Talks have begun since the agency lent $ 389 million to the country in April last year. The high debt and the little room for maneuver have intensified them. The IMF makes its money available, but in return demands strict fiscal measures.
The government of Nayib Bukele has been negotiating for months and with greater intensity a Stand-by agreement with the International Monetary Fund (IMF) in view of the little margin it has to handle the high debt accumulated to date and the urgent need of financing it has in the face of social demands.
Although negotiations have begun since the agency lent the country $ 389 million in April last year as part of the pandemic, they have intensified in recent months, fueled by the question of if the pro-government party, New Ideas, gets the qualified majority of the Legislative Assembly in the next election.
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On January 27, IMF Western Hemisphere Department Director Alejandro Werner confirmed to a group of investors in a virtual private meeting that active meetings have been held with the Salvadoran government to hire a program after of the elections.
A day after Werner’s statements, the Emerging Markets Bond Indicator (EMBI) went from 7.5 points to 6.62 points, as investors interpreted it as very likely that it would close.
A few months ago the country risk rose to reach a differential of 11 points due to high indebtedness and the difficult understanding between the Executive and the Legislature.
Financial services consultants such as Amherst Pierpoint are already wondering in their analysis whether El Salvador will be the next country in the region to take on a financial program with this agency, given that neighboring Costa Rica and Panama have recently done so. Costa Rica approved an agreement for $ 1.7 billion and Panama another for $ 2.7 billion.
However, talks remain very low-profile pending election results.
And it is that to have an agreement with the IMF is to assume a series of fiscal commitments, many of which are not popular among the population, starting with their main requirement: raising the Value Added Tax (VAT) and continuing with the application of a property tax and the implementation of measures to contain spending, including the reduction of public jobs.
In Costa Rica this is part of the recipe that the country must follow to the letter to have the funds that the IMF will grant it if Congress comes to approve it.
The mere announcement of an agreement with the IMF in October 2020 provoked in Costa Rica three consecutive days of protests among the population as they reject a tax increase amid the worst economic crisis in the wake of the pandemic.
In Costa Rica the population protested after the announcement of the agreement with the IMF.
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Agreement in 2009
But this would not be the first time that El Salvador has reached an agreement with the Monetary Fund. In 2009 he signed a $ 800 million Stand-by program, although the money was never disbursed.
To take this money the IMF demanded a fiscal adjustment of 3% of GDP in the country and to get it he suggested increasing VAT, applying a property tax and improving the efficiency of tax collection.
After three years of evaluation the IMF suspended the agreement in view that the country failed to comply with all tax requirements.
In 2009 the country’s economy fell -3% due to the 2008 U.S. financial crisis that affected it globally. The deal with the IMF was a financial support that allowed it access to other international loans.
This year the country’s debt did not exceed 60% of GDP and the fiscal deficit was 3%. The body’s requirement on this occasion was to make an adjustment of 3% of GDP to stabilize its finances.
But this time the scenario is different: due to a prolonged quarantine to prevent COVID-19 infections it is estimated that the Salvadoran economy will have fallen 9% in GDP and will be the most affected in the Central American region .
The accumulated debt in recent years, which was added to an accelerated placement of more debt acquired in 2020 by the Bukele government, has led to a 90% increase in total country debt.
In addition, the fiscal deficit exceeds 10.5% of GDP, the highest in Central America.
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necessary program
Economist Luis Membreño says that concretizing a program with the IMF, whether or not a majority of the pro-government party is obtained in the Legislative Assembly, is a necessary step as this will allow the government to establish obligations to meet and the more you have the supervision of an international body. “The deal should give — because this will allow fiscal targets to be met and the IMF is overseeing,” he said.
The same was recommended by the Salvadoran Foundation for Economic and Social Development (FUSADES), which has also raised the need for an external body to constantly assess compliance with tax targets.
Membreño also clarified that contrary to the requirements that the IMF requested from the country in 2009, this time it could be easing its requirements in the face of a new reality due to the pandemic.
What are the conditions to follow to access your funds?
Accessing an agreement with the IMF, rather than a benefit, is a strict fiscal commitment that involves a series of measures that are often not popular with the population. This box summarizes some of the measures he has previously proposed in El Salvador and others that have recently been proposed in Costa Rica, the last country in the region to have agreed a program with them. The “recipes” are different depending on the fiscal reality that each country has.
Tax increase
The IMF has long pushed for higher tax revenues as one of the main pillars for improving public finances. In 2009, with the first Stand-by agreement, the body suggested an increase in VAT.
It was also proposed to apply a property tax that applies to properties.
Recently, after the approval of a $ 389 million loan, he again recommended that the country increase VAT and fuel tax between 2021 and 2024.
In Costa Rica another proposed measure is to apply taxes to Lottery prizes and the application of taxes to luxury homes as well as an increase in income taxes.
The neighboring country needs to make an adjustment of 5% of its GDP to lower the debt level to 50% by 2035.
Reduction of public jobs
In the agreement with Costa Rica, the agency has suggested that an adjustment be made to reduce jobs in the public sector and thereby achieve savings to vent public finances.
In El Salvador, the latest statistics from the Salvadoran Social Security Institute (ISSS) show a 3.8% increase in the number of public employees.
Elimination of tax exemptions
The IMF also suggests eliminating tax exemptions for businesses and sectors in general in order to raise more taxes.
Collection efficiency
Another of the Fund’s commitments to the countries with which it has an agreement is that they improve efficiency in revenue collection. This collection should be done with more controls and an effective anti-evasion plan that allows better results.
Prerequisites to the agreement
“When a country has IMF credit, the government is committed to adjusting economic policy to overcome the problems that led it to seek financial assistance from the international community,” the IMF states.
That is why countries need to start implementing measures before the IMF disburses the money.
Subsequently, the body continues to make periodic evaluations to ensure that the country is complying with the instructions.
The money from the agreement, moreover, is not delivered in one go but is dosed according to the years in which the aid program has been agreed.