Wednesday, September 22, 2010

El Salavador's Eternal Binding Constraints

Perhaps the most telling indicator that El Salvador is not constrained by a lack of savings is that a dramatic boost in remittances has not been converted into investment. This suggests that the country invests little, not because it cannot mobilize resources (though savings are low) but because it cannot find productive investments.

IMF latest review of El Salvardor economy;

Over the longer term, further strengthening the economy’s growth prospects and reducing poverty, while safeguarding fiscal sustainability, requires a comprehensive strategy, including measures to raise revenues, structural reforms aimed at enhancing the business climate, and higher private investment...

The authorities’ strategy for 2011, which includes strengthening tax administration to increase revenues as well as reforming energy subsidies, will create space for high-priority social spending and public investment while lowering the fiscal deficit to 3.5 percent of GDP.

“Beyond 2011, timely enactment of a fiscal pact, which includes measures to raise revenue on a durable basis, and continued adherence to expenditure targets in the authorities’ program will be critical to sustain fiscal consolidation, placing the debt-to-GDP ratio on a firm downward path.

“Continued commitment to the dollarization regime has been the cornerstone of macroeconomic and financial stability. While the Salvadoran banking system is liquid and well-capitalized, it would benefit from further reforms aimed at enhancing its resilience. Approving the Financial Sector Supervision and Regulation Law, bolstering the corporate governance of banks, and upgrading the bank resolution framework will be key to this objective. Limiting the fiscal risks associated with the provision of credit by public banks will also be necessary,” Mr. Shinohara said.

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