WASHINGTON, June 2, 2011 - The World Bank Board of Directors approved today a US$100 million policy loan for El Salvador to help increase fiscal revenues for needed social spending. The goal is that by the end of this two-loan program, the country’s total tax revenues will jump from 13.3 percent of Gross Domestic Product (GDP) to 14.8 percent, a nominal increase of US$368 million by 2012.
This first phase of the loan will focus largely on addressing shortcomings in tax administration and should increase revenues by US$98 million. As opposed to most countries, tax collection responsibilities in El Salvador are divided among three agencies: the Internal Revenue Agency (DGII), the Customs Agency (DGA), and the Ministry of Finance’s Treasury Office (DGT). The Government strategy, supported by this loan, involves strengthening and modernizing each individual agency while gradually increasing the historically low levels of coordination and integration among agencies.
Supported actions will seek to improve the country’s efficiency in tax collection and expand its tax base. This loan series will focus on expanding El Salvador’s electronic payment platform (P@GOES), increasing its share of payments to the Government from 5.25 percent in 2008 to 9.5 percent in 2012. It will also seek to simplify tax schemes for wage earners and small and micro enterprises, thus reducing the cost and effort to pay taxes.
“A priority of President Mauricio Funes’ administration is to achieve fiscally and economically sustainable social progress”, said Carlos Caceres, Minister of Finance. “This World Bank loan will help the Government’s program to create fiscal space needed to expand the social gains achieved during the last years and protect vulnerable groups, especially women, children and elders”.
In order to cope with the recent global crisis, El Salvador entered an IMF Stand-by Arrangement (SBA) in February 2010. The program envisions a gradual increase in the primary surplus to bring the public debt to sustainable levels by 2015. Fiscal consolidation under the program is achieved by maintaining total spending while significantly increasing public revenues.
Tax revenues as a percent of GDP are low in El Salvador and represent a constraint for expanding public services and social aid. In 2008, tax revenues were about 27 percent of GDP on average in OECD countries, while they were about 16.1 percent in Latin America and 13.0 percent in El Salvador.
Additionally, a large part of Government revenues are generated through indirect taxes, which makes the Salvadoran tax system regressive. The informal sector, estimated to represent 54 percent of the total economic activity in El Salvador, is also a serious constraint, narrowing the country’s tax base.
“The current Government’s plan makes overcoming economic, social, and political inequality a priority,” said Felipe Jaramillo, Country Director for Central America at the World Bank. “This operation will support actions consistent with two main objectives of that plan: expanding fiscal space by substantially increasing tax revenues and expanding basic social services in rural and urban areas, especially to vulnerable segments of the population.”
In parallel to raising revenues, the Government is improving the efficiency and transparency in the allocation of public resources. In a country where subsidies have tended to be ill targeted and in some cases regressive (such as water subsidies), the current Government strategy is to protect vulnerable households by expanding effective and well-targeted safety net programs.
The Comunidades Solidarias program is the Government’s main tool for implementing social protection interventions. The Program was developed and implemented in partnership with the World Bank. There is currently a consensus that the program is fulfilling its main objectives of supporting the consumption of poor households and increasing their children’s access to basic health, nutrition and education services.
The approved operation supports the protection of vulnerable populations either by expanding current conditional cash transfer programs to other areas and by implementing additional social programs by January, 2012. Among such programs are:
- A cash transfer for elderly individuals -- expected to benefit approximately 5500 poor elderly Salvadorans.
- An expansion of Comunidades Solidarias into poor urban areas – to benefit approximately 20,000 households.
- A pilot program for full-day school – expected to benefit approximately 2000 primary and secondary students.
- A gender equity program – expected to support the creation in each region of the country of a consulting committee for monitoring gender equity progress in the public sector and a window for information on women’s rights.
The new US$100 million “Public Finance and Social Progress Development Policy Loan” has a 30-year maturity period, including a 5-year grace period.