Press Release No. 08/205

Press Release: IMF Staff Statement on the 2008 Article IV Consultation with El Salvador

September 12, 2008

An International Monetary Fund (IMF) staff mission, led by Mr. Alfred Schipke, issued the following statement in San Salvador on September 11:

"An IMF mission visited San Salvador during September 1-11 for the 2008 Article IV Consultation with El Salvador, to review economic developments and discuss the authorities' economic policies. The mission met with Technical Secretary of the Presidency Eduardo Ayala Grimaldi, Minister of Finance William Hándal, Central Bank President Luz María Serpas de Portillo, other senior government officials, members of Congress, labor union representatives, the private sector, think tanks, and the economic teams of the leading presidential candidates. The mission thanks the authorities for the warm welcome and close cooperation it received during its stay in El Salvador.

"As a result of sustained economic reforms over the last few years, El Salvador's macroeconomic fundamentals are solid. In 2007, the fiscal position improved, the public debt-to-GDP ratio declined, and economic growth reached its highest level in a decade.

"A combination of external and domestic shocks poses challenges for the near-term outlook. The mission expects growth to decelerate to 3.6 percent and 3.4 percent in 2008 and 2009, respectively, on the back of the U.S. slowdown (which is projected to extend into next year), high commodity prices, tight global financial conditions, and domestic electoral uncertainty. At the same time, high oil and food prices have pushed inflation up to 9.9 percent in August, with a greater adverse impact on the poor, and have widened the current account deficit.

"To support the external adjustment process, the mission encouraged the authorities to maintain fiscal restraint, while improving the efficiency of subsidies and increasing well-targeted poverty alleviation programs. In this context, the mission welcomed the gradual reduction in the electricity subsidy for private companies and encouraged the authorities to further tighten controls on the use of subsidies. The mission supported the authorities' public sector deficit target of 2 percent of GDP for 2009.

"The mission noted that the financial system remains well capitalized and liquid. To further strengthen it, the mission highlighted the need to pass the long-pending supervision bill, improve the central bank's liquidity management and lender-of-last-resort functions, and bolster the deposit insurance fund by increasing its reserves to 5 percent of deposits.

"Faced with an uncertain external environment and potential weakening of investor confidence in the run-up to the presidential election, the mission stressed to the economic teams of the main political parties the importance of clearly signaling their commitment to maintaining sound macroeconomic policies. The mission discussed with the authorities policy responses and contingency measures in this environment. It welcomed the authorities' decision to impose a temporary 3 percent liquid assets requirement on bank deposits. Also, the mission concurred with the authorities on the benefits of reaching an agreement with the main political parties on how to improve the public debt profile. Furthermore, there was a consensus on the need to focus medium-term macroeconomic policies on enhancing the resilience of the economy and the financial sector to shocks, increase fiscal space for counter-cyclical policies, and create conditions for higher growth and faster poverty reduction.

"The mission will continue to maintain a close dialogue with the authorities. Based on the recommendations presented to the authorities, the mission will prepare a report to be considered by the IMF Executive Board in October 2008."