Via IMF (Den Internationale Valutafond)

On May 22, 2019, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation
withEl Salvador.



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.

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Executive Board Assessment


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

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.

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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.