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Government must reduce spending to reach agreement with IMF, say economists

Experts inside and outside the country warn that the Nayib Bukele government’s discourse that it will combat tax evasion and thereby achieve a guarantee for the $ 1.3 billion loan it seeks with the International Monetary Fund (IMF) is not real, nor is it sufficient.

The economic and social situation in El Salvador is very critical and for the government to reach an agreement with the International Monetary Fund (IMF) to obtain a loan for $ 1,300 million, the discourse of combating tax evasion instead of raising taxes will not suffice. economists warn.

“I can almost assure you that the Fund is not going to sign an agreement with El Salvador just with the idea of ​​eliminating tax evasion; That’s a super attractive speech if it were possible, but it just isn’t. It must necessarily establish fiscal commitments in income, spending and structure in the public sector, ”warned Costa Rican economist Roberto Artavia, president of the board of directors of INCAE Business School, in a recent television interview.

He added that “in an ideal world one would say that the idea of ​​combating tax evasion is the happiest, because it means that we do not burden anyone. The IMF will never accept that: in the first place, because the bulk of tax evasion comes from the informal economy, it comes from smuggling, from activities that are already illegal… ”.

Agreement with the International Monetary Fund may lead to a VAT increase

The Artavia analysis arises from the fact that the government has been in negotiations with the IMF since the end of last year to lend it money, but it is known that an agreement with this organism entails rigid fiscal measures, such as an increase in VAT, for example.

Although according to the Minister of Finance, Alejandro Zelaya, the government’s strategy will be to combat tax evasion and not raise VAT.

“The VAT is not going to be increased, we are not including that part in the agreement, what we are going to do is fight against tax evasion and the IMF takes that as a fiscal measure for adjustment,” Zelaya assured. March 17 this year.

The government projects a collection of the Value Added Tax (VAT) of $ 2,643.4 million, a figure that according to the analysis of the Salvadoran Foundation for Economic and Social Development (Fusades) is impossible to achieve and that has overestimated $ 603.8 million of collection.

Given this, Salvadoran economists agree with Artavia that the Executive will not be able to reach an agreement with the IMF with this strategy.

“The government does not say anything about how it will fight tax evasion, I think it is not focused on fighting smuggling and tax evasion. To think that in a year they will collect 3 or 4 points of GDP, based on the methodology of persecuting those who already pay taxes, it will be minimal “, considered the economist Luis Membreño.

The economist Rafael Lemus also pointed out that the IMF may be able to believe the government that it is willing to develop good practices or a successful fiscal adjustment, but upon seeing the non-compliance it could suspend the agreement, if it is finalized.

“And this is also mentioned by Dr. Artavia when he says that he could ensure that there will be no agreement with the Fund if the entire government plan is to attack tax evasion; He is telling them that this is not credible, nor is it consistent. El Salvador’s fiscal problem is much bigger than Costa Rica’s in terms of debt and imbalance, ”said Lemus.

Regarding that if he sees possible that the Fund could ask the country to establish new taxes, Lemus considered that the discussion could go more in the reduction of expenses.

“The Fund will warn that the size of El Salvador’s adjustment is much larger than that of Costa Rica and that this country was asked to take income and expenditure measures, and with the government of El Salvador it will be the same, so it is not enough to say that he will go after evaders, “said Artavia.

In its analysis, Artavia considered that if it must establish taxes in the country, it must be a well-thought-out structure and not just to raise them.

“In El Salvador, relatively, the tax burden will be higher, to say: taxes on wealth, not on production; taxes on pollution, not investment; taxes on idle capital, not on productive capital; and in this sense, taxes should not be increased just to increase, but rather focus on taxes that generate additional income without harming the productive impulse, nor the investment that the country requires, ”said the Costa Rican expert.

The economist and former Minister of Finance, Manuel Enrique Hinds, said that the collection of taxes in El Salvador “is not bad”, but warned that the negotiation with the IMF can go more for the transparency of expenses and reduce them, than to increase the tax burden.

But Membreño pointed out that “the will to reduce government spending is not seen either and, furthermore, with the level of indebtedness the country has, it cannot maintain that level of spending.

Government needs more than $ 2 billion to pay short-term debt

About a pension reform

Another issue on which Artavia gave his opinion is that of pensions and considered that El Salvador had to work and carry out a real pension reform for a decade.

“The problem is that there are not enough contributors; they do not contribute enough; and each time the pensioners will receive a lower percentage of the standard of living they had, ”he said. He added that while 70% of the population is in the informal sector, “there will not be enough funds to support pensions.”

In Artavia’s opinion, the Salvadoran pension system must be supportive. “We must set higher retirement ages, increase the contribution and seek a practical situation for the informal economy, for all those who do not contribute and are leaving a pyramid without a base.”

He added that El Salvador has a double problem: the informal economy and the huge number of young people who have emigrated and who do not feed the pension system.

“They feed through remittances directly to consumption and some to investments, but not to the pension base,” said Artavia.

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