SEATTLE — Over the past few years, El Salvador has had the slowest growing economy in Central America. However, recent pro-business reforms and strong showings from the agricultural and industrial sectors indicate the potential strengthening of the economy. Doing Business ranked El Salvador as one of the world’s most improved economies of 2016-2017. Though the country still faces numerous social and fiscal obstacles, economic conditions appear to be improving.
El Salvador’s Economy
Economic growth in El Salvador averaged only 1.9 percent between 2010 and 2016. Cumbersome commercial regulations, inadequate levels of international trade, little foreign direct investment and social instability driven by violent crime have kept growth low.
Sluggish economic growth in El Salvador has contributed to high domestic poverty levels. Approximately 41 percent of El Salvadoran households lived below the poverty line in 2015. Of these, 10 percent lived in extreme poverty.
However, in recent years El Salvador has experienced a small economic upturn. In 2016, economic growth reached 2.4 percent, though much of this was due to external factors, specifically decreased oil imports and increased remittances.
So far this year, El Salvador’s agricultural and industrial sectors have performed well. Exports have increased relative to last year.
Additionally, 2018 will see higher levels of government spending and fixed investment. On January 5, the Legislative Assembly approved the 2018 fiscal budget with an increase in government expenditures. However, one-fifth of expenditures will be used on debt repayment and not investments in economic growth.
Doing Business Evaluates El Salvador’s Business Regulations
The World Bank’s annual Doing Business report analyzes qualitative indicators of the ease of doing business in 190 different countries. Doing Business monitors 11 different indicators: starting a business, dealing with construction permits, accessing electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and labor market regulation.
Doing Business ranked El Salvador as one of the most improved economies of 2016-2017.
Recent reforms in El Salvador have improved business conditions in four of the 11 categories monitored by Doing Business: trading across borders, accessing electricity, paying taxes and dealing with construction permits.
Trade across borders was made easier with an increase in customs officials at the Anguiatú land border. The reliability of electricity was improved with new software allowing for better outage and maintenance management. Ease of filing taxes increased with an online filing platform. Additionally, the risk-based audit selection system will focus more on large companies. Finally, a new online platform can process preliminary construction fees and experience requirements were introduced for construction inspectors.
These positive reforms follow anti-business regulations enforced in prior years. The Doing Business 2016 report noted that an extra border inspection at the Anguiatú land border made trade across borders more difficult. The year before, access to credit became more difficult because the coverage of the credit bureau was reduced.
USAID Programs Target Economic Growth in El Salvador
Continued focus on positive business reforms could spur additional economic growth in El Salvador. Organizations like the United States Agency for International Development (USAID) help promote good business conditions in El Salvador.
USAID fiscal policy programs target some of the economic indicators measured by Doing Business. For instance, USAID has helped the El Salvadoran government streamline tax collection in order to increase the country’s revenues from taxes.
USAID also advocates for free trade and encourages increased sustainable production of key exports like cacao. El Salvador’s economy relies on exports of coffee, sugar, textiles, gold, ethanol, chemicals and electricity. The combined value of imports and exports into the country is 64 percent of its GDP.
Targeted initiatives that encourage economic growth in El Salvador, like those introduced by USAID, could help maintain the promising performance from the past few years.
– Katherine Parks