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El Salvador Reaps Rewards of Outward-Oriented Strategy

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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Since taking office in 2004, the government of El Salvador has pursued an outward-oriented strategy to boost growth and improve social conditions through greater integration with the global and regional economies, investment and social reforms, and stabilization of the public debt. Its early achievements include an increase in tax revenue, improved debt management, and the signing of the Central America-Dominican Republic-United States Free Trade Agreement. Economic growth—spurred by investment and exports—has picked up; inflation has fallen to the lowest in the region, despite the full pass-through of higher oil prices; and the external current account deficit has widened only slightly, the IMF said in its most recent economic review.

Looking ahead, the authorities plan to bolster the fiscal position in 2006 by limiting income tax exemptions and subsidies and to secure passage of banking reforms to underpin financial stability and deepen intermediation. Over the medium term, the strategy is to keep the public debt-GDP ratio stable through 2008 and reduce it gradually thereafter. This would be achieved by further reducing tax evasion and controlling pension costs while creating space for priority infrastructure and social spending.

Executive Directors commended El Salvador’s continued progress and observed that the authorities’ main policy challenge is to place the economy on a path of sustained rapid growth and social progress that will help the country achieve the Millennium Development Goals. This will involve continued progress on its fiscal sector, financial system, and structural reform agendas.

El Salvador
Est.Proj.
2003200420052006
Real GDP (percent change)2.31.82.83.5
Consumer prices
(12-month percent change to end-year)2.55.44.34.0
Consolidated public sector deficit
(percent of GDP)–3.7–2.9–3.0–2.8
Public sector debt
(percent of GDP, end of period)42.143.542.342.6
Data: Salvadoran Central Reserve Bank and Ministry of Finance, and IMF staff estimates and projections.
Data: Salvadoran Central Reserve Bank and Ministry of Finance, and IMF staff estimates and projections.

To limit fiscal pressures and further improve the investment climate, Directors encouraged the authorities to facilitate further private sector participation in infrastructure projects and improve procedures for corporate insolvency, business dispute resolution, and creditors’ rights. Although the banking system appears well positioned to withstand temporary liquidity shocks, Directors recommended restructuring the balance sheet of the central bank and strengthening its lender-of-last-resort function to provide an additional cushion against systemwide financial shocks and to minimize contagion risks.

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