Caribbean & Central America - August 2025

On 15 July the International Monetary Fund (IMF) published details of its 2025 Article IV consultation and the completion of its first review of El Salvador’s Extended Fund Facility (EFF) arrangement which it said allowed for the immediate disbursement of around US$118m in funding.

This is part of the EFF arrangement worth around US$1.4bn in total that was approved in February following years of negotiations, which stalled in part due to concerns around President Nayib Bukele’s decision to make cryptocurrency bitcoin legal tender. The IMF said that programme performance has been “solid” in the months since it was finalised, “with the economy continuing to expand as macroeconomic imbalances are being addressed”. It cited a return to the pre-coronavirus (Covid-19) pandemic trend in real GDP growth, supported by robust remittances and strong performance in tourism and construction sectors driven by improvements in security and business confidence. Inflation has fallen and improvements in public finances, leading to a narrowing of the current account deficit and near-term refinancing risks have receded due to government buyback operations, said the Fund.

The IMF added that “substantial progress” had been made in implementing key structural benchmarks after what it called some “initial delays”. The Fund highlighted the fact that a new fiscal sustainability law has been enacted, a decree which limits exceptions to the procurement law has been published and financial information relating to the country’s six largest state-owned companies has been released, all of which were stipulated by the agreement. It also noted that “the overall stock of Bitcoin held by the public sector has remained unchanged since program approval”. However, in July the Salvadorean government’s bitcoin office said that it held 6,233.18 bitcoin, up from 6,101.18 bitcoin in March, demonstrating that Bukele has followed through on his pledge to continue adding to the country’s bitcoin reserves even though it violates the terms of the IMF arrangement.

El Salvador still faces macroeconomic vulnerabilities and structural impediments to growth and development, according to the IMF, including a high debt-to-GDP ratio, high external financing needs and costly market access. The country is also vulnerable to shocks such as natural disasters, especially as its economy is dollarised, and external and financial buffers are weak, it added. Longstanding concerns around low productivity remain, reflecting gaps in human capital and infrastructure, and there are persistently high poverty rates of around 25%.

To help deal with these myriad issues, an agreement has been reached on a timetable for further reforms that will safeguard macroeconomic stability and strengthen governance and transparency. The programme remains focused on “strengthening public finances, rebuilding external and financial buffers, and enhancing governance and transparency frameworks to create the conditions for stronger and more resilient growth” according to an IMF statement. This will be key in the face of increased downside risks that have arisen due to US President Donald Trump’s trade war and stricter immigration policies, which add to external challenges. 

Looking ahead, the IMF believes that this weaker external backdrop will be offset by stronger momentum in domestic GDP growth, which hit an estimated 2.6% in 2024 and is forecast to remain at 2.5% in 2025 and 2026. It also forecasts that inflation will be contained at around 1% in 2025 before rising slightly towards the historical average of around 1.75% in subsequent years, and the fiscal primary balance will rise from 1.9% of GDP this year to a surplus level of 3.7% of GDP by 2027. “Under these projections, the probability of sovereign stress would remain moderate and public debt would be on a sustainable path,” said the IMF, which added that the agreement also envisages support from international creditors in the coming years. “These improvements in public finances are expected to support higher per capita growth over the medium term,” it added.

However, while the IMF paints a relatively rosy picture of the country’s finances, there are growing concerns for the country’s poor. For example, the Center for Global Development (CGD), a thinktank with offices in Washington DC and London, estimates that a new 1% tax on remittances introduced by the US in July will mean that El Salvador receives US$198m less in remittances each year. These remittances constitute a significant portion of household income for the poorest families, who rely on them for basic necessities. El Salvador is also forecast to be the worst affected country in the world in terms of the estimated reduction in annual remittances as a percentage of gross national income (GNI), with US$198m equivalent to 0.62% of GNI. This could weaken consumer demand, with knock on effects for economic growth. 

In addition, the CGD estimates that El Salvador will also lose out on US$150m in funding from the US Agency for International Development (Usaid) as a result of spending cuts imposed by Trump. These programmes overwhelmingly support the poorest Salvadorean families to fulfil basic needs. With the Salvadorean economy standing to lose a combined US$348m per year as a result of the remittances tax and Usaid cuts, there is significant potential for the country’s poverty rate, which has already increased in recent years, to worsen further.

In conclusion, there is something of a disconnect between the IMF’s appraisal of the economy and the challenges that appear to be mounting for ordinary Salvadoreans. This could add to growing discontent with Bukele, although the president appears to have cemented control of state institutions to the extent that it would be difficult for a potential protest movement to remove him from office.

El Salvador’s trade deficit grows

In July El Salvador’s central bank (BCR) released new figures showing that the country’s exports totalled US$606.14m in May up from US$556.76m in April and up 6.75% on May 2024. Meanwhile imports in May totalled US$1.55bn, up from U$1.47bn in April and up 11.03% on April 2024. This leaves a trade deficit of US$947.85m in May, up from US$911.09m in April. Total exports in the first five months of 2025 came to US$2.84bn, representing accumulated growth this year of 5.4%. According to the BCR, total imports in the first five months came to US$7.62bn, representing accumulated growth of 10.5%.