El Salvador and the IMF

"El Salvador’s financial system has weathered well the aftershocks of the global financial crisis and the uncertainties surrounding the elections, and remains liquid and well-capitalized."

Thursday, May 28, 2009

A mission from the International Monetary Fund (IMF), headed by Alfred Schipke, visited San Salvador during May 18-27 to initiate discussions for the first review under the US$800 million precautionary Stand-By Arrangement, approved on January 16, 2009 (see Press Release No. 09/10). The mission had joint discussions with senior government officials and members of the incoming administration’s economic team, and also met with private sector representatives. At the conclusion of the mission, Mr. Schipke made the following statement:

“Over the past 10 days, an IMF staff mission visited San Salvador to review performance under the precautionary Stand-By Arrangement approved last January. The mission found that El Salvador’s financial system has weathered well the aftershocks of the global financial crisis and the uncertainties surrounding the elections, and remains liquid and well-capitalized. It also found that the impact of the global economic slowdown on El Salvador’s economy has been greater than anticipated when the SBA was approved. Exports, remittances, bank credit, and overall economic activity have been significantly below initial program projections.

“The weaker than expected output performance has had a large effect on government revenue. Tax collections of the central government totaled US$692 million in the first quarter of 2009, about US$55 million (7 percent) lower than in the same period in 2008 and more than US$100 million below projections under the program. In response to this shortfall, the authorities adopted prudent expenditure restraining measures, including on electricity subsidies and its public savings program. Notwithstanding these efforts, the overall deficit of the non-financial public sector through end-March was US$115 million above the program target.

“Looking forward, the mission agreed with both the outgoing and incoming administrations that the immediate challenge is to adopt an economic program that takes into account the effects of the global slowdown on the fiscal accounts, while safeguarding El Salvador’s fiscal sustainability. With this overarching objective in mind, the mission held productive discussions on a revised macroeconomic framework and a new fiscal deficit target for 2009-10. The mission was encouraged by the broad-based political support displayed by Congress in the recent approval of the financing package for the government. A similarly unified approach to the measures that are necessary to ensure the sustainability of the fiscal position will allow El Salvador to successfully overcome the challenges brought about by the global crisis.

“The mission commended the authorities for submitting the financial supervision law to Congress and urged for its prompt approval. The mission highlighted the need for continued close vigilance of the financial sector.

“The mission welcomed the incoming authorities’ commitment to maintaining macroeconomic stability, fiscal sustainability and dollarization, and to honoring all contractual obligations. The mission also reiterated the IMF’s disposition to maintain a close relationship with the new government. The incoming authorities indicated that they intend to continue treating the Stand-By Arrangement as precautionary.

“The mission is scheduled to return to El Salvador shortly after the new government has taken office to conclude program discussions.”

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