El Salvador is a small, dollarized economy with a population of 6.3 million people closely tied to the United States through trade and remittances. As highlighted in the Poverty and Equity Assessment for El Salvador launched in December 2024, gross domestic product (GDP) grew at an average annual rate of 2.1 percent between 2000 and 2023. During the same period, official poverty declined by 14 percentage points. Furthermore, with a GINI coefficient of 39.8 in 2023, inequality remained among the lowest in the region.
Since 2022, strengthened security measures have drastically reduced crime, boosting confidence in markets and removing a key barrier to prosperity. Challenges persist, however, including low productivity, weak human capital, and, over the past decade, high fiscal deficits and limited access to external financing. Poverty remains a major challenge, with official figures indicating that it increased from 26.8 percent in 2019 to 30.3 percent in 2023.
The government has taken recent steps to address fiscal and external imbalances by approving an austere budget for 2025, settling domestic arrears, and reducing short-term financing pressures through three recent debt buybacks. As a result, the difference between government bond interest rates and benchmark rates decreased significantly between July 2022 and February 2025. This reduction of more than 3,100 basis points indicates that the measures adopted by the government have boosted investor confidence in the country's economy.
In February 2025, the IMF Board approved an Extended Fund Facility (EFF) arrangement for El Salvador to support fiscal consolidation, strengthen financial stability, and improve governance and transparency. This paves the way for support from other multilateral banks, which will be crucial for driving reforms that promote growth, ensure sustainable public finances, and strengthen resilience to both economic and climate shocks.
El Salvador’s economy grew by 2.6 percent in 2024, down from 3.5 percent in 2023. This slowdown was mainly due to heavy floods that interrupted construction works and delayed public investment projects during the first half of 2024. The decline in public spending and investment associated with the fiscal consolidation plan, as well as other global factors, is expected to further reduce growth in 2025 and 2026.
The fiscal deficit shrank from 4.7 percent of GDP in 2023 to 4.4 percent in 2024, and the primary deficit fell to 0.1 percent of GDP, driven by a 7.3 percent increase in government revenues thanks in part to improved security. However, expenditure associated with an extraordinary voluntary retirement plan for public employees and interest payments limited any further reduction. Public debt peaked at 88.9 percent of GDP, despite three buybacks that eased short-term fiscal pressures.
To enhance productivity, attract foreign direct investment (FDI), diversify the economy, and improve jobs, comprehensive reforms are needed to strengthen the human capital of all Salvadorans throughout their life cycle (education, health), labor markets, infrastructure, and resilience to climate change. Moreover, if better quality jobs are to actually reduce poverty, then efforts will have to be scaled up to ensure that the poor have access to these jobs.
In the short term, labor intermediation actions are needed to connect workers with job offers available on the market. In the medium term, poor skills acquisition will need to be addressed, especially among women and vulnerable groups. In the long term, the lifelong learning system will have to be improved.
Last Updated: Apr 17, 2025
