Press Release No. 10/347

Press Release: IMF Executive Board Concludes First Review of El Salvador’s Stand-By Arrangement

September 20, 2010

The Executive Board of the International Monetary Fund (IMF) has concluded the first review of El Salvador’s performance under its 36-month Stand-by Arrangement. The main objectives of El Salvador’s economic program under the arrangement are to bolster economic recovery, reduce poverty, preserve financial stability, and secure debt sustainability. The Stand-By Arrangement was approved on March 17, 2010 in the amount equivalent to SDR 513.9 million (about US$781 million). The Salvadoran authorities intend to continue treating the arrangement as precautionary (see Press Release No. 10/95).

Following the Executive Board discussion of El Salvador on September 15, 2010, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, made the following statement:

“The Salvadoran economy continues its gradual recovery from the global downturn and the medium-term outlook is also generally favorable. Over the longer term, further strengthening the economy’s growth prospects and reducing poverty, while safeguarding fiscal sustainability, requires a comprehensive strategy, including measures to raise revenues, structural reforms aimed at enhancing the business climate, and higher private investment.

“The authorities’ Fund-supported economic program seeks to consolidate gradually the public finances as the economic recovery takes hold. The authorities’ strategy for 2011, which includes strengthening tax administration to increase revenues as well as reforming energy subsidies, will create space for high-priority social spending and public investment while lowering the fiscal deficit to 3.5 percent of GDP.

“Beyond 2011, timely enactment of a fiscal pact, which includes measures to raise revenue on a durable basis, and continued adherence to expenditure targets in the authorities’ program will be critical to sustain fiscal consolidation, placing the debt-to-GDP ratio on a firm downward path.

“Continued commitment to the dollarization regime has been the cornerstone of macroeconomic and financial stability. While the Salvadoran banking system is liquid and well-capitalized, it would benefit from further reforms aimed at enhancing its resilience. Approving the Financial Sector Supervision and Regulation Law, bolstering the corporate governance of banks, and upgrading the bank resolution framework will be key to this objective. Limiting the fiscal risks associated with the provision of credit by public banks will also be necessary,” Mr. Shinohara said.