Economy of El Salvador

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Economy of El Salvador

Headquarters of World Trade Center San Salvador

United States dollar (USD)

Currency
Bitcoin (XBT)
Fiscal year calendar year
Trade organizations WTO, CAFTA-DR, SICA
Country group Developing/Emerging[1]

Lower-middle income economy[2]

Statistics

Population  6.83 million (2021 est.)

GDP  $28.58 billion (nominal, 2023)[3]

 $63.91 billion (PPP, 2023)[3]

GDP rank 103rd (nominal, 2020)

105th (PPP, 2020)

GDP growth 10.2% (2021) [4]
GDP per capita  $4,341 (nominal, 2023)[3]
  $9,708 (PPP, 2023)[3]
GDP per capita rank 111th (nominal, 2020)

116th (PPP, 2020)

GDP by sector agriculture: 10.5%

industry: 30.0%

services: 59.4%

(2012 est.)
Inflation (CPI) 1.088% (2018)[5]
Population  22.8% in poverty (2019 est.)[6]
below poverty line
 8.5% on less than $3.20/day (2017)[7]
Gini coefficient  38.0 medium (2017)[8]
Human Development  0.675 medium (2021)[9] (125th)
Index
 0.548 low IHDI (2021)[10]
Labor force 2.91 million (2019 est.)
Labor force by agriculture: 21%
occupation
industry: 20%

services: 58%

(2011 est.)

Unemployment 6.9% (2016 est.)

Main industries food processing, beverages, petroleum, chemicals,

fertilizer, textiles, furniture, light metals

Ease-of-doing-business 91st (easy, 2020)[11]
rank

External

Exports $8.491 billion (2021 est.)

Export goods offshore assembly exports, coffee, sugar, textiles and

apparel, gold, ethanol, chemicals, electricity, iron and steel

manufactures
Main export partners  United States 40%

 Guatemala 15%

 Honduras 15%

 Nicaragua 6%

(2019 est.)[12]

Imports $15.575 billion (2021 est.)

Import goods raw materials (such as thread from US [2]), consumer

goods, capital goods, fuels, foodstuffs, petroleum,

 electricity
Main import partners  United States 30%

 China 14%

 Guatemala 13%

 Mexico 8%

 Colombia 5.7%

 European Union 4.0%

(2019 est.)[13]
Gross external debt $17.24 billion (2019 est.)

Public finances

Revenues US$5.89 billion (2017 est.)

Expenses US$6.52 billion (2017 est.)

Economic aid US$300 million (2010 est.)

Credit rating Standard & Poor's:[14]

BB (Domestic)

BB- (Foreign)

AAA (T&C Assessment)

Foreign reserves US$4.45 billion (31 December 2019)[6]

All values, unless otherwise stated, are in US dollars.

The economy of El Salvador has experienced relatively low rates of GDP growth, in

comparison to other developing countries. Rates have not risen above the low single
digits in nearly two decades – part of a broader environment
of macroeconomic instability which the integration of the United States dollar has done
little to improve.[15] One problem that the Salvadoran economy faces is the inequality in
the distribution of income. In 2011, El Salvador had a Gini Coefficient of .485,[16] which
although similar to that of the United States,[17] leaves 37.8% of the population below the
poverty line,[18] due to lower aggregate income. The richest 10% of the population
receives approximately 15 times the income of the poorest 40%. [16]
As of 3 November 2014, the IMF reports official reserve assets to be $3.192B. Foreign
currency reserves (in convertible foreign currencies) are $2.675B. Securities are
$2.577B with total currency and deposits at $94.9M. Securities with other national
central banks (BIS and IMF) are $81.10M. Securities with banks headquartered outside
the reporting country $13.80M. SDRs are at $245.5M. Gold reserves (including gold
deposits and, if appropriate, gold swapped) reported at $271.4M with volume in millions
of fine Troy ounces at $200k. Other reserve assets are financial derivatives valued at
$2.7M.[19]
Having this hard currency buffer to work with, the Salvadoran Government undertook a
monetary integration plan beginning 1 January 2001, by which the U.S. dollar became
 legal tender alongside the colón, and all formal accounting was undertaken in U.S.
dollars. This way, the government has formally limited its possibility of implementing
open market monetary policies to influence short term variables in the economy. Since
2004, the colón stopped circulating and is now never used in the country for any type of
transaction; however some stores still have prices in both colons and U.S. dollars. In
general, people were unhappy with the shift from the colón to the U.S. dollar, because
wages are still the same but the price of everything increased. Some economists claim
this rise in prices would have been caused by inflation regardless, even had the shift not
been made. Some economists also contend that now, according to Gresham's Law, a
reversion to the colón would be disastrous to the economy. The change to the dollar
also precipitated a trend toward lower interest rates in El Salvador, helping many to
secure credit in order to buy a house or a car. Over time, displeasure with the change
has largely disappeared, though the issue resurfaces as a political tool when elections
are on the horizon.
In June 2021, President Nayib Bukele said he would introduce legislation to
make Bitcoin legal tender in El Salvador.[20] The Bitcoin Law was passed by
the Legislative Assembly on 9 June 2021, with a majority vote of 62 out of 84. Bitcoin
officially became legal tender ninety days after the publication of the law in the official
gazette.[21][22] As part of the law, foreigners can gain permanent residence in El Salvador if
they invest 3 Bitcoin into the country.[23] In January 2022, The International Monetary
Fund (IMF) urged El Salvador to reverse its decision to make cryptocurrency Bitcoin
legal tender. Bitcoin had rapidly lost about half of its value, meaning economic
difficulties for El Salvador. President Bukele had announced his plans to build a Bitcoin
city at the base of a volcano in El Salvador.[24]
In 2021, El Salvador received a $40 million loan for small enterprises and projects for
climate action, from the European Investment Bank to the country's development bank,
Banco de Desarollo de el Salvador. [25] $20 million will be used to assist investments in
renewable energy projects, specifically photovoltaics, biogas, and micro hydro projects.
Up to 50% of the loan line will be used to assist small and medium-sized
enterprises who were affected by the COVID-19 pandemic.[26][27]

Contents

 1Public sector
 2Economic sectors
o 2.1Remittances
o 2.2Agriculture
o 2.3Energy
o 2.4Manufacturing
o 2.5Telecommunications
o 2.6Services
 3Trade
 4Natural disasters: Hurricane Mitch (1998) and the earthquakes (2001)
 5Macro-economic trend
 6See also
 7References
 8External links

Public sector[edit]


Departments of El Salvador
 

Centro Financiero Gigante (CFG) is a full five tower complex of office buildings located in San
Salvador
 

Cuscatlan Bank is headquartered at Torre Cuscatlán

 

Banco Agrícola headquarter in San Salvador

 
 

Lifestyle Center La Gran Via is one of many giant malls in El Salvador

 

An Athena Bitcoin ATM in El Salvador

 

Salvadorans using an Athena Bitcoin ATM

Fiscal policy has been one of the biggest challenges for the Salvadoran government.
The 1992 peace accords committed the government to heavy expenditures for transition
programs and social services. The stability adjustment programs (PAE, for the initials in
Spanish) initiated by President Cristiani's administration committed the government to
the privatization of banks, the pension system, electric and telephone companies. The
total privatization of the pension system has implied a serious burden for the public
finances, because the newly created private Pension Association Funds did not absorb
coverage of retired pensioners covered in the old system. As a result, in July 2017, the
Government of El Salvador wanted to take $500 million from the privatized pension
system to cover retired pensioners from the old not privatized system, but the Supreme
Court of El Salvador declared this move unconstitutional. [28]
The government lost the revenues from contributors and absorbed completely the costs
of coverage of retired pensioners. This has been the main source of fiscal imbalance.
ARENA governments have financed this deficit with the emission of bonds, something
the leftist party FMLN has opposed. Debates surrounding the emission of bonds have
stalled the approval of the national budget for many months on several occasions,
reason for which in 2006 the government will finance the deficit by reducing expenditure
in other posts. The emission of bonds and the approval of a loans need a qualified
majority (3/4 of the votes) in the parliament. If the deficit is not financed through a loan it
is enough with a simple majority to approve the budget (50% of the votes plus 1). This
would facilitate an otherwise long process in Salvadoran politics.
Despite such challenges to keep public finances in balance, El Salvador still has one of
the lowest tax burdens in the American continent (around 11% of GDP). The
government has focused on improving the collection of its current revenues with a focus
on indirect taxes. Leftist politicians criticize such a structure since indirect taxes (like the
value added tax) affect everyone alike, whereas direct taxes can be weighed according
to levels of income and are therefore more punitive toward productive people. However,
some basic goods are exempt from the indirect taxes. A value-added tax (VAT) of 10%,
implemented in September 1992, was raised to 13% in July 1995. The VAT is the
biggest source of revenue for the government, accounting for about 52.3% of total tax
revenues in 2004.

Economic sectors[edit]
Remittances[edit]

Salvadoran American population in the United States

Remittances from Salvadorans working in the United States sent to family members are
a major source of foreign income and offset the substantial trade deficit of around $2.9
billion. Remittances have increased steadily in the last decade and reached an all-time
high of $2.9 billion in 2005—approximately 17.1% of gross national product (GNP).
In recent years inflation has fallen to single digit levels, and total exports have grown
substantially.
Agriculture[edit]


A cotton field, Usulután Department.

 
 

Dark roasted coffee beans from Coffee production in El Salvador

In 2018, El Salvador produced 7 million tons of sugarcane, being heavily dependent on
this product. In addition to sugarcane, the country produced 685 thousand tons
of maize, 119 thousand tons of coconut, 109 thousand tons of sorghum, 93 thousand
tons of beans, 80 thousand tons of coffee, 64 thousand tons of orange, in addition to
smaller yields of other agricultural products such
as watermelon, yautia, apple, manioc, mango, banana, rice etc.[29]
The ultimate goal was to develop a rural middle class with a stake in a peaceful and
prosperous future for El Salvador. At least 525,000 people—more than 12% of El
Salvador's population at the time and perhaps 25% of the rural poor—benefited from
agrarian reform, and more than 22% of El Salvador's total farmland was transferred to
those who previously worked the land but did not own it. But when agrarian reform
ended in 1990, about 150,000 landless families still had not benefited from the reform
actions.
The 1992 peace accords made provisions for land transfers to all qualified ex-
combatants of both the FMLN and ESAF, as well as to landless peasants living in
former conflict areas. The United States undertook to provide $300 million for a national
reconstruction plan. This included $60 million for land purchases and $17 million for
agricultural credits. USAID remains actively involved in providing technical training,
access to credit, and other financial services for many of the land beneficiaries.
Energy[edit]


Geothermal power plant in Ahuachapan Department

 
 

Geothermal power center in the Usulután Department

 

Central hydroelectricity dam over the Lempa River

 

Wind park in Metapán, Santa Ana Department

El Salvador's energy industry is diversified across fossil fuels, hydro,
other renewables (mainly geothermal) for local electricity production, along with a
reliance on imports for oil. El Salvador has an installed capacity of 1,983 MW generating
5,830 GWh of electricity per year, 52% of this comes from renewable sources including
29% from geothermal (produced from the country's many volcanoes), 23% from hydro
and the rest is from fossil fuels.[30]
According to the National Energy Commission, 94.4% of total injections during January
2021 came from hydroelectric plants (28.5% - 124.43 GWh), geothermal (27.3% -
119.07 GWh), biomass (24.4% 106.43 GWh), photovoltaic solar (10.6% - 46.44 GWh)
and wind (3.6% - 15.67 GWh).[31]
2021
Forms of energy %
(GWh)
Hydroelectric
124.43 28.5
energy
Geothermal energy 119.07 27.3
Biomass 106.43 24.4
 2021
Forms of energy %
(GWh)
Solar photovoltaic 46.44 10.6
Wind 15.67 3.6
Total 412.04 94.4

Manufacturing[edit]
El Salvador historically has been the most industrialized state in Central America,
though a decade of war eroded this position. In 1999, manufacturing accounted for 22%
of GDP. The industrial sector has shifted since 1993 from a primarily domestic
orientation to include free zone (maquiladora) manufacturing for export. Maquila exports
have led the growth in the export sector and in the last 3 years [when?] have made an
important contribution to the Salvadoran economy.
Telecommunications[edit]
Main article: Telecommunications in El Salvador
El Salvador has 0.9 million fixed telephone lines, 0.5 million fixed broadband lines and
9.4 million mobile cellular subscriptions.[32] Much of the population is able to access
the internet through their smartphones and mobile networks, which liberal government
regulation promotes mobile penetration over fixed line including the deployment
of 5G coverage (which testing of began in 2020).[32] Transition to digital transmission of
TV/radio networks was done in 2018 with the adaptation of the ISDB-T standard. There
are hundreds of privately owned national TV networks, cable TV networks (that also
carry international channels), and radio stations available; while there is also 1
government owned broadcast station. [32]
El Salvador's IT Industry's history started early with several IT outsourcing companies
such as Gpremper and an early search engine that predated Google in 1995 called
"Buscaniguas".[33] The industry has since expanded with companies such as Creativa
Consultores, Applaudo Studios, and Elaniin providing software and website design
services to clients globally while employing thousands of people. [34] Canadian Telus
International, a major global IT outsourcing and software development firm, has a
significant workforce in the country employing nearly 1,500 people in high tech and
customer service roles.[35] The startup scene has also been growing with firms such as
HugoApp employing 600 locals and providing delivery and ride sharing services to
nearly 1 million users in the Central American/CAFTA region.[36][37][38] In 2020, the
government announced its "Digital Agenda 2020" a plan to digitize government
services, digitize identities, make it easier to start businesses, attract foreign investment
and improve the education system.[37] Finally, the passing of the Bitcoin Law in 2021
made El Salvador the first country in the world to adopt a cryptocurrency (Bitcoin) as
legal tender, this move seeks to improve access to financial services to the non-banked
and under banked while also making El Salvador a hub for innovation.
Services[edit]
In the 21st century, numerous call centers serving North American markets have been
developed in El Salvador, including Ubiquity Global Services and Synnex. The industry
benefits from the availability of a large English speaking work force, composed of
deportees from the United States.[39]

Trade[edit]

A proportional representation of El Salvador's exports.

Torre Futura at World Trade Center San Salvador

A challenge in El Salvador has been developing new growth sectors for a more
diversified economy. As many other former colonies, for many years El Salvador was
considered a mono exporter economy. This means, an economy that depended heavily
on one type of export. During colonial times, the Spanish decided that El Salvador
would produce and export indigo, but after the invention of synthetic dyes in the 19th
century, Salvadoran authorities and the newly created modern state turned to coffee as
the main export of the economy.
Since the cultivation of coffee required the highest lands in the country, many of these
lands were expropriated from indigenous reserves and given or sold cheaply to those
that could cultivate coffee. The government provided little or no compensation to the
indigenous peoples. On occasions this compensation implied merely the right to work
for seasons in the newly created coffee farms and to be allowed to grow their own food.
Such policies provided the basis of conflicts that would shape the political situation of El
Salvador in the years to come.
ARENA governments have followed policies that intend to develop other exporting
industries in the country as textiles and sea products. Tourism is another industry
Salvadoran authorities regard as a possibility for the country. But rampant crime rates,
lack of infrastructure and inadequate social capital have prevented these possibilities
from being properly exploited. The government is also developing ports and
infrastructure in La Unión in the east of the country, in order to use the area as a "dry
canal" for transporting goods from Gulf of Fonseca in the Pacific Ocean
to Honduras and the Atlantic Ocean in the north. Currently there are fifteen free trade
zones in El Salvador. The largest beneficiary has been the maquila industry, which
provides 88,700 jobs directly, and consists primarily of cutting and assembling clothes
for export to the United States.
El Salvador signed the Central American Free Trade Agreement (CAFTA), negotiated
by the five countries of Central America and the Dominican Republic, with the United
States in 2004. In order to take advantage of CAFTA-DR, the Salvadoran government is
challenged to conduct policies that guarantee better conditions for entrepreneurs and
workers to transfer from declining to growing sectors in the economy. El Salvador has
already signed free trade agreements with Mexico, Chile, the Dominican Republic, and
Panama, and increased its exports to those countries. El Salvador, Guatemala,
Honduras, and Nicaragua also are negotiating a free trade agreement with Canada, and
negotiations started on 2006 for a free trade agreement with Colombia.
El Salvador's balance of payments continued to show a net surplus. Exports in 1999
grew 1.9% while imports grew 3%, narrowing El Salvador's trade deficit. As in the
previous year, the large trade deficit was offset by foreign aid and family remittances.
Remittances are increasing at an annual rate of 6.5%, and an estimated $1.35 billion
will enter the national economy during 1999.
Private foreign capital continued to flow in, though mostly as short-term import financing
and not at the levels of previous years. The Central American Common Market
continued its dynamic reactivation process, now with most regional commerce duty-free.
In September 1996, El Salvador, Guatemala, and Honduras opened free trade talks
with Mexico. This trade alliance is also known as the Northern Triangle in relation to the
Central American economies that are grouped together by proximity and location.
[3] Although tariff cuts that were expected in July 1996 were delayed until 1997, the
government of El Salvador is committed to a free and open economy.
Total U.S. exports to El Salvador reached $2.1 billion in 1999, while El Salvador
exported $1.6 billion to the United States. U.S. support for El Salvador's privatization of
the electrical and telecommunications markets has markedly expanded opportunities for
U.S. investment in the country. More than 300 U.S. companies have established either
a permanent commercial presence in El Salvador or work through representative offices
in the country. The Department of State maintains a country commercial guide for U.S.
businesses seeking detailed information on business opportunities in El Salvador.

Natural disasters: Hurricane Mitch (1998) and the

earthquakes (2001)[edit]
Hurricane Mitch hit El Salvador in late October 1998, generating extreme rainfall of
which caused widespread flooding and landslides. Roughly 650 km2 were flooded, and
the Salvadoran Government pronounced 374 people dead or missing. In addition,
approximately 55,900 people were rendered homeless. The areas that suffered the
most were the low-lying coastal zones, particularly in the floodplain of
the Lempa and San Miguel Grande Rivers. Three major bridges that cross the Lempa
were swept away, restricting access to the eastern third of the country and forcing the
emergency evacuation of many communities. The heavy rainfall, flooding, and
mudslides caused by Hurricane Mitch also severely damaged El Salvador's road
network. Along with the three major bridges over the Lempa River, 12 other bridges
were damaged or destroyed by the Mitch flooding.
The largest single-affected sector was El Salvador's agriculture. Nearly 18% of the total
1998–99 basic grain harvest was lost. Coffee production was hit particularly hard; 3% of
the harvest was lost in addition to 8.2% that was lost earlier in the year due to El Niño.
Major losses of sugarcane, totaling 9% of the estimated 1998–99 production, were
sustained primarily in the coastal regions. Livestock losses amounted to $1 million,
including 2,992 head of cattle. In addition to these losses, El Salvador also had to face
the threat of disease outbreak. The Ministry of Health recorded a total of 109,038
medical cases related to Hurricane Mitch between 31 October and 18 November 1998;
23% of these cases were respiratory infections, followed by skin ailments, diarrhea, and
conjunctivitis.
Reconstruction from Mitch was still underway when, in early 2001, the country
experienced a series of devastating earthquakes that left nearly 2,000 people dead or
missing, 8,000 injured, and caused severe dislocations across all sectors of Salvadoran
society. Nearly 25% of all private homes in the country were either destroyed or badly
damaged, and 1.5 million persons were left without housing. Hundreds of public
buildings were damaged or destroyed, and sanitation and water systems in many
communities put out service. The total cost of the damage was estimated at between
$1.5 billion and $2 billion, and the devastation thought to equal or surpass that of the
1986 quake that struck San Salvador. Given the magnitude of the disaster,
reconstruction and economic recovery will remain the primary focus of the Salvadoran
Government for some time to come.
The Hurricane Mitch disaster prompted a tremendous response from the international
community governments, nongovernmental organizations (NGOs), and private citizens
alike. Sixteen foreign governments—including the U.S., 19 international NGOs, 20
Salvadoran embassies and consulates, and 20 private firms and individuals provided El
Salvador with in-kind assistance. The Government of El Salvador reports that 961 tons
of goods and food were received. The Ministry of Foreign Affairs estimates that
contribution in cash given directly to the Salvadoran Government totaled $4.3 million.
The U.S. Government has provided $37.7 million in assistance through USAID and the
U.S. Departments of Agriculture and Defense.
Following the 2001 earthquakes, the U.S. embassy assumed a leading role in
implementing U.S.-sponsored assistance. The U.S. Government responded
immediately to the emergency, with military helicopters active in initial rescue
operations, delivering emergency supplies, rescue workers, and damage assessment
teams to stricken communities all over the country. USAIDs Office of Foreign Disaster
Assistance had a team of experts working with Salvadoran relief authorities immediately
after both quakes, and provided assistance totaling more than $14 million. In addition,
the Department of Defense provided an initial response valued at more than $11 million.
For long-term reconstruction, the international community offered a total aid package of
$1.3 billion, over $110 million of it from the United States.

Macro-economic trend[edit]
The following table shows the main economic indicators in 1980–2017. [40]

198 198 199 199 20 20 20 20 20 200 20 20 20 20 20 201 20 20

Year
0 5 0 5 00 05 06 07 08 9 10 11 12 13 14 5 16 17

10. 11. 15. 23. 29. 37. 40. 42. 44. 42. 44. 46. 47. 49. 51. 52. 54. 57.
GDP 10 91 39 42 60 34 00 63 03 97 09 00 73 39 00 73 67 00
in $ Bln Bln Bln Bln Bl Bl Bl Bl Bl Bln Bl Bl Bl Bl Bl Bln Bl Bl
(PPP)
. . . . n. n. n. n. n. . n. n. n. n. n. . n. n.

GDP
per 2,1 2,4 2,9 4,1 5,0 6,1 6,6 7,0 7,2 6,9 7,1 7,4 7,6 7,9 8,1 8,3 8,6 8,9
capita 43 31 30 75 42 93 00 13 06 99 58 31 73 03 20 57 23 48
in $
(PPP)

GDP −8. 0.6 4.8 6.4 2.2 3.6 3.9 3.8 1.3 −3. 1.4 2.2 1.9 1.8 1.4 2.3 2.4 2.4
growth 6% % % % % % % % % 1% % % % % % % % %
(real)
 Inflati
on 17. 22. 28. 10. 2.3 4.7 4.0 4.6 7.3 0.5 1.2 5.1 1.7 0.8 1.1 −0. 0.6 1.0
(in 4% 3% 3% 0% % % % % % % % % % % % 7% % %
Percent)

Gover
nment
debt 26 27 39 39 38 39 48 50 50 55 55 57 58 59 59
... ... ...
(Percent % % % % % % % % % % % % % % %
age of
GDP)

See also[edit]
 El Salvador portal

 Central Reserve Bank of El Salvador

 Coffee production in El Salvador
 List of companies of El Salvador
 Salvadoran Stock Exchange