IMF economic assessment of El Salvador

The Executive Board of the International Monetary Fund (IMF) recently concluded an Article IV consultation with El Salvador. Their assessment seems to be a mixed bag.

Executive Directors noted that while favorable external conditions and low oil prices have contributed to some improvement in the economic situation, El Salvador continues to suffer from low growth due to a host of complex issues, including low investment, high crime and emigration, and weak competitiveness. Directors underscored that ensuring fiscal and debt sustainability and raising potential growth will require strong policies and far-reaching structural reforms supported by broad political consensus.

Directors generally emphasized that frontloaded fiscal consolidation is needed to reverse the upward trajectory of public debt, entrench fiscal sustainability, and create space to fund the lender of last resort (LOLR) facility and fully implement the authorities’ crime prevention strategy. They highlighted that both revenue and expenditure measures will be important to deliver the required adjustment while safeguarding social spending safety nets. Introducing less-distortionary taxes will be helpful in this regard. Directors took note of the authorities’ initiatives to reform the pension system and called for further steps to adjust the system to include changes essential to ensure its long-run fiscal and social sustainability. A sound medium-term fiscal framework will be essential going forward.

Directors noted that the authorities have made good progress in financial sector reforms and encouraged them to implement the remaining reforms, including those aimed at addressing liquidity risks. They also highlighted the importance of increasing annual budget allocations for the LOLR facility and making further progress in risk-based supervision along with comprehensive legislative reform to strengthen the bank resolution and crisis management framework.

Directors emphasized that structural reforms will be key to increasing investment and fostering inclusive growth. They encouraged the authorities to enhance the flexibility of wages and prices, including by containing minimum wage increases, ease barriers to entry and competition, and curb anti-competitive practices in key sectors and improving the effectiveness of the Competition Agency. Efforts should also continue towards improving the business climate, developing human and physical capital, and reducing crime and corruption.

Take their opinion for what it is worth.