From the Executive Board

• Pages: 92-94

Page 92

El Salvador: Stand-By

The IMF approved a 14-month stand-by credit for El Salvador, equivalent to SDR 37.7 million (about $52 million), to support the government's 1997 economic program.

Since the end of the 12-year long civil war in 1990, and through 1995, economic growth in El Salvador averaged more than 6 percent a year, fostered by the implementation of economic reform and structural policies supported by consecutive IMF stand-by credits. Significant progress was made in reforming the tax system and the labor market and, recently, in privatization, as well as in the implementation of the peace accords in the context of strengthening the fiscal position. These achievements notwithstanding, there has been less success in reducing inflation to international levels.

Economic activity decelerated between mid-1995 and mid-1996 as a result of a burst in private consumption, the end of a construction boom, and the effect on external competitiveness of adverse external shocks. At the same time, inflation remained high-in part because of increases in the international prices of cereals and oil. As a result, the colón continued to appreciate in real effective terms, contributing to the erosion of external competitiveness. However, in the second half of 1996, there were signs of a turnaround: the pace of economic activity picked up, inflation decelerated, and external competitiveness improved.

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Medium-Term Strategy and the 1997 Program

The program for 1997 aims at strengthening public finances while accommodating larger outlays for infrastructure, maintaining an appropriate monetary policy, and continuing to advance structural reforms. It envisages a real GDP growth of about 4 percent in 1997, a reduction of the overall deficit of the nonfinancial public sector to 1.4 percent of GDP, a decline in inflation to 5-6 percent, and an increase in net international reserves to the equivalent of five months of imports.

To strengthen public finances in the context of modernizing the public sector and improving social expenditure, the authorities have stepped up efforts to contain current expenditure and increase tax collections. Along these lines, new positions will be offered only in priority sectors of the public administration, such as health and education. As a result of efforts made to improve tax collections, the tax ratio is...