El Salvador Economy Facts

by ebizdir · Published January 30, 2023 · Updated February 22, 2023

Economical overview

El Salvador is considered a middle-income country, but its assets and income are unevenly distributed. Economic power is held by a small, land-owning elite who originally earned their money on sugar and coffee, but who are now increasingly investing in the service sector and manufacturing industry.

The economy has traditionally been based on agriculture but has been dominated by the service sector since the 1990s. Industry has also become increasingly important, not least the composition factories in the tax-free export zones (see Industry). Economic development is being slowed down by natural disasters, rising commodity prices and widespread crime.

Countryaah.com: Major imports by El Salvador, covering a full list of top products imported by the country and trade value for each product category.

For a long time, the economy is closely linked to the United States, which provides El Salvador with assistance and is its most important trading partner. An exchange rate reform in 2001 and the free trade agreement DR-Cafta that came into force in 2006 (see below) brought the two countries even closer together. The currency reform meant that the US dollar was introduced as a currency alongside the domestic currency colón during a transitional period.

Nowadays, the dollar is El Salvador’s only currency. The introduction of dollars has, as an estimator calculated, helped keep inflation and interest rates down, and made it easier to access capital. But foreign investment has not increased at the rate expected by analysts. One disadvantage of having the dollar as a currency is that the Salvadoran government cannot change the exchange rate to dampen the impact of external economic events.

Abbreviationfinder.org: Check this abbreviation website to find three letter ISO codes for all countries in the world, including SLV which represents the country of El Salvador. Check findjobdescriptions to learn more about El Salvador.

A very important source of income is the money that Salvadorans abroad (mainly the United States) send home to their relatives. The so-called remittances accounted for about one fifth of GDP in 2018.

Sales and social reforms

During its 20 years in power (1989–2009), the Right Party Arena pursued a strict market-liberal policy with the sale of state-owned companies, reduced public spending, abolished trade restrictions and a reform of the tax system.

During the FMLN’s left-wing regime in 2009–2019, a number of social reforms were implemented to reduce the economic gaps in society and to give the poor increased access to education, health care and service. In order to increase the state’s income, the government introduced, among other things, a new property tax and some excise taxes and increased income taxes. But the tax levy in 2017 was no more than 18 percent of GDP, still well below the average for Latin America, according to the OECD. The International Monetary Fund (IMF) also demands that El Salvador reform its pension system, which is too expensive in relation to the state’s income and which, according to the IMF, largely benefits high-income earners.

The widespread violence in society has a negative impact on the economy and is a brake on foreign investment. Also, weather phenomena such as storms, floods and droughts, as well as parasites, have only slowed economic growth. By the end of the 1900s, El Salvador had steady growth of 4 percent per year, but it declined in the early 2000s as a result of falling coffee prices and reduced demand for Salvadoran textiles. The new free trade agreement with the US and Central America, DR-Cafta, led to stronger growth.

Foreign trade

Coffee and sugar are the traditional export products. Their importance to the economy has diminished radically since the 1970s. Non-traditional export products such as ethanol, pharmaceuticals, animal feed, melons, pineapples and peanuts have instead become important. The largest export income now comes from the assembly plants (see Industry).

El Salvador has been part of a Central American common market since the 1960s and has also concluded several bilateral agreements with other countries. Since 2013, there has been an extended free trade agreement.

The disputed free trade agreement DR-Cafta entered into force in 2006 and includes the United States and Central American countries as well as the Dominican Republic. DR-Cafta has meant that previous restrictions on textile exports have been abolished and that more goods have become duty-free, including many agricultural products. The agreement has led to a sharp – but uneven – increase in bilateral trade between El Salvador and the United States. US imports have increased significantly more than exports there. Among other things, the agreement has favored Salvadoran exports of textiles, shoes and food. However, DR-Cafta has been criticized for risking knocking out small farmers in El Salvador and the rest of Central America because the trading conditions are uneven; Both the United States and the Central American countries have abolished tariffs, but the United States has retained its agricultural subsidies.

After several years of negotiations, an association agreement between the EU and Central America began to apply in 2013. The comprehensive agreement includes free trade, development cooperation and political dialogue. The free trade section means that the Central American countries have free access to the EU market for 90 percent of their export products. However, in the case of important goods such as bananas, tariff rates are gradually reduced or, as for sugar and beef, gradually increased export quotas. The agreement also covers trade in services such as telecommunications and financial services, and the agreement also entails common rules on intellectual property rights.