This 2004 Article IV Consultation highlights that economic growth in El Salvador in recent years has been dampened by adverse external conditions, major earthquakes, and election-related uncertainties. Real GDP growth is estimated at about 1½ percent in 2004 while inflation picked up to more than 5 percent, owing to higher oil prices. The public sector deficit is expected to decline to 3 percent of GDP in 2004. Executive Directors have praised El Salvador’s long-standing record of structural reform and commitment to sound macroeconomic policies, and considered that official dollarization has served El Salvador well.

Abstract

This 2004 Article IV Consultation highlights that economic growth in El Salvador in recent years has been dampened by adverse external conditions, major earthquakes, and election-related uncertainties. Real GDP growth is estimated at about 1½ percent in 2004 while inflation picked up to more than 5 percent, owing to higher oil prices. The public sector deficit is expected to decline to 3 percent of GDP in 2004. Executive Directors have praised El Salvador’s long-standing record of structural reform and commitment to sound macroeconomic policies, and considered that official dollarization has served El Salvador well.

January 31, 2005

1. The information on recent developments presented below has become available since the staff report was issued. It does not affect the thrust of the staff appraisal.

2. Inflation rose to 5.4 percent (year-on-year) in December. The increase reflected mainly higher oil prices, and was in line with the projection in the staff report. Core inflation (excluding food and oil prices) was 4 percent.

3. Preliminary data indicate a stronger fiscal performance for 2004 than estimated earlier. The overall public sector deficit is now estimated at 2.6 percent of GDP in 2004 (3 percent in the staff report), with the primary deficit amounting to 0.3 percent of GDP. The improvement reflected mainly stronger tax collections and lower capital spending, and led to a build up in public sector deposits at the central bank.

4. As a result, the net international reserves position was also stronger than anticipated. Net international reserves (NIR) reached US$1.9 billion at end-2004, some US$150 million higher than originally projected.

5. Congress is expected to approve the 2005 budget shortly. It has already approved the limit on public sector borrowing proposed by the authorities. The budget coming out of congress is expected to be broadly in line with the draft submitted by the authorities.