Two Decades after El Salvador s Peace Accords The Economic Outlook

Transcription

1 Analyst: Heather Berkman Two Decades after El Salvador s Peace Accords The Economic Outlook Prepared for Woodrow Wilson Center 30 January 2012

2 Table of Contents El Salvador: 1992 versus 2012 What are the key economic challenges? What are the constraints on future growth? The politics of policy 1

3 El Salvador: 1992 versus 2002 Indicator Rank in UNDP Development index 96 / / 182 Per capita income (USD) $1,082 $3,426 % population below poverty line 58.7% 37.8% Population 5.2 million 6.2 million Life expectancy at birth 68 years 71 years Child mortality rate, under 5 years (per 1000 live births) Source: UNDP, World Bank Development Indicators 2

4 Percent of households below national poverty line Urban households Rural households All households Source: World Bank, El Salvador VI Population Census 3

5 Number of deaths per 1000 births Prepared for the Woodrow Wilson Center Child mortality rates (per 1000 births), LAC all income El Salvador Source: World Bank Development Indicators 4

6 Growth in El Salvador has lagged Central America Real GDP growth (%) El Salvador Central America Average Source: IMF World Economic Outlook Database, September

7 Why has growth fallen behind? Limited competitiveness -- productivity factors: physical capital, human capital, financial capital. Dollarization has made labor relatively more expensive Vulnerability to imported commodity prices Cost of violence and crime Political considerations impact the business climate, investors still worried about the real FMLN 6

8 Business costs of crime and violence * ** *** ARG BRA COL DR GTE HON MEX NIC PERU PAN EL SAL * Rank out of 134 countries **Rank out of 133 countries ***Rank out of 142 countries Source: World Economic Forum "Global Competitiveness Index" The effect on GDP of crime is between 4.8% and 10.8% of GDP (depending on whether health costs are included). The average for Central America is 7.7% 7

9 Funes administration inherited an economy in crisis Public finances weakened by 2009 election spending Impact of 2009 global slowdown Non-Financial Public Sector Deficit, NFPS Fiscal deficit (millions $) As % GDP -5-6 Source: Ministry of Finance 8

10 Funes administration economic policies Emphasis on instilling market confidence, increasing expenditures on social programs FMLN and center-right party support has been crucial Goal: raise tax/gdp ratio from 13% to 17% by 2014 Signed IMF SBA in March 2010 Focus on controlling spending and keeping public debt ratio constant Five Year Development Plan $4.87 billion project prioritizes education, healthcare, housing, public security, and initiatives to stimulate the economy 9

11 Funes administration fiscal policies Fiscal consolidation: passed two tax reforms Restructure in finance ministry: VM of revenues 18 Structure of government tax revenues, as % GDP Other Specified Consumption items Customs ISR VAT VAT accounts for a little over half of all tax revenues Source: Ministry of Finance, BCR, Presentacion Reforma Fiscal Jan

12 Fiscal consolidation calls for further austerity General government total expenditure (% of GDP) Government expenditures have remained steady Source: IMF World Economic Outlook Database, September 2011 but subsidy targeting is difficult to implement One-time outlays in 2011 (% GDP) Energy subsidies 0.2 LPG subsidy targeting 0.2 Electricity tariff transition 0.3 Other 0.1 Total 0.8 Source: IMF staff calculations 11

13 Managing debt is crucial 60 Gross govt debt/gdp Source: IMF World Economic Outlook Database, Sept 2011; IMF SBA Oct 2011 review 12

14 2012 will be a tough year Much will depend on: External economic activity Cost of imported food and energy (oil) Constraints on the govt: Low tax intake, tax evasion Large informal economy Slow budget execution Difficulty of cutting subsidies Asia 3% EU 6% Honduras 13% Export destinations (Jan - Nov 2011) Other Central America 12% Other 6% Guatemal a 14% United States 46% Source: Central Reserve Bank of El Salvador Vulnerability to natural disasters Political considerations 13

15 Political considerations: March 2012 elections FMLN 35 Arena 18 Gana 16 CN Independent PDC CD Latest polls show Arena poised to gain seats in congress: Arena: 32.3% FMLN: 27.3% Gana: 6.1% Others polling ~ 3% (JBS Opinion Publica, 18 Jan) 14

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