Development & Aid, Economy & Trade, Financial Crisis, Headlines, Latin America & the Caribbean, Poverty & SDGs

ECONOMY-EL SALVADOR: Passing the Poisoned Chalice

Raúl Gutiérrez

SAN SALVADOR, Apr 6 2009 (IPS) - Warnings about the dire state of the Salvadoran economy and its weak position for coping with the global recession were ignored by outgoing President Antonio Saca for political reasons in an election year, analysts say, as they point out the difficulties that lie ahead for the new government.

Two weeks before the Mar. 15 presidential elections, Saca and spokespersons for the government of the rightwing Nationalist Republican Alliance (ARENA) stated that public finances were stable and that “there is nothing to worry about.”

But shortly after voters awarded a victory to President-elect Mauricio Funes, who will take office on Jun. 1, the head of the Central Reserve Bank (BCR), Luz María de Portillo, and Eduardo Ayala, technical secretary at the Office of the Presidency, admitted otherwise.

They reported a sharp decline in exports and tax revenue, as well as the loss of thousands of jobs over the past eight months.

“We have been warning about this situation for a whole year,” especially about the condition of the state coffers and the fall in GDP, but “unfortunately (the government) turned a deaf ear,” Jorge Daboub, president of the Salvadoran Chamber of Trade and Industry (CCIES), told IPS.

In his view, the “electoral climate” prevented the situation from being acknowledged, and preventive measures were not taken to counteract the global economic and financial crisis that originated in the United States, which absorbs 57 percent of Salvadoran exports.

“Now we have to cope with the consequences of those bad decisions,” Daboub said.

The business leader reported that 36,000 jobs have been lost since August 2008, and that sales were 21.4 percent down in February in comparison to the same month last year, especially exports to the United States. Tax revenue also declined, by 12.5 percent in the same period.

The economy “is in a tight squeeze,” he said.

Official figures indicate that value added tax (VAT), the main source of tax revenue, fell by 25 percent, from 130.8 million dollars to 98 million dollars in the twelve months to January 2009, due to the fall in internal consumption and lower revenues from fuel sales.

The incoming government of the leftwing Farabundo Martí National Liberation Front (FMLN), headed by Funes, will face a difficult period due to the “disproportionate impact” of the global economic crisis, the financial risk rating agency Fitch, Inc. said in mid-March.

Funes, who defeated ARENA candidate Rodrigo Ávila, will head the first leftist government in El Salvador’s history.

Meanwhile, the Inter-American Development Bank (IDB) predicted that remittances from Latin American migrants to their countries of origin would fall by up to 13 percent this year.

Income from remittances is vitally important to the Salvadoran economy.

BCR statistics indicate that remittances amounted to 3.79 billion dollars in 2008 alone, equivalent to 17.1 percent of GDP that year. Most of these funds came from the United States, where 90 percent of the 2.9 million Salvadoran migrants live. In January 2009, remittances fell by eight percent compared with January 2008.

The Salvadoran economy grew by 3.2 percent in 2008, according to the BCR, but official forecasts for growth this year are barely one percent.

Carlos Acevedo, an economist with the United Nations Development Programme (UNDP), added his own criticism to that of Daboub. “The (public) financial situation has not changed; what has changed is the government’s discourse,” after the ARENA defeat, he said.

The expert added that since the third quarter of 2008, the BCR has posted “negative values” for the volume index of economic activity (IVAE), which may register a fall of as much as three percent in the 12 months to February 2009.

The IVAE is an “advanced indicator” of the performance of different sectors of the economy, prior to the closing of an accounting period. The estimated figures, therefore, mean that GDP growth was most likely also negative in the last quarter, the economist said. “It is unlikely that we shall have a positive economic growth rate this year,” said Acevedo, adding that the sharp fall in remittances from migrants has a severe impact on consumption, the main engine of the economy, which in turn will lead to a major economic slowdown.

“The situation is deteriorating at a rapidly accelerating rate,” the UNDP official said.

However, Acevedo said that the 500 million dollar loan approved by the World Bank at the end of last year, and another 450 million dollars from the IDB, will give El Salvador some “breathing space,” allowing Funes to fulfil some of his election promises, like protecting the most vulnerable sectors and creating jobs, although not as many as the 200,000 he promised.

This week Francisco Rojas, the general secretary of the Latin American Faculty of Social Sciences (FLACSO), said that one of the region’s pending tasks is the creation in each nation of social pacts, or agreements between the various sectors of society on how to face the crisis.

Héctor Dada Hirezi, a member of the working group set up by Funes, said the present government should implement “immediate measures to fight the crisis,” as otherwise, the economy may suffer “irreparable damage.”

Nearly 40 percent of the 5.7 million people of El Salvador live in poverty, according to official figures which civil society organisations regard as underestimates. Unemployment is officially estimated at 6.5 percent of the economically active population, but 43 percent are underemployed.

This country, with a territory of 20,000 square kilometres, has one of the highest homicide rates in the world, with 61 murders per 100,000 population per year. Among the causes are the 1980-1992 war between the armed forces and the FMLN, then a guerrilla movement, which left 75,000 people dead, 6,000 disappeared and 40,000 disabled.

Daboub said that efficient, transparent use of state resources and policies that attract greater private investment would help the country weather the effects of the global crisis.

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