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In December 2024, El Salvador and the International Monetary Fund (IMF) reached a staff-level agreement for a $1.4 billion loan. The agreement, which outlines key policy commitments and structural reforms, remains subject to approval by the IMF Executive Board before the funds can be disbursed. However, concerns persist among civil society organizations and broader segments of the Salvadorean public that approval of an arrangement with the IMF could enable continued democratic backsliding and allow Nayib Bukele to further consolidate his authoritarian grip. The IMF Executive Board can help mitigate such concerns by enhancing transparency and accountability in the IMF-supported program. As a first step, including the following considerations into the IMF program would strengthen democratic norms and the rule of law in El Salvador, especially in the areas of governance and anti-corruption. Similarly, by improving consultation and encouraging communication with and the involvement of civil society actors, the IMF team, management, and the board would support broader public buy-in and strengthen program implementation.
The Government of El Salvador (GOES) recently enacted a new anti-corruption law, despite the existence of strong legal frameworks already in place. However, the key challenge lies in ensuring its effective implementation. As the IMF Executive Board has noted, “PAs [prior actions] are often used prominently in cases where a country has a weak track record of implementation and are useful to ensure a minimum implementation standard. However, staff should be mindful of the possibility that PAs may be implemented without genuine ownership such that its impact is nominal or temporary.” To prevent superficial compliance, it is essential to enforce concrete measures—such as requiring all government officials covered by the law to submit their declarations of assets (declaración de patrimonio) and ensuring full compliance with existing transparency and accountability regulations.
As part of its agreement with the IMF, El Salvador amended the Bitcoin Law to make its use optional and remove its status as a legal tender. The government should now publicly disclose the costs and sources of funding for its Bitcoin experiment―including a full audit of the crypto wallet Chivo.
Implement a ceiling on government borrowing from private pension funds: El Salvador’s Legislative Assembly made changes to the pensions regime in December 2022. As a result, the GOES has been able to increase its borrowing, which amounted to 80 percent of pension contributions received between January 2023 and June 2024, according to data from the Banco Central de Reserva (BCR) and press reports. Further, through a debt swap in 2023, the GOES will not pay interest or principal for four years. Given this, the GOES should significantly pay down this debt and undertake a serious pension reform that would ultimately prohibit further government borrowing from the pension funds going forward, in order to ensure the pension scheme’s long-term viability.
Implement a ceiling on government borrowing from private banks: The GOES has similarly forced private banks to purchase its domestic debt instruments (known as CETES and LETES) to the point that banks have had to draw on their legal banking reserve funds. In March 2024, Barclay’s reported that, according to BCR data, commercial banks’ “gross credit, measured by bonds and loans, to the public sector is . . . 13.7% of total assets . . . the highest level on record and up markedly from 11.8% in 2022” (per a Barclays analysis from March 5, 2024). To safeguard depositors’ funds and maintain the stability of the banking sector such practices should be curtailed, and the minimum reserve requirements must be restored to pre-Covid-19 levels by the end of the 40-month arrangement.
Nonobservance of the above should interrupt purchases or disbursements under the arrangement.
Strengthen banking sector regulation: Due to weak banking oversight, the GOES stepped in to manage the savings and loan association COSAVI in 2024, resulting in ongoing restrictions on depositor withdrawals. It is unclear whether depositors will be able to recover their savings, and the government has not been transparent on how it is planning to resolve the crisis. Resolution of this matter―namely full restitution to depositors and accountability for those responsible―as well as stronger oversight and supervision of savings and loan entities should be a condition for the IMF arrangement. This would prevent similar occurrences from taking place in the future.
Due process for laid-off public sector employees: In an effort to reduce its wage bill, the GOES has been laying off employees and will likely continue to do so during program implementation. Workers complain that the separation process is vexed by illegalities and that their rights have been violated, for example, by noncompliance with the general principles and due notice provisions contained in the Labor Code and the Civil Service Law. Under the IMF arrangement, any reduction of the government workforce must be respectful of labor rights and in full compliance with the law.
Other actions: Transparency should be strengthened under the IMF program. The government should demonstrate ownership and commitment to transparency, anti-corruption, and the rule of law by taking clear and specific actions. Key priorities should include:
Establish an Economic Program Oversight Committee (EPOC): In 2013, under the IMF’s Extended Fund Facility with Jamaica, EPOC “was formed so that stakeholders from the private sector, unions, government, academia, and the media could come together to hold the government accountable for its reform commitments and fiscal discipline.” A similar committee should be established for El Salvador, one that would share monitoring with IMF staff from the start. It is worth noting that IMF Managing Director Kristalina Georgieva and former Managing Director Christine Lagarde have both referred to the Jamaica program as a “model.”
Quarterly program reviews: In order to gain maximum benefit from the proposed EPOC mechanism above and considering the current level of polarization in the country, it would be advisable to hold program reviews on a quarterly basis, as opposed to every six months. This would allow closer monitoring and more frequent feedback from civil society to inform the program implementation assessments.
The IMF’s 2018 Review of Program Design and Conditionality recommended “improving two-way communication to support broad public buy-in.” In the case of El Salvador, establishing a participatory process would “foster greater flexibility in program design, encourage greater ownership and, as such, strengthen program implementation.” As the IMF itself proposes, it should “deepen engagement” with civil society organizations (CSOs) and engage “through various channels and with different audiences.” In turn, the GOES should establish a formal consultation process with CSOs “targeting the appropriate level of consultation for broad ownership,” and the IMF should encourage officials to “engage in a transparent participatory process, make themselves available to give seminars, provide training, meet with various stakeholders, and engage the media.” Regular meetings between CSOs and IMF senior management and the board should also take place.
Implementing these reforms is essential to strengthening democratic governance, restoring institutional independence, and ensuring transparency in El Salvador. Failure to act would have adverse effects. For example, it would exacerbate unemployment and social dislocation resulting from efforts to reduce the government wage bill, weaken the financial system by failing to meet robust capital reserve standards, and allow opportunities for corruption and bribery to persist. However, by addressing concerns over constitutional amendments, judicial autonomy, anti-corruption efforts, and access to public information, the arrangement with the IMF will help rebuild trust in government institutions and uphold the rule of law. Additionally, enhancing accountability in government procurement and fiscal management, along with reengaging with international transparency initiatives, will contribute to greater economic stability and democratic resilience.
Alexander A. Kravetz is a senior associate (non-resident) with the Americas Program at the Center for Strategic and International Studies in Washington, D.C.
