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El Salvador Promotes Inclusion

Creating Fiscal Space for Social Spending

November 13, 2013

Woman in municipality of El Carmen        

With Bank support, the Government of El Salvador improved the efficiency of its tax collection by reducing the number of income tax returns by 35%; expanded the percentage of payments to the Government through the electronic platform to 30.1%; and improved the protection of vulnerable groups by giving cash transfers to 80% of the elderly individuals in 75 rural municipalities, including 52 of the poorest.
80%

of elderly individuals in 75 rural municipalities receive cash transfers.

PROJECT MAP

Challenge

Tax revenues in El Salvador are among the lowest in Latin America and the Caribbean, and they are not sufficient to finance needed social spending.  The fiscal reforms implemented since 2000 contributed to raising tax revenues from 10% of GDP in 2000 to 13.6% in 2007. However the global financial crisis and the slowdown in economic activity reversed these gains. In 2009, revenues fell to 12.6% of GDP.

Solution

In its efforts to restore the pre-crisis positive trend in tax revenues, the World Bank funded Public Finance and Social Progress Development Policy Loan supported the Government’s efforts (i) to increase tax revenues through tax administration actions and fiscal reform, (ii) to improve the efficiency in spending allocation and resource management, (iii) to increase monitoring and accountability,  and (iv) to strengthen the agencies that have tax collection responsibilities. These reforms were expected to increase efficiency by reducing tax collection cost, and expand the tax base by reducing costs and facilitating tax payment. 

The Public Finance and Social Progress project supported key elements of the Government’s reform program aimed at creating fiscal space for needed social expenditure and protecting and including vulnerable segments of the population such as the elderly, women, and children.

Reforms included:

  • Improved efficiency in tax collection.
  • Expanded tax base through a reduction in the number of income tax returns filed.
  • Increased share of payments to the Government made through the national electronic platform.
  • Increased tax revenues as a percent of GDP through tax administration measures and fiscal reform.
  • Improved efficiency, transparency and accountability in the allocation of public resources by using framework agreements to purchase commonly used goods and services, and by not making payments to awarded contracts, unless the business opportunity is published in the e-procurement system in due time.
  • Protected vulnerable groups (i) by creating in each region at least one functioning consulting committee for monitoring progress on gender equity and one functioning window for information on women's rights, (ii) by transferring cash to at least 80% of the targeted elderly individuals in the 52 poorest rural municipalities, and (iii) by allowing at least 2,000 primary and secondary students to attend school full time.

Results

Six of ten expected outcome indicators were fully achieved and one was partially achieved. By the beginning of 2013, the operation helped to support improvements in the following key outcomes:

  • Payments made to the Government through the platform for electronic payments, P@GOES, was 30.1%.  This result surpassed the target in terms of percentage of total payments to the Government.
  • The tax revenue as a percent of GDP increased by 1.2 percentage points, with respect to the baseline average of 13.3% for 2006-2008.
  • Transparency over public resources management was significantly improved with the publication of the results and conditions for all public contracts.
  • There were 14 functioning consulting committees monitoring progress in gender equality in the public sector, and 11 regions of the country had at least one functioning information window on women’s rights.
  • 80% of the elderly individuals in 75 rural municipalities (including the 52 poorest) receive cash transfers. The cash transfer program was not extended to urban municipalities. 
  • Around 10,356 students were studying under the extended-day modality and approximately 16,968 students were studying under indirect modality, in 53 full-day inclusive schools, surpassing the target.
  • Net tax revenues to GDP were 14.4%, an improvement compared to the average of 13.3% of GDP for 2006-2008, but not sufficient to meet the target due to external and internal conditions that lowered economic activity.

Bank Contribution

The Bank contributed $100 million through the Public Finance and Social Progress Development Policy Loan to support the Government’s efforts aimed at: (i) Creating fiscal space for needed social expenditure by supporting actions to increase tax revenues and to improve efficiency and transparency in the allocation of public resources; and (ii) Protecting and including vulnerable segments of the population by allocating additional public resources towards social programs targeting vulnerable groups. The operation responded to the Government’s request for continuity in the support of strategic areas addressed by the two previous DPLs: El Salvador Public Finance and Social Sector DPL (2009) and the Sustaining Social Gains for Economic Recovery DPL (2009).

Partners

The operation was designed in close collaboration with the Government of El Salvador to ensure that supported actions were fully consistent with the country’s development goals, which included creating the fiscal space needed for sustainable social spending, enhancing the social gains achieved during the last decade, and protecting vulnerable segments of the population. The operation was prepared with extensive consultation with the International Monetary Fund (IMF) and the Inter-American Development Bank (IADB).

Moving Forward

This operation was originally conceived as the first of two development policy loans designed to support the implementation of the Government’s medium-term development plan. However, the International Monetary Fund (IMF) postponed the fourth review, and as a result, the preparation of the second loan has been postponed to a later date. 

Beneficiaries

As of January 2013, 80% of the elderly individuals in 75 rural municipalities (including the 52 poorest) are receiving cash transfers. The operation improved the protection of vulnerable groups by increasing the cash transfer program to elderly individuals in more municipalities than originally targeted at project inception—including the poorest departments in the country.