El Salvador - GFDRR

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102 | El Salvador: Damage, Loss, and Needs Assesment TABLE 42. PRINCIPAL MACROECONOMIC INDICATORS (In rates of variation and percentages of GDP) Indicators 2001 2002 2003 2004 2005 2006 2007 2008 Gross Domestic Product 1.7 2.3 2.3 1.9 3.1 4.2 4.7 2.5 Consumer prices 1.4 2.8 2.5 5.4 4.3 4.9 4.9 5.5 Balance of current account /GDP –1.1 –2.8 –4.7 –4 –3.3 –3.6 –5.8 –7.2 Balance of goods and services/GDP –15.8 –14.7 –15.9 –17.2 –17.7 –19.4 –21.4 –22.1 Source: CEPAL based on official figures. i) Economic and fiscal policies. During the four-year period from 2004 to 2007, El Salvador was able to improve its fiscal performance thanks to expenditure control and increased tax revenue. This improvement reflected a substantial increase in tax revenue which raised tax collection to 14.1% of the GDP in 2007 (approximately 2% of the GDP above tax collection in 2003), thanks to a reform that increased income tax revenue. Meanwhile, expenditures remained relatively constant, around 20% of the GDP. This policy helped to address the expenditures caused by the 2001 earthquakes and made it possible to reduce the primary deficit in recent years. The overall deficit (including pensions) of the Non-financial Public Sector NFPS went from 3.1% of the GDP in 2004 to 1.9% in 2007. Consequently, the NFPS’s public debt, including the pension debt, dropped from 40.5% of the GDP in 2004 to 38.9% of the GDP at the end of 2007. However, this reduction occurred following significant growth in recent years (about 10% of the GDP since 2000), especially after the 2001 earthquakes and the change in the pension system. Fiscal performance began to deteriorate in 2008, reflecting an increase in the cost of energy subsidies due to the increase in petroleum prices, selective salary increases and an increase in capital expenditure. The NFPS’s deficit rose from 1.9% of the GDP in 2007 to 3.1% of the GDP in 2008, while NFPS’s debt rose to 39.7% of the GDP at the end of 2008. ii) Monetary and financial policies. The consolidation of the dollarization process drove the decrease in domestic interest rates. In real terms, average interest rate deposits with a term of 180 days dropped from 1.5% in 2002 to 0.1% in 2007. In turn, credit to the private sector grew 4.4% in real terms in 2007. This decrease in interest rates, together with increasing inflation, resulted in negative real interest rates, which achieved their highest level in March 2008 when the real interest rate reached -3.7%. With the prospect of the upcoming elections, the Central Reserve Bank of El Salvador (Banco Central de Reserva de El Salvador) temporarily increased reserve requirements by banks in mid-2008 by 3%. Beginning in the third quarter and due to the international crisis, growth in credit to the private sector became negative and interest rates increased, resulting in an average of -3% in real terms for 2008. To address this restriction on the system’s liquidity, and in light of the uncertainty regarding the elections, the government contracted credits through multilateral banks in order to back international reserves and provide liquidity to the system.
IV. ECONOMIC IMPACT | 103 iii) Trade policy. In March 2006, CAFTA-DR came into effect, resulting in a significant growth in exports and imports. The signing of CAFTA, as well as increasing competition from Asian textile exports, imposed new competitive demands and opened both opportunities and challenges for exports and for economic growth in El Salvador. These factors highlight the importance of competitiveness as a critical issue for the country. iv) Evolution of key variables. Economic activity. Economic growth was relatively low in the first half of the decade, with considerable acceleration since 2005, achieving an annual growth rate of 4.7% in 2007. However, this positive trend was reversed since the middle of 2008 with the impact of the international crisis. Growth totaled only 2.4% in 2008, reflecting a tightening in construction and a slowdown in commerce, agriculture and industry on the supply side. On the demand side, there was a tightening in private investment and a slowdown in private consumption even though exports showed positive growth. v) Prices, wages and employment. Inflation grew with the petroleum and food crisis, from an average of 3.5% between 2000 and 2007 to an average of 7.3% in 2008. Thus, real wages increased nearly 0.5% between 2001 and 2007. Unemployment dropped slightly from 2001 (7%) to 2007 (6.3%), but in 2008 it again rebounded (7.5%) vi) External sector. The trade deficit experienced a significant increase beginning in 2003, from an average 13% of the GDP between 2000 and 2002 to 20% of the GDP in 2007 and 2008. This increase in the trade deficit went hand-in-hand with a significant increase in the flow of remittances, which increased from 13.5% of the GDP in 2003 to 18.1% of the GDP in 2007. In 2008, the current account deficit was 7.2% of the GDP, higher than that observed in 2007, due to increased petroleum and food prices and to an increase in the debt service. Exports grew 14.1% in 2008, thanks to an increase in coffee and non-traditional exports. Despite this significant growth in exports, imports grew 10.6%, reaching 40% of the GDP in 2008 and resulting in a trade deficit equivalent to 20% of the GDP. In the past, the high deficit levels in the commercial account were essentially financed through the remittances of emigrants and the entry of capital (public and private), and thus international reserve levels have remained stable. The annual growth in remittances between 2000 and 2006 averaged 14%. However, since 2007 average annualized growth has slowed considerably, reaching a growth of 2.4% in 2008, demonstrating the impact of the international crisis, particularly in the last quarter.
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| iii ACKNOWLEDGEMENTS We wish to e
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Acknowledgement | v The external su
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| 1 PRESENTATION At the request of
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| 3 SUMMARY AND CONCLUSIONS Through
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AUSTRALIA BELGIUM BRAZIL CANADA DEN
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