EL SALVADOR

El Salvador is a unitary country with a presidential regime. Legislative power is vested in the legislative assembly (a unicameral congress) while judicial power is entrusted to the Supreme Court of Justice. According to the electoral rules of the national Constitution of 1983, the president and vice-president of the Republic are elected every five years, while legislative and local council elections are held every three years. The presiding judges of the Supreme Court of Justice are elected by the legislative assembly for a period of nine years.

The public sector in El Salvador is comprised of the financial public sector (FPS) and the non-financial public sector (NFPS). The NFPS is subdivided into the general government (GG) and the non-financial public enterprises (NFPE). Within the GG, a distinction is made between the decentralised entities (Salvadorian Institute of Social Security, National Centre of Registers, University of El Salvador, Salvadorian Institute of Tourism, among others) and the local governments (LGs).

In accordance with Art. 203 of the Constitution, the LGs are autonomous in terms of economic, technical and administrative matters, and exercise their authority through municipal councils. The LGs are governed by the provisions of the Municipal Code (Legislative Decree 274 of 1986), which lays out the main constitutional principles with regard to the organisation, function and exercise of the autonomous faculties of the LGs. Other standards which regulate local governments are: the General Law on Municipal Taxation of 1991, the Organic Law of the Finance Administration of the Public Sector – Law AFI of 1995, the Regulatory Law of Municipal Public Debt of 2005 and the Law establishing the Social and Economic Development Fund – FODES (L.D. 74 of 1988, replaced by L.D. 204 of November 2021), among others.

The Corporation of Salvadorian Municipalities (COMURES or Corporación de Municipalidades de la República de El Salvador), a body created by executive order in 1941, serves to coordinate the relationship of the municipal councils with the national government and plays a key role in local development. COMURES represents the municipal councils in the National Council for Territorial Development, a body which is also made up of the Ministry of Governance and the Technical and Development Secretariat of the presidency, and whose objective is to promote the participation of territorial stakeholders in local development. Also involved in managing this relationship is the Department of Municipal Public Works (DOM), a body set up in November 2021 to replace the Salvadorian Institute of Municipal Development (ISDEM or Instituto Salvadoreño de Desarrollo Municipal). The main function of the DOM is to implement infrastructure investment projects in the country’s 262 municipalities.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
262 municipalities (municipalidades)
Average municipal size: 24 756 inhabitants
262			262

GENERAL DESCRIPTION: El Salvador is divided into 14 departments and had 262 municipalities in 2021. Each department is represented by a governor nominated by the president of the Republic. This level of deconcentrated government does not wield political power. The legal framework prevents the establishment of new municipalities below a minimum population size of 20 000 inhabitants. However, current trends indicate that the population is migrating to large urban centres, which means a considerable number of municipalities are losing inhabitants.

MUNICIPAL LEVEL: Each municipality is governed by the municipal council, consisting of a mayor, a trustee (síndico) and two or more councillors, depending on the population of the municipality. Municipal elections are held every three years, with the last elections having taken place in February 2021. The municipal territory is subdivided into cantons (cantones) and again into villages (caseríos). Data from 2020 record that the municipalities with the largest population are: San Salvador (338 268 inhabitants), Soyapango (259 147), Santa Ana (253 515) and San Miguel (218 137). The average number of inhabitants per municipality is 24 756 persons.

HORIZONTAL COOPERATION: COMURES is a body that represents the country’s mayors and is the main agency in charge of promoting cooperation between the municipalities. Its aims are, among others: to contribute to the defence and reinforcement of municipal autonomy, to form a participative society, to promote and consolidate the process of reform related to decentralisation. The municipalities also have the authority to organise themselves into associations, with 28 separate associations in existence in 2020. The objective of these initiatives is to take a supra-municipal approach to managing development that allows the municipalities to complement each other and expand their local government capacity, for example in the management of solid waste or in making improvements to roads and tracks.

Local government competences are defined in the Municipal Code (Art. 2 and 4), which establishes, in general terms, that the municipality is charged with fostering and managing the local common good, in coordination with national policies and measures. In practice, the national government deals with the provision of basic public services: education, health, public safety, social services, etc., while the local governments are charged with maintaining minor roads in urban and rural areas, lighting and environmental sanitation in the municipality, support for education and health, as well as the realisation of infrastructure investment projects for local development. This last competence has been removed from the municipalities and centralised with the creation of the Department of Municipal Public Works (DOM) from November 2021. Potable water is supplied by the National Administration of Waterways and Drainage Systems (ANDA or Administración Nacional de Acueductos y Alcantarillados), but given the limited coverage of this service, some LGs take responsibility for this supply themselves.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Municipal level
1. General public services (administration)	Administrative services (weddings, births, etc.); Public buildings and facilities (parks, streets, squares, etc.); Administrative and operational measures related to general services; Management of cemeteries and funeral services
2. Public order and security	Municipal police force; Civil protection and emergency services
3. Economic affairs / transports	Installation of local road networks; Car parks; Employment policies, Support for local businessesAgriculture, rural development; Tourism; Commerce
4. Environment protection	Parks and green spaces; Nature conservation; Air pollution measures; Waste management (collection, disposal); Street cleaning
5. Housing and community amenities	Supply of potable water (some municipalities); Public lighting; Management and subsidy of social housing; Regional and urban planning; Urban planning
6. Health	Pharmaceutical and medical services; General medical and paramedical services; Preventative healthcare; Public sanitation services
7. Culture & Recreation	Sport and leisure; Libraries; Cultural activities; Cultural heritage
8. Education	Professional training; Promotion of education, science and the arts
9. Social Welfare	Social services for children and young people; Social services for families; Senior citizens; People with disabilities; Social exclusion; Community centres; Housing benefit or loans

Scope of fiscal data: municipalities

Open databases of the financial management of the local governments, management reports and municipal debt reports.

Availability of fiscal data: Medium

Quality/reliability of fiscal data: Medium

GENERAL INTRODUCTION: Local governments have financial autonomy, derived from their authority to set fees and tariffs for the provision of services (Municipal Code and the General Law on Municipal Taxation). The exception is the imposition and exemption of municipal taxes, which, in accordance with the constitution, are under the exclusive authority of the legislative assembly, but on the initiative of each municipal council. The annual budget is approved by the council, while financial management complies with the generally accepted government accounting standards using the Integrated Municipal Financial Administration System (Sistema de Administración Financiera Integrada Municipal or SAFIM). Public purchases must comply with the provisions laid out in the Law for Public Procurement and State Contracting (LACAP or Ley de Adquisiciones y Contrataciones de la Administración Pública). The municipalities present monthly financial statements to the General Office of Governmental Accounting (DGCG or Dirección General de Contabilidad Gubernamental) at the Treasury Department, a body charged with integrating and publishing the accounts on El Salvador’s fiscal transparency portal. For its part, the Republic’s Court of Audit (CdC or Corte de Cuentas de la República) controls public finances and expenditures.

Subnational government expenditure by economic classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	294	3.5%	11.7%	100.0%
Inc. current expenditure	208	2.5%	9.0%	70.8%
Compensation of employees	79	0.9%	7.9%	26.8%
Intermediate consumption	42	0.5%	10.1%	14.3%
Social expenditure	-	-	-	-
Subsidies and current transfers	3	0.03%	0.5%	0.9%
Financial charges	20	0.2%	5.6%	6.8%
Others	65	0.8%	0.0%	22.0%
Incl. capital expenditure	86	1.0%	40.8%	29.2%
Capital transfers	-	-	-	-
Direct investment (or GFCF)	86	1.0%	46.0%	29.2%

EXPENDITURE: Local government funding is primarily destined to finance the operating costs of the municipality (around 70%), with wages being the sector where most of the outlay is concentrated, although not disproportionately (26.8%), followed by other operating costs that include: depreciation of assets, adjustments and costs from previous periods and in third place, the category of goods and services, which refers to the input required to provide services; payment for the services of electricity, telecommunications, water; office items; rental of movable and fixed property, etc. The level of municipal expenditure in 2020, in terms of GDP (3.5%), fell by 12.3% compared to 2019 as a consequence of the economic contraction of 7.9% suffered by the country in the wake of the COVID-19 pandemic. This included the restriction of most economic activities and the deferral of the FODES transfer from central government. Despite representing 11.7% of the total expenditure of general government (GG), the expenditure of the local governments (LGs) is low compared to other countries in Central America. According to the Inter-American Development Bank (IDB), the expenditure of the LGs in Nicaragua and Guatemala made up 16.8% and 14.6% respectively of public spending in 2018 (in which year the expenditure of LGs in El Salvador represented 9.6% of the total general government spending). In El Salvador, the level of local spending is linked to the low level of fiscal decentralisation in the country.

DIRECT INVESTMENT: In 2020, the investment of the municipalities amounted to 1.0% of GDP and was comprised for the most part of road infrastructure projects (38.0%), social projects (21.4%) and health programmes (8.9%). At country level, local investment represented 41% of public investment, which is explained by the fact that by law 75% of the FODES funding is directed at investment projects. By comparison, the direct consolidated investment of the GG amounted to 2.2% of GDP in 2020.

Subnational government expenditure by functional classification
2020 (GG not consolidated)	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	294	3.5%	-	100.0%
1. General public services	196	2.3%	27.9%	66.8%
2. Defence	-	-	-	-
3. Security and public order	-	-	-	-
4. Economic affairs/transports	45	0.5%	9.9%	15.4%
5. Environmental protection	10	0.1%	69.9%	3.4%
6. Housing and community amenities	4	0.04%	67.7%	1.2%
7. Health	8	0.1%	1.6%	2.6%
8. Recreation, culture and religion	3	0.04%	30.1%	1.1%
9. Education	3	0.03%	0.8%	0.9%
10. Social protection	26	0.3%	5.5%	8.7%

In 2020, two-thirds of the revenue of the Salvadorian municipalities goes to fund their administrative costs (salaries, assets and services, interest on debt); 15.4% is used to promote economic development; while only 13.4% represents social costs (education, health, housing and social protection). This pattern of distribution basically reflects the current status of the process of decentralisation, whereby education, health, social programmes and environmental protection are administered directly by central government.

Subnational government revenue by category
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	365	4.3%	18.6%	100.0%
Tax revenue	30	0.4%	2.0%	8.3%
Grants and subsidies	202	2.4%	-	55.4%
Tariffs and fees	69	0.8%	-	19.0%
Income from assets	-	-	-	-
Other revenues	63	0.8%	-	17.3%

GENERAL DESCRIPTION: Art. 63 of the Municipal Code details the sources of income for the municipalities: taxes, duties and municipal contributions; financial penalties; credit interest; administration of public services; all forms of rental; dividends or utilities; subsides, grants and legacies; contributions from central government, borrowings and other credit operations; sales of mobile and fixed property; other revenues. In practice, the FODES transfer constitutes the main source of income, making up, on aggregate terms, 55.4% of the revenue of the municipalities. Its role is to serve as a central government contribution to the municipalities, in the context of fiscal decentralisation, with the aim of guaranteeing the financing of infrastructure projects for local development. The fees and tariffs for services are in second place after central government subsidies, making up 19% of the total income of the municipalities; while other revenue (return on investment, dividends, property rental, grants and others), represent 17.3% of local income. Tax revenue only represents 8.3%, which underlines the low level of decentralisation in terms of revenue collection.

The composition of revenue varies between municipalities. In 2020, for example, according to the open database of the finances of the municipalities, in the large population centres such as San Salvador, 92% of the income is own-source revenue. In Santa Tecla, that figure is 89.7%; in Soyapango 88.4%; and in Santiago de María 85.7%. In a further 20 municipalities the internal income is greater than 60% of the total. At the other extreme, in 71 municipalities, own-source revenue represents less than 10% of the total revenue and in 52 municipalities, own-source revenue accounts for between 10% and 20% of the total. In the last two cases, the municipalities rely almost entirely on the FODES transfer.

TAX REVENUE: The legal basis for municipal taxation is the General Law on Municipal Taxation, a provision that enables each municipality to seek approval from the legislative assembly for its specific taxation law. The fiscal revenues are not very relevant for local governments (8.3% of the total income of the municipalities and 0.4% of GDP), which is explained by the small number of taxes managed at this level of government and reflects a low degree of fiscal decentralisation. The municipal taxes are mainly levied on economic activities, with a primary emphasis on commercial operations, making up 48.5% of the receipts, followed by industry (17.2%), services in general (13.4%) and financial services (9.0%). The remaining 11.6% are accrued from taxes on advertising billboards, gambling and road usage. In the vast majority of cases, the tax base is the value of the assets which is why they can be classified as asset or property taxes.

In the last 10 years, fiscal revenues have represented the same proportion of the total revenue of the municipalities, with no significant changes. However, in the last 15 years, a considerable number of municipalities have asked the Legislative Assembly to update their respective fiscal laws, given that many of them date back more than 50 years. Following the adoption of the US dollar as legal currency in January 2001, many municipalities have taken advantage of the new taxation laws to modify the currency of denomination (from the colón to the dollar) and to update the tariffs based on current price levels.

GRANTS AND SUBSIDIES: Subsidies are the main source of income for most of the country’s municipalities (forming, on average, 55.4% of total revenue). The main subsidy is in the form of the FODES transfer, which is governed by a law stating that 75% of these funds must be used to finance infrastructure projects, while 25% of the remainder can be used on operating costs. In accordance with this law, the amount that each municipality receives is determined based on a formula made up of four criteria: population (50% of the transfer), poverty level (25%), equity (20%) and territorial extension (5%).

The transfer has been in place since 1988 and has evolved from 1% of the current income of the CG up until 1996, 6% from 1997 to 2004, 7% from 2005 to 2010, 8% from 2011 to 2019 and 10% from 2020 to October 2021. From November 2021, it was reduced to 6% of the current revenue of the CG, with the particular feature that only 25% is effectively transferred to the municipalities – for operating costs –, while 75% is managed by the Department for Municipal Public Works, a CG body that centralises the execution of public investment in the municipalities.

OTHER REVENUE: Apart from fiscal revenue and grants, 19.0% of the income of the municipalities comes from fees and tariffs levied on services provided by the municipalities. Those that are worth highlighting include charges for waste collection and disposal services; public lighting; rights involved in the erection of masts, towers and antenna; permits and licences, market tariffs, etc. As with taxation, the fees and tariffs have undergone changes in the last 10 years, both with the change of the currency of denomination and in order to update and express them in line with current price levels.

The municipalities also raise revenue corresponding to previous years (basically charging for services that were not accounted for in a timely fashion, and making up 14.9% of the total revenue), and they earn income from fines, returns and dividends from investments, special contributions, etc. This combination of concepts provides the municipalities with 17.3% of their total income.

Beyond what is earned through returns on investments and some leases for the use of municipal activities for private events: function rooms, sports complexes, etc. (which represent 0.15% of the revenue), the municipalities no longer earn rent from municipal properties despite having autonomy to manage the municipality’s fixed assets.

Subnational government fiscal rules and debt
2020	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt	273	3.2%	3.8%	100.0%	-
Financial debt	214	2.5%	3.0%	78.3%	100.0%

FISCAL RULES: The municipalities are subject to the rules of the AFI Law, specifically in terms of budgetary balance, the allocation of the resources from the debt exclusively to investment and the registration of operations in line with government accounting standards and using SAFIM. The FODES law also sets out the distribution of the funds from the transfer.

The municipalities are allowed to contract debt. The internal debt is approved by the municipal council, while the external debt must be approved and ratified by the legislative assembly with two-thirds of the votes, being thus converted into a debt guaranteed by central government.

The Municipal Borrowing Act (L.D. 930, of 21 December 2005) contains a series of rules relating to municipal debt. First and foremost, it establishes a limit to the debt (which may not exceed 1.7 times the operational revenue of the municipality – own-source revenue plus FODES transfer). At the same time, the municipalities have been categorised by the General Office of Government Accounting (DGCG) at the Treasury based on their borrowing capacity. This categorisation depends on the generation of savings, creditworthiness, the capacity index and the overall capacity index. These criteria make it possible to divide the municipalities into three categories: A (may borrow up to the legal limit), B (may borrow on condition that they improve their financial indicators) and C (may not incur any debt).

DEBT: Based on the information provided by the municipalities, the DGCG draws up an “Annual report on the state of municipal public borrowings”. This report compiles the balance, contracts, payments and analysis of the debt of each municipality.

In 2020, the total municipal debt (including guarantees and financial-monetary creditors) amounted to 3.2% of GDP and represented 3.8% of the GG debt. With regard to 2019, the debt of the LGs registered an increase of 13.6%, explained by the need to turn to external creditors to complete the financing of the expenditure of the municipalities in light of a deferral of the transfers from central government. The instrument used most often is in the form of loans from local banks (81.4% of the financial debt). In addition, in the last few years, some municipalities are making use of asset securitisation. This instrument represents 18.6% of the financial debt. The municipalities that have securitised debt are, in general, those that are larger or with greater financial capacity: San Salvador, Santa Tecla, Antiguo Cuscatlán, Santa Ana, Sonsonate and San Miguel.

TERRITORIAL MANAGEMENT OF THE CRISIS: The COVID-19 pandemic generated a state of emergency and crisis that was unprecedented in El Salvador. From the middle of March 2020, when the first case of infection was recorded in the country, the government declared a state of national emergency (L.D. 593 of 14 March 2020), in which it laid down a series of mandatory restrictions. These included the total closure of the borders; a total lockdown, with people only allowed out to buy food or to carry out banking transactions (on days linked to ID numbers) or for healthcare reasons; the cessation of the majority of economic activities, with the sole exception being agricultural production and food production in general, and the operation of healthcare facilities and banks.

The management of the pandemic was led by the president of the Republic, the Treasury and the Ministry of Health (MINSAL). The main decisions were taken at central level without relying on the active participation of the subnational governments and other stakeholders. At the territorial level, the MINSAL dictated the guidelines and coordinated with ISDEM (replaced by DOM in 2021), COMURES and the local governments to execute the emergency response measures in the municipalities, especially those related to the provision of food parcels, medicines and healthcare supplies. In the second half of 2020, the municipalities had the space to take autonomous decisions at the point at which they were assigned a portion of the resources budgeted by the Legislative Assembly to deal with the pandemic.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Using the resources provided in accordance with legislative decrees 587, 624, 650, 668 and 687, issued in March, April and June of 2020, local governments took steps to implement the spending programmes. The municipal authorities developed clean-up programmes for streets and squares, sanitation programmes for vehicles and pedestrians at the entrances to towns and cities, and programmes to distribute protective equipment (alcohol gel, masks, gloves, sterile clothing, etc.) and food parcels to homes. Healthcare measures were also taken, including supplying medicines to homes and healthcare centres and transporting patients to hospitals and deceased individuals to burial sites.

These programmes were maintained from the middle of March until the end of December 2020. The municipal authorities continued to meet the demands of the population related to the pandemic throughout 2021, even though central government funding was withdrawn.

In order to cover the financial needs caused by the crisis, in the second half of 2020 the central government ran up a debt of USD 2 350.8 million, of which USD 191.7 million (8.2% of the total debt incurred) was distributed to the 262 municipal authorities to finance the implementation of the social assistance programmes and cover the costs caused by the pandemic as well as mitigating the risks related to the tropical storms Amanda and Cristóbal (which struck in May 2020). In addition, part of the FODES transfer (USD 156.8 million) was used to finance the costs of dealing with the pandemic (clean-up campaigns for markets, streets, communities, purchase of equipment, etc.) and the costs generated by the tropical storms. In total, the municipal authorities were provided with USD 348.5 million (1.4% of GDP) to deal with the crisis.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The COVID-19 pandemic had a major impact on the Salvadorian economy and, ultimately, on public finances. First and foremost, due to the cessation of almost 75% of the economic activities, the State was no longer earning income and registered an increase in public expenditure to deal with the emergency, principally health-related costs (infrastructure, hospital equipment, medicines) and social services (monetary and food subsidies to 1.5 million homes).

Local finances also suffered substantially as a result of the crisis. In addition to the low tax revenues that are a characteristic feature of the municipalities, the economic downturn also caused a fall in fiscal income. According to the open databases of budget execution of the municipalities in 2020, own-source revenues contracted in 65% of the municipal authorities. The average fall was 48.5%, although there was a wide range of results in this regard, from falls of 10% to 95% of revenue, with the smaller municipalities suffering the greatest shrinkage.

In terms of expenditure, the impact manifested itself in an average increase of 25%. It should be noted that a large part of the rise in spending was financed by the subsidies that the municipalities received from the financial support programmes handed down by the national government. These sums contributed to the fact that the financial debt only grew by 10.9% - at the same rate as 2019. However, the debt owed by the municipalities to financial providers and creditors could not be contained and rose by 44.5% compared to 8.2% of variation in 2019.

ECONOMIC AND SOCIAL STIMULUS PLANS: The main stimulation packages were implemented and coordinated at central level. Those worthy of particular mention include the provision of monetary help to homes (a USD 300 bonus per household), the provision of food parcels to homes, the provision of agricultural packages, subsidies to informal small and micro businesses, and loans to formal companies to get them back on their feet. The subsidies and loans to the productive sectors were managed by the Development Bank of El Salvador (BANDESAL or Banco de Desarrollo de El Salvador). This central government body was charged with administering the trust fund for the recuperation of Salvadorian companies (FIREMPRESA or Fideicomiso para la recuperación de las empresas salvadoreñas). This trust fund will remain in operation over the next few years, providing resources and giving technical assistance to the productive sectors. The local governments carried out their own programmes of support to homes when they received the resources allocated by the legislative assembly. From 2021, the municipalities will not receive any further resources to deal with the pandemic and consequently only those with greater financial capacity will continue to roll out support plans for families.