Abstract
IMF Country Report No. 22/20
Copyright Page
IMF Country Report No. 22/20
EL SALVADOR
2021 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR EL SALVADOR.
January 2022
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2021 Article IV consultation with El Salvador, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its January 24, 2022 consideration of the staff report that concluded the Article IV consultation with El Salvador.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on January 24, 2022 following discussions that ended on November 22, 2021 with the officials of El Salvador on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 3, 2022.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for El Salvador.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
PO Box 92780 • Washington, D.C. 20090
Telephone: (202) 623–7430 • Fax: (202) 623–7201
E-mail: publications@imf.org Web: http://www.imf.org
Price: $18.00 per printed copy
International Monetary Fund
Washington, D.C.
© 2022 International Monetary Fund
Press Release
PR22/13
IMF Executive Board Concludes 2021 Article IV Consultation with El Salvador
FOR IMMEDIATE RELEASE
Washington, DC-January 25, 2022: The Executive Board of the International Monetary Fund (IMF) on January 24, concluded the Article IV consultation1 with El Salvador.
The pandemic interrupted ten years of growth, but El Salvador is rebounding quickly. Robust external demand, resilient remittances, and a sound management of the pandemic—with the help of a disbursement under the Rapid Financing Instrument (SDR287.2 million or US$389 million) approved in April 2020—are supporting a strong recovery. The economy contracted by 7.9 percent in 2020 and is projected to grow by about 10 percent in 2021 and 3.2 percent in 2022.
Against this backdrop, public debt vulnerabilities emerged. Persistent fiscal deficits and high debt service are leading to large and increasing financing needs. The fiscal deficit is projected at 5% percent of GDP in 2021 and about 5 percent of GDP in 2022. Under current policies, public debt is expected to rise to about 96 percent of GDP in 2026 on an unsustainable path.
Since September2021, the government has adopted Bitcoin as legal tender. The adoption of a cryptocurrency as legal tender, however, entails large risks for financial and market integrity, financial stability, and consumer protection. It also can create contingent liabilities.
Executive Board Assessment2
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for their timely and effective management of the pandemic, which has helped limit its economic and humantoll. The economy is rebounding strongly, and El Salvador has one of the lowest rates of COVID-19 infection and mortality in the region.
Directors cautioned that fiscal vulnerabilities—stemming from the large public debt stock-to-GDP ratio—have grown during the pandemic and need to be promptly addressed. They underscored that high and rising financing needs are constraining medium-term growth and stressed the need to implement structural fiscal reforms. Directors also underscored the importance of other structural reforms to boost inclusive growth and supported the authorities’ efforts to reduce crime, cut red tape, reduce energy costs, and increase infrastructure and social spending, including on education and health.
Directors generally agreed on the need to implement a fiscal consolidation starting this year based on high-quality revenue and spending measuresto restore fiscal sustainability and put public debt on a firm downward trajectory. Directors welcomed in this context the steps being taken to modernize public financial management and assess fiscal risks.
With the unwinding of the exceptional measures introduced to support liquidity and provide debt relief to households and companies, Directors stressed the need to monitor banks’ recovery strategies and welcomed plans to introduce a banking crisis resolution framework. They also took positive note of the decision to transition toward a forward -looking and risk-based financial supervision.
Directors agreed on the importance of boosting financial inclusion and noted that digital means of payment—such as the Chivo e-wallet—could play this role. However, they emphasized the need for strict regulation and oversight of the new ecosystem of Chivo and Bitcoin. They stressed that there are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities. They urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status. Some Directors also expressed concern over the risks associated with issuing Bitcoin-backed bonds.
Directors welcomed the publication of reports on the use of public funds for COVID-19 and the audits of the Court of Accounts, as well as the decision to further strengthen fiscal transparency and accountability. Directors urged the authorities to strengthen the anti-corruption and AML/CFT frameworks in line with international standards. Directors also recommended upgrading the statistical framework.
It is expected that the next Article IV consultation with El Salvador will be held on the standard 12-month cycle.
El Salvador: Selected Economic Indicators
Includes gross debt of the nonfinancial public sector (including pension liabilities) and external debt of the central bank.
Includes inventories.
El Salvador: Selected Economic Indicators
| Per capita income (U.S. dollars, 2020) | 3,799 | Population (million, 2020) | 6.3 | ||||||
| Percent of pop. below poverty line (2020) | 26 | Gini index (2019) | 35 | ||||||
| Proj. | |||||||||
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |||
| Income and Prices | |||||||||
| Real GDP growth (percent) | 2.5 | 2.2 | 2.4 | 2.6 | -7.9 | 10.0 | 3.2 | ||
| Consumer price inflation (average, percent) | 0.6 | 1.0 | 1.1 | 0.1 | -0.4 | 3.5 | 2.8 | ||
| Terms of trade, percent change | 6.1 | -4.3 | -3.9 | 0.8 | 6.0 | -5.4 | 3.4 | ||
| External sovereign bond spread (basis points) | 599 | 520 | 424 | 453 | 760 | 837 | ... | ||
| Money and Credit | |||||||||
| Credit to the private sector | 51.2 | 52.2 | 53.5 | 55.3 | 62.1 | 57.6 | 56.3 | ||
| Broad money | 50.0 | 53.8 | 54.8 | 59.0 | 70.2 | 65.7 | 65.1 | ||
| Interest rate (time deposits, percent) | 4.4 | 4.4 | 4.2 | 4.3 | 4.1 | 3.9 | ... | ||
| External Sector | |||||||||
| Current account balance | -2.3 | -1.9 | -3.3 | -0.6 | 0.5 | -3.9 | -2.5 | ||
| Trade balance | -19.2 | -19.4 | -21.7 | -21.2 | -21.1 | -28.7 | -28.4 | ||
| Transfers (net) | 18.8 | 20.2 | 20.6 | 21.0 | 24.2 | 26.1 | 26.5 | ||
| Foreign direct investment | -1.4 | -3.6 | -3.2 | -2.4 | -0.8 | -2.8 | -1.9 | ||
| Gross international reserves (mill. U.S. dollars) | 3,238 | 3,567 | 3,569 | 4,446 | 3,083 | 3,510 | 3,980 | ||
| Nonfinancial Public Sector | |||||||||
| Overall balance | -3.1 | -2.5 | -2.7 | -3.1 | -8.2 | -5.8 | -4.9 | ||
| Primary balance | -0.2 | 0.7 | 0.9 | 0.6 | -3.8 | -1.1 | 0.0 | ||
| Of which: tax revenue | 17.2 | 17.6 | 18.0 | 17.7 | 18.5 | 20.4 | 20.9 | ||
| Public sector debt 1/ | 68.8 | 70.5 | 70.4 | 71.3 | 89.2 | 84.4 | 84.8 | ||
| National Savings and Investment | |||||||||
| Gross domestic investment | 16.0 | 16.7 | 18.4 | 16.9 | 17.9 | 18.5 | 17.7 | ||
| Private sector 2/ | 13.5 | 14.1 | 15.7 | 14.2 | 15.7 | 15.8 | 14.5 | ||
| National savings | 13.7 | 14.8 | 15.1 | 16.3 | 18.4 | 14.5 | 15.2 | ||
| Private sector | 13.7 | 14.7 | 14.7 | 16.4 | 24.0 | 17.3 | 16.4 | ||
| Net Foreign Assets of the Financial System | |||||||||
| Millions U.S. dollars | 1,995 | 2,645 | 2,714 | 3,424 | 3,046 | 3,303 | 3,836 | ||
| Memorandum Items | |||||||||
| Nominal GDP (billions of U.S. dollars) | 24.2 | 25.0 | 26.0 | 26.9 | 24.6 | 27.9 | 29.4 | ||
Includes gross debt of the nonfinancial public sector (including pension liabilities) and external debt of the central bank.
Includes inventories.
El Salvador: Selected Economic Indicators
| Per capita income (U.S. dollars, 2020) | 3,799 | Population (million, 2020) | 6.3 | ||||||
| Percent of pop. below poverty line (2020) | 26 | Gini index (2019) | 35 | ||||||
| Proj. | |||||||||
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |||
| Income and Prices | |||||||||
| Real GDP growth (percent) | 2.5 | 2.2 | 2.4 | 2.6 | -7.9 | 10.0 | 3.2 | ||
| Consumer price inflation (average, percent) | 0.6 | 1.0 | 1.1 | 0.1 | -0.4 | 3.5 | 2.8 | ||
| Terms of trade, percent change | 6.1 | -4.3 | -3.9 | 0.8 | 6.0 | -5.4 | 3.4 | ||
| External sovereign bond spread (basis points) | 599 | 520 | 424 | 453 | 760 | 837 | ... | ||
| Money and Credit | |||||||||
| Credit to the private sector | 51.2 | 52.2 | 53.5 | 55.3 | 62.1 | 57.6 | 56.3 | ||
| Broad money | 50.0 | 53.8 | 54.8 | 59.0 | 70.2 | 65.7 | 65.1 | ||
| Interest rate (time deposits, percent) | 4.4 | 4.4 | 4.2 | 4.3 | 4.1 | 3.9 | ... | ||
| External Sector | |||||||||
| Current account balance | -2.3 | -1.9 | -3.3 | -0.6 | 0.5 | -3.9 | -2.5 | ||
| Trade balance | -19.2 | -19.4 | -21.7 | -21.2 | -21.1 | -28.7 | -28.4 | ||
| Transfers (net) | 18.8 | 20.2 | 20.6 | 21.0 | 24.2 | 26.1 | 26.5 | ||
| Foreign direct investment | -1.4 | -3.6 | -3.2 | -2.4 | -0.8 | -2.8 | -1.9 | ||
| Gross international reserves (mill. U.S. dollars) | 3,238 | 3,567 | 3,569 | 4,446 | 3,083 | 3,510 | 3,980 | ||
| Nonfinancial Public Sector | |||||||||
| Overall balance | -3.1 | -2.5 | -2.7 | -3.1 | -8.2 | -5.8 | -4.9 | ||
| Primary balance | -0.2 | 0.7 | 0.9 | 0.6 | -3.8 | -1.1 | 0.0 | ||
| Of which: tax revenue | 17.2 | 17.6 | 18.0 | 17.7 | 18.5 | 20.4 | 20.9 | ||
| Public sector debt 1/ | 68.8 | 70.5 | 70.4 | 71.3 | 89.2 | 84.4 | 84.8 | ||
| National Savings and Investment | |||||||||
| Gross domestic investment | 16.0 | 16.7 | 18.4 | 16.9 | 17.9 | 18.5 | 17.7 | ||
| Private sector 2/ | 13.5 | 14.1 | 15.7 | 14.2 | 15.7 | 15.8 | 14.5 | ||
| National savings | 13.7 | 14.8 | 15.1 | 16.3 | 18.4 | 14.5 | 15.2 | ||
| Private sector | 13.7 | 14.7 | 14.7 | 16.4 | 24.0 | 17.3 | 16.4 | ||
| Net Foreign Assets of the Financial System | |||||||||
| Millions U.S. dollars | 1,995 | 2,645 | 2,714 | 3,424 | 3,046 | 3,303 | 3,836 | ||
| Memorandum Items | |||||||||
| Nominal GDP (billions of U.S. dollars) | 24.2 | 25.0 | 26.0 | 26.9 | 24.6 | 27.9 | 29.4 | ||
Includes gross debt of the nonfinancial public sector (including pension liabilities) and external debt of the central bank.
Includes inventories.
Title page
EL SALVADOR
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION
January 3, 2022
KEY ISSUES
Political Context. President Bukele took office in June 2019 on an inclusive growth and anti-corruption agenda, and his party gained super-majority in the Legislative Assembly (LA) in May 2021.
Economic Context. The pandemic interrupted ten years of growth, but El Salvador is rebounding quickly. Robust external demand, resilient remittances, and a sound management of the pandemic—with the help of a disbursement under the Rapid Financing Instrument (RFI) (SDR287.2 million or US$389 million) approved in April 2020—are supporting a strong recovery. Persistent fiscal deficits and high debt service are leading to large and increasing gross fiscal financing needs.
Policies. The discussions focused on the policies needed to secure inclusive growth, fiscal sustainability, and financial stability:
Inclusive growth: Efforts to support growth should focus on continuing to reduce crime, reducing electricity costs, and fostering economic diversification. Better targeting social spending, and prioritizing infrastructure projects are critical to ensure inclusive growth by creating fiscal space without increasing risks.
Fiscal: A well-articulated fiscal consolidation strategy should be anchored in a medium-term framework consisting of permanent measures to help restore fiscal sustainability.
Financial stability: Continuing to closely monitor the unwinding of emergency pandemic measures, maintaining a strong liquidity management system, and advancing towards a risk-based financial supervision would maintain financial stability.
Governance: Economic governance measures are critical to support public confidence and consolidation, and help contain borrowing costs. In this respect, fiscal transparency, and accountability, including on extra budgetary funds, should be strengthened, and anti-corruption and AML/CFT frameworks should be aligned with international standards.
Bitcoin: Efforts to improve financial inclusion are welcome, but Bitcoin use carries significant risks and Bitcoin should not be used as an official currency with legal tender status. Narrowing the scope of the Bitcoin law will contain some of the macroeconomic risks. Strict regulation and supervisory oversight are needed to mitigate remaining fiscal, financial integrity and financial stability risks.
Risks. The risks to the outlook are sizeable, stemming from high uncertainty regarding the course of the pandemic, and resulting global economic and financial conditions. On the domestic side, delays in addressing El Salvador’s economic challenges, including with respect to fiscal policy, governance, and reforms to support inclusive growth, or closing the gaps in the oversight of Bitcoin could undermine fiscal sustainability and financial stability.
Approved By
Julie Kozack (WHD) and Geremia Palomba (SPR)
Discussions took place virtually during April 6–21, and November 10–22, 2021, and in person at IMF Headquarters in Washington D.C. during November 8–10, 2021. The staff team comprised Alina Carare (head), Javier Kapsoli, Yorbol Yakhshilikov (all WHD), Laura Doherty and Lorena Rivero del Paso (FAD), Jaime Ponce (MCM), Burcu Hacibedel and Juan Francisco Yepez (SPR). Metodij Hadzi-Vaskov, Regional Resident Representative, and Edgar Cartagena (OED) joined the missions. Julie Kozack (WHD) and Executive Director Pablo Moreno participated in some meetings. Justin Lesniak, Soungbe Coquillat, Heidi Canelas, Madina Toshmuhamedova and Sean Thomas (all WHD) supported the team. Given the virtual setting, TA experts from functional departments joined some of the technical meetings as warranted.
Contents
Glossary
CONTEXT
RECENT DEVELOPMENTS
A. The Pandemic
B. The 2021 Recovery
OUTLOOK AND RISKS
SUSTAINING THE RECOVERY AND BUILDING FORWARD BETTER
A. Raising Growth Potential
B. Continuing to Support the Recovery while Ensuring Fiscal Sustainability
C. Maintaining Financial Stability
D. Strengthening Governance and Anti-Corruption Frameworks
BITCOIN AS LEGAL TENDER, AND “CHIVO” A NEW MEANS OF PAYMENTS
STATISTICS
STAFF APPRAISAL
BOXES
1. Resilient Remittances
2. Attracting More FDI to El Salvador
3. Ensuring Effectiveness and Efficiency of Public Spending and Reducing Risks
4. Financial Inclusion, Bitcoin and Chivo
5. Accounting for Bitcoin Transactions in Macro-Framework Tables
FIGURES
1. Long-Term Growth and Poverty
2. Balance of Payments Developments
3. Fiscal Developments
4. Financial Sector Developments
5a. Remittances, Fees, and Mobile Inclusion
5b. Bitcoin Network, Mining, And Electricity Consumption
TABLES
1. Selected Economic Indicators
2. Medium-Term Outlook
3a. Balance of Payments (in millions of U.S. dollars)
3b. Balance of Payments (Percent of GDP)
4. Gross External Financing Requirements and Sources
5a. Statement of Operations of the Nonfinancial Public Sector
5b. Statement of Operations of the Central Government
6. Public Sector Financing Requirements and Sources
7. Summary Accounts of the Financial System
8. Financial Soundness Indicators Heatmap
9. Selected Vulnerability Indicators
10. Risk Assessment Matrix
ANNEXES
I. Increasing the Employment Contribution to Growth
II. Public Debt Sustainability Analysis
III. External Debt Sustainability Analysis
IV. External Sector Assessment
V Wage Bill Reform
VI. Pension System
VII. Fostering Domestic Market Development and Reducing Sovereign Risk
VIM Liquidity Management and Emergency Liquidity Assistance
IX. Governance, Anti-Corruption, and AML/CFT Frameworks
X. Implementing Fund’s Policy Advice
Glossary
| AML | Anti-Money Laundering |
| AFPs | Administradoras de Fondos de Pensiones |
| ARA | Assessing Reserve Adequacy |
| BCR | Central Bank (Banco Central de Reserva) |
| CABEI | Central American Bank for Economic Integration |
| CAF | Corporación Andina de Fomento |
| CAPTAC-DR | Central America, Panama, and Dominican Republic-Technical Assistance Center |
| CEL | Comisión Ejecutiva Hidroeléctrica de Río Lempa |
| CICIES | International Commission Against Impunity in El Salvador |
| CID | Interdisciplinary Development Consultants |
| CIP | Certificado de Inversión Previsional |
| CIT | Corporate Income Tax |
| CFT | Combating Terrorist Financing |
| CGS | Cuenta de Garantía Solidaria |
| CPMI-IOSCO | Committee on Payments and Market Infrastructure – International Organization of Securities Commissions |
| CoA | Court of Accounts |
| COVID | Coronavirus Disease |
| DOM | Dirección de Obras Municipales |
| DSA | Debt Sustainability Analysis |
| ELA | Emergency Liquidity Assistance |
| EMBI | Emerging Markets Bond Index |
| EMEs | Emerging Market Economies |
| ESA | External Sector Assessment |
| FATF | Financial Action Task Force |
| FDI | Foreign Direct Investment |
| FODES | Fondo para el Desarrollo Económico y Social de los Municipios de El Salvador |
| FOP | Fideicomiso de Obligaciones Previsionales |
| FOPROMID | Fondo de Protección Civil, Prevención y Mitigación de Desastres |
| FRL | Fiscal Responsibility Law |
| GAFILAT | Financial Action Task Force of Latin America |
| GDP | Gross domestic product |
| GFSR | Global Financial Stability Report |
| GFSM | Government Finance Statistics Manual |
| GIR | Gross International Reserves |
| GSMA | The Groupe Speciale Mobile Association |
| IADB | Inter-American Development Bank |
| ICU | Intensive Care Unit |
| IFC | International Finance Corporation |
| IFIs | International Financial Institutions |
| IFRS | International Financial Reporting Standards |
| IMF | International Monetary Fund |
| KYC | Know Your Customer |
| LA | Legislative Assembly |
| LAC | Latin America and the Caribbean |
| LCR | Liquidity Coverage Ratio |
| MoF | Ministry of Finance |
| MoU | Memorandum of Understanding |
| MPG | Minimum Pension Guarantee |
| MTEF | Medium-Term Expenditure Framework |
| MTFF | Medium-Term Fiscal Framework |
| NIIP | Net International Investment Position |
| NSFR | Net Stable Funding Ratio |
| NFPS | Non-Financial Public Sector |
| NPLs | Non-Performing Loans |
| OAS | Organization of American States |
| OGP | Open Government Partnership |
| PAYG | Pay-As-You-Go |
| PEPs | Publicly Exposed Persons |
| PFM | Public Financial Management |
| PPE | Personal Protective Equipment |
| PPPs | Public Private Partnerships |
| REER | Real Effective Exchange Rate |
| RFI | Rapid Financing Instrument |
| SAFI | Sistema de Administración Financiera Integrada |
| SDR | Special Drawing Rights |
| SMEs | Small and Mid-size Enterprises |
| SOEs | State-Owned Enterprises |
| TA | Technical Assistance |
| UN | United Nations |
| UNCAC | United Nations Convention Against Corruption |
| VAT | Value Added Tax |
| WB | World Bank |
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 discussbn 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.orc/extanal/np/sec/misc/qualifiers.htm.
