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Economy of El Salvador

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, prospects for any growth in 2001 are dim. Inflation for 1998 was 4%, and remained stable in 1999-2000.

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 $117 million, with the total estimated at more than $1.4 billion for 1999. 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
El Salvador's external debt decreased sharply in 1993, chiefly as a result of an agreement under which the United States forgave about $461 million of official debt. As a result, total debt service decreased by 16% over 1992. External debt stood at $2.8 billion at the end of 1999. Debt service amounted to 2.5% of GDP in 1998 and is considered moderate. The Government of El Salvador has been successful in obtaining significant new credits from the international financial institutions. Among the most significant loans are a second structural adjustment loan 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 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 nongovernmental organizations 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.

Natural Disasters: Hurricane Mitch (1998) and the Earthquakes (2001)
Hurricane Mitch hit El Salvador in late October 1998, generating extreme rainfall of which caused widespread flooding and landslides. Roughly 65,200 hectares were flooded, and the Salvadoran Government pronounced 374 people dead or missing. In addition, approximately 55,864 people were rendered homeless. The areas that suffered the most were the low-lying coastal zones, particularly in the floodplain of the Lempa and Sam Miguel Grande rivers. Three major bridges that cross the Lempa were swept away, restricting access to the eastern third of the country and forcing the emergency evacuation of many communities. The heavy rainfall, flooding, and mudslides caused by Hurricane Mitch also severely damaged El Salvador's road network. Along with the three major bridges over the Lempa River, 12 other bridges were damaged or destroyed by the Mitch flooding.

The largest single-affected sector was El Salvador's agriculture. Nearly 18% of the total 1998-99 basic grain harvest was lost. Coffee production was hit particularly hard; 3% of the harvest was lost in addition to 8.2% that was lost earlier in the year due to El Nino . Major losses of sugarcane, totaling 9% of the estimated 1998-99 production, were sustained primarily in the coastal regions. Livestock losses amounted to $1 million, including 2,992 head of cattle. In addition to these losses, El Salvador also had to face the threat of disease outbreak. The Ministry of Health recorded a total of 109,038 medical cases related to Hurricane Mitch between October 31 and November 18, 1998; 23% of these cases were respiratory infections, followed by skin ailments, diarrhea, and conjunctivitis.

Reconstruction from Mitch was still underway when, in early 2001, the country experienced a series of devastating earthquakes that left nearly 2,000 people dead or missing, 8,000 injured, and caused severe dislocations across all sectors of Salvadoran society. Nearly 25% of all private homes in the country were either destroyed or badly damaged, and 1.5 million persons were left without housing. Hundreds of public buildings were damaged or destroyed, and sanitation and water systems in many communities put out service. The total cost of the damage was estimated at between $1.5 billion and $2 billion, and the devastation thought to equal or surpass that of the 1986 quake that struck San Salvador. Given the magnitude of the disaster, reconstruction and economic recovery will remain the primary focus of the Salvadoran Government for some time to come.

Response
The Hurricane Mitch disaster prompted a tremendous response from the international community governments, nongovernmental organizations (NGOs), and private citizens alike. Sixteen foreign governments--including the U.S., 19 international NGOs, 20 Salvadoran embassies and consulates, and 20 private firms and individuals provided El Salvador with in-kind assistance. The Government of El Salvador reports that 961 tons of goods and food were received. The Ministry of Foreign Affairs estimates that contribution in cash given directly to the Salvadoran Government totaled $4.3 million. The U.S. Government has provided $37.7 million in assistance through USAID and the U.S. Departments of Agriculture and Defense.

Following the 2001 earthquakes, the U.S. Embassy assumed a leading role in implementing U.S. sponsored assistance. The U.S. Government responded immediately to the emergency, with military helicopters active in initial rescue operations, delivering emergency supplies, rescue workers, and damage assessment teams to stricken communities all over the country. USAID?s Office of Foreign Disaster Assistance had a team of experts working with Salvadoran relief authorities immediately after both quakes, and provided assistance totaling more than $14 million. In addition, the Department of Defense provided an initial response valued at more than $11 million. For long-term reconstruction, the international community offered a total aid package of $1.3 billion, over $110 million of it from the United States.

Manufacturing
El Salvador historically has been the most industrialized nation in Central America, though a decade of war eroded this position. In 1999, manufacturing accounted for 22% of GDP. The industrial sector has shifted since 1993 from a primarily domestic orientation to include free zone (maquiladora) manufacturing for export. Maquila exports have led the growth in the export sector and in the last 3 years have made an important contribution to the Salvadoran economy.

Trade
El Salvador's balance of payments continued to show a net surplus. Exports in 1999 grew 1.9% while imports grew 3%, narrowing El Salvador's trade deficit. As in the previous year, the large trade deficit was offset by foreign aid and family remittances. Remittances are increasing at an annual rate of 6.5%, and an estimated $1.35 billion will enter the national economy during 1999. Private foreign capital continued to flow in, though mostly as short-term import financing and not at the levels of previous years. The Central American Common Market continued its dynamic reactivation process, now with most regional commerce duty-free. 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. The Department of State maintains a Country Commercial Guide for U.S. businesses seeking detailed information on business opportunities in El Salvador.

Agriculture and Land Reform
Before 1980, a small economic elite owned most of the land in El Salvador and controlled a highly successful agricultural industry. About 70% of farmers were sharecroppers or laborers on large plantations. Many farm workers were under- or unemployed and impoverished. The civilian-military junta, which came to power in 1979, instituted an ambitious land reform program to redress the inequities of the past, respond to the legitimate grievances of the rural poor, and promote more broadly based growth in the agricultural sector. The ultimate goal was to develop a rural middle class with a stake in a peaceful and prosperous future for El Salvador. At least 525,000 people--more than 12% of El Salvador's population at the time and perhaps 25% of the rural poor--benefited from agrarian reform, and more than 22% of El Salvador's total farmland was transferred to those who previously worked the land but did not own it. But when agrarian reform ended in 1990, about 150,000 landless families still had not benefited from the reform actions. The 1992 peace accords made provisions for land transfers to all qualified ex-combatants of both the FMLN and ESAF, as well as to landless peasants living in former conflict areas. The United States undertook to provide $300 million for a national reconstruction plan. This included $60 million for land purchases and $17 million for agricultural credits. USAID remains actively involved in providing technical training, access to credit, and other financial services for many of the land beneficiaries.

GDP: purchasing power parity - $18.1 billion (1999 est.)

GDP - real growth rate: 2.2% (1999 est.)

GDP - per capita: purchasing power parity - $3,100 (1999 est.)

GDP - composition by sector:
agriculture: 12%
industry: 22%
services: 66% (1999 est.)

Population below poverty line: 48% (1999 est.)

Household income or consumption by percentage share:
lowest 10%: 1.2%
highest 10%: 38.3% (1995)

Inflation rate (consumer prices): 1.3% (1999 est.)

Labor force: 2.35 million (1999)

Labor force - by occupation: agriculture 30%, industry 15%, services 55% (1999 est.)

Unemployment rate: 7.7% (1997 est.)

Budget:
revenues: $1.5 billion
expenditures: $1.73 billion, including capital expenditures of $NA (1999)

Industries: food processing, beverages, petroleum, chemicals, fertilizer, textiles, furniture, light metals

Industrial production growth rate: 3.5% (1999 est.)

Electricity - production: 4.1 billion kWh (1999 est.)

Electricity - production by source:
fossil fuel: 49.32%
hydro: 36.46%
nuclear: 0%
other: 14.22% (1998)

Electricity - consumption: 4.17 billion kWh (1999)

Electricity - exports: 30 million kWh (1999)

Electricity - imports: 65 million kWh (1999)

Agriculture - products: coffee, sugar cane, maize, rice, beans, oilseed[?], cotton, sorghum; beef, dairy products; shrimp

Exports: $2.5 billion (f.o.b., 1999)

Exports - commodities: offshore assembly exports, coffee, sugar, shrimp, textiles, chemicals, electricity

Exports - partners: US 59%, Guatemala 12%, Germany 6%, Costa Rica 4%, Honduras (1998)

Imports: $4.15 billion (c.i.f., 1999)

Imports - commodities: raw materials, consumer goods, capital goods, fuels, foodstuffs, petroleum, electricity

Imports - partners: US 51%, Guatemala 9%, Mexico 6%, Japan 3%, Costa Rica (1999)

Debt - external: $3.3 billion (1999 est.)

Economic aid - recipient: total $252 million; $57 million from US (1999 est.)

Currency: 1 Salvadoran colon (C) = 100 centavos

Exchange rates: Salvadoran colones (C) per US$1 (end of period) - 8.755 fixed rate since 1993

Fiscal year: calendar year

See also : El Salvador



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