On 1 July 2016 the IMF published a report and selected issues paper following the conclusion of consultations under Article IV of the IMF’s articles of agreement.
El Salvador’s economic growth rate has been significantly lower than other countries in the region, averaging 2% between 2000 and 2014. GDP grew 2.5% in 2015. Growth is expected to be 2.3% in 2016 and 2.4% in 2017, falling back to 2% in the medium term.
Revenues were boosted by the banking transactions tax but were lower than expected. New taxes on telecommunications services and large enterprise profits were introduced in late 2015. Fiscal consolidation is needed and this could be helped by the introduction of taxes that do not distort the economy.
The selected issues paper notes that public sector policy should aim at rationalizing taxes, improving the business climate and rebalancing spending. Labor productivity would be improved by removing rigidities and reducing the informal sector. The situation could be helped by facilitating access to social security systems; reducing tax distortions; and simplifying tax filing and business licensing procedures.
In a discussion of pensions the selected issues paper suggests that any pension reform should include some moderate redistribution relative to the current system which effectively subsidizes the rich. One possibility is progressive taxation of the unequal pension benefits as this could raise more revenue and deal with concerns over distribution.
