High debt, stagnating growth and low productivity key challenges.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

The International Monetary Fund said in early August that it had reached “preliminary understandings” with El Salvador as the two sides seek to find agreement on a new lending agreement. The IMF said it and the government had made progress toward a program that would include stronger public finances and bank reserve buffers, as well as improved transparency and governance. However, the IMF has continued to express reservations about El Salvador’s use of Bitcoin as legal tender. How important is a new IMF loan deal to El Salvador and its economy? For what purposes would El Salvador use the funding? What role would a new agreement with the IMF play in President Nayib Bukele’s push to bolster the economy?

Douglas Farah, president of IBI Consultants: The Bukele administration has raised debt to historic levels and shown a marked inability to tackle endemic corruption, especially tied to members of his Nuevas Ideas party. El Salvador’s main economic policy initiatives, attracting massive Bitcoin investments and mining, as well as foreign investment to fund promised social programs, have largely failed. The country faces stagnant growth, a crippled agricultural sector and growing poverty. There is a growing perception that the governing party, with an iron grip on all branches of the government, offers no real guarantees of legal security to investors. Bukele has moved aggressively to shut down all government transparency—classifying most ostensibly public financial information for seven years—while driving the independent investigative media into exile. Security has improved, but so have the credible reports of massive human rights violations and illegal detentions. The IMF loan would be a desperately needed lifeline to Bukele’s foundering efforts to carry out economic reforms that benefit more than small groups of his choosing like foreign Bitcoin investors. Bukele history of blocking access to government expenditures makes it is doubtful that promises of transparency are credible. Vice President Félix Ulloa’s recent public statements offering El Salvador’s Bitcoin infrastructure to Russia for untraceable financial movements is another cause for concern. In his five years in office, Bukele has failed to lay out a coherent economic strategy beyond utopian crypto proclamations. With the national debt now reaching unsustainable levels and few legitimate sources of income available, the IMF loan is important, but will likely not bring necessary structural reforms.

Valeria Vásquez, senior analyst at Control Risks: With the security situation under control, Salvadorans are turning their attention to the rising cost of living and persistent socioeconomic challenges, such as unemployment. The new challenge for Nayib Bukele’s administration is maintaining macroeconomic stability amid high public debt, stagnating growth, low productivity, unemployment and inflation. To achieve this, Bukele has vowed to transform the economy through a series of bittersweet measures, including a comprehensive six-phase economic plan. A key component is securing an IMF loan and funding program, which will help the country address fiscal imbalances and resolve ongoing liquidity issues while also financing the government’s expanding social and security programs. The latter, Bukele’s main success, has placed significant pressure on the government’s finances, with increased expenditures. However, for the agreement to succeed, the government must implement significant changes and agree to specific conditions, which may be at odds with Bukele’s flagship initiatives, such as the Bitcoin law. Ultimately, the success of this agreement hinges on Bukele’s ability to make the necessary concessions while maintaining his high popularity and strong leadership. For now, considering Bukele’s track record in tackling one of the country’s longstanding challenges (insecurity), the balance is tilting in his favor.

Patricio Vimberg, associate director for sovereign & international public finance ratings at S&P Global Ratings: El Salvador’s sovereign credit rating of ‘B-’ and its stable outlook reflect our view that the government’s intensive liability management operations over the past two years have reduced its short-term financing needs. Notably, the next bullet bond amortization in January 2025 has been significantly reduced from the original $800 million to $100 million after two debt repurchases. Having said that, the country’s medium-term fiscal situation remains fragile, characterized by a high debt burden, costly interest payments and limited market access. The country was able to tap the international markets and raised $1 billion in April, although with a step-up coupon that could increase from the current 9.5 percent to 13.25 percent, unless the country secures a program with the IMF or achieves a sovereign credit rating of ‘B’ over the next two years. An IMF program could provide a cheaper financing source, reduce the cost of the outstanding debt and grant visibility on fiscal policy. This would enable the government to consolidate the material improvement in security and maintain its current level of investment in infrastructure. However, achieving the IMF’s suggested fiscal adjustment of 3.5 percent of GDP may prove difficult, particularly given the government’s reluctance to raise the tax rate on VAT. Furthermore, transparency over long-term policies and the adoption of Bitcoin as an alternative currency, despite low population usage, could raise concerns for the IMF.

Patrice Flynn, distinguished university professor at Mount St. Mary’s University: Why is the IMF hesitant to release another loan to El Salvador? One concern noted in the latest IMF Staff Statement (Aug. 6, 2024) and Consultation (Feb. 10, 2023) is the need for El Salvador to ‘improve governance and transparency,’ particularly in the arenas of ‘protecting judicial independence’ and ‘ensuring impartial access to the court system.’ Let’s hope the IMF follows through on these concerns and that it is not just talk. Below is part of what I think is going on based on my career as an economist in five continents and more than 20 years working in El Salvador with women and civil society groups. On March 27, 2022, the Bukele government suspended the constitution and imposed a State of Exception. Some 80,000 people have been arrested and are incarcerated in a two-prison system that separates gang members from other prisoners. The government has acknowledged that gang leaders agreed to be detained only if granted special accommodations in a new mega prison with 24/7 health care, gymnasiums, one bed per prisoner and three meals a day. Visitors to El Salvador see only this prison, not the old facilities that house innocent detainees with no ties to gangs or drug trafficking. These prisons have one toilet for 150 men, inadequate food and water and four men to a bed or sleeping on the floor. The State of Exception has led to brutal conditions for many Salvadorans and their families in the face of arbitrary detention, inhumane treatment, lack of due process, no presumption of innocence and denial of legal representation. To my mind, the conditions threaten macroeconomic stability in El Salvador. Thus, it is important that the IMF follow up on its call for ‘improved governance and transparency’ before considering further loans.

Republished with permission from the Inter-American Dialogue‘s daily Latin America Advisor

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