Business Environment Improves in El Salvador

For the IMF, the Salvadoran authorities are dealing firmly with crime and corruption and are beginning to improve the business environment in order to support economic growth.

Monday, November 11, 2019

In 2019, real GDP growth is expected to be 2.5% as a result of the solid confidence of the business sector, reported the International Monetary Fund (IMF) after its visit to El Salvador.

From the IMF statement:

An International Monetary Fund (IMF) mission led by Ms. Alina Carare visited San Salvador during November 4-8, 2019, to discuss the outlook, the 2020 budget and the government’s growth agenda, including structural reforms to promote investment. The mission met with President of the Republic Nayib Bukele, Chief of Cabinet Carolina Recinos, Finance Minister Nelson Fuentes, Central Bank President Carlos Federico Paredes, Superintendent of the Financial System Mirna Arevalo de Patiño, Minister of the Economy Maria Luisa de Hayem, Secretary of Commerce and Investment Miguel Kattan, Minister of Defense Rene Francis Merino Monroy, other senior government officials, members of the Legislative Assembly, and representatives of the private sector. At the conclusion of the mission, Ms. Carare made the following statement:
“The economy grew 2.2 percent in the first half of the year, and inflation hovered around zero. After dipping in the second quarter, remittances growth returned to its long-term rate of 4 percent. In 2019 real GDP growth is expected to be 2½ percent on the back of improving business confidence. Over the medium-term and under current policies, economic growth will converge to the estimated potential. Downside risks to the outlook stem from weaker-than-expected global growth, and domestic policy slippages. Those slippages could occur if spending measures are adopted without identifying appropriate non-borrowing funding resources. On the upside, global financial conditions may prove more supportive than presently expected.
“The authorities are aggressively tackling crime and corruption and are starting to improve the business environment to support growth. The mission welcomes the implementation of the “Plan of Control Territorial” to improve security, and the elimination of the so-called “gastos reservados” for the office of the presidency to reduce corruption. Higher spending on security, human capital, and infrastructure in the 2020 budget is also welcome as it constitutes provision of public goods needed for economic growth. The mission also supports the government’s efforts to expedite the processing of business permits, including by creating a red tape committee, and information sharing among public agencies to streamline business registration.
“The primary fiscal balance has improved by 2¾ percent of GDP since 2013 but remains broadly unchanged over 2018-2019 at 0.9 percent of GDP. The 2020 draft budget envisages a further consolidation of 0.2 percent of GDP owing to better revenue administration.
“However, the envisaged primary surpluses (of 1.2 percent of GDP on average during 2020-2021) would not be enough to offset the rising interest bill associated with the high stock of debt, in the absence of sizeable frontloaded adjustment. Moreover, as the interest-growth differential remains considerable—about 4 percent—staff will continue to recommend prudent fiscal adjustment. Further fiscal consolidation, of about 2 percent of GDP by 2021 will ensure commitment to the fiscal responsibility law and put debt on a firmly declining path. These measures should be carefully calibrated, growth-friendly, and protecting the poor and vulnerable. Market conditions currently remain favorable, but sizeable financing gaps are looming over the medium-term. Approving a strong budget and its financing on time will contribute to macroeconomic stability and enhance the investment climate.
“Banks are solid with low NPLs, high capital buffers, and abundant liquidity. Staff support the authorities’ efforts to preserve financial stability by: (i) adopting the bank resolution legislation in line with best practices; (ii) ensuring that the reactivated interbank market functions smoothly to increase banks’ efficiency in managing liquidity; (iii) ensuring that measures supporting credit growth fully comply with the risk-based supervision framework; and (iv) continuing to promote financial inclusion, including the recently adopted amendments to the financial inclusion law.
“The IMF greatly appreciates the frank and productive discussions and the warm hospitality of our Salvadoran counterparts.”

More on this topic

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According to the international organization, policies to regain the confidence of the private sector, including a frank assessment of the impact of recent measures, are essential to promote economic recovery and compensate for increased poverty. In the short term, strengthening government institutions in the areas of contract enforcement and efficiency of the legal framework for dispute resolution, protection of property rights, investor protection, property registration, and insolvency resolution could significantly improve the country's competitiveness.

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After registering a 7% year-on-year increase in July, in August the Confidence in Economic Activity Index in Guatemala showed a 6% variation.

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IMF with Good Outlook for the Banking Sector

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For the international organization, El Salvador's banking sector is well capitalized and is optimistic about the recent progress made in the area of cross-border banking supervision.

In order to further enhance the resilience of the banking sector, the authorities were encouraged to pass the bank resolution law, strengthen the emergency liquidity assistance framework, and ensure full compliance with the risk-based supervisory framework, among others, of the International Monetary Fund (IMF) after concluding its last visit to the country.

El Salvador As Seen by the IMF in March 2018

March 2018

The institution highlights the progress that has been made in reducing the fiscal deficit and stabilizing the debt, but warns that a greater effort is needed to place the debt on a downward trajectory.

From a statement issued by the International Monetary Fund:

The IMF staff team visited San Salvador during February 5—16 for the 2018 Article IV consultation [1] and held productive discussions with the Salvadoran authorities, parliamentarians, business community, and social partners. The consultation was based on revised National Accounts statistics.

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