The smallest country in Central America, El Salvador has experienced modest economic growth in recent decades, with an annual rate of 2.5 percent between 2013 and 2019. Still, the country achieved a significant decline in poverty and inequality. The Gini Index, which ranges from 0 to 1, with 0 representing perfect equality and 1 representing perfect inequality, 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 Gross Domestic Product (GDP) declined by -7.9 percent in 2020.
In 2021, El Salvador’s economy grew by 11.2 percent, while growth moderated to 2.6 percent in 2022 and is expected to average 2.8 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.
Poverty increased 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.
The upper and lower middle-income poverty rates, measured at US$6.85 and US$3.65 (2017 Purchasing Power Parity - PPP) per person, stood 27.5 and 8.6 percent in 2022, respectively. The national poverty rates show a mixed story. The moderate poverty rate remains relatively stable, close to the pre-pandemic level, while the extreme increased in 2022, staying 4.1 percentage points higher to 2019. Since the official extreme poverty rate is lower than the lower middle-income country poverty line of US$3.65/day, this result suggests that the least favored segment of the population is growing.
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 16.5 percent of GDP and, together with low revenues and rigid expenditures, pushed public debt to beyond 90 percent of GDP.
Although in recent years debt has declined, it is still above pre-pandemic levels and the country's fiscal position remains fragile. The government faces liquidity pressures due to narrowing financing alternatives. A well-defined medium-term fiscal framework could reduce uncertainty and allow the country to regain the ability to issue debt in international markets to foster sustainable growth.
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: Oct 04, 2023
