New Administration Will Face Historic Deficit

According to the most recent economic indicators, El Salvador’s economy continues to deteriorate.  Though the Internal Revenue Ministry projects significant budget deficits over the next three years, the Saca administration recently increased government spending by 23%, as they prepare to transfer power to the new Funes administration on June 1st. Analysts contribute the increased spending to the rising cost of transportation and energy subsidies.  Other rumors point to the million dollar mansions high funciontaries of ARENA have acquired int he past months, including President Saca and ex-candidate Rodrigo Avila.

In the first quarter of 2009, tax revenue fell 9.6% ($87 million), while Salvadorans living abroad sent home $68.9 million less than they did in the first quarter of 2008.  In addition, Salvadoran exports fell by 8.3% and employment in the industrial sector fell by 35.8% with over 4,000 lay-offs in the maquila sector alone. The National Foundation for Development (FUNDE) reported 9,675 lay-offs in the last two months of 2008.  Inflation remains steady at 2.3%.

With the decrease in revenue and increase in spending, the government is struggling to pay its bills.  The government spends 8 of every 10 dollars on salaries, contractors, and wire transfers.  The government owes $127 million for operational expenses, including electricity, gas, and water, for January 2009 alone.

To cover the costs of social programs, the government relies on loans, which now exceed $355 million.  Over $200 million of these loans are with the Inter-American Development Bank (BID). The Saca administration reports that the World Bank, International Monetary Fund (IMF), BID, and the Central American Economic Integration Bank (BCIE) have approved another 2.5 billion dollars in loans, which will be distributed for social programs in the near future.

The Internal Revenue Ministry and the Funes transition team are discussing numerous measures to increase government revenue and close the current budget deficits.  Some of their proposals include directing natural gas and electricity subsidies to families in need instead of providing assistance to everyone.  They are also considering new taxes on soft drinks and new cars, as well as fees for new ID’s and license plates.  The Ministry and transition team are also considering a tax system for street vendors and others in the informal markets. None of their proposals, however, include measures to collect the more than $2.7 billion that El Salvador’s largest companies did not paid in 2008.

Economist Santiago Ruiz sees the worst to come in the coming  months, and a recovery period lasting until September of 2011.  This recession compares  to the 1980’s civil war economy.  He believes the Funes administration will inherit a government without the resources to confront the economic crisis in it’s first two years in office.  Measures he recommends would be to invest in infrastructure and implement a Moratorium Law to help families or businesses in danger of losing their homes or other assets.  Funes’s economic advisor, Alex Segovia, and others on the transition team have not yet released concrete plans for their government, citing the need for further information from the Saca administration.

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