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At the heart of America

12:26 18 de November de 2021 By Daniel Oiticica

The Ministry of Finance in El Salvador is working to achieve steady growth inspired by the Singapore model. Photo: Fabio Lima

With focus on strong commitment to infrastructure megaprojects and reduction of bureaucratization, already underway, within the framework of a stable economy, with growth projections above the Latin American average, the Ministry of Finance in El Salvador is working to achieve steady growth inspired by the Singapore model. Alejandro Zelaya, Minister of Finance, explains his vision of the current context and the advantages and benefits the country offers to investors.

Important banks and international organizations forecast quite strong growth for El Salvador for this year. What are the factors that led to this encouraging reality?
The International Monetary Fund (IMF) confirms that we will grow 10% by the end of 2021. The World Bank forecasted an 8% growth and the Central Reserve Bank around 9%. The Bank of America in recent analysis informed that we could grow up to 12% this year. In private conversations, analysts said we could achieve an even higher growth rate than forecasted. There are several government initiatives that have caused this economic recovery, post Covid-19, to happen earlier than in other countries. In addition, there is a very clear strategy of an economic take-off plan with large infrastructure works, a lot of trade facilitation and a broad commitment towards tourist areas of the country, especially the coast. By 2022, our infrastructure plans would have increased 25% compared to the previous year. We have also closed some gaps in education that were damaging the professional training of our citizens. We also participate to become the center of the new Regional Securities Market, that is, El Salvador is about to become as of first quarter of 2022 a thriving financial market for Central America, directly competing Panama.

In addition to this important possibility of becoming the headquarters of the regional stock market, which are the other advantages that the country offers to foreign investors?
We have initiated an extremely broad trade facilitation phase. Our customs are going through massive transformation and the stock market will be strengthened. We also made an important bet on cryptocurrencies, to be positioned as crypto paradise, with mining projects through volcanic energy to balance the reputational risk that crypto brings in relation to environmental damage. In this sense, there are private initiatives being launched in the country, such as exchange houses, financial services, the same private mining companies, etc. Also, we should bear in mind that El Salvador is one of the Latin American countries with no property tax, which reduces settling costs for international investors. There are no income taxes for the generation of cryptocurrencies or for mining, since it is a legal tender. Our territory is small, which allows us to have a much more compact logistics chain and to move between the beach and mountains much faster. We are also at the heart of Central America, which, in turn, is the heart of the entire American continent.

Are the investment legal frameworks being renewed?
We are reducing the amount of documentation requested from the foreign investor. For example, before four or five documents were required to be able to register as a company, now, in the case of physical person, only the ID card is needed, which makes business in El Salvador much easier. In addition, there is a framework of tax incentives that has also been launched through the investment attraction policy and managed by the Ministry of Commerce and Investments of the Presidency, which is also added to all the regulatory improvement, through a one-stop shop. We are strongly committed towards developing infrastructure, but also to reduce paperwork and to have fewer requirements in our regulatory framework so that investors can come to El Salvador.

Which is the importance of fiscal balance for the Government?
The world is going through a stage in which governments are obliged to implement an expansive policy of public spending. With a crisis like Covid-19, the worst thing any fiscal planner can do to cut expenditure. Quite the opposite. Expenditures related to public investment should be expanded to generate jobs quickly. This is the path we have taken. We launched the road to Surf City in 2021, we are about to inaugurate the Gerardo Barrios path and the Claudia Lars beltway, among others. In addition, we are promoting the Pacific Train and the Pacific Airport, large infrastructure works that, in the short term, create jobs and, in the mid- term, provide fiscal sustainability as they generate income or reduce costs in the logistics chain. And in the long term, they also ensure strategic assets that will generate a lower risk profile, or that will make it more attractive to foreign direct investment. Our strategy is to shore up public spending on investment, reduce it in current spending, in such a way that public investment can boost private investment and between the two can increase the country’s GDP, and thus continue along this path of fiscal discipline that was lacking in El Salvador in previous years.

A very important moment is coming for the country due to coming projects. What expectations do you have for future bidding processes?
The world in general is looking at El Salvador due to several of the strategies that we have implemented. We also believe that the world is waiting for this new style of public management, a system that is committed to economic growth, without forgetting that there is a population to serve and some basic infrastructures to build. The mega infrastructure works and all the planned public investment will boost private investment. We will have many investors interested in participating in building assets such as roads, paths, factories or mega-projects such as the Pacific Airport or the Pacific Train. El Salvador has a lot of investment potential right now. We offer legal certainty, long-term vision and a public management with the necessary political consensus for the approval of strategic projects.

Which are the strengths of El Salvador’s 2022 budget?
The most important part of this budget was to pass on the message of fiscal discipline. We have reduced the gap by 62% compared to last year. Multilateral organizations trust us. The World Bank has recently disbursed us operations for about 500 million dollars for investments in early childhood. The IDB has also just approved a contingency credit operation for natural disasters for $ 400 million. We are negotiating with the IMF an extended facility agreement to improve El Salvador’s country risk profile. They trust us because we have a predictable fiscal policy that tries to smooth the repayment curve of El Salvador’s sovereign debt, and which in turn is presenting general budgets with a high investment component. Of the 7,000 million dollars that currently make up our budget, almost 25% is direct public investment, with a high infrastructure component. We have the support of private initiatives and other innovative bets such as Bitcoin, which can generate additional cash flows that we did not have within our tax planning.

Is there a country model to follow?
We believe that El Salvador is in the process of transformation, that we can turn it into the Singapore of Central America. This is the model that we want to follow, adapted to local reality and inherent features. This model is based on economic freedom, with a robust financial system, but which in turn maintains some strategic assets, always taken care of by the State to ensure the benefit to the general population. And that also distributes its wealth equitably on the side of public spending, provides opportunities for economic growth to its individuals so that they can develop all their activities and business, artistic, professional and any other type of skills. Strategic projects that were stagnant for the last decade have already started to move forward again. The World Bank had not operated in El Salvador for 10 years. They had already pointed out in a 1948 report, 72 years ago, that we should invest in early childhood. Only in 2021, with the configuration of this new political leadership, it was possible to refocus on early childhood. It should also be noted that the project to reduce the digital gap is already underway and planning to distribute 1.4 million computers to all children in public schools, strengthening the training of our local workforce that is already recognized as one of the best in the region. We are going to become a thriving nation in the coming years, and I hope readers support us so that we can grow together.