The smallest country in Central America, El Salvador has experienced modest economic growth in recent decades, with annual GDP growth exceeding 3 percent only three times between 2000 and 2022. Still, the country achieved a significant decline in poverty and inequality.
The poverty rate (based on a US$6.85 2017 PPP per person per day poverty line) declined from around 50 percent by 2010 to around 30 a decade later. Extreme poverty, measured at US$2.15 a day, declined from almost 10 percent by 2010 to almost 1 percent in 2019. The Gini index fell from 0.54 in 1998 to 0.38 in 2019, the lowest in the region.
The COVID-19 pandemic had a significant negative impact on people’s lives and families’ incomes. Although El Salvador was quick to adopt strong containment measures against the outbreak and the Government rolled out a robust fiscal response to limit the pandemic’s impact on households and businesses, the pandemic dealt a major blow to growth as GDP declined by 8.2 percent in 2020.
Poverty increased almost 5 percentage points between 2019 and 2020 but by 2021 it returned to a figure below the pre-pandemic one. Extreme poverty, however, is still higher than the pre-pandemic figures. Inequality increased from 0.38 to 0.39 during the pandemic period.
El Salvador’s economy grew by 10.3 percent in 2021, after a fall of 8.2 percent in 2020 due to the COVID-19 pandemic, while growth moderated to 2.8 percent in 2022 and is expected to average 2.3 percent in 2023. In the medium-term, GDP is forecast to converge to 2.1 percent, above historical averages, on the back of private consumption, public investment, and tourism.
Challenges persist for El Salvador, such as the need to advance reforms for fiscal sustainability. The fiscal response to the COVID-19 crisis helped mitigate its impacts, cost around 15 percent of GDP and, together with low revenues and rigid expenditures, pushed public debt to beyond 90 percent of GDP. To avoid debt distress, El Salvador requires a fiscal consolidation to improve revenue mobilization and increase spending efficiency, while also protecting the economic recovery and the poor. A solid fiscal package can also help El Salvador reduce refinancing risks.
Despite challenges, El Salvador has great potential to boost a dynamic, inclusive, and resilient economic growth. The country can continue to prioritize ramping up investments in human capital to foster accumulation and strengthening the effectiveness of the social protection system. El Salvador can also enhance public and private investment, promote access to high-quality jobs and foster a more dynamic, competitive, and innovative private sector. To reduce vulnerabilities, the country can also promote a sustainable and equitable fiscal policy, strengthen resilience to disaster risk and pandemics and consolidate governance and institutions.
Last Updated: Apr 04, 2023
