Washington, DC: The Executive Board of the International Monetary Fund (IMF) on January 24, concluded the Article IV consultation[1]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 5¾ 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 September 2021, 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 Assessment[2]
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 human toll. 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 measures to 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.
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[1]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.
[2]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:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.