The smallest country in Central America, El Salvador has experienced modest economic growth in recent decades, with annual GDP growth exceeding 3 percent only twice between 2000 and 2020. Still, the country achieved a significant decline in poverty and inequality.
The poverty rate (based on a US$5.5 per person per day poverty line) declined from 39 percent in 2007 to 22.3 percent in 2019. Extreme poverty, measured as US$1.9 a day, declined from 13 percent in 1995 to 1.5 percent in 2019. Driven by pro-poor growth and improved shared prosperity, El Salvador became the most equal country in Latin America and the Caribbean (LAC). 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 percent in 2020.
Poverty increased by 4.6 percentage points between 2019 and 2020. Yet, estimates indicate that poverty would have increased by up to 7.6 percentage points without government mitigation measures. Inequality is expected to have increased from 0.38 to 0.39.
In 2021, economic growth rebounded to 10.7 percent, supported by remittance-fueled consumption and exports. El Salvador’s economy is expected to grow by 2.9 percent in 2022 and 1.9 percent in 2023. The COVID-19 national vaccination campaign is well positioned, with 66 percent of Salvadoran population being fully vaccinated by March 2022.
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.
Crime and violence are a threat to social development and economic growth in El Salvador and are among the factors driving Salvadorans to migrate. The homicide rate fell from 103 per 100,000 people to 20 per 100,000 people between 2015 and 2020, the lowest in two decades but still high relative to other countries.
El Salvador also has a high exposure to natural hazards, such as earthquakes and volcanic eruptions, and is highly vulnerable to climate change impacts, including more frequent occurrences of floods, droughts, and tropical storms, all of which disproportionally affect poor and vulnerable populations.
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 22, 2022