IMF Mission Finds that El Salvador’s Financial System Intact After Global Financial Crisis

During May 18 -27, an International Monetary Fund (IMF) mission headed by Alfred Schipke visited El Salvador to meet with outgoing and incoming government officials and private sector representatives to discuss the current economic situation and to review the precautionary $800 million Stand-By Arrangement (SBA) that was approved in January. Though the mission found that El Salvador had a significantly large deficit to overcome and slower economic activity than expected, Mr. Schipke reported that as a whole, “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.”

According to the IMF information website, SBAs are the most common way that the IMF assists countries, and it is meant to cover short-term balance of payments issues. The SBA approved for El Salvador was a precautionary one, and it will not be drawn upon unless conditions deem it necessary to do so.

When the SBA was first approved, the IMF agreed that El Salvador was not facing any balance-of payment crises at that time. However, the recent mission found that “Exports, remittances, bank credit, and overall economic activity have been significantly below initial program projections.” Furthermore, this poor economic performance has had a detrimental effect on government revenue. Tax collections in the first quarter of 2009 totaled about $100 million less than projected, and the overall deficit of the non-financial public sector was US$115 million more than expected. Still, the IMF found that El Salvador was surviving the global financial crisis with its institutions intact, liquid, and well-capitalized.

This positive report showed that El Salvador’s relative success was possible through the “broad-based political support displayed by Congress in the recent approval of the financing package for the government.” Furthermore, they were encouraged by the incoming government’s “commitment to maintaining macroeconomic stability, fiscal sustainability and dollarization, and to honoring all contractual obligations.”

El Diario de Hoy, a daily news source in El Salvador, reported that Funes announced his new Economic Cabinet on May 26. Those announced were Héctor Dada Hirezi as minister of the Economy, Alex Segovia as Technical Secretary, Carlos Acevedo as president of the Central Reserve Bank and Carlos Cáceres as head of the Treasury department. The new Economic cabinet has thus far maintained that it would keep the dollar as El Salvador’s official currency, to create more economic transparency, a development bank within the Central Reserve Bank, and a mechanism to ensure that the large informal sector pays taxes. These goals are all in line with the IMF’s recommendations, and the IMF mission reiterated during their visit the goal of maintaining a close relationship with the incoming administration. Soon after the new administration has taken office, the IMF mission will return to evaluate the situation.