IMF Executive Board Concludes 2019 Article IV Consultation with El Salvador
May 24, 2019
Background
During the past decade El Salvador has 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.
Fueled by strong domestic consumption and investment, real GDP grew by 2½ percent in 2018. The primary fiscal surplus increased to about 1 percent of GDP, driven by strong import tax revenues and one-off tax measures. Nevertheless, 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 continued to be solid and used the remittance-fueled increase in deposits to expand credit to the private sector.
Real GDP is projected to grow at 2½ percent in 2019 and converge to its potential of 2.2 percent over the medium-term, in line with the global growth outlook. Inflation is expected to remain anchored at 1 percent, and remittances growth will decline to its long-term rate. 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.
Downside risks to the outlook stem from weaker-than-expected global growth, rising protectionism, and domestic policy slippages, especially if spending measures are adopted without identifying appropriate funding resources. On the upside, global financial conditions may tighten less than expected.
Executive Board Assessment [2]
Executive Directors commended the authorities’ policies that contributed to the strong macroeconomic performance and a decline in poverty and inequality. Noting that risks remain tilted to the downside, Directors emphasized the need for prompt fiscal adjustment to reduce the high public debt, and structural reforms to raise potential growth, including measures to combat crime, improve governance, and reduce poverty.
Directors welcomed the authorities’ fiscal consolidation efforts and the fiscal laws recently passed by the Legislative Assembly, including the revised Fiscal Responsibility Law. In view of the high public debt and the large financing needs, Directors called for the authorities to adopt frontloaded fiscal measures to put debt on a firmly declining path, while noting, in line with staff recommendations, that the measures should be calibrated in a growth-friendly way without adversely affecting social outcomes. In that context, Directors also stressed the importance of improving revenue collection and tax administration.
Directors commended the authorities’ efforts to improve the business environment and competitiveness, including through the implementation of the El Salvador Seguro plan, regulatory improvements to complete the Northern Triangle customs union, and policies to help human capital formation. They noted that potential growth could be further raised by increasing investment in public infrastructure, including through public‑private partnerships, improving security, removing barriers to trade and investment, and reducing informality and the gender gap in labor force participation.
Directors noted that the banking sector is well capitalized and welcomed the recent progress in risk‑based and cross‑border banking supervision. To further improve the resilience of the banking sector, they encouraged the authorities to approve the bank resolution law, strengthen the emergency liquidity assistance framework, and ensure full compliance with the risk‑based supervision framework. Director also noted the importance of further promoting financial inclusion, including by expanding access to fintech services.
Directors supported the recently adopted measures to improve the governance, anticorruption and Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) frameworks. Nevertheless, these frameworks should be strengthened further by enhancing fiscal transparency of the 2020 budget law, by improving the audit of fiscal operations, and establishing better spending controls. Directors recommended promptly implementing electronic invoicing, and also noted that changes to the anticorruption legal framework should be comprehensive, ensure harmonization of laws and consider the impact on the budget.
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El Salvador: Selected Economic Indicators |
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I. Social Indicators |
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Per capita income (U.S. dollars, 2018) |
3,701 |
Population (million, 2017) |
6.4 |
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Percent of pop. below poverty line (2017) |
29 |
Gini index (2017) |
38 |
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II. Economic Indicators (percent of GDP, unless otherwise indicated) |
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Proj. |
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2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
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Income and prices |
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Real GDP growth (percent) |
2.4 |
2.5 |
2.3 |
2.5 |
2.5 |
2.3 |
2.2 |
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Consumer price inflation (average, percent) |
-0.7 |
0.6 |
1.0 |
1.1 |
0.6 |
1.3 |
1.1 |
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Terms of trade, percent change |
12.4 |
-2.9 |
-2.1 |
-3.9 |
-0.9 |
0.9 |
0.1 |
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|
External sovereign bond spread (basis points) |
497 |
600 |
520 |
424 |
… |
… |
… |
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Money and credit |
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Credit to the private sector |
49.5 |
50.6 |
51.5 |
52.4 |
53.2 |
53.1 |
53.3 |
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Broad money |
47.9 |
48.0 |
51.4 |
52.0 |
52.7 |
52.7 |
52.8 |
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Interest rate (time deposits, percent) |
4.2 |
4.4 |
4.4 |
4.2 |
… |
… |
… |
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External sector |
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Current account balance |
-3.2 |
-2.3 |
-1.9 |
-4.8 |
-4.4 |
-4.4 |
-4.5 |
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Trade balance |
-21.2 |
-19.3 |
-19.4 |
-22.8 |
-23.1 |
-22.9 |
-22.9 |
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Transfers (net) |
18.6 |
18.8 |
20.2 |
20.6 |
21.2 |
21.1 |
21.0 |
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Foreign direct investment |
1.7 |
1.4 |
3.6 |
3.2 |
2.5 |
2.5 |
2.2 |
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Gross international reserves (millions of U.S. dollars) |
2,787 |
3,238 |
3,567 |
3,569 |
3,728 |
3,882 |
4,039 |
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Nonfinancial public sector |
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Overall balance |
-3.6 |
-3.1 |
-2.5 |
-2.7 |
-3.4 |
-3.5 |
-2.9 |
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Primary balance 1/ |
-0.9 |
-0.2 |
0.7 |
0.9 |
0.7 |
0.4 |
1.2 |
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Of which: tax revenue |
16.7 |
17.2 |
17.7 |
17.9 |
17.6 |
17.6 |
17.6 |
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Public sector debt 2/ |
66.8 |
68.8 |
70.3 |
69.8 |
70.8 |
71.2 |
71.2 |
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National savings and investment |
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Gross domestic investment |
16.0 |
16.0 |
16.6 |
20.4 |
19.0 |
17.6 |
17.7 |
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Private sector 3/ |
13.5 |
13.5 |
14.2 |
18.1 |
16.8 |
15.5 |
15.5 |
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National savings |
12.8 |
13.7 |
14.8 |
15.7 |
14.5 |
13.2 |
13.1 |
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Private sector |
13.6 |
13.6 |
14.5 |
15.2 |
14.9 |
13.7 |
12.9 |
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Net foreign assets of the financial system |
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Millions of U.S. dollars |
1,931 |
2,021 |
2,689 |
2,771 |
2,910 |
3,043 |
3,241 |
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Memorandum items |
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Nominal GDP (billions of U.S. dollars) |
23.4 |
24.2 |
24.9 |
26.1 |
27.0 |
28.2 |
29.5 |
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Sources: Central Reserve Bank of El Salvador, Ministry of Finance, and IMF staff estimates. 1/ The baseline scenario does not include planned revenue measures (electronic invoicing, the monotributo, and transfer pricing). 2/ Includes gross debt of the nonfinancial public sector and external debt of the central bank. 3/ Includes inventories. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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