Talks have begun since the agency loaned $ 389 million to the country in April last year. High debt and little room for maneuver have exacerbated these. The IMF makes its money available, but demands strict fiscal measures in return.
Nayib Bukele’s government has been negotiating a stand-by arrangement with the International Monetary Fund (IMF) for months and with more intensity, given the narrow margin it has to address the high debt it has accumulated so far and the urgent need for funding it has in the face of social demands.
While negotiations have begun since the agency loaned $ 389 million to the country in April last year in the context of the pandemic, they have intensified in recent months, spurred by whether the ruling party, New Ideas, has the qualified majority of the Legislative Assembly at the next election.
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On January 27, IMF Western Hemisphere 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 conclude a post-election program.
A day after Werner’s comments, the Emerging Markets Bond Indicator (EMBI) went from 7.5 points to 6.62 points, as investors interpreted it as likely to be signed.
Several months ago, country risk rose to an 11-point difference due to the high debt burden and the difficult relationship between the executive and the legislature.
Financial services firms like Amherst Pierpoint are already wondering in their analyzes whether El Salvador will be the next country in the region to implement a financial program with this agency, as neighboring countries Costa Rica and Panama have recently done so. Costa Rica has approved a deal for $ 1,700 million and Panama for $ 2,700 million.
In anticipation of the election results, however, talks are kept very low.
And it is that having an agreement with the IMF involves making a series of tax obligations, many of which are unpopular with the population, starting with the main requirement: increasing the value added tax (VAT) and to continue to apply a property tax and implement cost containment measures, including the reduction of public jobs.
In Costa Rica, this is part of the recipe that the country must follow to the letter in order to get the funds the IMF will allocate to it if Congress approves it.
The mere announcement of an agreement with the IMF in October 2020 sparked three consecutive days of popular protests in Costa Rica as they rejected a tax hike amid the worst economic crisis triggered by 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 wouldn’t be the first time El Salvador has reached an agreement with the Monetary Fund. In 2009, he signed a $ 800 million standby program, although the money was never disbursed.
To take this money, the IMF demanded a tax adjustment of 3% of the country’s GDP and to achieve this it proposed increasing VAT, applying a property tax and making tax collection more efficient.
After three years of evaluation, the IMF suspended the agreement because the country did not meet all the imposed requirements.
In 2009, the country’s economy fell -3% due to the 2008 financial crisis in the United States that hit the world. The agreement with the IMF was a financial aid that gave him access to other international loans.
That year, the country’s debt was no more than 60% of GDP and its budget deficit was 3%. At the time, the agency had a requirement to make a 3% of GDP adjustment to stabilize its finances.
But this time the scenario is different: as a result of a prolonged quarantine to avoid contamination with COVID-19, it is estimated that the Salvadoran economy will have declined by 9% in its GDP and will be the one most affected in the central American region.
The debt accumulated in recent years, added to an accelerated placement of more debt acquired in 2020 by the Bukele government, has led to an increase in the country’s total debt to 90%.
In addition, the budget deficit exceeds 10.5% of GDP, the highest in Central America.
IN ADDITION: Costa Rica and the IMF reach an agreement on a tax adjustment of $ 1.75 billion
Required program
Economist Luis Membreño says finalizing a program with the IMF, regardless of whether a majority of the ruling party is obtained in the Legislative Assembly, is a necessary step as it will allow the government to establish obligations to comply and also oversee an international organization. “The deal needs to be closed, because then the fiscal targets can be met and the IMF will monitor,” he said.
The same was recommended by the Salvadoran Foundation for Economic and Social Development (Fusades), which has also created the need for an outside body to continuously evaluate the achievement of tax targets.
Membreño also clarified that, contrary to the requirements the IMF had asked the country in 2009, this time it could relax its requirements in the face of a new reality resulting from the pandemic.
What are the conditions that must be followed to access your funds?
Entering into an agreement with the IMF, more than a distribution, is a strict fiscal obligation that involves a series of measures that are in many cases unpopular with the population. This box provides an overview of some of the measures it previously proposed to El Salvador and others recently proposed in Costa Rica, the last country in the region to agree a program with them. The “recipes” are different depending on the tax reality of each country.
Tax increase
The IMF has previously promoted an increase in revenue by paying more taxes as one of the main pillars of improving public finances. In 2009, with the first Stand-by agreement, the authority proposed a VAT increase.
It was also proposed to apply a real estate tax applied to properties.
Recently, after approving a $ 389 million loan, he again recommended that the country increase VAT and fuel taxes between 2021 and 2024.
In Costa Rica, another proposed measure is to impose taxes on lottery prizes and apply taxes on luxury homes, as well as an increase in income taxes.
The neighboring country must make an adjustment of 5% of its GDP to reduce the debt level to 50% by 2035.
Reduction of public jobs
In the agreement with Costa Rica, the agency has proposed to make an adjustment to cut public sector jobs and thereby achieve savings to ease public finances.
In El Salvador, the latest statistics from the Salvadoran Social Security Institute (ISSS) show a 3.8% increase in the number of civil servants.
Abolition of tax exemptions
The IMF also proposes to abolish tax breaks for companies and sectors in general in order to impose more taxes.
Efficiency in collecting
Another of the Fund’s commitments to the countries with which it contracts is to improve the efficiency of revenue collection. This collection should be done with more controls and an effective anti-avoidance plan that allows for better results.
Conditions precedent to the agreement
“When a country receives credit from the IMF, the government is committed to adapting its economic policies to resolve the issues that have led it to request financial assistance from the international community,” the IMF said.
To this end, countries must take measures before the IMF pays out the money.
Subsequently, the agency will continue to make periodic reviews to ensure that the country meets the indications.
Moreover, the money from the agreement is not delivered in one go but dosed according to the years in which the aid program was agreed.