Economy - Fiscal Policy and the Budget Process

Economy - Fiscal Policy and the Budget Process

Salvadoran law stipulated that fiscal budgets of the central government, the decentralized agencies, and public enterprises such as Incafe and Inazucar had to be approved by the Legislative Assembly. Budgets were generally approved for one fiscal year (FY) at a time. Special projects, such as those funded by the United States Agency for International Development (AID) and other foreign agencies, were considered extrabudgetary operations, however, and were not subject to legislative approval.

In nominal terms, government spending doubled between 1976 and 1982, from US$335 million to US$658 million. Government spending was stable relative to GDP, however; government expenditures represented 12.8 percent of GDP in 1972, compared with 12.9 percent in 1986. In 1986 the government maintained a surplus in its current account and an overall deficit equal to 5.4 percent of GDP.

The central government's fiscal deficit increased significantly as a share of GDP during the 1980s as compared with the 1970s. The deficit was 0.5 percent of GDP in 1976 but reached 3.4 percent in 1986. Most of the capital needed to cover the growing fiscal deficits between 1979 and 1987 was obtained from the Central Reserve Bank. The government could in fact cover about 85 percent of its annual fiscal deficit with financing from the Central Reserve Bank. In order to fund operations of public enterprises and additional development programs, however, the government had to rely heavily on foreign aid and international loans. The government owed only US$88 million to foreign creditors in 1970, but this indebtedness had increased to US$1.5 billion by 1986.

United States assistance greatly increased in importance to the Salvadoran economy during the 1980s. Between 1980 and 1986, the United States provided a total of US$2.5 billion in economic and military aid. This represented an increase of more than 3,000 percent over the US$7 million in economic, military, and development aid sent during the entire 1970-79 period. By 1987 United States assistance totaled US$608 million, larger than the fiscal budget of the Salvadoran government of US$582 million.

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