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El Salvador’s reforms pay off, but external factors dampen growth

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 2005
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Over the past decade, El Salvador’s rigorous implementation of a wide range of structural reforms contributed to considerable improvements in the country’s per capita income and social conditions. In 2001, the reform effort was capped with official dollarization, which helped reduce interest rates and consolidated low inflation, according to the IMF’s annual economic assessment. Nevertheless, economic growth has been sluggish in recent years as a result of high oil prices, natural disasters, deteriorating terms of trade, and the economic slowdown in the United States.

El Salvador20012002200320042005
PreliminaryProjections
(percent change)
Real GDP1.72.21.81.52.5
Consumer prices (end of period)1.42.82.55.52.5
(percent of GDP)
Consolidated public sector deficit4.34.63.82.93.1
Public sector debt (end of period)39.443.546.144.846.2
Data: IMF staff report.

The IMF’s Executive Board praised El Salvador’s impressive reforms, which include trade opening, privatization, and overhauls of tax policy, the civil service, and the pension system, but noted that the challenge of reviving economic growth remains. It stressed that maintaining dollarization still required additional efforts with a focus on strengthening public finances and achieving debt sustainability. In this context, the new government recently approved tax measures, including steps to improve tax administration, that are projected to raise annual revenue by about 1 percent of GDP. A moderate primary fiscal surplus will be needed to place public debt firmly on a downward path. While it supported the planned increase in social and infrastructure spending, the Board encouraged the authorities to enhance public expenditure management by containing current spending, including the wage bill.

The Board welcomed the government’s focus on fiscal consolidation and structural reforms aimed at raising national savings and improving productivity and competitiveness. It encouraged efforts to deepen trade reform, further strengthen the banking system, address infrastructure constraints, increase labor market flexibility, and improve incentives for private investment. To achieve these, the Board added, it will be important to win popular support for the reform agenda.

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