For El Salvador’s Right Wing, the Fiscal Crisis itself is the Goal

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President Salvador Sanchez Ceren along with FMLN General Secretary Medardo González (right) and ARENA President Mauricio Iteriano (left) at the signing of the fiscal agreement. Photo: Transparencia Activa

As El Salvador faces the possibility of defaulting on approximately $17 billion dollars in international debt, the recalcitrant right-wing opposition is using the situation to their political advantage while simultaneously blocking sustainable solutions proposed by the government. Since the leftist Farabundo Martí National Liberation Front (FMLN) party was elected to the presidency in 2009 ending twenty consecutive years of rule by the Nationalist Republican Alliance (ARENA) party, it has proposed a series of measures and reforms to address this impending fiscal crisis; however, ARENA legislators and the Constitutional Chamber of the Supreme Court have blocked virtually every government-proposed solution.

In an interview on September 26th, Technical Secretary Roberto Lorenzana noted that 80% of the original debt was accumulated during ARENA administrations, much of it as a result of the flawed pension privatization plan. When the public pension system was partially privatized in 1998, the government retained responsibility to pay for the pensions of past retirees while private pension funds collected the ongoing contributions from not-yet-retired workers. The end result of this being that the government has to borrow from these private pension funds in order to pay out its own pension obligations. In February, the FMLN presented a Pension Reform proposal to transition to a more sustainable public-private system, but right wing parties in the Legislative Assembly have blocked it from advancing while elite economic sectors have colluded with the right wing press in an attempt to rally the public against the proposal. Pensions were just one in a sweep of US-pushed privatizations implemented by ARENA administrations.

Another major factor that has limited the government’s ability to rein in the debt is the limited tax revenue collected by the State, due in part to the persistence of an extremely regressive tax structure rife with corporate loopholes as well as massive corporate tax evasion. A recent study by the Economics Department at the University of Central America (UCA) showed that tax evasion could be costing the State up to $1.5 billion dollars per year, and that businesses nationwide evade as much as 50% of their income taxes. To address this glaring financial liability, in the past few years the government has taken measures to both strongly encourage payment of back taxes as well as close loopholes and collect revenue from new sources. Some of these measures include amnesty periods for paying past-due taxes with no penalty, publishing the names of tax evaders in the media, and passage of a new 1% minimum income tax, a new tax on incoming international telephone calls, and a tax on motor vehicles. The Constitutional Chamber has used dubious legal rationale to strike down all of these measures, prompting unions and social movement groups to accuse the Constitutional Chamber of trying to starve the FMLN-led government of resources. At multiple demonstrations they have called for the resignation of the four Supreme Court Magistrates at the heart of these rulings, one of whom was recently revealed to be a tax evader himself.

In July, President Salvador Sanchez Ceren, of the Farabundo Marti National Liberation Front (FMLN), convened a meeting of leaders from all the political parties to discuss short and long term solutions to the impending fiscal crisis. In the short term, the government needs 1.2 billion dollars in bonds in order to restructure short-term treasury titles to long-term debt, so that it can pay pensions, salaries, operational obligations, and debt payments for the rest of the year. Throughout the on and off negotiations, ARENA has conditioned any support for the approval of this money on a number of changing demands, ranging from an audit of government employees to the passage of a Fiscal Responsibility Law aimed at limiting government spending through austerity measures and cuts to social programs. Pressure from everyone from the US government to the International Monetary Fund (IMF) and local Catholic leadership has kept ARENA attending the negotiations that have proven somewhat of a moving target, as the right wing party has stated that it will support the approval of bonds after a session, but then subsequently added more demands.

As of this article’s publication, the FMLN and ARENA had come to an agreement that approved a total of $550 million in bonds, far short of the requested $1.2 billion, along with the approval of a Fiscal Responsibility Law. The Association of Participatory Radio Stations and Programs of El Salvador (ARPAS) called the agreement “insufficient and counterproductive,” and noted that the agreement conditions how the government must spend the money, limits future government spending with the Fiscal Responsibility Law, all while ARENA refuses to address serious tax and pension reforms which are the root causes of the fiscal problems facing the country.

The FMLN has accused ARENA of preferring a situation of crisis and instability to actually solving the financial issues facing the country. Eugenio Chicas, Communications Secretary of the President, stated “They are on the path to generating huge problems not for the government but for El Salvador; it is a shortsighted and irresponsible view, because they are only looking towards the elections to regain power … what they want is to bring the workers of the country to desperation.” The refusal of ARENA to approve more than $550 million in bonds all but assures that El Salvador´s fiscal problems will continue. In fact, the international credit rating agency Moody´s recently stated that the country will almost certainly face another fiscal crisis within the next 12 months. The strategy of ARENA is clearly to give just enough so that the government does not default, but not enough to solve the fiscal situation in any long term way, all but assuring that there will be another round of crisis the party can exploit politically in the near future.

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