Economy of El Salvador

Historically, El Salvador had inequitable distribution of land, with most of it concentrated among the so-called Fourteen Families after El Salvador experienced an agrarian revolution in the late 1800s. President Rafael Zaldívar authorized the sale and privatization of Indigenous communal lands to facilitate farming.^[17] Whereas other states in Latin America had implemented land reforms, El Salvador still had a highly inequitable land system by the middle of the 20th century.^[17] El Salvador has been characterized as an oligarchic agro-export economy centered around large-scale coffee cultivation.^[17]

El Salvador had an economic boom in the 1920s, which was brought to an end with the onset of the Great Depression, which brought coffee prices down.^[17] Over the period 1926 to 1932, income from exports were halved.^[17]

The long-standing inequality culminated in the Salvadoran Civil War, a conflict fought between military-backed governments and left-wing guerrillas. The war destroyed vital infrastructure, crippled agricultural output and prompted a massive wave of emigration, primarily to the United States.^[17]

The signing of the Chapultepec Peace Accords in 1992 marked the start of El Salvador's economic recovery. The government embraced neoliberal, free-market policies that privatized state utilities and banks and joined the Dominican Republic–Central America Free Trade Agreement (CAFTA-DR) to spur manufacturing and exports.^[17]

The Salvadoran government undertook a monetary integration plan beginning 1 January 2001, by which the U.S. dollar became legal tender alongside the colón, and all formal accounting was undertaken in U.S. dollars. This way, the government has formally limited its possibility of implementing open market monetary policies to influence short term variables in the economy. Since 2004, the colón stopped circulating and is now never used in the country for any type of transaction; however some stores still have prices in both colons and U.S. dollars. The change to the dollar precipitated a trend toward lower interest rates in El Salvador, helping many to secure credit in order to buy a house or a car. Over time, displeasure with the change has largely disappeared, though the issue resurfaces as a political tool when elections are on the horizon.

In June 2021, president Nayib Bukele said he would introduce legislation to make Bitcoin legal tender in El Salvador.^[18] The Bitcoin Law was passed by the Legislative Assembly on 9 June 2021, with a majority vote of 62 out of 84. Bitcoin officially became legal tender ninety days after the publication of the law in the official gazette.^[19][20] As part of the law, foreigners can gain permanent residence in El Salvador if they invest 3 Bitcoin into the country.^[21] In January 2022, The International Monetary Fund (IMF) urged El Salvador to reverse its decision to make cryptocurrency Bitcoin legal tender. Bitcoin had rapidly lost about half of its value, meaning economic difficulties for El Salvador. President Bukele had announced his plans to build a Bitcoin city at the base of a volcano in El Salvador.^[22] In the first 18 months of Bitcoin adoption, the cryptocurrency was rarely used by the local population or tourists, leaving USD the de facto standard for transactions.^[23] The Bitcoin experiment was largely a failure.^[24]

In 2021, El Salvador received a $40 million loan for small enterprises and projects for climate action, from the European Investment Bank to the country's development bank, Banco de Desarollo de el Salvador.^[25] $20 million will be used to assist investments in renewable energy projects, specifically photovoltaics, biogas, and micro hydro projects. Up to 50% of the loan line will be used to assist small and medium-sized enterprises who were affected by the COVID-19 pandemic.^[26][27]

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  Departments of El Salvador
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  Centro Financiero Gigante (CFG) is a full five tower complex of office buildings located in San Salvador
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  Cuscatlan Bank is headquartered at Torre Cuscatlán
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  Banco Agrícola headquarter in San Salvador
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  Lifestyle Center La Gran Via is one of many giant malls in El Salvador
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  An Athena Bitcoin ATM in El Salvador
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  Salvadorans using an Athena Bitcoin ATM

Fiscal policy has been one of the biggest challenges for the Salvadoran government. In December 1999, net international reserves equaled US$1.8 billion. Having this hard currency buffer to work with, the Salvadoran government undertook a monetary integration plan beginning in January 2001 by which the U.S. dollar became legal tender alongside the Salvadoran colón, and all formal accounting was done in U.S. dollars. With the adoption of the U.S. dollar, 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.

The 1992 peace accords committed the government to heavy expenditures for transition programs and social services. The stability adjustment programs (PAE, for the initials in Spanish) initiated by president Cristiani's administration committed the government to the privatization of banks, the pension system, electric and telephone companies. The total privatization of the pension system has implied a serious burden for the public finances, because the newly created private Pension Association Funds did not absorb coverage of retired pensioners covered in the old system. As a result, in July 2017, the Government of El Salvador wanted to take $500 million from the privatized pension system to cover retired pensioners from the old not privatized system, but the Supreme Court of El Salvador declared this move unconstitutional.^[28] The government lost the revenues from contributors and absorbed completely the costs of coverage of retired pensioners. This has been the main source of fiscal imbalance. ARENA governments have financed this deficit with the emission of bonds, something the leftist party FMLN has opposed. Debates surrounding the emission of bonds have stalled the approval of the national budget for many months on several occasions, reason for which in 2006 the government will finance the deficit by reducing expenditure in other posts. The emission of bonds and the approval of a loans need a qualified majority (3/4 of the votes) in the parliament. If the deficit is not financed through a loan it is enough with a simple majority to approve the budget (50% of the votes plus 1). This would facilitate an otherwise long process in Salvadoran politics.

Despite such challenges to keep public finances in balance, El Salvador still has one of the lowest tax burdens in the American continent (around 11% of GDP). The government has focused on improving the collection of its current revenues with a focus on indirect taxes. Leftist politicians criticize such a structure since indirect taxes (like the value added tax) affect everyone alike, whereas direct taxes can be weighed according to levels of income and are therefore more punitive toward productive people. However, some basic goods are exempt from the indirect taxes. A value-added tax (VAT) of 10%, implemented in September 1992, was raised to 13% in July 1995. The VAT is the biggest source of revenue for the government, accounting for about 52.3% of total tax revenues in 2004.

As of 3 November 2014, the IMF reports official reserve assets to be $3.192B. Foreign currency reserves (in convertible foreign currencies) are $2.675B. Securities are $2.577B with total currency and deposits at $94.9M. Securities with other national central banks (BIS and IMF) are $81.10M. Securities with banks headquartered outside the reporting country $13.80M. SDRs are at $245.5M. Gold reserves (including gold deposits and, if appropriate, gold swapped) reported at $271.4M with volume in millions of fine Troy ounces at $200k. Other reserve assets are financial derivatives valued at $2.7M.^[29]

Bitcoin

This section is an excerpt from Bitcoin in El Salvador.[edit]

El Salvador was the first country in the world to use bitcoin as legal tender, after it was adopted as such by the Legislative Assembly of El Salvador in 2021.^[30] It has been promoted by Nayib Bukele, the president of El Salvador, who claimed that it would improve the economy by making banking easier for Salvadorans, and that it would encourage foreign investment. In 2022, more Salvadorians had Bitcoin Lightning wallets than bank accounts.^[31][32]

The adoption was criticized both internationally and within El Salvador, due to the volatility of bitcoin, its environmental impact, and lack of transparency regarding the government's fiscal policy. By 2024, El Salvador had agreed to partially limit its involvement with bitcoin as part of a deal made with the International Monetary Fund (IMF).

In February 2025, bitcoin was rescinded as legal tender in El Salvador.^[33] Research showed it was rarely used by the public.^[33] In March 2025, The Economist wrote that El Salvador's bitcoin experiment had been a failure, bringing more costs than benefits to the El Salvador economy.^[34]

A challenge in El Salvador has been developing new growth sectors for a more diversified economy. As many other former colonies, for many years El Salvador was considered a mono exporter economy. This means, an economy that depended heavily on one type of export. 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, Salvadoran authorities and the newly created modern state turned to coffee as the main export of the economy.

Since the cultivation of coffee required the highest lands in the country, many of these lands were expropriated from indigenous reserves and given or sold cheaply to those that could cultivate coffee. The government provided little or no compensation to the indigenous peoples. On occasions this compensation implied merely the right to work for seasons in the newly created coffee farms and to be allowed to grow their own food. Such policies provided the basis of conflicts that would shape the political situation of El Salvador in the years to come.

ARENA governments have followed policies that intend to develop other exporting industries in the country as textiles and sea products. Tourism is another industry Salvadoran authorities regard as a possibility for the country. But rampant crime rates, lack of infrastructure and inadequate social capital have prevented these possibilities from being properly exploited. The government is also developing ports and infrastructure in La Unión in the east of the country, in order to use the area as a "dry canal" for transporting goods from Gulf of Fonseca in the Pacific Ocean to Honduras and the Atlantic Ocean in the north.

Currently there are fifteen free trade zones in El Salvador. The largest beneficiary has been the maquila industry, which provides 88,700 jobs directly, and consists primarily of cutting and assembling clothes for export to the United States. El Salvador signed the Central American Free Trade Agreement (CAFTA), negotiated by the five countries of Central America and the Dominican Republic, with the United States in 2004. In order to take advantage of CAFTA-DR, the Salvadoran government is challenged to conduct policies that guarantee better conditions for entrepreneurs and workers to transfer from declining to growing sectors in the economy. El Salvador has already signed free trade agreements with Mexico, Chile, the Dominican Republic, and Panama, and increased its exports to those countries. El Salvador, Guatemala, Honduras, and Nicaragua also are negotiating a free trade agreement with Canada, and negotiations started on 2006 for a free trade agreement with Colombia.

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. This trade alliance is also known as the Northern Triangle in relation to the Central American economies that are grouped together by proximity and location. 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.

Hurricane Mitch hit El Salvador in late October 1998, generating extreme rainfall of which caused widespread flooding and landslides. Roughly 650 km² were flooded, and the Salvadoran Government pronounced 374 people dead or missing. In addition, approximately 55,900 people were rendered homeless. The areas that suffered the most were the low-lying coastal zones, particularly in the floodplain of the Lempa and San 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 Niño. 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 31 October and 18 November 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.

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. USAIDs 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.

The following table shows the main economic indicators in 1980–2024. Inflation under 10% is in green.^[71]

More information Year, GDP (in billion US$ PPP) ...

Year	GDP (in billion US$ PPP)	GDP per capita (in US$ PPP)	GDP (in billion US$ nominal)	GDP growth (real)	Inflation (in Percent)	Government debt (in % of GDP)
1980	11.2	2,305	3.9	-8.6%	17.4%	n/a
1981	11.5	2,352	3.4	-5.7%	14.8%	n/a
1982	11.5	2,321	3.4	-6.3%	11.7%	n/a
1983	12.1	2,435	3.3	1.5%	13.1%	n/a
1984	12.7	2,541	2.4	1.3%	11.7%	n/a
1985	13.2	2,616	2.3	0.6%	22.3%	n/a
1986	13.5	2,647	2.3	0.2%	31.9%	n/a
1987	14.2	2,748	2.4	2.5%	24.8%	n/a
1988	14.9	2,858	2.8	1.9%	19.8%	n/a
1989	15.7	2,952	3.2	1.0%	17.7%	n/a
1990	17.0	3,155	4.8	4.8%	28.3%	n/a
1991	17.9	3,266	5.3	1.5%	14.4%	43%
1992	19.6	3,526	5.8	7.0%	11.2%	36%
1993	21.2	3,766	6.7	5.8%	18.5%	32%
1994	22.7	3,983	7.7	4.7%	10.6%	31%
1995	24.2	4,218	8.9	4.7%	10.0%	28%
1996	24.9	4,294	9.6	0.8%	9.8%	29%
1997	26.1	4,470	10.2	3.1%	4.5%	28%
1998	27.1	4,607	10.9	2.7%	2.5%	26%
1999	28.1	4,742	11.3	2.2%	0.5%	28%
2000	29.0	4,875	11.8	1.1%	2.3%	30%
2001	30.0	5,004	12.3	0.9%	3.7%	38%
2002	30.9	5,142	12.7	1.6%	1.9%	44%
2003	32.0	5,312	13.2	1.6%	2.1%	46%
2004	33.2	5,495	13.7	0.9%	4.5%	47%
2005	35.1	5,819	14.7	2.7%	4.7%	46%
2006	37.8	6,262	16.0	4.3%	4.0%	53%
2007	39.5	6,541	17.0	1.9%	4.6%	52%
2008	41.2	6,782	18.0	2.1%	7.3%	54%
2009	40.5	6,656	17.6	-2.1%	0.5%	66%
2010	41.9	6,853	18.4	2.1%	1.2%	67%
2011	44.4	7,234	20.3	3.8%	5.1%	66%
2012	46.5	7,547	21.4	2.8%	1.7%	70%
2013	48.3	7,816	22.0	2.2%	0.8%	70%
2014	50.0	8,057	22.6	1.7%	1.1%	72%
2015	51.7	8,297	23.4	2.4%	-0.7%	73%
2016	53.5	8,563	24.2	2.5%	0.6%	75%
2017	55.7	8,889	25.0	2.3%	1.0%	77%
2018	57.2	9,121	26.0	2.4%	1.1%	77%
2019	60.7	9,667	26.9	2.4%	0.1%	78%
2020	58.6	9,306	24.9	-7.9%	-0.4%	95%
2021	67.6	10,710	29.0	11.9%	3.5%	88%
2022	74.5	11,753	32.0	2.8%	7.2%	83%
2023	79.9	12,547	34.0	3.5%	4.0%	85%
2024	84.2	13,173	35.8	3.0%	1.0%	85%

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• List of companies of El Salvador
• Bitcoin City
• Bitcoin Law
• Central America–United Kingdom Association Agreement
• Central Reserve Bank of El Salvador
• Directorate of National Markets of El Salvador
• El Salvador and the International Monetary Fund
• International use of the U.S. dollar
• Ministry of Finance (El Salvador)
• Salvadoran Stock Exchange