Experts inside and outside the country warn that the Nayib Bukele government’s speech that it will fight tax evasion and therefore obtain a guarantee for the $ 1.3 billion loan it is requesting from the International Monetary Fund (IMF) is not real and not even enough.
The economic and social situation in El Salvador is very critical and for the government to reach an agreement with the International Monetary Fund (IMF) to obtain a $ 1.3 billion loan, the discourse of combating tax evasion instead of raising taxes will not be sufficient. warns economists.
“I can almost assure you that the Fund will not sign an agreement with El Salvador just with the idea of eliminating tax evasion; This is a very attractive speech if possible, but it simply isn’t. It must necessarily establish fiscal commitments in terms of public sector revenues, expenditures and structure, ”warned Costa Rican economist Roberto Artavia, chairman of the INCAE Business School board, in a recent television interview.
He added that “in an ideal world it would be said that the idea of combating tax evasion is the happiest, because it means that we do not burden anyone. The IMF will never accept this: first of all, because most of the tax evasion comes from the informal economy, it comes from smuggling, from activities that are already illegal … ”.
The agreement with the International Monetary Fund may lead to an increase in VAT
Artavia’s analysis stems from the fact that the government has been in negotiations with the IMF since the end of last year to lend it money, but it is known that an agreement with this organization involves rigid fiscal measures, such as an increase in VAT, for example.
Although, according to Finance Minister Alejandro Zelaya, the government’s strategy will be to combat tax evasion and not increase VAT.
“VAT will not be increased, we do not include that party in the agreement, what we will do is fight tax evasion and the IMF takes it as a fiscal measure for adjustment,” Zelaya said. year.
The government projects a collection of value added tax (VAT) of 2,643.4 million dollars, a figure which, according to the analysis of the Salvadoran Foundation for Economic and Social Development (Fusades), is impossible to achieve and which has overestimated 603.8 million dollars . .
Given this, Salvadoran economists agree with Artavia that the Executive will not be able to reach an agreement with the IMF with this strategy.
“The government does not say anything about how it will fight tax evasion, I think it is not focused on combating smuggling and tax evasion. To believe that in a year they will collect 3 or 4 points of GDP, based on the methodology of persecuting those who already pay taxes, will be minimal “, considered the economist Luis Membreño.
Economist Rafael Lemus also stressed that the IMF may believe the government is willing to develop good practices or a successful fiscal adjustment, but if it sees non-compliance, it could suspend the deal if it is finalized.
“And this is also mentioned by Dr. Artavia when he says that he could ensure that there will be no agreement with the Fund if the whole government plan will attack tax evasion; he tells them that this is neither credible nor consistent. The fiscal problem of El Salvador is much bigger than the one in Costa Rica in terms of debt and imbalance “, said Lemus.
Regarding the fact that, if he sees it possible for the Fund to ask the country to set new taxes, Lemus considered that the discussion could go further in reducing spending.
“The fund will warn that the size of El Salvador’s adjustment is much larger than in Costa Rica and that this country has been asked to take revenue and expenditure measures, and it will be the same with the government of El Salvador, so it is not enough to say that will go after the escapees, “Artavia said.
In its analysis, Artavia considered that if it is to set taxes in the country, it must be a well-thought-out structure and not just raise them.
“In El Salvador, relatively, the tax burden will be higher, so to speak: taxes on wealth, not on production; pollution taxes, not investments; taxes on inactive capital, not on productive capital; and in this sense, taxes should not be increased just to increase, but rather to focus on taxes that generate additional income without affecting the productive momentum, nor the investments that the country demands “, said the Costa Rican expert .
Economist and former finance minister Manuel Enrique Hinds said tax collection in El Salvador was “not bad,” but warned that negotiations with the IMF could go more for transparency and spending cuts than to increase the tax burden.
But Membreño stressed that “there is no will to reduce government spending and, moreover, with the level of indebtedness that the country has, it cannot maintain that level of spending.”
The government needs more than $ 2 billion to pay off short-term debt
About a pension reform
Another issue on which Artavia gave her opinion is that of pensions and she considered that El Salvador had to work and carry out a real pension reform for a decade.
“The problem is that there are not enough contributors; does not contribute enough; and each time the retirees will receive a lower percentage of the standard of living they had, ”he said. He added that although 70% of the population is in the informal sector, “there will not be enough funds to support pensions”.
In Artavia’s opinion, the Salvadoran pension system must support. “We need to set higher retirement ages, increase the contribution and look for a practical situation for the informal economy, for all those who do not contribute and who leave a pyramid without a basis.”
He added that El Salvador has a double problem: the informal economy and the large number of young people who have emigrated and do not feed the pension system.
“They feed on remittances directly to consumption and some to investment, but not to the pension base,” Artavia said.