El Salvador: Draft Budget Confirms Structural Problems in Public Finance

By ICEFI and CLALS*

US banknote lot

U.S. Banknote Lot/ Creative Commons/ https://www.pxfuel.com/en/free-photo-jqchd

The budget that President Nayib Bukele submitted to El Salvador’s Legislative Assembly in September increases much-needed social spending appropriate for the country’s current socio-economic context, but it lacks clear objectives and benchmarks — and fails to address ongoing structural problems in public finance.

  • The proposed budget is based on revenues of US$5.466 billion, 92.7 percent of which will come from taxes. In gross terms — without considering tax rebates — that amounts to a tax burden of 18.2 percent of GDP, just below the 18.3 percent that ICEFI estimates for 2019. In net terms, the budget claims taxes will reach 18.1 percent of GDP (compared to 17.7 percent in 2019), but that figure is not realistic: it estimates tax refunds of only $16.5 million — compared to $117.4 million for the January-August period of this year. This error threatens to undermine serious Legislative debate.

Spending in the proposed 2020 budget reaches $5.774 billion — equal to 20.8 percent of GDP, compared to 22.3 percent estimated for 2019. Some areas that are already struggling, such as environmental programs, face significant cuts, while others will experience modest decreases and increases.

  • According to the draft, Central Government operating costs will decrease by 1.8 percent of GDP, driven by cuts in contracting of services and purchase of goods as well as in current transfers. Capital expenditures, on the other hand, will increase 0.3 percent over 2019 — that is, about 3.3 percent of GDP.
  • The Central Government’s spending on social development is slated to grow to its highest level in decades — about 10.5 percent of GDP ($2.921 billion), compared to 9.7 percent this year. The main beneficiaries of the increase will be municipal governments, pension systems, trusts for social security, and health care. With some 800,000 children and adolescents lacking schools to attend, the proposed increase in the education budget — from 3.73 percent (in 2019) to 3.75 percent — is minimal.

The budget anticipates a slight increase in the federal deficit. The non-financial public sector, including trusts to cover social security obligations, will experience a deficit of 3.1 percent of GDP (compared to the 2.7 percent that ICEFI estimates for 2019) — pushing total public debt to 70 percent of GDP. That’s less than the 70.7 percent estimated for 2019, but ICEFI cautions that the decline could easily evaporate as the government faces growing demands over the course of the year. Either way, debt servicing will remain the most significant item in the 2020 budget, reaching $1.102 billion (4 percent of GDP).

The perennial challenge that El Salvador’s leaders like their counterparts throughout the region  face is how to stimulate economic growth and reduce inequalities to make the state more democratic and effective. But this budget, if implemented as drafted, will achieve neither goal in politically significant ways. The fiscal data underscore that the fundamental structural problems low revenues, inadequate public spending, and high fiscal deficits and public debt remain unaddressed.

  • The increase in capital spending, while positive, is insufficient to have its desired impact of driving economic growth. ICEFI’s analysis indicates that the jump in social spending is certainly warranted by the growing unhappiness in various social sectors, but also falls far short of what’s needed to reverse ongoing negative trends. The cuts in environmental protection from a minuscule 0.07 percent of GDP (2019) to 0.05 percent seem outright foolish for a country that has already shown vulnerabilities, which could aggravate existing economic and social conditions. Rather than taking on the serious challenges El Salvador and its economy face, the 2020 draft budget kicks the can down the road, without credible expectation that the task will be easier in the future.

December 9, 2019

* The Instituto Centroamericano de Estudios Fiscales conducts in-depth research and analysis on the region’s economies. Data and charts supporting this article can be found by clicking here. This is the third in a series of summaries of its analyses on Central American countries.

New Leadership in El Salvador: Breaking from the Past?

By Eric Hershberg*

U.S. Air Force Chief of Staff Gen. David L. Goldfein meets with El Salvador’s newly elected President Nayib Bukele

U.S. Air Force Chief of Staff Gen. David L. Goldfein meets with El Salvador’s newly elected President Nayib Bukele / Joint Base San Antonio / Public Domain

Salvadoran President Nayib Bukele’s stunning defeat of both of his country’s two dominant parties in February was propelled by promises of change and new approaches to challenges that vexed his predecessors. His initial six weeks in office have featured notable gestures toward fresh directions but also grounds for concern. The country’s problems are many and severe. Decades of paltry private investment has produced anemic economic growth, worsened in recent years by a devastating internal security situation. The limited economic growth that has occurred relies disproportionately on remittances from migrants – the value of which exceeds that of exports – but the circumstances of Salvadorans in the United States are growing more precarious, potentially eroding future transfers. In addition, plausible shifts in trade policy by an erratic U.S. administration could undermine the U.S.-CAFTA-DR trade agreement, threatening critical manufacturing jobs. Corruption, meanwhile, is perceived by the population as no less urgent a challenge as joblessness and impunity for the gangs whose extortion and violence torment much of the population.

Bukele’s winning campaign formula was to promise to turn things around with a new vision and new people. One important signal of change was the President’s order to immediately remove the big block letters “Monterrosa” from the barracks of the armed forces 3rd brigade, in San Miguel, and his hosting a dinner at the Presidential residence for family of the victims of the El Mozote massacre that Lt. Col. Monterrosa had overseen. A handful of initial cabinet appointments signaled an inclination toward meritocracy and gender balance. Yet Bukele has more recently appointed to key positions dodgy veterans of the administration of former President Tony Saca (2004-09), who split (and was later expelled from) his ARENA Party to form a new party, GANA. While Saca is serving a 10-year prison sentence for corruption, Bukele, who was expelled from the FMLN in 2017 and thus lacked a vehicle of his own with which to seek the presidency, opted to run on the vacant GANA ticket. The appearance of figures from Saca’s inner circle is thus not entirely a surprise, but it stands out given the degree that Bukele’s largely platform-less campaign highlighted the battle against corruption.

  • One of his pledges was to create a hybrid (national-international) anti-corruption commission – adapted from the experiences of CICIG in Guatemala and MACCIH in Honduras – to hold accountable political elites suspected of extraordinary levels of malfeasance. Yet both domestic and external constraints make such an effort less likely than Bukele might have imagined while on the campaign trail, and the Comisión Internacional contra la Impunidad en El Salvador (CICIES) seems to have been relegated to a back burner.
  • Equally striking is the new President’s doubling down on militarized responses to gang violence, departing from both his campaign rhetoric and his mode of governance as mayor of Nuevo Cuscatlán (2012-15) and San Salvador (2015-18). Whereas he had entered into pragmatic if unspoken accommodations with the gangs in order to secure governability at the municipal level, he’s now declaring all-out war against the maras, sending the military into gang-ridden communities and clamping down on communication from the prisons from which gang leaders continue to direct operations. During the first week of July – a month after assuming office – he asserted that repression was but the first phase of a comprehensive anti-gang strategy, promising a second phase, focused on social opportunity, that would address the structural factors that draw youth toward lives of criminal violence. But details remain thin, and whether funds will be appropriated by a legislature in which GANA has only a small minority of seats remains to be seen.

Bukele represents El Salvador’s first Instagram and Twitter president – with a penchant for announcing sweeping personnel changes without having informed affected staff in advance. His recourse to social media for proclaiming “you’re fired” aligns him with other western hemisphere presidents eschewing traditional channels of communication with public employees and the citizenry, but in El Salvador as elsewhere this justifies concern over how governance through a cacophony of tweets may affect the quality of democracy.

Meanwhile, the new president has wisely emphasized that cordial relations with the United States are an imperative for his government. More than a third of his compatriots reside there, and he has already taken steps to gain Washington’s blessing for his administration. At U.S. urging, he invited the representative of Venezuelan assembly president Juan Guaidó to his inaugural, and when a Salvadoran father and daughter drowned in the Rio Grande, Bukele exonerated President Trump’s border policies, saying “La culpa es nuestra.” Nonethelesss, he has been critical not only of Venezuelan dictators who Washington abhors but also Honduran ones who the Americans enable. Meanwhile, observers in San Salvador opine that, contrary to Washington’s wishes, he will not reverse his FMLN predecessor’s decision to deepen relations with China – he needs Chinese investment and recent history offers little reason for expecting analogous resources to arrive from the U.S. Finding the money needed to provide jobs, security and social welfare to the vast majority of Salvadorans who have lacked them may prove as vexing for the outsider president as it was for leaders of the dominant parties of the post-war period.

July 16, 2019

* Eric Hershberg is Professor of Government and Director of CLALS at American University. He took part in a delegation of AU experts for a weeklong visit to El Salvador in June, during which they met with political leaders across the political spectrum, as well as leading journalists, scholars, NGO leaders, policymakers and diplomats.