The IMF issued Country Report 13/15 on El Salvador on 12 January 2015, following the completion of an IMF mission to El Salvador to assess the country’s economic situation.

To deal with the imbalances in the pension system the IMF recommends a pension reform that includes the introduction of progressive taxation of pension benefits, together with an increase in the retirement age. In the opinion of the IMF pension income could be taxed progressively within the existing income tax system.

Although in recent years progress has been made through tax reforms, the growth in revenue was hindered in 2013/14 by a Constitutional Court decision reversing some tax measures that had been taken earlier. Tax measures introduced in July 2014 included a financial transactions tax, a 1% tax on net assets, the scrapping of an income tax exemption for publishing companies and a measure to name and shame tax evaders.

Further fiscal measures are however required to achieve the required GDP adjustment and these still need to be identified and carried out. The IMF recommends a menu of revenue and expenditure measures that include a 2% rise in the value added tax to 15%, together with an expanded program of social assistance to minimize the impact of the increase on low income groups; and the introduction of a luxury property tax. Most countries in the region have already introduced this type of full-fledged property tax.

The authorities in El Salvador are in agreement with the IMF about the need to deal with fiscal imbalances but they prefer a more gradual fiscal adjustment that would include the introduction of a wealth tax and scrapping tax exemptions in particular sectors. They will look at possibilities for rationalizing subsidies once the March elections are over.