El Salvador: Economic Outline

Economic Indicators

Between 2000 and 2019, El Salvador maintained an average growth rate of 2%. Its economic performance is closely tied to the U.S. economy, particularly through substantial remittances (26% relative to GDP) and trade interactions. According to the World Bank, El Salvador's growth was projected to reach 2.7% in 2023. Throughout the year, economic activity gained momentum, with year-on-year growth accelerating from 0.5% in the first quarter to 3.6% by the third quarter. This upswing was fueled by public investment and consumption, primarily driven by remittances, alongside a rebound in exports. The country is projected to grow on average at 2.5% between 2024-2026, nearing its potential growth. This slowdown is attributed to a deceleration in U.S. activity, which is likely to dampen remittances and tourism.

Government revenues increased by 6.8%, driven by higher current taxes from improved economic performance, alongside rising social security contributions (13.8%). However, government spending expanded by 10%, driven by both public investment (69%) and consumption (9%). Nevertheless, social spending remains among the lowest in Latin America. El Salvador’s public debt reached 76% of GDP in 2023. The 2023 pension reform has temporarily improved fiscal accounts by reducing interest payments until 2027. However, it may lead to future fiscal pressures due to increases in the minimum pension payout (data World Bank). The primary fiscal deficit is forecasted to decrease in 2024, primarily due to reduced public spending associated with the election cycle, the phase-out of subsidies (except for propane gas), hiring freezes, and the moderation of automatic wage adjustments. Debt service will remain below 2022 levels due to restructuring short-term debt into long-term instruments, lowering rollover risk. Moreover, revenues are expected to remain strong, helped by enhanced tax collection efforts. El Salvador's fiscal position remains delicate for a dollarized economy, facing liquidity challenges and limited financing options. Medium-term prospects continue to be risky without a credible medium-term fiscal consolidation plan. Following a peak of 7.2% in 2022, inflation moderated to an average of 4.1% in 2023. The fiscal deficit widened to 4.2% of GDP in 2023, up from 2.7% in 2022. Inflation is projected to continue its downward trajectory, reaching 2.1% in 2024.

The unemployment rate was estimated at 2.8% in 2023 by the World Bank (from 3% one year earlier). However, the very low official unemployment rate masks substantial underemployment, as 7 out of every 10 Salvadorans work in the informal sector. Poverty and vulnerability persist, with over a quarter of the population living on less than USD 6.85 per day and two-thirds on less than USD 14 per day. Inequality, comparatively, is among the lowest in the region. Nevertheless, the country faces ongoing structural challenges, including low productivity and human capital deficiencies stemming from issues such as malnutrition and inadequate education levels. Other social challenges the country faces include lack of formal and social education, gang violence, and a high homicide rate, especially among young adults. El Salvador's high crime rate and extreme poverty have been driving migration to other countries in the region, as well as to the United States.

Monetary Indicators	2016	2017	2018	2019	2020
American Dollar (USD) - Average Annual Exchange Rate For 1 GHS	2.19	0.23	0.22	0.19	0.18

Source: World Bank - Latest available data.

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Latest Update: May 2024