This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 SAN SALVADOR 000090 
 
SIPDIS 
 
USDOC FOR 4332/MAC/WH/MSIEGELMAN 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ES
SUBJECT: NEW TOURISM LAW A POSITIVE STEP, BUT CHALLENGES 
REMAIN 
 
 
¶1.   SUMMARYSummary:  In December 2005, the GOESEl Salvador 
approved a Tourism Law establishing tax incentives for new 
investment in the sector.  The law shows government support 
for the industry, but has received criticism from the 
International Monetary Fund (IMF).  The GOES is expecting to 
close the year with $629 million in tourist receipts from 
1.4 million visitors, 32XX and 33XX percent increases over 
2004, respectively. income as the result of 1.4 million 
tourists visiting El Salvador. If the forecast turns out to 
be right, then the sector will represent 3.8% of total GDP. 
The Tourism Ministry still faces the challenges of limited 
resources and staff, and there is weak financial support for 
the sector from the private sectorbanks. END SUMMARYEnd 
Summary. 
 
¶2.   On December 9, 2005, the Legislative Assembly approved 
a new tourism law to spur investment in the sector..   The 
new law, which the private sector has been calling for for 
years, takestook effect  January 1, 2006, and establisheds 
fiscal tax incentives for tourist operators, and will take 
effect in January 2006.   The incentives will benefit those 
enterprises thatthose whocompanies that invest a minimum of 
$50,000.00 in tourism tourism-related projects in El 
Salvador.  Upon reaching the $50,000.00 investment level, 
and the enterprise opens to the public, the incentives 
begin.   Incentives include a 100 percentn income tax break 
of 100% for 10 years,, a land acquisition tax break for five 
years, and a 50 percent cut in municipal taxes for five 
years.  The government will also foregowaive duties on 
imported goods used for construction or ongoing operations 
of goodsused in the project,  related to the enterprise up 
to the amount of the investment. up to  tThe total value of 
the investment.  the exemption is based on the amount ofFor 
five years the enterprise also receives a land acquisition 
tax break, as well as a 50% cut in municipal taxes.In order 
tTo take advantage of these incentives, the enterprise 
investor will need tomust contribute 5%  percent of profits 
during the exemption period to a government-administered 
Tourism Promotion Fund. 
 
¶3.   TIn a communiqu which was released by the Technical 
Secretary to the President, the International Monetary 
 
SIPDIS 
FunIMFd was in consultations with the Salvadoran Government 
from December 5 - 8, and has criticized El Salvador's the 
use of these types of fiscaltax incentives to attract 
investment, .   The IMF recommending instead s that 
countries in the region develop a code of conduct to avoid a 
competition for investment based on tax incentivesin which 
fiscal incentives are used to attract investment, which the 
IMF says will weaken fiscal positions in the region.  . 
President Saca responded to this criticism in a newspaper 
interview by saying having the tourism law was better than 
no law at all.  Comment:  The Salvadoran Treasury Ministry 
of Finance also hexpressedad reservations about the law as 
tax breaks will decrease El Salvador's tax revenues, at a 
time when they are trying to increase tax collection, as it 
decreases the amount of funding they receive in tax 
revenues.  However, President Saca signed the law despite 
this criticism, saying publicly that the country could had 
no choice but to act quickly or lose potential for growth in 
the sector. [is this fair paraphrasing?] [There is also 
concern about the possibility of use of the exemptions for 
non-tourist related activities.  Comment: The law is in line 
withsimilar to those of other countries in the region, who 
have used these types of incentives for years to promote 
their tourist industriesy.  End Comment.] 
 
Sector Overview 
--------------- 
 
¶4.   President Saca has identified tourism as a high 
potential sector, and established a new Ministry of Tourism 
when he took office in June 2004.  The Salvadoran Ministry 
of Tourism expects estimated that by the end of 2005, 1.4 
million tourists willwould have visited El Salvador. The 
total income for the sector is expected to be $629 million, 
representing 3.8% of total GDP. This would be an increase 
from 2004 figures of 966,000 tourists and $425 million in 
revenue.  [Can you compare 2004 to 2005, visitors and total 
receipts?] GovernmentGOES surveys indicate thatT the growth 
in revenues is a result ofreflects tourists' increasing 
their average lodging days from 5 days to 6 and while 
averageand increasing average spending from spending grew 
from  $87/day to $92 per /day as compared with last 
year2004.  The regional breakdown of tourist entries to El 
Salvador is as follows; ; Central America (69%),  percent), 
followed by North America (25%),  percent), Europe (3%) 
percent) and Asia (3%).  percent).  [Comment. The Salvadoran 
government does not provide separate figures forinformation 
to differentiate those peopleSalvadoran expatriates coming 
to El Salvador to visit family and friends from those 
otherscoming to visit on what is traditionally considered a 
vacation. Thus tThe figures are most likely very heavily 
skewed towards family visits, and it is impossible to verify 
how many travelers are coming to El Salvador as a tourist 
destination. The Ministry of Tourism should focus on 
traditional tourism activities as a goal; right now they are 
capturing large numbers of people who would be coming to El 
Salvador anyway and classifying them as tourists.  End 
Comment.] 
 
¶5.   In 2006, The Tourism Ministry is now working on 
developing an Action Plan for the period 2006 - 2014. The 
Action Plan will include specific activities to promote new 
investment and attract more tourists. The goal of the GOES 
is that by the end of 2009 the tourism sector will represent 
at least 5% of total GDP.  Another goal is to increase the 
availability of hotel rooms; by 2014 they want to double the 
number of rooms in the country to 12,000. 
 
¶5.   Tourism Minister Ruben Rochi has set new goals for the 
sector in 2006. He plans to finish the reconstruction of two 
important government government-managed tourist centers that 
are popular and commonly attended by low income usersamong 
domestic tourists (Los Chorros and Amapulapa) but that were 
severely damaged during the 2001 earthquakes; he also wants 
to revitalize and promote the Port of La Libertad,; create 
national tourism committees that would be in charge of 
managinge the tourism issues at a municipal level; , and 
promote alternate tourism routes.  The Ministry is also 
working on developing an Action Plan for the period 2006 - 
2014 that will include specific activities to promote new 
investment and attract more tourists.  By the end of 2009, 
the GOES hopes the tourism sector will represent at least 5 
percent of GDP. 
 
 
Challenges to Tourism Promotion 
------------------------------- 
 
¶6. Need to add to this para on the ministry/budget. We say 
it is not enough, but don't say what the funding is, or that 
it is new and just getting started, etc.] 
Currently, the Ministry does not have a technical staff or 
budget to perform the initiatives originally proposed.The 
new law establishes a source of badly needed income for the 
Ministry but budget constraints will continue to limit its 
projects.   Its budget was reduced from $7.5 million in 2005 
to $7.41 million in 2006 with the expectation that payments 
into the Tourism Promotion Fund (independent of the general 
budget) would make up for the decreased budget.  For 
example, the Ministry has no funding to conduct a much- 
needed wants to do a Nnational Survey survey of all tourism 
centers, hotels, and other locations, . but that is still a 
pending activity until the funds are received to do it. It 
is expected that The Tourism Promotion Fund (independent 
from the general budget), established in the new Tourism 
Law, will may prove a useful source of fundingbe the source 
of such funds.  In addition to the investors' 5 percent The 
Tourism Promotion Fund will receive contribution, The 
Tourism Promotion Fund will be funded from an$7 of the 
current  increase in the airport tax of $27.14 to $32 
airport tax and a 5 percent hotel tax will go the Tourism 
Promotion Fund. , of which $7 will go directly to the fund. 
Other sources of revenue for the fund are a 5% hotel tax. 
The fund will also be used to develop advertising campaigns 
to attract international tourists.  Still, the Ministry has 
no funding to conduct what it says is a much-needed national 
survey of all tourism centers, hotels, and other locations. 
Currently there are no such campaigns, even in the most 
obvious markets such as the United States. 
 
 
¶1.   7.   Another important challenge the sector faces is 
the lack of support from the local banking system. 
Currently, there are no specific credit lines to support the 
modernization of the sector; in addition, the banking system 
also lacks expertise to evaluate tourism projects. Now with 
the approved Law, the private sector will start with the 
investment plans they have in mind and for the banking 
system to create new credit lines for the sector. 
 
 
¶87.  Comment.  Much has been made of a new all inclusive 
beach resort opened in December by a Colombian group, 
Decameron, but this is a single success.   Apart from Tthe 
sector policy, the industry has much to do in order tofaces 
serious obstacles to developing the image of El Salvador as 
a tourist destination; not many people think of El Salvador 
as a place for a vacation, and news reports on the emerging 
gang problem and rising violence only complicate the matter. 
Even thoughAlthoughHowever,  President Saca gave hishas 
pledged his full commitment support to the development of 
the tourist sector in his inauguration ceremony in 2004, and 
the new Tourism Law is the first sign of active support for 
the sector by the government.  If the GOES is going to 
support the development of this sector, it must assign the 
Ministry should be assigned moreadditional resources to hire 
a technical staff and work on the initiatives that are 
pending. It will also have to separate out people who are 
coming to El Salvador to visit family and friends from 
tourists who specifically choose El Salvador as a tourist 
destination, which will allow them to focus their efforts in 
light of severely constrained resources.  End Comment. 
 
Barclay