The Central American Bank for Economic Integration authorized a $220 million credit line to offset a government fuel subsidy and the World Bank is set to reimburse $100 million spent on the pandemic. The funds provide the government with the resources to finish out this year and brace for major repayments starting in January.
According to these two organizations, the $320 million can be used to reimburse expenses that the government has already incurred, or to manage the gas subsidy and other unforeseen expenses due to rising fuel prices. With the legislature’s order authorizing the first disbursement, the Treasury Ministry has already succeeded in securing the Assembly’s approval for one of the two loans.
The $330 million loans are new funds that give the government room to maneuver in preparation for the debts that will come due in January 2023 and for the increased amount it must allocate to pay the 'public debt.' Since March, the Treasury Ministry has been devising a fiscal adjustment plan to increase the revenue it collects by $380 million, as well as a $674 million savings plan to avoid defaulting next year, according to internal documents reviewed by El Faro.
According to the 2022 Budget Law, this year's budget allocates $1.43 billion for paying the public debt (both the principal and interest). As September approaches, the government must prepare the 2023 Budget and, according to the internal documents, it must allocate $2.023 billion to pay next year's public debt.
Because $800 million of bonds will come due in January 2023 and creditors will ask the government to pay them, the budget’s allocation for paying the public debt will increase from $1.430 billion (in the 2022 Budget) to $2.023 billion (in the 2023 Budget). Investors have been concerned about the government's ability to honor this commitment.
Ricardo Castaneda, an economist at the Central American Institute for Fiscal Studies (ICEFI), explains that the loans will give the government some breathing room and possibly help it pay the $800 million in January 2023. But he also said that public finances are still in bad shape.
'The CABEI and World Bank work by giving the government money for expenses that it has already incurred,' said Castaneda. 'The government can only make financing substitutions and that gives it room to maneuver, but beyond the January 2023 bonds, it still does not have sufficient resources to pay off the short-term debt, close to $1.2 billion. In September, more than $500 million will come due, and we do not know if the government will be able to pay it.'
At the end of April, El Salvador’s government requested a $220 million loan from the 'Temporary Support Program' in response to rising fuel prices, and CABEI granted the request. 'The loan in question is at the stage of meeting the conditions prior to being formalized. In order to schedule the disbursement, the government must first have the necessary legislative approvals in place,' a CABEI spokesperson told El Faro.
On June 16, the World Bank announced on its website that it has approved a $100 million credit line to reimburse expenses that the Salvadoran government incurred during the pandemic with purchases of Covid-19 vaccines, medical supplies, and protective equipment for hospitals. 'This project has been approved by the World Bank, but it is now in the process of being submitted to El Salvador’s Legislative Assembly for approval,' said a World Bank spokesperson. On June 28, Nuevas Ideas Party representatives approved a legislative order enabling the government to sign the contract with the bank and receive these funds.
'The loan is [intended] to retroactively finance the purchase of approximately 8 million doses of vaccines and related supplies,' said a World Bank statement. 'It will also finance the purchase of ancillary vaccination supplies, including personal protective equipment (PPE), medicines, and medical tests and supplies; [and] transportation services for vaccine deployment,' the World Bank added. On June 28, the Assembly approved the contract with the World Bank to receive the loan disbursements.
In November 2020, the Attorney General's Office raided the Ministry of Health for evidence of corruption in 66% of pandemic purchases. The Ministry of Health responded by placing a 7-year hold on all public procurement information, including vaccines, protective equipment, masks, transport equipment, and other medical supplies. In May 2021, the Bukele-controlled legislature dismissed the Attorney General and appointed Rodolfo Delgado in his place. Delgado disbanded the unit investigating irregularities in these purchases and ended its agreement with the OAS-backed International Commission against Impunity in El Salvador (CICIES), which had also alleged that these purchases showed signs of corruption. In May 2021, Nuevas Ideas legislators approved an immunity order that protects officials and employees from consequences for irregularities that may have occurred in the pandemic purchases. The order also eliminated the Procurement Law’s controls.
Last March, the government began to outline a series of measures to avoid defaulting after it failed to negotiate an agreement with the International Monetary Fund (IMF) to obtain a $1.3 billion loan. On March 31, the Treasury Ministry gave investors a list of measures to start the fiscal adjustment.
Outreach to investors began in February 2022 when the government organized an event 'whose purpose is to improve dialogue with Wall Street as the country recovers from the pandemic-induced recession,' according to correspondence between the ministry and investors, dated on March 31. In the document, the government promised to implement five measures to increase revenues by $380 million, as well as four measures to generate $674 million in savings.
The document contains ideas that are not fully explained. For example, to increase revenues, the ministry promised to collect an additional $130 million from the largest taxpayers; $115 million by eliminating unspecified exemptions; $15 million from new tobacco taxes; $10 million from gun license renewal fees; and $110 million from 'multiple initiatives.'
According to the document, in order to generate savings, the Treasury Ministry promised investors spending cuts, some of which have already begun. For example, they promised to cut $260 million from the Fund for Economic and Social Development (FODES). In addition to eliminating FODES, the government passed new laws this year including one that created the Executive-controlled Directorate of Municipal Works, which has monopolized the resources that used to go to the municipalities.
The correspondence between the Treasury Ministry and investors mentions $114 million in 'additional budget cuts,' which were reflected in the reduction of budget items for social programs; $130 million through the creation of a program for the 'modernization and restructuring of the federal government,' and a savings of $170 million through a 'Promotion and Development of Human Talent' program. The cuts and programs must be included in the 2023 Budget; the government has until the last day of September to submit the budget.
In its correspondence with investors, the ministry mentioned that it made progress in 2021 in talks with the Inter-American Development Bank (IDB) to arrange a 'contingent loan' of $400 million for emergencies. El Faro asked the IDB for information on the status of these talks but had not received a response at press time.
*Translated by Jessica Kirstein