El Salvador is in the midst of a financial crisis. Its government is running out of funds to pay its bills; the political parties are deadlocked in negotiations to find a solution; and there are suggestions the government might even default on its debt.
El Salvador President Salvador Sanchez said the government was in a state of emergency as he pushed lawmakers to agree to a global bond sale to ease a liquidity crunch.
A "lack of liquidity" must be solved this year to "avoid negative consequences of greater dimension," Sanchez said in a televised address, as yields on the Central American nation’s debt soared.
The government is willing to reach an agreement on a fiscal responsibility law in congress that would include tighter spending rules, Sanchez said, while calling on lawmakers to approve a $1.2 billion bond sale. Standard & Poor’s placed El Salvador on credit watch last week and said the country’s B+ rating may be downgraded if parties fail to agree on fiscal issues. The country’s "financial management is deteriorating" due to "heightened political polarization," S&P said in a report.The credit rating agency Standard & Poor's subsequently did downgrade El Salvador's credit rating, writing:
The downgrade reflects deterioration in our assessment of El Salvador's institutional and governance effectiveness, which has contributed to a weaker external profile, and a further erosion of the government's liquidity position.
Continued political stalemate between the governing party Frente Farabundo Martí para la Liberación Nacional and the main opposition party ARENA (Alianza Republicana Nacionalista) has blocked progress on fiscal and pension reform, undermining investor confidence. It has also imposed a heavy cost on financial management by weakening the government's ability to raise added revenues and to manage its debt.
There has not been consensus from a qualified majority in Congress to approve the issuance of external debt due to opposition from ARENA.So what's going on? The government of El Salvador is having a hard time paying its bills when they come due. It wants to borrow $1.2 billion on world markets, to help pay these bills but ARENA will not agree to approve the changes without a package of fiscal reforms.
- Political deadlock. El Salvador's warring political parties have been unable to agree on a series of fiscal measures to reduce spending and increase revenues to get the country out of this crisis.
- Tax evasion. Many businesses and other tax payers are delinquent in paying their taxes. The government says that more than $560 million is owed the government by more than eleven thousand individuals and businesses.
- High price of social spending. Seven years of FMLN governments have seen an increase in social spending, but income to the government has not kep up.
- Inefficiency and corruption. El Salvador's government does not spend its money well.
- Slow growing economy. The economy of El Salvador has been suffering with growth rates below 3% for many years. More growth could increase government revenues and reduce unemployment.
It is a crisis that an editorial from the University of Central America blames on both political parties, who seek more to gain political advantage than to come together for the good of the country:
Actúan como verdaderos niños caprichosos, llorando sobre la leche derramada y planteando exigencias que la misma crisis hace imposible atender.
[The parties] act as truly capricious children, crying over spilled milk and making demands that make it impossible to address the current crisis.