Real GDP growth in El Salvador reached 2.3 percent in 2017. Agriculture, livestock, forestry and fisheries, manufacturing and mining, and commerce, restaurants and hotels accounted for about two-thirds of the observed growth. The country also benefited from an improved current account balance thanks to strong inflows of workers remittances. The current accounts balance showed a deficit of 2 percent of GDP in 2017 compared to 2.1 percent in 2016. This improvement took place despite a deterioration of the trade deficit which in 2017 reached $4.8bn.
However, El Salvador continues to suffer from persistent low levels of growth. Between 2010 and 2016 real GDP growth averaged 2.6 percent, making the country one of those with the lowest growth in the Central American region. The country is expected to grow at 2.8 percent in 2018.
The country’s low growth has translated into modest poverty reduction and high rural poverty. The poverty rate (based on a $5.5 per day poverty line) declined from 39 percent in 2007 to 31 percent in 2016. Extreme poverty (based on a $3.2 per day poverty line) also declined from 15 percent to 10 percent over the same period. This decline in poverty rates is mainly explained by increased salaries of low skilled workers and economic growth (albeit modest) that benefited mainly the population in the lowest 20 percent of the income distribution. Remittances have also contributed to the reduction of the poverty rates.
El Salvador’s low growth and the high levels of public debt (over 70 percent of GDP) are a matter for concern. The pension system reform made in 2017 reduced the financing needs of the public sector. As a result, it is expected that the fiscal deficit will stabilize around 2.5 percent of GDP in the coming years. However, the significant risk associated to the higher debt service resulting from higher interest rates is a call for additional fiscal consolidation efforts to reduce public debt levels.
In terms of political and social developments, the country has accomplished noteworthy progress on both fronts. Democracy and peace have been consolidated since the end of the civil war in 1992, and five consecutive democratic presidential elections have taken place with peaceful transitions of power. Moreover, El Salvador continues to make progress in advancing human development outcomes mainly through the expansion of access to public services. For example, in the health sector, increased access to healthcare facilities, particularly by the poor, contributed to El Salvador’s ability to reach MDG 4 (reducing under-5 mortality).
Immunization rates have increased from 76 percent in the 1990s to 93 percent in 2016. Similarly, the share of the population with access to improved water sources increased from 79 percent to 89 percent, and the share with access to improved sanitation expanded from 56 percent to over 95 percent during the same period. In education, both access (particularly at the primary level) and literacy rates have increased, with the most significant advances in urban areas. Yet, high school dropouts remain a challenge.
El Salvador is also becoming a more equal country. Inequality – measured by the Gini coefficient – declined by about 5 percentage points between 2007 and 2016. This reduction was driven by income growth for the poorest 20 percent in 2016, making El Salvador the most equal country in Latin America the same year, after Uruguay.
However, crime and violence threaten social development and economic growth in El Salvador, and negatively affect the quality of life of its citizens. The crime rate reached historic record levels in 2015 with 102 homicides per 100,000. Crime and violence make doing business more expensive, negatively affect investment decisions and hinder job creation.
In addition, the vulnerability of the country to adverse natural events, exacerbated by environmental degradation and extreme climate variability, also undermines its long-term growth trajectory and sustainability.
Last Updated: Oct 05, 2018
