COVID resurges, even as finances stabilize

CENTRAL AMERICA - Report 29 Sep 2021 by Fernando Naranjo and Felix Delgado

El Salvador’s economy shows remarkable dynamism toward overcoming the economic effects of the pandemic, in H1 2022 or even earlier. In politics, understanding where El Salvador is headed continues to be a hard task. President Nayib Bukele’s political discourse normally highlights success in confronting the pandemic, as well as in fighting crime and violence. Bukele also emphasizes the political decisions to combat corruption, such as by removing those he calls “the others” – a reference to the opposition. After 27 months in power, the president enjoys robust popularity and the support of Salvadorans, which are important to restoring confidence. Yet the same decisions have opened cracks in external relations, and worries about moves toward an authoritarian government, a lack of economic programs to cope with fiscal and growth weaknesses, and introduction of noise into the payments system. These issues could seriously affect the future outlook. In the very short run, economic activity is expected to rebound in 2021, and to rise to the growth rates of the last decade. The external sector will be the main driver of this year’s recovery, particularly through the substantial increase of foreign remittances. Fiscal finances started to improve this year, even without an IMF agreement but, absent a fiscal adjustment program, the risk of unsustainability remains.

Costa Rica will be facing the first semi-annual review of its IMF Extended Fund Facility (EFF) in coming weeks. There is a high probability that the review will be favorable: fiscal revenues have grown powerfully, and government expenditures have moved slowly. Due to the fiscal rule, government finances showed a positive primary balance during the first seven months of the year. These results and other performance criteria will be evaluated by the IMF board. Congress did not approve the Public Employment Bill by the end of May as scheduled. The opportunity for approving the bill during the rest of the year is very limited. Congress is currently analyzing the fiscal budget proposal for 2022, and elections will be held in February, so space for voting on the employment law is tight, though a vote is still possible.

Guatemala’s pandemic situation has grown critical in recent weeks. The rise in coronavirus infections led President Alejandro Giammattei to decree a “state of calamity” on September 2nd. But Congress on September 7th rejected the governmental decree 8-2021 that had established a 30-day curfew from 8:00 p.m. to 4:00 a.m., and other restraints. Herd immunity will not be reached this year, and it makes the population more vulnerable to new variants, such as the Delta or Lambda. Meanwhile, imposing restrictions creates uncertainty, and affects private consumption.

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