|The Salvadoran economy continues to benefit from a commitment to free
markets and careful fiscal management. The impact of the civil war on El
Salvador's economy was devastating; from 1979-90, losses from damage to
infrastructure and means of production due to guerrilla sabotage as well
as from reduced export earnings totaled about $2.2 billion. But since
attacks on economic targets ended in 1992, improved investor confidence
has led to increased private investment.
Rich soil, moderate climate, and a hard-working and enterprising labor pool comprise El Salvador's greatest assets. Much of the improvement in El Salvador's economy is due to free market policy initiatives carried out by the Cristiani and Calderon Sol governments, including the privatization of the banking system, telecommunications, public pensions, electrical distribution and some electrical generation, reduction of import duties, elimination of price controls on virtually all consumer products, and enhancing the investment climate through measures such as improved enforcement of intellectual property rights.
The post-war boom in the Salvadoran economy began to fade in July 1995 after an abrupt shift in monetary policy was followed by a June increase in the value added tax (VAT) and price hikes in basic public services. The slowdown lingered into 1996. Growth in GDP in 1996 was a mere 2.1%, but by 1997 it had picked up to 4%. In 1998, El Salvador's economy grew by 3.2% compared to the 4.2% growth posted in 1997. The damage caused by Hurricane Mitch to infrastructure and to agricultural production reduced 1998 growth by an estimated .5%. Growth weakened further (to 2.6%) in 1999 due to poor international prices for El Salvador's principal export commodities, weak exports to Central American neighbors recovering from Hurricane Mitch, and an investment slowdown caused by the March 1999 presidential elections and delays in legislative approval of a national budget. It picked up slightly to 3% in 2000. Because of the earthquakes that struck the country in January and February, the economy grew less than 2% in 2001. Inflation for 1998 was 4% and remained stable in 1999-2000. Thanks to the introduction of the U.S. dollar as legal tender and despite the earthquakes, inflation in 2001 was only 3.5%.
Fiscal policy has been the biggest challenge for the Salvadoran Government. The 1992 peace accords committed the government to heavy expenditures for transition programs and social services. Although international aid was generous, the government has focused on improving the collection of its current revenues. A 10% value-added tax, implemented in September 1992, was raised to 13% in July 1995. The VAT is estimated to have contributed 51% of total tax revenues in 1999, due mainly to improved collection techniques. A multiple exchange rate regime that had been used to conserve foreign exchange was phased out during 1990 and replaced by a free-floating rate. The colón depreciated from five to the dollar in 1989 to eight in 1991, and in 1993, was informally pegged at 8.73 colónes to the dollar, later adjusted to 8.79.
Large inflows of dollars in the form of family remittances from Salvadorans working in the United States offset a substantial trade deficit and support the exchange rate. The monthly average of remittances reported by the Central Bank is around $150 million, with the total estimated at more than $1.9 billion for 2001. As of December 1999, net international reserves equaled $1.8 billion or roughly 5 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 dollar became legal tender alongside the colón. No more colónes are to be printed, the economy is expected to be, in practice, fully dollarized, and the Central Reserve Bank dissolved, by late 2003. The FMLN is strongly opposed to the plan, regarding it as unconstitutional, and plans to make it an issue in the 2003 legislative elections.
Foreign Debt and Assistance
Among the most significant loans are second structural adjustment loans from the World Bank for $52.5 million, another World Bank loan of $40 million for agricultural reform, a $20 million loan from the Central American Bank for Economic Integration to be used to repair roads, and a $60 million Inter-American Development Bank loan for poverty alleviation projects. Total non-U.S. Government aid, excluding nongovernmental organizations (NGO) assistance and bilateral loan programs, reached $38 million in1999. Although official figures show relatively small and diminishing aid flows, the total is probably larger. Significant amounts come in through NGOs and are channeled to groups not generally included in official statistics, such as political parties, unions, and churches.
Some $300 million has been contracted from international institutions and governments for infrastructure works and social programs to be undertaken. The debt profile is expected to increase over the next several years as the international donor community has pledged $1.26 billion to finance El Salvador's reconstruction and modernization. Large loans now being sought to finance reconstruction from the 2001 earthquakes will further alter the country's debt profile.
In September 1996, El Salvador, Guatemala, and Honduras opened free trade talks with Mexico. Although tariff cuts that were expected in July 1996 were delayed until 1997, the Government of El Salvador is committed to a free and open economy. Total U.S. exports to El Salvador reached $2.1 billion in 1999, while El Salvador exported $1.6 billion to the United States. U.S. support for El Salvador's privatization of the electrical and telecommunications markets has 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.
Agriculture and Land Reform
GDP: purchasing power parity -
$24 billion (2000 est.)
SOURCES: The World Factbook, U.S. Department of State
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