IMF Steps In As El Salvador's Revenues Plunge

by Mike Godfrey, Tax-News.com, Washington

23 March 2010

The International Monetary Fund (IMF) has approved a 36-month Stand-By Arrangement (SBS) for El Salvador, worth USD790m, to help the country mitigate the effects of plunging tax revenues brought about by the global financial and economic crisis. The arrangement, which the authorities intend to treat as precautionary, will succeed the 15-month arrangement approved on January 16, 2009.

The arrangement will aid El Salvador in delivering its economic program, which is geared towards speeding up the economic recovery reducing poverty, preserving financial stability and securing debt sustainability. One of the immediate priorities is to support domestic demand.

Following the IMF discussion on the SBA, Murilo Portugal, Deputy Managing Director and Acting Chair of the IMF Executive Board, made the following statement:

“The global downturn of 2009 severely affected El Salvador, despite the economy’s strong fundamentals achieved through several years of prudent macroeconomic policies and structural reforms.”

“Trade flows and remittances declined, foreign financing contracted, while economic activity and tax collections were hit hard. Against this backdrop, the Stand-By Arrangement approved on January 2009 served an important role in reducing uncertainty by facilitating the dialogue between the outgoing and incoming administrations.”

The economic slowdown weighed heavily on tax revenues in 2009. Total net tax revenue contracted strongly and was about USD600m below the levels envisaged in the 2009 SBA.

Last December, the national assembly approved a package of tax reforms which aim to increase tax revenues by up to USD250m in 2010 and raise tax collection as a percentage of the economy from 13% to 17%. The new proposals include streamlining administrative processes and judicial procedures to ensure tax compliance and measures to combat tax evasion and smuggling, estimated to cost USD400m a year in lost revenue.

While most of the main taxes remained unaffected by the tax reform package, special taxes on alcohol, tobacco, weapons and ammunition will be increased alongside the first vehicle registration fee and insurance tax. The reforms also created a new tax on investment income, including dividends and bank interest.

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