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IMF Program Eases El Salvador’s Financing Constraints

Wed 05 Mar, 2025 - 2:20 PM ET

ֳ-New York/London-05 March 2025: El Salvador’s IMF program eases financing constraints and will support fiscal consolidation, reducing financing needs, ֳ says. Improved financing prosects, also boosted by El Salvador regaining market access, drove ֳ’s sovereign rating upgrade to ‘B-’/Stable from ‘CCC+’ on Jan. 7.

The IMF executive board approved a USD1.4 billion, 40-month Extended Fund Facility (EFF) for El Salvador on Feb. 26, having reached a staff-level agreement with the El Salvadoran authorities in December. Sixty percent of the program will be used for budget support, including building deposits at the central bank with the rest allocated to the central bank to boost gross international reserves. The EFF should unlock about USD2 billion of additional multilateral funds over the coming years.

President Nayib Bukele’s party has a commanding majority in congress, which should ensure that agreed measures are enacted. The program is not without execution risk, but its design, which will initially feature quarterly reviews before switching to semi-annual monitoring, and the IMF’s insistence that prior actions in all key areas will be required for disbursements, are mitigants.

The program aims to enhance fiscal sustainability by improving the non-financial public sector (NFPS) primary balance by about 3.5pp of GDP over three years. The 2025 budget already sets out the measures intended to achieve the initial 1.5pp adjustment and ֳ forecasts a larger improvement of 1.8pp this year, leading to a 2025 primary surplus of 1.2% of GDP.

Challenges in implementing expenditure adjustment and possibly diminishing benefits from tax administration measures may become more evident in 2026, when the program targets revenue reforms to broaden the tax base. In addition, the interest burden is high notwithstanding the four-year grace period on pension-related debt granted to the government after it completed a debt exchange with private pension funds in May 2023.

El Salvador’s public debt, which we estimate at 87.6% of GDP in 2024, is well above the ratings peer median (2024: 50.3%) and is a key sovereign rating weakness. ֳ forecasts consolidation at the general government level under the program to keep the public debt/GDP ratio stable this year and lead to a slight decline to 87.5% in 2026.



EFF and other multilateral financing and a manageable current account deficit in 2025 will support central bank gross reserves, strengthening resilience to shocks. IMF disbursements and higher multilateral funding are incorporated in our forecast that reserves will continue rising in 2025, to USD4.4 billion, strengthening near-term debt repayment capacity. Successful fiscal consolidation could enable more international market issuance.

Approval of the EFF will unlock enough resources to comfortably increase the banking system’s liquidity buffers to 15% of deposits by end-2H26, from 11.5%. This will support financial stability. However, stricter immigration policies and a more protectionist U.S. trade stance under President Donald Trump could present risks to El Salvador’s growth prospects, while exporters could come under pressure if the dollar resumes strengthening.

A stumbling block in agreeing the EFF was El Salvador’s adoption of bitcoin as legal tender. The program includes legal reforms to make acceptance of bitcoin by the private sector voluntary, while taxes will have to be paid in dollars. The program aims to enhance transparency, regulation and supervision of digital assets.

Contacts:

Richard Francis
Senior Director, Sovereigns
+1 202 908 0858


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Javier Alfaro
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Mark Brown
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