ECONOMY
The Salvadoran economy continues to benefit from a commitment to free markets and careful fiscal management. The economy has been growing at a steady and moderate pace since the signing of peace accords in 1992, and poverty has been cut from 66% in 1991 to 30.7% in 2006. Much of the improvement in El Salvador's economy is a result of the privatization of the banking system, telecommunications, public pensions, electrical distribution and some electrical generation; reduction of import duties; elimination of price controls; and improved enforcement of intellectual property rights. Capping those reforms, on January 1, 2001, the U.S. dollar became legal tender in El Salvador. The economy is now fully dollarized.
The Salvadoran Government has maintained fiscal discipline during post-war reconstruction and reconstruction following earthquakes in 2001 and hurricanes in 1998 and 2005. Taxes levied by the government include a value added tax (VAT) of 13%, income tax of 20%, excise taxes on alcohol and cigarettes, and import duties. The VAT is the largest source of revenue, accounting for about 52.2% of total tax revenues in 2007. El Salvador's public external debt in May 2008 was about $5.5 billion, 27.02% of GDP.
Years of civil war, fought largely in the rural areas, had a devastating impact on agricultural production in El Salvador. The agricultural sector experienced significant recovery, buoyed in part by higher world prices for coffee and sugarcane and increased diversification into horticultural crops. Seeking to develop new growth sectors and employment opportunities, El Salvador created new export industries through fiscal incentives for free trade zones. The largest beneficiary has been the textile and apparel (maquila) sector, which directly provides approximately 70,000 jobs. Services, including retail and financial, have also shown strong employment growth, with about 48.7% of the total labor force now employed in the sector.
Remittances from Salvadorans working in the United States are an important source of income for many families in El Salvador. In 2007, the Central Bank estimated that remittances totaled $3.7 billion. UNDP surveys show that an estimated 22.3% of families receive remittances.
Under its export-led growth strategy, El Salvador has pursued economic integration with its Central American neighbors and negotiated trade agreements with the Dominican Republic, Chile, Mexico, Panama, Taiwan, Colombia, and the United States. Central American countries began negotiating an Association Agreement with the European Union in 2007. Trade agreements with CARICOM and Canada are also under negotiation, while an agreement with Israel is being considered. Exports in 2007 grew 7.4% while imports grew 13.1%. As in previous years, the large trade deficit was offset by family remittances.
The U.S.-Central America-Dominican Republic Free Trade Agreement (CAFTA-DR), implemented between El Salvador and the United States on March 1, 2006, provides El Salvador preferential access to U.S. markets. Textiles and apparel, shoes, and processed foods are among the sectors that benefit. In addition to trade benefits, CAFTA-DR also provides trade capacity building, particularly in the environment and labor areas, and a framework for additional reforms on issues such as intellectual property rights, dispute resolution, and customs that will improve El Salvador's investment climate. For sensitive sectors such as agriculture, the agreement includes generous phase-in periods to allow Salvadoran producers an opportunity to become more competitive.
U.S. support for privatization of the electrical and telecommunications markets
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 U.S.
Department of Commerce maintains a Country Commercial Guide for U.S. businesses
seeking detailed information on business opportunities in El Salvador.
On November 29, 2006, the Government of El Salvador and the Millennium Challenge Corporation (MCC) signed a five-year, $461 million anti-poverty Compact to stimulate economic growth and reduce poverty in the country's northern region. The grant seeks to improve the lives of approximately 850,000 Salvadorans through investments in education, public services, enterprise development, and transportation infrastructure. The Compact entered into force in September 2007 and it is expected that incomes in the region will increase by 20% over the five-year term of the Compact, and by 30% within ten years of the start of the Compact.
Natural
Disasters
Located on the Pacific's earthquake-prone Ring of Fire and at latitudes plagued by hurricanes, El Salvador's history is a litany of catastrophe, including the Great Hurricane of 1780 that killed 22,000 in Central America and earthquakes in 1854 and 1917 that devastated El Salvador and destroyed most of the capital city. More recently, an October 1986 earthquake killed 1,400 and seriously damaged the nation's infrastructure. In 1998, Hurricane Mitch killed 10,000 in the region, although El Salvador--lacking a Caribbean coast--suffered less than Honduras and Nicaragua. Major earthquakes in January and February of 2001 took another 1,000 lives and left thousands more homeless and jobless. El Salvador's largest volcano, Santa Ana (also known by its indigenous name Ilamatepec), erupted in October 2005, spewing sulfuric gas, ash, and rock on surrounding communities and coffee plantations, killing two people and permanently displacing 5,000. Also in October 2005, Hurricane Stan unleashed heavy rains that caused flooding throughout El Salvador. In all, the flooding caused 67 deaths and more than 50,000 people were evacuated at some point during the crisis. Damages from the storm were estimated at $355.6 million.
GDP (2007): $20.4 billion; PPP GDP $41.56 billion (2007 IMF estimate).
GDP annual real growth rate (2007): 4.7%.
Per capita income (2007): $3,547.21; PPP per capita income $5,842 (2007 IMF estimate).
Agriculture (11.2% of GDP, 2007): Products--coffee, sugar, livestock, corn, poultry, and sorghum. Arable, cultivated, or pasture land--68% (2005).
Industry (20.6% of GDP, 2007): Types--textiles and apparel, medicines, food and beverage processing, clothing, chemical products, petroleum products, electronics, call centers.
Trade (2007): Exports--$4 billion: textiles and apparel, ethyl alcohol, coffee, sugar, medicines, iron and steel products, tuna, light manufacturing, and paper products. Major markets--U.S. 50.8%, Central American Common Market (CACM) 33.7%. Imports--$8.7 billion: petroleum, iron products, machines and mechanical devices, cars, medicines, consumer goods, foodstuffs, capital goods, and raw industrial materials. Major suppliers--U.S. 35.6%, CACM 16.8%, Mexico 9.8%.
