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.
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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.
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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.
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.
FACTS - FINANCE
GDP per person
US $ 4,058 (2018)
Total GDP
US $ 26,057 million (2018)
GDP growth
2.5 percent (2018)
Agriculture's share of GDP
4.9 percent (2018)
Manufacturing industry's share of GDP
16.2 percent (2018)
The service sector's share of GDP
60.3 percent (2018)
Inflation
0.9 percent (2019)
Government debt's share of GDP
67.1 percent (2018)
External debt
US $ 16,699 million (2017)
Currency
US dollar
Merchandise exports
US $ 4,735 million (2018)
Imports
US $ 10,671 million (2018)
Current account
- US $ 1,242 million (2018)
Commodity trade's share of GDP
68 percent (2018)
Main export goods
clothing, textiles, coffee, sugar, food, tobacco
Largest trading partner
USA, Guatemala, Honduras, Mexico
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