Home » Potential Increase in VAT Sparks Concerns Over Inflation and Food Prices in El Salvador

Potential Increase in VAT Sparks Concerns Over Inflation and Food Prices in El Salvador

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Potential Increase in VAT Sparks Concerns Over Inflation and Food Prices in El Salvador

The Salvadoran Government is considering a potential increase in the Value Added Tax (VAT) as part of an agreement with the International Monetary Fund (IMF) to secure low-interest funds. The VAT, currently at 13%, could be raised by a few percentage points, potentially generating an additional $256 million to $758 million per month for the government.

The IMF has made this agreement a requirement for El Salvador to obtain funds, as failure to do so could result in increased interest rates on existing debt. The potential VAT increase comes at a time when food prices in the country are already on the rise, with food inflation outpacing general inflation rates since October 2021.

Economists warn that an increase in VAT could lead to higher inflation, particularly affecting the poorest sectors of society who spend a larger portion of their income on food. The Central Reserve Bank reports that nearly half of all state revenue in 2023 came from VAT.

With El Salvador heavily reliant on food imports, any external factors affecting food production or distribution could further exacerbate inflation. Increased VAT could also lead to a rise in poverty rates, with projections suggesting that an additional two percentage points on the VAT could push thousands into extreme poverty.

Civil society groups have proposed excluding food from VAT, a measure implemented in other countries in the region. However, economists argue that the impact may be limited as many food purchases in El Salvador occur in the informal sector, where VAT is not paid.

The poverty measure in El Salvador, based on the basic basket, has been criticized for not providing a healthy diet for individuals. An update to the basket could potentially reveal higher poverty rates in the country. Despite these concerns, the government continues to negotiate with the IMF, weighing the potential consequences of a VAT increase on its citizens.

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