On June, 20, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with El Salvador.
El Salvador continues to suffer from significantly lower growth than neighboring countries amid low investment, high outward migration, weak competitiveness, and political gridlock. GDP growth has averaged 2 percent over 2000-2014, well below the Central American regional average of 4½ percent.
Low oil prices helped growth and the current account improve in 2015 alongside low headline inflation. GDP grew 2½ percent in 2015, up from 1½ percent in 2014, supported by steady growth in the US, robust exports to the rest of Central America, and a stimulus from lower oil prices. Investment also increased significantly. Headline inflation was slightly negative (-0.7 percent). The current account deficit fell 1½ percentage points to 3½ percent of GDP.
The fiscal deficit fell by 0.1 percentage point to 3.4 percent of GDP in 2015. Fiscal expenditure remained broadly constant as a percent of GDP, with conservative increases in wages and lower energy subsidies. Capital expenditure remained subdued. Revenues were helped by the banking transactions tax (BTT) but were lower than expected. New taxes on telecommunications services and large enterprise profits were introduced in late-2015 to finance a needed increase in law enforcement and security spending. However, fiscal risks are rising. Reflecting a parliamentary impasse over approval to access external financing, domestic financing has risen sharply in 2015 and early 2016, pushing up yields on government short term domestic securities and raising the prospect of disorderly adjustment if the impasse continues.
The financial sector is stable but is exposed to the rising sovereign risks. Banking sector capital adequacy ratio remains substantially above the minimum statutory level of 12 percent. Provisioning is adequate, and asset quality continues to improve while liquidity appears ample. However, bank profitability is relatively low. Deposits and credit to the private sector grew by around 6 and 5 percent, respectively, in 2015 as corporate credit picked up and household credit slowed. Financial sector credit to the public sector, on the other hand, increased by nearly 15 percent and now accounts for about 35 percent of private financial system assets.
GDP growth is expected to be 2.3 percent in 2016 and 2.4 in 2017, falling over the medium-term toward a potential growth rate of 2 percent. There is some near-term upside risk if several significant investment projects get underway (notably a large gas project). However, US growth is projected to decline over the medium term. Moreover, oil prices are expected to trend upwards over the medium term, tempering the recent boost to demand and causing the current account deficit to rise to 5½ percent of GDP by 2021. The fiscal deficit is expected to widen to 5½ percent of GDP over the medium term absent measures, reflecting pressures from wages, interest payments, security-related expenses, and public investment. Alongside, public debt is expected to exceed 70 percent of GDP by 2021.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.