El Salvador - Economy

Economy

According to the IMF and CIA World Factbook, El Salvador has the third largest economy in the region, behind Costa Rica and Panama, when comparing nominal Gross Domestic Product and purchasing power GDP El Salvador's GDP per capita stands at US$4,365.

El Salvador's economy has been hampered at times by natural disasters such as earthquakes and hurricanes, by government policies that mandate large economic subsidies, and by official corruption. Subsidies became such a problem that in April, 2012, the International Monetary Fund suspended a $750 million loan to the central government. President Funes' chief of cabinet, Alex Segovia, acknowledged that the economy was at the "point of collapse."

Antiguo Cuscatlán has the highest per capita income of all the cities in the country, and is a center of international investment.

GDP in purchasing power parity (PPP) in 2008 was estimated at $ 25.895 billion USD. The service sector is the largest component of GDP at 64.1%, followed by the industrial sector at 24.7% (2008 est.). Agriculture represents only 11.2% of GDP (2010 est.)

The GDP grew after 1996 at an annual rate that averaged 3.2% real growth. The government committed to free market initiatives, and the 2007 GDP's real growth rate was 4.7%.

In December 1999, net international reserves equaled US $1.8 billion or roughly five months of imports. Having this hard currency buffer to work with, the Salvadoran government undertook a monetary integration plan beginning January 1, 2001 by which the U.S. dollar became legal tender alongside the Salvadoran colón, and all formal accounting was done in U.S. dollars. Thus, the government has formally limited the implementing of open market monetary policies to influence short-term variables in the economy. As of September 2007, net international reserves stood at $2.42 billion.

It has long been a challenge in El Salvador to develop new growth sectors for a more diversified economy. In the past, the country produced gold and silver, but recent attempts to re-open the mining sector, which were expected to add hundreds of millions of dollars to the local economy, collapsed after President Saca shut down the operations of Pacific Rim Mining Corporation. The U.S.-Canadian company had spent $77 million to discover a gold deposit estimated at 1.4 million troy ounces. President Funes and the FMLN upheld the gold and silver mining ban.

As with other former colonies, El Salvador was considered a mono-export economy (an economy that depended heavily on one type of export) for many years. 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, the newly created modern state turned to coffee as the main export.

The government has sought to improve the collection of its current revenues, with a focus on indirect taxes. A 10% value-added tax (IVA in Spanish), implemented in September 1992, was raised to 13% in July 1995.

Inflation has been steady and among the lowest in the region. Since 1997 inflation has averaged 3%, with recent years increasing to nearly 5%. As a result of the free trade agreements, from 2000 to 2006, total exports have grown 19% from $2.94 billion to $3.51 billion, and total imports have risen 54% from $4.95 billion to $7.63 billion. This has resulted in a 102% increase in the trade deficit, from $2.01 billion to $4.12 billion.

Despite being the smallest country in Central America, El Salvador has the third largest economy, with a per capita income that is roughly two-thirds that of Costa Rica and Panama, but more than double that of Nicaragua. Growth has been modest in recent years, and the economy contracted nearly 3% in 2009. Because of the recent growing and dollarized economy, El Salvador is seeing an increase of Central American, South American, and Caribbean immigrants from Guatemalans, Hondurans, Nicaraguans, Dominicans, Colombians, Venezuelan, Peruvians and Cubans searching for better living opportunities.

El Salvador has promoted an open trade and investment environment, and has embarked on a wave of privatizations extending to telecom, electricity distribution, banking, and pension funds. In late 2006, the government and the Millennium Challenge Corporation signed a five-year, $461 million compact to stimulate economic growth and reduce poverty in the country's northern region, the primary conflict zone during the civil war, through investments in education, public services, enterprise development, and transportation infrastructure. With the adoption of the US dollar as its currency in 2001, El Salvador lost control over monetary policy. Any counter-cyclical policy response to the downturn must be through fiscal policy, which is constrained by legislative requirements for a two-thirds majority to approve any international financing.