Borrowed time

CABEI approves loan for El Salvador, but is it the right option?

The Central American Bank for Economic Integration (“CABEI”) approved its largest financing programme with a USD 600 million loan support for sustainable development in El Salvador. The funds are to be invested in financing SMEs involved in human development projects, improvement of public infrastructure and economic reactivation.

A senior economic adviser with prominent corporate clients across Latin America was underwhelmed, “The new loan will be welcomed but it isn’t transformational as some have suggested. To put it in perspective, USD 6 billion in remittances are sent from the Salvadoran community in the US, the new loan is just 10% of that. In fact, if you add up all the loan packages, from the IDB, IMF or private banks, the total doesn’t even reach 30% of the remittances.”

“To put it in perspective, USD 6 billion in remittances are sent from the Salvadoran community in the US, the new loan is just 10% of that.”

Senior economic adviser, El Salvador

Salvadoran economy contracted by 7.9% in 2020 due to effects of the COVID-19 pandemic, reported the Central Bank of El Salvador, and the CABEI loan will be mostly oriented to support SMEs facing liquidity issues. The aim is to alleviate the economic woes of entrepreneurs, employees and their family groups through a more efficient and direct loans programme. It is expected that funds will reach 21,000 companies which, in turn, are expected to create 100,000 jobs.

The economic adviser continued his criticism, “There is a concern that the loan will be lost to cover interest on existing debt, it will be a drop in the ocean of national debt. There is no clear state priority plan, in order to create jobs it must go to centres of technical expertise such as electrical industries, agrobusiness etc. El Salvador needs to create new industries that neighbouring competitors don’t have.”

The funds will be distributed by 13 financial institutions acting as intermediaries which will allocate them through three sub-programmes depending on the amount granted to its final beneficiary. El Salvador will have to repay the loan in 20 years with a 2.5% annual interest rate.

A former government adviser and construction executive commented, “The loan period extends beyong Bukele’s term so it is a matter of State. In this regard it is not enough, taking into account the challenges of poverty, social inequality and migration to the US and Mexico. Having said that, some scenarios show debt reaching 100% of GDP by 2023, the cost of that debt is going to cause problems for the country.”

“It is not enough, taking into account the challenges of poverty, social inequality and migration to the US and Mexico.”

Former government adviser and construction executive, El Salvador

José Alejandro Zelaya, Minister of Economy, said that the funds would allow the government to push forward their social, political and economic plan to consolidate the country’s economic recovery. However, there are widespread concerns about fund allocation as President Nayib Bukele faces international accusations of overstepping his powers. The recent removal of the attorney general and five Supreme Court judges led the country’s opposition to accuse Bukele of staging a coup. Last year, he was also criticised for using troops to take control of the legislative assembly. However, Bukele controls more than two-thirds of the Congress and has a high approval rating.

The economic adviser sees further problems ahead, “The new legislative majority is shielding the current administration from accountability – huge corruption cases will be buried. Will these international financial institutions not take note of it? Thus, tomorrow the international loans will be spent and El Salvador will lose credibility.”

 

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