implementation of structural reforms in the financial sector, including bolstering the autonomy and legal protection of supervisory authorities, enhancing cross-border supervision, strengthening the deposit insurance fund, and providing a framework for dealing with systemic liquidity problems. In this sense, the mission encouraged the authorities to press ahead with their efforts to strengthen financial supervision.

"The IMF will maintain a close policy dialogue with the authorities and continue to provide technical assistance to El Salvador. A mission is expected to return to El Salvador for the next Article IV consultation in the second half of this year."