El Salvador - GFDRR

104 | El Salvador: Damage, Loss, and Needs Assesment
b) Expected Evolution of the Economy in 2009 Prior to the Disaster 46
i) Key trends. Since the end of 2008, the Salvadoran economy was affected by uncertainty about the
result of the legislative and presidential elections, in which Mauricio Funes of the Frente Farabundo
Martí para la Liberación Nacional (FMLN) party was elected; he began his term of office in June 2009.
The loss of momentum was exacerbated by the effects of the international crisis, which caused an
overall tightening of economic activity. Consequently, CEPAL estimated that the GDP would drop
2.5% in 2009, which means that the GDP per inhabitant would be reduced by 4%.
Although cumulative inflation as of October was ranked at -0.7%, an upswing is expected, so that
the year would end at around 0.5%. As a result of the drop in the level of activity, government revenue
was seriously affected. Thus, the deficit of the NFPS, including pensions, is expected to be around 5.4%
of the GDP. In the external sector, the reduction in petroleum prices partially compensated for the drop in
exports as well as reductions in flows of remittances. Thus, the deficit in the current account is estimated
to be nearly 2% of the GDP. For 2010, a modest recovery was forecasted, with a 0.5% growth, 2% inflation,
3% deficit in the current account, and 4.5% for the NFPS, including pensions.
To address the international crisis, the new government announced a plan organized around three
pillars: social protection, employment promotion, and the formulation of a National Development Plan.
Chief among the announced measures are the expansion and implementation of social programs aimed
at the most vulnerable groups, the conversion of the Multisectoral Investment Bank into a National Development
Bank, and the creation of 100,000 jobs through the implementation of infrastructure projects,
including the northern transverse highway, as well as the construction of 25,000 public housing units.
ii) Economic policy. Fiscal policy. Although several of the announced measures have been implemented, the
government has had to face a rather complicated economic situation, characterized by a deterioration
of public finance. Due to the drop in the level of activity, it is estimated that for 2009 the central
government’s revenue will decrease by over 11% in real terms. This outcome mainly reflects the drop
in VAT tax collection, which is expected to decrease by nearly 14%. In contrast, current expenditure
could increase by nearly 8% in real terms, while public investment could see a drop of nearly 4.5%.
Consequently, it is estimated that the NFPS deficit, including pensions, could reach a level of nearly
5.4% of the GDP. In light of this situation, the government has redirected previously agreed credits and
has issued Treasury Bonds to cover current expenditures. At the end of September, it announced its
intention to sign a new agreement with the International Monetary Fund (IMF), which would be of a
precautionary nature, for US$800 million with a three-year term, replacing the agreement signed by the
Government of El Salvador in January 2009. Although the government has no intention to use the funds
from this agreement, it provides access to financing by other multilateral agencies.
Furthermore, a tax reform plan was announced at the end of October; it is estimated that this plan could
result in US$250 million in additional revenue (approximately 1% of the GDP). The plan has been the subject
of strong resistance by the business sector. Details remain pending on the government’s plan to rationalize
spending, as well as on the timetable for addressing the discussion of a possible broad fiscal reform.
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The economy’s expected performance in 2009 is estimated using official information available up to the third quarter of
the year, as well as estimates and forecasts for the fourth quarter.