Economy Of El Salvador

The economy of El Salvador has historically exhibited relatively low gross domestic product (GDP) growth rates when compared to other developing nations, with annual expansion rarely surpassing the low single digits over a span of nearly two decades. This modest growth trajectory reflected structural challenges within the Salvadoran economy, including limited diversification and vulnerability to external shocks. Concurrently, income inequality remained a pronounced feature, with an estimated 37.8% of the population living below the poverty line. This significant poverty rate underscored persistent disparities in wealth distribution and access to economic opportunities, which in turn influenced social and political dynamics within the country. A major shift in El Salvador’s monetary framework occurred on January 1, 2001, when the government implemented a monetary integration plan that introduced the United States dollar as legal tender alongside the Salvadoran colón. This dual currency system mandated that all formal accounting and financial reporting be conducted exclusively in U.S. dollars, effectively anchoring the country’s monetary policy to the currency of its principal trading partner and remittance source. The adoption of the U.S. dollar was intended to stabilize the economy by reducing inflation and interest rates, thereby fostering a more predictable business environment. However, this dollarization also constrained the government’s capacity to engage in open market monetary policies designed to influence short-term economic variables such as interest rates and money supply, as the Central Bank of El Salvador no longer had the authority to issue currency or adjust exchange rates independently. By 2004, the Salvadoran colón had ceased circulating and was effectively removed from everyday transactions, marking the full transition to a dollarized economy. Despite the colón’s official discontinuation, some retail establishments continued to display prices in both colón and U.S. dollar denominations for a period, reflecting lingering public familiarity with the former currency. The switch to the U.S. dollar contributed to a downward trend in interest rates within El Salvador, which in turn facilitated easier access to credit for consumers, particularly for purchasing homes and vehicles. This financial environment encouraged borrowing and investment, supporting sectors such as real estate and automotive sales, and was viewed as a key benefit of dollarization. Over time, public discontent with dollarization diminished significantly, as the stability and predictability associated with the U.S. dollar became accepted norms. Nonetheless, the issue occasionally resurfaced as a political topic during election periods, with some opposition figures and social groups critiquing the loss of monetary sovereignty and the inability to deploy independent monetary tools to address economic downturns or stimulate growth. Despite these periodic debates, dollarization remained a foundational element of El Salvador’s economic policy framework. In June 2021, President Nayib Bukele announced a groundbreaking initiative to introduce legislation that would make Bitcoin legal tender in El Salvador, positioning the country as the first in the world to adopt a cryptocurrency as an official currency alongside the U.S. dollar. This announcement marked a significant departure from traditional monetary policy and was framed as an effort to foster financial inclusion, attract foreign investment, and leverage emerging technologies. The Legislative Assembly subsequently passed the Bitcoin Law on June 9, 2021, with a substantial majority vote of 62 out of 84 members, signaling broad political support for the initiative. Bitcoin officially became legal tender in El Salvador ninety days after the law’s publication in the official gazette, thereby mandating that all economic agents accept Bitcoin for goods and services alongside the U.S. dollar. The law included provisions that incentivized foreign investment by allowing foreigners to obtain permanent residence in El Salvador if they invested 3 Bitcoin into the country, aiming to attract cryptocurrency investors and entrepreneurs. This residency incentive was part of a broader strategy to position El Salvador as a hub for digital finance and innovation. However, the International Monetary Fund (IMF) expressed concerns about El Salvador’s Bitcoin adoption, urging the government in January 2022 to reconsider the decision. The IMF highlighted the rapid depreciation of Bitcoin’s value—approximately a 50% decline—alongside the associated economic difficulties, including increased financial volatility and risks to macroeconomic stability. These warnings underscored the challenges of integrating a highly volatile cryptocurrency into a small, dollarized economy with limited regulatory infrastructure. In alignment with the cryptocurrency initiative, President Bukele announced plans to construct a Bitcoin city at the base of a volcano in El Salvador. This proposed city was envisioned as a futuristic urban center powered by geothermal energy, designed to attract crypto investors and technology companies while promoting sustainable development. The Bitcoin city concept symbolized the government’s ambition to leverage El Salvador’s natural resources and innovative financial policies to stimulate economic growth and diversification. Despite the ambitious vision, the practical uptake of Bitcoin during the first eighteen months following its adoption remained limited. Both locals and tourists rarely used Bitcoin for everyday transactions, with the U.S. dollar continuing to serve as the de facto standard currency for the vast majority of economic exchanges. This limited usage suggested that the Bitcoin experiment had not achieved widespread acceptance or integration into the Salvadoran economy, raising questions about its long-term viability and impact. In 2021, El Salvador secured a $40 million loan from the European Investment Bank (EIB), channeled through the country’s development bank, Banco de Desarrollo de El Salvador. This financial support was aimed at bolstering small enterprises and advancing climate action projects, reflecting an effort to stimulate economic recovery and sustainable development amid global challenges such as the COVID-19 pandemic. Of the total loan amount, $20 million was specifically allocated to investments in renewable energy initiatives, including photovoltaics, biogas, and micro-hydro projects. These investments sought to enhance the country’s energy infrastructure, reduce dependence on fossil fuels, and promote environmental sustainability. Furthermore, up to 50% of the loan line was designated to assist small and medium-sized enterprises (SMEs) that had been adversely affected by the COVID-19 pandemic. This targeted support aimed to mitigate the economic fallout experienced by SMEs, which constitute a vital component of El Salvador’s economy and employment base. By providing financial resources to these businesses, the loan sought to preserve jobs, stimulate economic activity, and facilitate a more resilient recovery in the post-pandemic period.

El Salvador’s economic history has been profoundly shaped by a highly inequitable system of land distribution that persisted for much of its modern development. For decades, the majority of arable land was concentrated in the hands of a small elite group known as the Fourteen Families. This oligarchy controlled vast landholdings, dominating both the agricultural sector and the political landscape. The Fourteen Families wielded considerable influence, not only through their ownership of the most productive lands but also by maintaining tight control over the country’s economic and social structures. This concentration of land ownership created stark disparities in wealth and opportunity, leaving the majority of the rural population landless or with only marginal plots insufficient for subsistence farming. Unlike many other Latin American nations that undertook land reform initiatives to address such inequalities, El Salvador resisted substantive redistribution efforts well into the mid-20th century. While countries such as Mexico and Bolivia implemented agrarian reforms aimed at breaking up large estates and redistributing land to peasant farmers, El Salvador’s ruling elite preserved the status quo. The entrenched power of the landholding class, combined with limited political will and the absence of strong social movements advocating for reform, meant that the highly unequal land system remained largely intact. This persistence of inequality contributed to social tensions and periodic unrest, as the vast majority of Salvadorans had little access to land or the economic benefits it could provide. The economic structure of El Salvador during this period has been characterized as an oligarchic agro-export economy. This model was dominated by the small elite who controlled the production and export of key agricultural commodities, particularly coffee, which was the backbone of the national economy. The oligarchs’ control extended beyond mere ownership; they influenced government policies, labor relations, and export markets to maintain their economic dominance. The reliance on agricultural exports, especially coffee, made the country highly dependent on international commodity markets, exposing it to fluctuations in global demand and prices. This export-oriented economy prioritized the interests of the landowning elite, often at the expense of broader economic diversification or equitable development. During the 1920s, El Salvador experienced a significant economic boom largely fueled by its export-oriented agricultural sector. Coffee production expanded rapidly during this decade, benefiting from favorable international prices and increased global demand. The coffee industry became the principal driver of economic growth, generating substantial export revenues and contributing to infrastructure development, such as transportation networks and port facilities. This period of prosperity allowed the oligarchic elite to consolidate their wealth and influence further, reinforcing the existing social and economic order. However, this boom was heavily dependent on the continued success of coffee exports, leaving the economy vulnerable to external shocks. The onset of the Great Depression in 1929 abruptly halted El Salvador’s economic growth and exposed the fragility of its export-dependent economy. The global economic downturn severely disrupted international trade and caused a sharp decline in commodity prices. For El Salvador, whose economy was heavily reliant on coffee exports, the Depression had devastating effects. The collapse of global markets led to a dramatic reduction in demand for coffee, which was the country’s primary export commodity. This decline not only reduced foreign exchange earnings but also undermined the livelihoods of those involved in coffee production, from landowners to laborers. Between 1926 and 1932, the income generated from exports in El Salvador was reduced by approximately 50%, reflecting the severity of the economic downturn during this period. This halving of export revenues had far-reaching consequences for the Salvadoran economy, exacerbating existing social inequalities and contributing to political instability. The reduction in income affected government finances, limiting public investment and social spending, while also increasing unemployment and poverty among the rural population. The economic crisis underscored the vulnerabilities inherent in El Salvador’s oligarchic agro-export model and highlighted the urgent need for economic diversification and social reform, challenges that would continue to shape the country’s development in subsequent decades.

El Salvador’s public sector encompasses a variety of departments and key infrastructure entities that play significant roles in the country’s economic landscape. Among these is the Centro Financiero Gigante (CFG), a prominent complex situated in San Salvador, which consists of five office towers. This complex serves as a central hub for numerous financial and commercial activities, symbolizing the modernization and growth of the nation’s business infrastructure. The CFG stands as a testament to El Salvador’s efforts to bolster its financial services sector and attract both domestic and international enterprises. Another notable institution within the Salvadoran financial sector is Cuscatlán Bank, whose headquarters are located in Torre Cuscatlán. This building is a landmark in the capital city and represents one of the country’s most important banking institutions. Cuscatlán Bank has played a critical role in the development of El Salvador’s banking industry, offering a wide range of financial products and services to individuals, businesses, and government entities. Alongside Cuscatlán Bank, Banco Agrícola also maintains its headquarters in San Salvador and is recognized as one of the primary banking institutions in the country. Banco Agrícola’s extensive network and financial services contribute significantly to the Salvadoran economy, particularly in sectors such as agriculture, commerce, and industry. Commercial retail infrastructure in El Salvador includes several large shopping malls, among which Lifestyle Center La Gran Via is particularly prominent. This shopping center exemplifies the country’s expanding consumer market and the growing importance of retail and leisure sectors. La Gran Via provides a modern, comprehensive shopping experience with numerous international and local brands, entertainment options, and dining establishments, reflecting the increasing urbanization and economic diversification within El Salvador. The adoption of innovative financial technologies is also evident in the presence of Athena Bitcoin ATMs throughout the country. These machines facilitate transactions involving Bitcoin, a leading cryptocurrency, indicating El Salvador’s pioneering role in embracing digital currency infrastructure. The availability and use of Athena Bitcoin ATMs highlight the growing acceptance and utilization of Bitcoin and related digital currency services among Salvadorans. This trend aligns with the country’s broader efforts to integrate cryptocurrency into its financial system, promoting financial inclusion and technological advancement. Fiscal policy has historically presented significant challenges for the Salvadoran government, particularly due to the constraints imposed by limited control over monetary policy following the country’s dollarization. In December 1999, El Salvador’s net international reserves amounted to US$1.8 billion, providing a substantial hard currency buffer that supported economic stability. However, beginning in January 2001, the government implemented a monetary integration plan that established the U.S. dollar as legal tender alongside the Salvadoran colón. This policy mandated that all formal accounting be conducted in U.S. dollars, effectively resulting in the loss of independent monetary policy control. The adoption of the U.S. dollar constrained the government’s ability to use monetary policy tools to respond to economic downturns, thereby positioning fiscal policy as the primary mechanism for economic stabilization. Despite this reliance on fiscal policy, the government’s capacity to implement effective fiscal measures has been limited by legislative requirements. Specifically, the approval of international financing necessitates a two-thirds majority in parliament, which can pose significant obstacles to timely and flexible fiscal responses. The fiscal landscape was further complicated by the 1992 peace accords, which mandated substantial government expenditures on transition programs and social services aimed at consolidating peace and fostering social development. During President Alfredo Cristiani’s administration, stability adjustment programs known as Programas de Ajuste Estructural (PAE) were introduced. These programs included the privatization of key sectors such as banks, the pension system, and public utilities including electric and telephone companies. While the privatization of the pension system was intended to improve fiscal sustainability, it inadvertently created a fiscal burden. Private Pension Association Funds established under the new system did not cover all retired pensioners who had previously been supported under the old public system, leading to a coverage gap. In July 2017, the Salvadoran government attempted to address this issue by transferring US$500 million from the privatized pension system to cover pensioners from the old system. However, this transfer was declared unconstitutional by the Supreme Court, preventing the government from reallocating these funds. Consequently, the government absorbed the costs of pension coverage for these retirees while simultaneously losing revenue from contributors to the private pension funds. This dual financial strain significantly contributed to the country’s fiscal imbalance. To finance the resulting fiscal deficit, the government resorted to bond issuance, a practice that has been met with opposition from the leftist Farabundo Martí National Liberation Front (FMLN) party. This opposition has led to political debates and delays in the approval of the national budget, complicating fiscal management. In 2006, in an effort to address budget shortfalls, the government planned to finance the deficit primarily through expenditure reductions rather than by issuing bonds or taking loans. The latter options require a qualified majority of three-quarters in parliament for approval, making them more difficult to secure. When the fiscal deficit is not financed through loans, the approval of the national budget requires only a simple majority—defined as 50% plus one vote—thereby simplifying the legislative process. Despite these fiscal challenges, El Salvador maintains one of the lowest tax burdens in the Americas, with tax revenues amounting to approximately 11% of the country’s gross domestic product (GDP). The government has prioritized improving revenue collection, focusing predominantly on indirect taxes, particularly the value-added tax (VAT). The reliance on indirect taxes such as VAT has drawn criticism from leftist politicians, who argue that these taxes are regressive because they affect all consumers equally regardless of income level. In contrast, direct taxes, which are based on income, are considered more progressive and equitable. To mitigate the impact on low-income households, certain basic goods have been exempted from indirect taxes like VAT. The VAT was initially introduced at a rate of 10% in September 1992 and was subsequently increased to 13% in July 1995. By 2004, VAT had become the largest source of government revenue, accounting for approximately 52.3% of total tax revenues. Regarding the country’s financial reserves, as of November 3, 2014, the International Monetary Fund (IMF) reported El Salvador’s official reserve assets at US$3.192 billion. These reserves included foreign currency holdings in convertible currencies totaling US$2.675 billion. Securities held by the country amounted to US$2.577 billion, with total currency and deposits recorded at US$94.9 million. Among these securities, those held with other national central banks, including the Bank for International Settlements (BIS) and the IMF, were valued at US$81.10 million, while securities held with foreign banks were valued at US$13.80 million. In addition to these assets, El Salvador’s Special Drawing Rights (SDRs) were valued at US$245.5 million. The country’s gold reserves, including deposits and swaps, were reported at US$271.4 million, with a volume of approximately 200,000 fine Troy ounces. Other reserve assets comprised financial derivatives valued at US$2.7 million. Collectively, these reserve assets provide El Salvador with a financial buffer to support its external obligations and maintain macroeconomic stability.

The Salvadoran American population residing in the United States has played a crucial role in supporting El Salvador’s economy through the steady flow of remittances sent to family members and relatives back home. These remittances represent a vital source of foreign income for El Salvador, providing financial resources that supplement domestic earnings and contribute to the livelihoods of many Salvadoran households. The funds sent by Salvadorans abroad have helped to alleviate some of the economic challenges faced by the country, particularly by offsetting its substantial trade deficit, which stood at approximately $2.9 billion. This trade imbalance, characterized by the country importing far more goods and services than it exports, has been partially mitigated by the inflow of remittances, thereby stabilizing the national economy and supporting consumption. In 2005, remittances to El Salvador reached an unprecedented peak of $2.9 billion, marking a significant milestone in the country’s economic history. This amount represented roughly 17.1% of El Salvador’s gross national product (GNP), underscoring the extraordinary importance of remittances in the national income structure. The magnitude of these transfers highlighted the deep economic interconnection between El Salvador and its diaspora in the United States, as well as the reliance of many Salvadoran families on this external source of income. Over the preceding decade, the volume of remittances had increased steadily, reflecting a growing dependence on the Salvadoran diaspora to sustain household consumption, investment, and overall economic activity within the country. The inflow of remittances has produced a complex array of effects on El Salvador’s economy and society, encompassing both positive and negative dimensions. On the positive side, remittances have provided critical financial support to families, enabling improved access to education, healthcare, and basic necessities. This external income has also contributed to poverty reduction in certain regions and supported local businesses through increased consumer spending. However, the reliance on remittances has also introduced challenges, including potential distortions in labor markets, inflationary pressures, and social dynamics related to migration and dependency. The uneven distribution of remittance income has sometimes exacerbated inequalities, while the economy’s vulnerability to external shocks affecting the diaspora’s earnings has raised concerns about long-term sustainability. In 2005, the United Nations Development Program (UNDP) reported that approximately 20% of El Salvador’s population was living in extreme poverty, highlighting the persistent socio-economic challenges facing the country despite the inflow of remittances. This statistic underscored the depth of deprivation experienced by a significant segment of the population and pointed to the limitations of remittances as a sole mechanism for poverty alleviation. The persistence of extreme poverty indicated structural issues within the Salvadoran economy, including limited access to quality education, inadequate employment opportunities, and insufficient social safety nets, which remittances alone could not fully address. Despite notable improvements in education levels among the Salvadoran population, wage expectations have risen at a pace exceeding gains in labor productivity, creating economic pressures within the domestic labor market. As Salvadorans attained higher educational qualifications and skills, their aspirations for better wages and living standards increased correspondingly. However, the growth in productivity—measured as output per worker—did not keep pace with these heightened wage demands, leading to a mismatch between labor costs and economic output. This divergence has posed challenges for businesses and employers, who face increased wage bills without commensurate increases in productivity, thereby affecting competitiveness and employment dynamics. The rising wage expectations in El Salvador have attracted workers from neighboring countries such as Honduras and Nicaragua, who are willing to accept the prevailing wages within the Salvadoran labor market. This influx of migrant labor has been driven by economic disparities in the region, with workers from less prosperous countries seeking better income opportunities in El Salvador. The availability of foreign labor willing to work at established wage levels has influenced the composition of the workforce and alleviated some labor shortages in specific sectors. However, it has also introduced complexities related to labor market integration, wage competition, and social cohesion, as the presence of migrant workers intersects with domestic economic conditions. The local propensity for consumption in El Salvador has increased, a trend that has been partly driven by the inflow of remittances from abroad. Households receiving remittance income have generally exhibited a higher tendency to spend on goods and services, contributing to increased demand within the domestic economy. This enhanced consumption has stimulated various sectors, including retail, transportation, and services, thereby fostering economic activity and employment. The injection of remittance funds into local markets has also encouraged the circulation of money within communities, supporting small businesses and informal economic activities. Remittances have contributed to rising prices for certain commodities in El Salvador, with the real estate sector being particularly affected. The increased purchasing power of remittance recipients has led to greater demand for housing, driving up property values and rental costs in many areas. This phenomenon has been especially pronounced in urban centers and regions with significant diaspora connections, where the influx of remittance income has intensified competition for limited housing stock. The escalation in real estate prices has had mixed implications, benefiting property owners and investors while simultaneously creating affordability challenges for lower-income Salvadorans seeking adequate shelter. Many Salvadorans living abroad, benefiting from higher wages in countries such as the United States, have been able to afford paying elevated prices for houses in El Salvador, thereby exerting upward pressure on housing prices for all Salvadorans. The ability of the diaspora to invest in real estate back home has fueled demand for residential properties, often resulting in price increases that extend beyond the reach of local residents with more modest incomes. This dynamic has contributed to a real estate market characterized by growing disparities, where wealthier Salvadorans and expatriates can access higher-quality housing, while others face difficulties in securing affordable accommodation. The pattern of investment by Salvadorans abroad reflects both economic aspirations and emotional ties to the homeland, as well as the broader influence of remittances on the country’s housing market and social fabric.

Agriculture has historically played a central role in the economy of El Salvador, serving as a foundation for both domestic sustenance and export revenues. The sector’s significance is underscored by the cultivation of a variety of crops, with sugarcane standing out as a dominant agricultural product. By 2018, El Salvador produced approximately 7 million tons of sugarcane, reflecting the crop’s vital contribution to the nation’s agricultural output and its economic reliance on this commodity. Sugarcane cultivation not only supported the sugar industry but also provided employment opportunities for a substantial portion of the rural population, reinforcing its status as an economic mainstay. In addition to sugarcane, maize emerged as a significant staple crop, with production reaching 685,000 tons in the same year. Maize has traditionally been a dietary cornerstone in El Salvador, forming the basis of many local dishes and serving as a critical source of nutrition for the population. The prominence of maize cultivation highlights the dual role of agriculture in the country: supporting both commercial activities and food security. Alongside these major crops, El Salvador also produced notable quantities of other agricultural goods, including 119,000 tons of coconut and 109,000 tons of sorghum. These crops contributed to the diversification of the agricultural sector, providing raw materials for various food products and industries. Beans and coffee were also significant components of the agricultural landscape, with yields of 93,000 tons and 80,000 tons respectively. Beans, like maize, are a dietary staple and an essential source of protein for many Salvadorans, while coffee has long been a key export product, historically linked to the country’s economic development and international trade relations. The cultivation of coffee, in particular, has shaped rural economies and social structures, often associated with large plantations and export-oriented agriculture. Other agricultural products with smaller but meaningful yields included 64,000 tons of oranges, as well as watermelon, yautia, apple, manioc, mango, banana, and rice. These crops contributed to both local consumption and niche markets, reflecting the varied agroecological zones within the country that support diverse agricultural activities. Agrarian policies in El Salvador have been deeply intertwined with broader social and economic objectives, particularly the goal of fostering a rural middle class invested in the nation’s peaceful and prosperous future. Land reform initiatives sought to address historical inequalities in land ownership, which had contributed to social tensions and conflict. Through these reforms, at least 525,000 people—representing over 12% of the total population and approximately 25% of the rural poor—benefited from land redistribution programs. This substantial demographic shift aimed to empower rural communities by granting land ownership to those who had previously worked the land without legal title, thereby promoting social stability and economic development. The land redistribution efforts resulted in the transfer of over 22% of El Salvador’s total farmland to individuals who had formerly been landless laborers. This redistribution was a critical step toward rectifying entrenched disparities in land tenure that had long characterized the Salvadoran countryside. However, despite these significant reforms, by the conclusion of the process in 1990, approximately 150,000 landless families remained excluded from land redistribution. This persistent gap underscored the challenges inherent in implementing comprehensive agrarian reform in a context marked by political conflict and economic constraints. The 1992 peace accords, which formally ended the civil war, incorporated provisions aimed at further addressing land issues. These accords mandated land transfers to all qualified ex-combatants from both the Farabundo Martí National Liberation Front (FMLN) and the El Salvador Armed Forces (ESAF), as well as to landless peasants residing in former conflict zones. This component of the peace agreement was designed to facilitate reintegration and reconciliation by providing tangible economic opportunities to individuals affected by the war. The land transfers were intended not only as a means of restitution but also as a foundation for sustainable livelihoods in post-conflict rural areas. Supporting these land redistribution efforts, the United States committed $300 million toward a national reconstruction plan focused on post-conflict recovery and development. This financial assistance was critical in addressing the economic devastation wrought by years of civil war and in promoting stability through investment in rural development. Of the total commitment, $60 million was specifically allocated for land purchases, enabling the acquisition and redistribution of farmland to eligible beneficiaries. Additionally, $17 million was designated for agricultural credits, providing essential financial resources to support farming activities and improve productivity among new landowners. The United States Agency for International Development (USAID) has maintained an active role in El Salvador’s agricultural sector, continuing to provide technical training, facilitate access to credit, and offer other financial services to land beneficiaries. These interventions aim to enhance the capacity of smallholder farmers and rural communities to manage their land effectively, increase agricultural output, and improve livelihoods. Through these ongoing efforts, USAID contributes to the broader goals of rural development, poverty reduction, and economic diversification in El Salvador, helping to consolidate the gains achieved through agrarian reform and peacebuilding initiatives.

The geothermal power plant located in the Ahuachapán Department stands as a pivotal element within El Salvador’s renewable energy infrastructure. Established in an area rich with volcanic activity, the facility harnesses the Earth’s internal heat to generate electricity, capitalizing on the abundant geothermal resources characteristic of the region. This plant has played a central role in the country’s efforts to diversify its energy matrix and reduce dependence on fossil fuels, contributing significantly to the national grid’s renewable energy supply. Its operation not only exemplifies the practical utilization of geothermal technology but also underscores El Salvador’s commitment to sustainable energy development. Complementing the Ahuachapán facility, the geothermal power center situated in the Usulután Department further bolsters the nation’s geothermal energy production capacity. This center taps into the geothermal reservoirs associated with the volcanic systems in the eastern part of the country, thereby expanding the reach of geothermal power generation beyond western El Salvador. Together, these two geothermal installations form the backbone of the country’s geothermal energy sector, supplying a substantial portion of the electricity consumed domestically. Their strategic locations within geothermally active zones enable efficient energy extraction, reinforcing El Salvador’s position as a leader in geothermal energy utilization in Central America. In addition to geothermal resources, El Salvador’s hydroelectric infrastructure is anchored by the Central hydroelectric dam constructed over the Lempa River, the country’s longest and most significant watercourse. This dam constitutes a key facility in the hydroelectric energy generation system, harnessing river flow to produce renewable electricity. The Lempa River’s considerable volume and gradient provide favorable conditions for hydroelectric power, making the dam an essential contributor to the national energy portfolio. Its operation supports grid stability and complements other renewable sources, thereby enhancing the overall resilience and sustainability of El Salvador’s electricity generation framework. The energy industry in El Salvador is characterized by a diversified mix that integrates fossil fuels, hydroelectric power, and other renewable sources, with geothermal energy serving as a primary component of local electricity production. This diversification reflects a strategic approach to energy security and environmental sustainability, balancing traditional and renewable energy sources to meet growing demand. While fossil fuels continue to play a role, particularly in transportation and certain industrial sectors, the electricity generation sector increasingly emphasizes renewables, driven by the country’s abundant natural resources and policy incentives. This mixed energy portfolio facilitates a gradual transition toward cleaner energy while ensuring reliability and affordability for consumers. Despite the emphasis on renewable electricity generation, El Salvador remains reliant on imports to satisfy its oil energy requirements. The country lacks significant domestic oil production capabilities, necessitating the importation of crude oil and refined petroleum products to meet the demands of transportation, industry, and other sectors dependent on liquid fuels. This dependence on external sources exposes El Salvador to fluctuations in global oil markets and underscores the importance of diversifying energy sources and enhancing energy efficiency. Efforts to reduce oil dependency include promoting alternative fuels and expanding renewable energy infrastructure, though oil imports continue to constitute a critical component of the national energy supply chain. El Salvador’s installed electricity generation capacity totals approximately 1,983 megawatts (MW), reflecting the combined output potential of its various power plants across different energy sources. This capacity encompasses geothermal, hydroelectric, thermal (fossil fuel-based), and other renewable energy facilities, representing the country’s ability to meet peak electricity demand and maintain grid stability. The distribution of installed capacity highlights the significant role of renewables, particularly geothermal and hydroelectric plants, which collectively contribute a substantial share of the total. The scale of this capacity aligns with El Salvador’s population size and economic activity, supporting ongoing development and electrification goals. Annually, El Salvador generates around 5,830 gigawatt-hours (GWh) of electricity, a volume that satisfies domestic consumption and supports economic growth. This generation figure reflects the output from all sources connected to the national grid, including renewable and non-renewable plants. The electricity produced underpins residential, commercial, and industrial usage, facilitating the country’s modernization and improving quality of life. The annual generation also serves as a benchmark for assessing energy efficiency, grid performance, and the impact of renewable energy integration within the national energy system. Renewable energy sources account for over half of El Salvador’s electricity production, constituting approximately 52% of the total generated electricity. Within this renewable segment, geothermal energy represents the largest share at 29%, followed by hydroelectricity at 23%, with the remainder derived from other renewable technologies. This distribution underscores the prominence of geothermal and hydroelectric power as the foundational pillars of the country’s renewable energy strategy. The substantial contribution of these sources not only reduces greenhouse gas emissions but also enhances energy independence and sustainability. Other renewables, including biomass, solar, and wind, complement this mix, gradually expanding their presence in the energy landscape. The production of geothermal energy in El Salvador is intrinsically linked to the country’s numerous volcanoes, which serve as a natural and abundant resource for geothermal power generation. The volcanic activity beneath the surface heats subterranean water reservoirs, creating steam that can be harnessed to drive turbines and generate electricity. This geological endowment provides El Salvador with a renewable energy advantage, enabling the exploitation of clean, reliable, and continuous power. The utilization of volcanic geothermal resources has positioned El Salvador as one of the leading geothermal energy producers in the region, contributing to both environmental objectives and energy security. In 2021, data from the National Energy Commission revealed that 94.4% of the total energy injections into El Salvador’s electricity grid originated from renewable sources, amounting to 412.04 GWh. This remarkable proportion highlights the country’s successful integration of renewables into its energy system, reflecting policy initiatives, investments, and technological advancements. The dominance of renewable energy in grid injections signifies a transformative shift away from fossil fuel dependence and illustrates the effectiveness of El Salvador’s renewable energy infrastructure. Such a high percentage also indicates the potential for further expansion and innovation within the renewable sector. A detailed breakdown of renewable energy contributions in 2021 shows that hydroelectric plants accounted for 28.5% of the renewable energy injections, producing 124.43 GWh. Geothermal energy followed closely, contributing 27.3% with 119.07 GWh generated. Biomass energy represented a significant portion as well, comprising 24.4% of the total renewable injections with 106.43 GWh. Photovoltaic solar energy contributed 10.6%, amounting to 46.44 GWh, while wind energy made up 3.6%, corresponding to 15.67 GWh. This distribution illustrates the diversified nature of El Salvador’s renewable energy portfolio, with multiple technologies playing vital roles in meeting electricity demand. The presence of biomass, solar, and wind alongside geothermal and hydroelectric sources reflects a comprehensive approach to renewable energy development. The total renewable energy injection of 412.04 GWh in 2021, representing 94.4% of all energy injected into the grid during that period, underscores the centrality of renewables in El Salvador’s electricity supply. This overwhelming majority indicates a mature and well-established renewable energy sector capable of meeting the vast majority of the country’s electricity needs. The high penetration of renewables contributes to reducing carbon emissions, enhancing energy security, and fostering sustainable economic growth. It also positions El Salvador as a regional example in renewable energy adoption, demonstrating the feasibility and benefits of transitioning to a predominantly renewable electricity system.

El Salvador has long held the distinction of being the most industrialized nation in Central America, a status that underscored its relatively advanced economic development compared to its regional neighbors. This industrial prominence, however, experienced a significant setback during the decade-long civil war that ravaged the country from 1980 to 1992. The prolonged conflict disrupted industrial production, damaged infrastructure, and created an environment of economic uncertainty that hindered investment and growth within the manufacturing sector. As a result, El Salvador’s industrial base, once a cornerstone of its economy, was substantially weakened, necessitating a period of reconstruction and strategic realignment in the post-war years. By 1999, the manufacturing sector had regained considerable ground, contributing approximately 22 percent to El Salvador’s Gross Domestic Product (GDP). This figure reflected the sector’s importance as a key driver of economic activity and employment within the country. The recovery of manufacturing was indicative of broader economic stabilization efforts and structural reforms implemented throughout the 1990s, which aimed to revitalize industry and promote export-led growth. The sector’s contribution to GDP underscored its role not only in domestic production but also in positioning El Salvador within the increasingly competitive global marketplace. Since the early 1990s, particularly from 1993 onward, El Salvador’s industrial sector underwent a notable transformation. Traditionally focused on serving the domestic market, the sector began shifting towards an export-oriented model centered around free zone manufacturing, commonly referred to as maquiladora operations. These maquilas, which are factories that import raw materials and components duty-free for assembly or manufacturing before exporting finished goods, became a pivotal element in the country’s industrial strategy. The establishment of free trade zones facilitated foreign direct investment and integrated El Salvador more deeply into global supply chains, especially in textiles and apparel production. This transition marked a significant departure from the previously inward-looking industrial framework, enabling the country to capitalize on competitive labor costs and preferential trade agreements. The growth of maquila exports has been a major catalyst for the expansion of El Salvador’s export sector. By focusing on manufacturing goods primarily for foreign markets, maquila operations have driven a substantial increase in export volumes and diversification. This export-led growth has contributed to improving trade balances and generating much-needed foreign exchange earnings. The maquila industry’s success is closely tied to its ability to adapt to global demand trends and maintain cost-effective production, factors that have attracted multinational companies seeking efficient manufacturing bases in the region. Consequently, maquila exports have become a cornerstone of El Salvador’s economic development strategy, fostering industrial growth and employment opportunities. Over the most recent three-year period, maquila exports have continued to play an increasingly important role in bolstering the Salvadoran economy. Although specific years are not detailed, this timeframe reflects ongoing trends in which the maquila sector has sustained its contribution to overall economic performance. The continued expansion of maquila exports has supported job creation, particularly for women, who constitute a significant portion of the workforce in these factories. Additionally, the sector’s resilience amid global economic fluctuations has underscored its importance as a stable source of income and foreign investment. The maquila industry’s sustained growth has also encouraged the government and private sector to pursue policies aimed at enhancing competitiveness, infrastructure, and workforce skills to further strengthen this vital component of El Salvador’s manufacturing landscape.

Mining in El Salvador evolved significantly over the course of the 20th century, transitioning from small-scale artisanal extraction methods to more industrialized operations during the 1970s. This shift was epitomized by activities at the San Sebastián mine, which became one of the country’s most prominent industrial mining sites. The San Sebastián mine’s operations introduced modern extraction techniques and increased production capacity, marking a notable change in the scale and intensity of mining within the nation. However, this industrial expansion came with environmental consequences, as the chemical runoff from the San Sebastián mine led to pollution in the San Sebastián River. The contamination of this waterway raised concerns about the ecological impact of mining practices, affecting aquatic life and potentially the health of communities relying on the river. Mining activities in El Salvador were significantly disrupted by the outbreak of the Salvadoran Civil War, which lasted from 1980 to 1992. During this period of intense internal conflict, industrial mining operations were largely halted due to security concerns, economic instability, and the broader disruption of national infrastructure. The cessation of mining reflected the broader challenges faced by the Salvadoran economy during the war years, as the focus shifted to survival and conflict resolution rather than resource extraction and industrial development. Following the end of the civil war, the right-wing government of El Salvador sought to revitalize the mining sector as part of broader economic development plans. This post-war government proposed the establishment of 33 designated mining zones across the country, aiming to attract foreign investment and modernize the industry. Exploration licenses were issued to several international mining companies, including those from the United States, Australia, and Canada, reflecting a strategic effort to integrate El Salvador into the global mining economy. These initiatives were intended to stimulate economic growth, create jobs, and generate government revenue through mineral extraction. Despite the government’s ambitions, the expansion of mining activities encountered substantial opposition from local communities and their leaders. Many residents expressed concerns about the environmental and social impacts of mining, including water contamination, land degradation, and displacement. This grassroots resistance was particularly evident in Chalatenango, where community mobilization successfully blocked exploration activities in 2005. The opposition in Chalatenango demonstrated the strength of local activism and the challenges faced by the government and foreign companies in advancing mining projects amid widespread public skepticism and environmental apprehensions. One notable example of foreign investment in El Salvador’s mining sector was the Pacific Rim Mining Corporation, which received a permit in 2002 to explore the El Dorado gold mine. This project attracted considerable attention due to the potential economic benefits of gold extraction, as well as the environmental risks associated with large-scale mining operations. However, Pacific Rim’s ambitions were met with persistent local opposition, which culminated in the government’s decision in 2008 to deny the company a license to proceed with mining at El Dorado. The refusal was largely attributed to the strong resistance from local communities and environmental groups, which underscored the contentious nature of mining development in the country. The culmination of these conflicts and concerns led to a decisive policy shift in 2017, when El Salvador officially banned metal mining nationwide. This ban represented a landmark decision, positioning El Salvador as one of the first countries in the world to prohibit metal mining entirely. The government cited environmental protection, water security, and public health as primary motivations for the ban, reflecting the influence of sustained community activism and environmental advocacy. The prohibition effectively halted all metal mining operations and exploration activities, signaling a commitment to preserving natural resources and prioritizing sustainable development. Despite the ban, the government maintained regulatory oversight of mining-related activities, as evidenced by the establishment of a mining regulator in 2021. This regulatory body was tasked with monitoring compliance, managing permits related to non-metallic mining, and ensuring that any mining activities adhered to national laws and environmental standards. The creation of the regulator indicated that while metal mining remained prohibited, the government recognized the need for a formal institutional framework to oversee the mining sector’s limited activities and to address any emerging issues related to mineral resource management. In 2023, the arrest of several anti-mining activists sparked public speculation regarding the Salvadoran government’s stance on mining operations. These arrests raised concerns among civil society groups and international observers that the government might be reconsidering its previous ban on metal mining, potentially signaling a shift toward resuming mining activities. The detentions were perceived by many as an attempt to suppress opposition and silence dissenting voices, fueling debates about the balance between economic development, environmental protection, and human rights in El Salvador’s mining policy. This development underscored the ongoing tensions surrounding mining in the country and the complex interplay between government objectives, community interests, and environmental stewardship.

El Salvador’s telecommunications infrastructure reflects a dynamic interplay between fixed-line services and rapidly expanding mobile networks. The country maintains approximately 0.9 million fixed telephone lines, a figure that underscores the continued presence of traditional telephony despite global shifts toward mobile communication. Complementing this, there are around 0.5 million fixed broadband lines, indicating a moderate penetration of wired internet services. However, the most striking aspect of El Salvador’s telecommunications landscape is the prevalence of mobile cellular subscriptions, which total approximately 9.4 million. This number significantly exceeds the country’s population, highlighting a high mobile penetration rate and the widespread adoption of mobile devices as the primary means of communication and internet access. The predominance of mobile connectivity is further reinforced by the population’s internet usage patterns. The majority of Salvadorans access the internet primarily through smartphones and mobile networks rather than fixed broadband connections. This trend has been facilitated by government policies that prioritize the expansion and enhancement of mobile infrastructure over fixed-line services. These policies have aimed to bridge digital divides by leveraging the widespread availability and affordability of mobile devices, thereby enabling broader segments of the population to participate in the digital economy. The emphasis on mobile connectivity has also been driven by the geographic and economic realities of El Salvador, where mobile networks offer more flexible and cost-effective solutions for internet access in both urban and rural areas. Government regulation in the telecommunications sector has adopted a liberal stance, fostering an environment conducive to the rapid expansion of mobile networks. This regulatory framework has encouraged competition among service providers and facilitated investments in advanced technologies. Notably, El Salvador has embarked on the deployment of fifth-generation (5G) mobile network coverage, with testing activities commencing in 2020. The introduction of 5G technology promises to enhance network speeds, reduce latency, and support a broader array of digital services, positioning the country to capitalize on emerging opportunities in fields such as the Internet of Things (IoT), smart cities, and digital commerce. The government’s proactive approach to embracing 5G underscores its commitment to modernizing the telecommunications infrastructure and ensuring that El Salvador remains competitive in the global digital landscape. Parallel to advancements in telecommunications, El Salvador completed its transition to digital broadcasting in 2018, marking a significant milestone in the modernization of its media infrastructure. The country adopted the Integrated Services Digital Broadcasting-Terrestrial (ISDB-T) standard for digital television and radio transmission. This standard, originally developed in Japan and widely adopted in Latin America, offers superior picture and sound quality, increased channel capacity, and enhanced interactive capabilities compared to analog systems. The digital transition has enabled broadcasters to deliver a more diverse range of content and improved service reliability, while also freeing up spectrum resources for other telecommunications uses. The adoption of ISDB-T aligns El Salvador with regional trends and facilitates interoperability with neighboring countries that have implemented similar digital broadcasting standards. El Salvador’s media landscape is characterized by a diverse array of broadcasting entities. Hundreds of privately owned national television networks operate within the country, offering a wide spectrum of programming that caters to various audiences. In addition to terrestrial television, cable TV networks provide access to both domestic and international channels, expanding the range of content available to Salvadoran viewers. Radio remains a vital medium, with numerous stations serving different linguistic, cultural, and demographic groups. Despite the dominance of private media outlets, the government maintains ownership of one broadcast station, which serves as a platform for public information and official communications. This pluralistic media environment reflects the country’s commitment to freedom of expression and the importance of diverse information sources in a democratic society. El Salvador’s information technology (IT) industry has deep historical roots, tracing back to the mid-1990s when pioneering companies and initiatives laid the foundation for future growth. Among the early players was Gpremper, a company that contributed to the nascent IT sector. Notably, in 1995, a Salvadoran-developed search engine called “Buscaniguas” was launched, predating the global dominance of Google by several years. This early innovation demonstrated the country’s capacity for technological creativity and positioned El Salvador as an early adopter of internet technologies in the Central American region. The existence of such initiatives during the formative years of the internet era highlights the country’s longstanding engagement with digital technologies and its potential to nurture homegrown tech solutions. Over time, the IT industry in El Salvador has expanded significantly, evolving to encompass a broad range of services including software development and website design. Companies such as Creativa Consultores, Applaudo Studios, and Elaniin have emerged as key contributors to this growth, providing technology solutions to international clients and generating employment opportunities for thousands of Salvadorans. These firms have leveraged the country’s skilled labor force and favorable business environment to establish themselves as competitive players in the global IT outsourcing market. Their services span diverse sectors, including e-commerce, finance, healthcare, and entertainment, reflecting the versatility and sophistication of El Salvador’s IT capabilities. The success of these companies underscores the industry’s role as a driver of economic diversification and technological advancement within the country. The presence of multinational corporations has further bolstered El Salvador’s IT sector. Canadian company Telus International operates a significant workforce in the country, employing nearly 1,500 people in high-tech and customer service roles. This investment has positioned Telus International as a major player in the local IT ecosystem, contributing to job creation and skills development. The company’s operations encompass a range of functions, including software engineering, technical support, and business process outsourcing, which have helped integrate El Salvador into global technology and service delivery networks. Telus International’s engagement reflects the attractiveness of El Salvador as a destination for foreign direct investment in the technology sector, supported by competitive labor costs and a growing pool of qualified professionals. The startup ecosystem in El Salvador has also experienced notable growth, driven by innovative enterprises that address regional market needs. One prominent example is HugoApp, a company that employs approximately 600 locals and offers delivery and ride-sharing services to nearly 1 million users across the Central American Free Trade Agreement (CAFTA) region. HugoApp’s success illustrates the potential for Salvadoran startups to scale operations beyond national borders and compete in the broader Central American market. By leveraging mobile technology and digital platforms, startups like HugoApp contribute to economic dynamism, job creation, and the expansion of digital services accessible to consumers. The growth of such companies signals an increasingly vibrant entrepreneurial culture and the emergence of El Salvador as a hub for technology-driven innovation in the region. In 2020, the Salvadoran government unveiled the “Digital Agenda 2020,” a comprehensive strategic plan aimed at accelerating the country’s digital transformation. This initiative sought to digitize government services, thereby improving efficiency, transparency, and accessibility for citizens. A key component of the agenda involved the digitalization of identities, which facilitates secure and streamlined interactions between individuals and public institutions. Additionally, the plan aimed to simplify procedures for starting and operating businesses, reducing bureaucratic barriers and fostering a more conducive environment for entrepreneurship and investment. The agenda also prioritized attracting foreign investment in the technology sector and enhancing the education system to better prepare the workforce for the demands of a digital economy. By implementing these measures, the government intended to position El Salvador as a competitive player in the global information society and to promote inclusive economic growth. In a landmark legislative move in 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender through the passage of the Bitcoin Law. This pioneering policy aimed to enhance financial inclusion by providing unbanked and underbanked populations with access to digital financial services. By integrating Bitcoin into the national economy, the government sought to reduce reliance on traditional banking infrastructure, lower transaction costs, and facilitate remittances from the Salvadoran diaspora. The law also intended to attract innovation and investment in cryptocurrency and blockchain technologies, positioning El Salvador as a forward-looking hub for digital finance. While the adoption of Bitcoin as legal tender generated significant international attention and debate, it underscored the country’s ambition to leverage emerging technologies to address longstanding economic challenges and to embrace new paradigms in monetary policy and financial services.

In the 21st century, El Salvador experienced significant growth in its call center industry, positioning itself as an important hub for business process outsourcing (BPO) services targeting North American markets. This expansion was driven by increasing demand from companies in the United States and Canada seeking cost-effective customer service and technical support solutions. The establishment of numerous call centers across the country facilitated the creation of employment opportunities and contributed to the diversification of El Salvador’s service sector. These centers primarily catered to clients in the United States, leveraging the country’s geographical proximity and time zone compatibility to provide efficient and timely services. Among the prominent call centers that established operations in El Salvador were Ubiquity Global Services and Synnex, both of which played pivotal roles in the industry’s development. Ubiquity Global Services, a multinational company specializing in customer experience management, opened facilities that employed thousands of Salvadorans to handle customer interactions, technical support, and sales for various North American clients. Similarly, Synnex, a global distributor of technology products and services, expanded its presence in El Salvador by setting up call centers that supported its extensive client base with customer service and logistics coordination. The presence of these companies not only underscored El Salvador’s growing reputation as a viable outsourcing destination but also attracted further investment from other international BPO firms. A key factor underpinning the success of the call center industry in El Salvador was the availability of a large English-speaking workforce, which distinguished the country from many other Latin American nations. English proficiency was essential for meeting the communication requirements of North American clients, and El Salvador’s labor pool demonstrated competitive language skills that enabled effective customer interactions. This linguistic capability was supported by a national education system that increasingly emphasized English language instruction, as well as by private language training programs designed to prepare workers for the demands of the BPO sector. The combination of language skills and relatively low labor costs made El Salvador an attractive destination for companies seeking to outsource customer service operations. A significant portion of this English-speaking workforce consisted of deportees from the United States, a demographic that contributed uniquely to the call center sector’s growth and development. Many Salvadorans who had migrated to the United States and subsequently been deported returned with advanced English language abilities and familiarity with American culture, which proved invaluable in customer service roles. Their experience living in the United States allowed them to understand the nuances of American consumer expectations and communication styles, thereby enhancing the quality of service provided by Salvadoran call centers. This population not only filled a critical labor niche but also helped bridge cultural and linguistic gaps between clients and service providers. Consequently, the integration of deportees into the workforce became a defining characteristic of El Salvador’s call center industry, reinforcing the country’s competitive advantage in the regional BPO market.

In 1999, the trade dynamics of El Salvador revealed a pronounced reliance on the United States as a primary partner in both exports and imports. Specifically, 66% of El Salvador’s exports were destined for the U.S. market, underscoring the significant economic interdependence between the two countries. Other notable export destinations included the Caribbean region, which accounted for 26% of exports, reflecting regional trade ties within Central America and the Caribbean basin. Mexico and Spain each represented 1% of the export market, while the remaining 6% was distributed among various other countries. This distribution highlighted El Salvador’s efforts to diversify its export markets, albeit with a dominant focus on the United States. On the import side, the United States also played a pivotal role, supplying 43.4% of El Salvador’s imported goods in 1999. Guatemala and Mexico followed as significant sources, contributing 8.2% and 7.8% respectively, indicating strong regional trade linkages within Central America and North America. The European Union accounted for 7.0% of imports, reflecting El Salvador’s engagement with global markets beyond the Western Hemisphere. The remaining 33.6% of imports originated from various other countries, illustrating a relatively broad base of international suppliers. This import composition underscored El Salvador’s dependence on both regional neighbors and global partners to meet its domestic demand for goods and services. The commercial development of El Salvador in the late 20th century was symbolically embodied by the Torre Futura, a prominent skyscraper located within the World Trade Center San Salvador complex. This modern architectural landmark represented the country’s aspirations toward economic modernization and integration into the global economy. The Torre Futura became an emblem of El Salvador’s expanding business environment, housing multinational corporations, financial institutions, and trade organizations that facilitated international commerce and investment. A persistent challenge for El Salvador’s economy has been the need to develop new growth sectors to achieve diversification beyond its historical dependence on a single export commodity. For much of its history, the country was characterized as a mono-export economy, initially centered on the production of indigo during the colonial period. Indigo, a valuable dye, was the primary export until the 19th century when the advent of synthetic dyes led to a decline in its economic importance. Subsequently, coffee cultivation emerged as the dominant export commodity, reshaping the country’s economic and social landscape. The shift to coffee production in the 19th century necessitated the acquisition of highland lands, which were often expropriated from indigenous reserves. This process frequently involved little or no compensation to indigenous communities, who were sometimes granted only seasonal rights to work the land or permission to cultivate subsistence crops. These land appropriations disrupted traditional indigenous livelihoods and contributed to long-term political conflicts rooted in land tenure and social inequality. The concentration of coffee plantations in the highlands entrenched a socio-economic hierarchy that persisted into the modern era, influencing El Salvador’s political and economic development. During the administrations of the Nationalist Republican Alliance (ARENA) party, policies were implemented to foster the development of other export industries beyond coffee. The government actively promoted sectors such as textiles and seafood products, recognizing their potential to contribute to economic diversification and job creation. Additionally, tourism was identified as a promising growth sector, given El Salvador’s natural beauty, cultural heritage, and strategic location. These initiatives aimed to reduce the country’s vulnerability to fluctuations in coffee prices and global commodity markets by broadening the economic base. Despite these efforts, several challenges impeded the full realization of diversification goals. High crime rates, particularly related to gang violence, undermined investor confidence and deterred tourism development. Inadequate infrastructure, including transportation networks, port facilities, and utilities, limited the efficiency of production and export activities. Furthermore, limited social capital, encompassing factors such as education, workforce skills, and institutional capacity, constrained the ability of emerging sectors to compete effectively in international markets. These obstacles necessitated comprehensive policy responses and investments to create an enabling environment for sustainable economic growth. In response to infrastructure limitations, the Salvadoran government undertook significant investments in port and transportation projects, particularly focusing on La Unión in eastern El Salvador. This initiative aimed to establish a “dry canal” that would facilitate the movement of goods from the Gulf of Fonseca on the Pacific coast through to Honduras and onward to the Atlantic Ocean. The dry canal concept sought to enhance regional connectivity and trade efficiency by providing an alternative to the Panama Canal for certain cargo routes. This strategic infrastructure development was expected to bolster El Salvador’s role as a logistics hub within Central America and expand its export capabilities. El Salvador’s commitment to export-oriented industrialization was further demonstrated by the establishment of fifteen free trade zones across the country. These zones provided preferential regulatory and fiscal conditions to attract foreign investment and promote manufacturing for export markets. The maquila industry, which involved the assembly and processing of imported materials for re-export, was the largest beneficiary of these zones. By 1999, the maquila sector employed approximately 88,700 workers, primarily engaged in clothing cutting and assembly operations geared toward the United States market. This industry played a crucial role in generating employment opportunities, particularly for women, and contributed significantly to export earnings. In 2004, El Salvador signed the Central American Free Trade Agreement-Dominican Republic (CAFTA-DR) with the United States, marking a milestone in the country’s trade liberalization efforts. The agreement encompassed provisions designed to improve conditions for entrepreneurs and workers, facilitating the transition from declining traditional sectors to emerging industries. CAFTA-DR aimed to reduce tariffs, enhance market access, and promote investment flows between El Salvador and the United States, thereby integrating the Salvadoran economy more deeply into the North American trade framework. The agreement also included labor and environmental standards intended to promote sustainable development. Beyond CAFTA-DR, El Salvador maintained existing free trade agreements with several countries, including Mexico, Chile, the Dominican Republic, and Panama. These agreements contributed to increased export volumes to these nations by reducing trade barriers and fostering closer economic cooperation. The diversification of trade partners through such agreements helped El Salvador to mitigate risks associated with overreliance on a single market and to explore new opportunities in Latin America and the Caribbean. Negotiations for additional free trade agreements were ongoing in the mid-2000s. Talks with Canada involved a regional bloc comprising El Salvador, Guatemala, Honduras, and Nicaragua, reflecting a coordinated approach to expanding market access in North America. Furthermore, negotiations with Colombia commenced in 2006, signaling El Salvador’s intent to deepen economic ties with South America. These efforts illustrated the country’s proactive stance in pursuing trade liberalization as a means to stimulate economic growth and integration into the global economy. The balance of payments data for 1999 indicated a net surplus for El Salvador, reflecting a positive overall external financial position. Exports experienced a modest growth rate of 1.9%, while imports increased by 3%, resulting in a narrowing of the trade deficit. This deficit was effectively offset by inflows of foreign aid and family remittances, which played a critical role in stabilizing the country’s external accounts. The reliance on remittances underscored the importance of Salvadoran diaspora communities, particularly in the United States, as a source of foreign exchange and household income. Remittances themselves were on an upward trajectory, increasing at an annual rate of 6.5% and reaching an estimated inflow of $1.35 billion in 1999. These funds provided vital support to many Salvadoran families, contributing to poverty alleviation and domestic consumption. The steady growth of remittances also highlighted the interconnectedness of El Salvador’s economy with migration patterns and the global labor market. Private foreign capital inflows during this period primarily consisted of short-term financing aimed at facilitating imports. However, the overall level of such capital was lower than in previous years, reflecting cautious investor sentiment and possibly the impact of global economic conditions. The composition and volume of foreign investment influenced the country’s capacity to finance trade deficits and support economic development initiatives. Regionally, the Central American Common Market (CACM) was undergoing a process of reactivation, with most regional commerce becoming duty-free. This reinvigoration of the CACM aimed to promote economic integration among member states by eliminating tariffs and non-tariff barriers, thereby enhancing intra-regional trade. The revival of the CACM represented a strategic effort to strengthen Central America’s collective economic position and competitiveness in the global market. In September 1996, El Salvador, along with Guatemala and Honduras, initiated free trade negotiations with Mexico, forming the Northern Triangle economic grouping. This regional alliance was based on geographic proximity and shared economic interests, seeking to facilitate trade liberalization and cooperation among the member countries. The Northern Triangle’s formation underscored the importance of regional integration as a complement to broader international trade agreements. Although tariff reductions initially scheduled for July 1996 were postponed until 1997, El Salvador remained steadfast in its commitment to maintaining a free and open economy. This dedication was reflected in ongoing efforts to liberalize trade policies, attract foreign investment, and participate actively in regional and global economic frameworks. The country’s adherence to open market principles aimed to foster economic growth and improve living standards. Trade flows between the United States and El Salvador were substantial by the end of the 20th century. U.S. exports to El Salvador reached $2.1 billion in 1999, while El Salvador’s exports to the United States amounted to $1.6 billion. This bilateral trade relationship was a cornerstone of El Salvador’s economic strategy, providing access to a large consumer market and opportunities for Salvadoran producers. U.S. support for El Salvador’s privatization efforts in key sectors such as electricity and telecommunications facilitated expanded opportunities for American investment. The liberalization of these sectors attracted capital and expertise, contributing to the modernization of infrastructure and services. The privatization initiatives were part of broader structural reforms aimed at improving efficiency and competitiveness within the Salvadoran economy. By the late 1990s, over 300 U.S. companies had established a presence in El Salvador, either through permanent operations or representative offices. This significant U.S. corporate footprint reflected the attractiveness of the Salvadoran market and its strategic position within Central America. The presence of these companies contributed to technology transfer, employment generation, and enhanced trade relations. To support U.S. businesses seeking opportunities in El Salvador, the U.S. Department of State maintained a country commercial guide. This resource provided detailed information on the Salvadoran market, regulatory environment, and investment climate, facilitating informed decision-making by American entrepreneurs and investors. The guide exemplified the institutional support underpinning the bilateral economic relationship and efforts to promote mutually beneficial trade and investment.

The electoral defeat of the Nationalist Republican Alliance (ARENA) in 2009 marked a significant turning point in El Salvador’s political landscape. The U.S. Embassy in San Salvador attributed this loss largely to widespread official corruption during the administration of President Antonio Saca, who governed from 2004 to 2009. Corruption scandals under Saca’s leadership eroded public trust in ARENA, becoming a critical factor in the electorate’s rejection of continued governance by the party. This perception of entrenched corruption diminished ARENA’s credibility and opened the door for the leftist Farabundo Martí National Liberation Front (FMLN) to gain power, signaling a shift in both political and economic priorities for the country. Following ARENA’s defeat, the administration of President Mauricio Funes, who took office in 2009, implemented policies aimed at improving El Salvador’s economic environment, particularly in terms of attracting foreign investment. The Funes government sought to enhance regulatory frameworks and promote transparency to create a more investor-friendly climate. Efforts included streamlining bureaucratic procedures and fostering greater engagement with international economic organizations. These initiatives contributed to a gradual improvement in the country’s reputation among foreign investors, signaling a departure from the previous era’s challenges and positioning El Salvador as a more viable destination for capital inflows. In 2014, the World Bank’s annual “Ease of Doing Business” index ranked El Salvador 109th out of 189 economies worldwide. This placement was slightly better than neighboring countries Belize, which ranked 118th, and Nicaragua, at 119th, reflecting modest progress in business environment reforms. The index evaluates factors such as the ease of starting a business, dealing with construction permits, getting electricity, registering property, and paying taxes. Although El Salvador’s ranking indicated ongoing challenges, it demonstrated incremental improvements that distinguished it from some regional peers, suggesting a cautiously optimistic outlook for investors. According to Santander Trade, a Spanish think tank specializing in foreign investment analysis, foreign direct investment (FDI) into El Salvador experienced a steady increase in recent years, with a particularly notable rise in 2013. This upward trend was attributed to a combination of improved economic policies, enhanced political stability under the Funes administration, and increased integration into regional trade agreements. The inflow of FDI was seen as a positive indicator of growing international confidence in the Salvadoran economy, reflecting the country’s efforts to position itself as an attractive destination for multinational corporations and investors seeking opportunities in Central America. Despite these gains, El Salvador continued to receive less foreign direct investment than many of its Central American neighbors. This relative underperformance was largely attributed to limited progress in improving the overall business climate. Investors faced several structural obstacles, including the country’s small domestic market, which constrained the potential scale of operations and consumer demand. Additionally, weak infrastructure, such as inadequate transportation networks and unreliable utilities, hindered efficient business operations and increased costs. Institutional weaknesses, including bureaucratic inefficiencies and inconsistent enforcement of regulations, further complicated investment decisions. High levels of criminality, particularly related to gang violence, also posed significant risks that deterred some foreign investors from committing substantial resources. Nonetheless, El Salvador was recognized as the second most “business friendly” country in South America with regard to business taxation policies. The government maintained relatively competitive corporate tax rates and offered various fiscal incentives designed to attract and retain foreign investment. These tax advantages were complemented by efforts to simplify tax compliance procedures and improve transparency in fiscal administration. As a result, the Salvadoran tax regime was viewed as a comparative strength in the regional investment landscape, providing a tangible benefit to companies considering operations in the country. The nation also benefited from a young and skilled labor force, which was an important asset for foreign investors seeking cost-effective yet capable human capital. El Salvador’s demographic profile included a large proportion of working-age individuals with increasing levels of education and technical training. This workforce was complemented by the country’s strategic geographical position, situated at the crossroads of North and South America and providing access to key markets through well-established trade routes. The combination of labor availability and geographic advantage enhanced El Salvador’s appeal as a base for manufacturing, logistics, and export-oriented industries. Membership in the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) further bolstered El Salvador’s attractiveness to foreign investors by granting preferential access to the United States market, one of the largest consumer markets globally. This trade agreement reduced tariffs and facilitated cross-border commerce, making El Salvador a more competitive location for export-driven enterprises. Additionally, reinforced integration with the C4 countries—comprising the region’s principal cotton producers—was expected to stimulate foreign direct investment inflows by promoting regional economic cooperation and supply chain development. These trade and regional integration initiatives collectively enhanced El Salvador’s prospects for sustained FDI growth. However, foreign companies operating in El Salvador have occasionally resorted to arbitration in international trade tribunals due to disagreements with Salvadoran government policies. Such disputes underscored ongoing tensions between investor interests and state regulatory prerogatives. One notable case involved Italy’s Enel Green Power and its geothermal project investment. In 2008, El Salvador initiated international arbitration against Enel on behalf of its state-owned electric companies, citing issues related to the project’s implementation and contractual obligations. This move reflected the government’s assertive stance in protecting national interests within the energy sector, particularly regarding natural resource management. In response, Enel indicated in 2012 that it would seek arbitration against El Salvador, citing technical problems that had prevented the completion of the geothermal project. The company argued that unforeseen difficulties and government actions had impeded its ability to fulfill contractual commitments. The Salvadoran government, in turn, defended its position by invoking Article 109 of the national constitution, which prohibits the privatization of natural resources, including geothermal energy. This constitutional provision underscored the state’s sovereign authority over strategic resources and framed the dispute within a broader context of national resource sovereignty. The protracted disagreement was ultimately resolved in December 2014 through an undisclosed agreement, following pressure from the International Centre for Settlement of Investment Disputes (ICSID), a Washington-based arbitration institution. The settlement brought an end to the contentious dispute, allowing both parties to move forward while avoiding further legal escalation. This case highlighted the complexities of balancing foreign investment interests with national regulatory frameworks and constitutional protections in El Salvador’s evolving economic environment. A 2008 report by the United Nations Conference on Trade and Development (UNCTAD) provided insight into the ownership structure of El Salvador’s electricity generation sector. The report indicated that approximately one-third of the country’s electricity generation capacity was publicly owned, while the remaining two-thirds were controlled by American and other foreign entities. This distribution of ownership reflected a mixed model of energy sector participation, combining state involvement with significant foreign private investment. The presence of foreign companies in the electricity market underscored the importance of international capital in critical infrastructure sectors, while also exposing the government to potential conflicts over resource management and regulatory oversight. In terms of corruption perception, El Salvador ranked 80th out of 175 countries on the 2014 Corruption Perceptions Index published by Transparency International. This ranking indicated a moderate perception of corruption within the country, suggesting that while corruption was recognized as a problem, it was not perceived as severely as in many other nations. Compared regionally, El Salvador’s rating was relatively better than Panama, which ranked 94th, but worse than Costa Rica, which achieved a significantly higher ranking at 47th. These comparative standings provided context for understanding El Salvador’s governance challenges and the ongoing need for anti-corruption measures to enhance investor confidence and institutional integrity.

In late October 1998, Hurricane Mitch struck El Salvador, bringing with it extreme rainfall that triggered widespread flooding and numerous landslides throughout the country. The intense precipitation caused approximately 650 square kilometers of land to be inundated, severely affecting both urban and rural areas. The Salvadoran Government reported that the disaster resulted in 374 people either dead or missing, highlighting the severe human toll of the hurricane. Additionally, the catastrophe left around 55,900 individuals homeless, displacing a significant portion of the population and straining emergency response resources. The regions most severely impacted by Hurricane Mitch were the low-lying coastal zones, particularly those situated within the floodplains of the Lempa and San Miguel Grande Rivers. These areas, characterized by their proximity to major waterways and relatively flat terrain, were especially vulnerable to the storm’s flooding. The hurricane’s force was strong enough to sweep away three major bridges spanning the Lempa River, a critical transportation artery. The destruction of these bridges effectively restricted access to the eastern third of El Salvador, isolating numerous communities and necessitating emergency evacuations to safeguard residents from further harm. The heavy rainfall and subsequent flooding also caused extensive damage to the country’s road infrastructure. Beyond the three bridges lost over the Lempa River, an additional twelve bridges were either destroyed or severely damaged, disrupting transportation and complicating relief efforts. The widespread mudslides and floodwaters undermined roadways and cut off vital supply routes, hampering the movement of goods and emergency services across the affected regions. This infrastructural devastation underscored the vulnerability of El Salvador’s transportation network to natural disasters and highlighted the challenges faced in post-disaster recovery. Agriculture, a cornerstone of El Salvador’s economy, was the sector most severely impacted by Hurricane Mitch. Nearly 18% of the 1998–99 basic grain harvest was lost due to the storm’s destructive effects, representing a significant blow to food security and rural livelihoods. Coffee production, another vital agricultural activity, also suffered notable losses. Approximately 3% of the coffee harvest was destroyed by Mitch, compounding an earlier 8.2% loss earlier in the year attributed to El Niño-related weather disturbances. The combined impact of these events placed considerable strain on the coffee industry, a key export sector for the country. Sugarcane production in coastal regions was similarly affected, with an estimated 9% reduction in the 1998–99 output, further diminishing agricultural productivity. Livestock losses added to the economic damage wrought by the hurricane, with approximately $1 million in value lost due to the death of 2,992 cattle. This loss not only affected farmers’ incomes but also disrupted local food supplies and agricultural production cycles. The Ministry of Health documented a total of 109,038 medical cases related to Hurricane Mitch between 31 October and 18 November 1998. Of these cases, 23% were respiratory infections, reflecting the health challenges posed by the damp and unsanitary conditions following the flooding. Additional health issues included skin ailments, diarrhea, and conjunctivitis, all of which underscored the public health crisis triggered by the hurricane’s aftermath. While reconstruction efforts from Hurricane Mitch were still underway, El Salvador faced another devastating natural disaster in early 2001 when a series of powerful earthquakes struck the country. These seismic events resulted in nearly 2,000 people dead or missing and caused injuries to approximately 8,000 individuals. The earthquakes led to widespread societal dislocation, with many communities experiencing severe disruption to daily life and economic activities. Nearly 25% of all private homes in El Salvador were either destroyed or severely damaged, leaving an estimated 1.5 million people homeless and in urgent need of shelter and assistance. The earthquakes also inflicted significant damage on public infrastructure. Numerous public buildings were either damaged or completely destroyed, further complicating recovery efforts and the provision of essential services. Sanitation and water systems in many communities were rendered inoperative, raising concerns about waterborne diseases and public health in the disaster’s aftermath. The total economic damage from the earthquakes was estimated to be between $1.5 billion and $2 billion, with the scale of destruction comparable to or exceeding that of the 1986 San Salvador earthquake, one of the most catastrophic seismic events in the country’s recent history. The scale of the earthquake disaster prompted a significant international response, involving a wide array of governments, non-governmental organizations (NGOs), and private citizens. Sixteen foreign governments, including the United States, mobilized aid efforts alongside 19 international NGOs, 20 Salvadoran embassies and consulates, and 20 private firms and individuals who provided in-kind assistance to support the country’s recovery. The Salvadoran Government received a total of 961 tons of goods and food aid, which played a critical role in addressing immediate humanitarian needs. Financial contributions also formed a crucial component of the international response. The Ministry of Foreign Affairs estimated that cash donations made directly to the Salvadoran Government totaled $4.3 million. The United States Government emerged as a leading donor, contributing $37.7 million in assistance through various agencies, including the United States Agency for International Development (USAID) and the Departments of Agriculture and Defense. Following the earthquakes, the U.S. embassy took a leading role in coordinating aid efforts, with military helicopters conducting rescue operations, delivering emergency supplies, and deploying rescue workers and damage assessment teams across the country. USAID’s Office of Foreign Disaster Assistance deployed a team of experts immediately after both earthquakes, providing more than $14 million in aid to support relief and recovery activities. The U.S. Department of Defense also contributed an initial response valued at over $11 million, underscoring the multifaceted nature of the aid provided. Overall, the international community offered a total aid package of approximately $1.3 billion for long-term reconstruction efforts, with the United States alone contributing over $110 million. This extensive support was instrumental in facilitating El Salvador’s recovery from the twin disasters of Hurricane Mitch and the 2001 earthquakes, addressing both immediate humanitarian needs and longer-term rebuilding challenges.

El Salvador’s macroeconomic trends from 1980 through 2024 reveal a complex trajectory marked by periods of contraction, recovery, steady growth, and occasional recessions, as reflected in key economic indicators such as gross domestic product (GDP), GDP per capita, nominal GDP, real GDP growth rates, inflation, and government debt as a percentage of GDP. A comprehensive examination of these indicators over this 44-year span highlights the dynamic economic environment the country has navigated, shaped by both internal policies and external shocks. In 1980, El Salvador’s economy was valued at approximately 11.2 billion US dollars in purchasing power parity (PPP) terms, with a GDP per capita of 2,305 US dollars PPP and a nominal GDP of 3.9 billion US dollars. This year was characterized by a significant economic contraction, as the real GDP declined sharply by 8.6%. Concurrently, inflation was notably high at 17.4%, reflecting the economic instability during this period. The early 1980s were marked by continued challenges, with the economy showing only modest signs of stabilization. In 1981 and 1982, GDP in PPP terms increased slightly to 11.5 billion US dollars, but the real GDP growth rates remained negative, at -5.7% and -6.3% respectively. Inflation rates during these years, while somewhat lower than in 1980, remained elevated at 14.8% in 1981 and 11.7% in 1982, indicating persistent inflationary pressures amid economic contraction. The year 1983 marked a turning point as the economy began to recover, achieving a positive real GDP growth rate of 1.5%. GDP in PPP terms rose to 12.1 billion US dollars, and inflation was recorded at 13.1%. This gradual recovery continued through the mid-1980s, with GDP increasing to 13.2 billion US dollars PPP in 1985 and further to 13.5 billion in 1986. However, inflation exhibited volatility during this period, peaking at 31.9% in 1986, which underscored ongoing macroeconomic challenges despite the growth in output. The late 1980s saw slight improvements in economic performance. In 1987, real GDP growth accelerated to 2.5%, with GDP reaching 14.2 billion US dollars PPP. Inflation, although still high, decreased to 24.8%, signaling some progress in stabilizing prices. By 1989, GDP had expanded further to 15.7 billion US dollars PPP, and inflation declined to 17.7%, reflecting a gradual easing of inflationary pressures as the economy continued its recovery trajectory. The 1990s represented a period of more sustained economic growth for El Salvador. GDP increased from 17.0 billion US dollars PPP in 1990 to 24.9 billion in 1996, while GDP per capita rose from 3,155 to 4,294 US dollars PPP during the same timeframe. This growth was accompanied by improvements in fiscal management, as government debt as a percentage of GDP decreased from 43% in 1991 to 28% by 1996. These trends suggested enhanced macroeconomic stability and a strengthening economic base, which facilitated increased per capita income and reduced fiscal vulnerability. The early 2000s continued this positive momentum, with GDP reaching 30.0 billion US dollars PPP in 2001 and peaking at 37.8 billion in 2006. Inflation rates during this period were generally low, often remaining below 5%, with the exception of 2004 when inflation was recorded at 4.5%. This relatively stable inflation environment supported steady economic expansion and improved living standards. From 2007 onward, El Salvador’s GDP growth remained relatively steady, with GDP in PPP terms reaching 55.7 billion US dollars by 2017. Correspondingly, GDP per capita approached 8,889 US dollars PPP, indicating continued improvements in individual income levels. Inflation rates stayed low during this period, mostly under 2%, although there were occasional spikes such as the 7.3% inflation recorded in 2008, which was likely influenced by global economic factors including the financial crisis. The year 2009 was marked by a recession, with the economy contracting by 2.1%. GDP in PPP terms dropped to 40.5 billion US dollars, inflation remained minimal at 0.5%, and government debt increased significantly to 66% of GDP. This downturn reflected the broader global economic crisis and its impact on El Salvador’s economic performance. Following the recession, the economy rebounded strongly. By 2011, GDP in PPP terms had recovered to 44.4 billion US dollars, with a real GDP growth rate of 3.8%. Government debt stabilized around 66% of GDP, indicating improved fiscal conditions relative to the recession period. Between 2012 and 2014, GDP continued to grow, reaching 50.0 billion US dollars in 2014. Inflation remained low, hovering around 1%, while government debt increased slightly to approximately 72% of GDP. This period was characterized by steady economic expansion and manageable inflationary pressures, though rising government debt signaled growing fiscal challenges. The years from 2015 to 2019 witnessed consistent economic growth. GDP in PPP terms rose from 51.7 billion in 2015 to 60.7 billion in 2019, while GDP per capita increased from 8,297 to 9,667 US dollars PPP. Inflation remained mostly under 2% throughout this period, with a notable low of 0.1% recorded in 2019, indicating a stable price environment conducive to economic growth. However, in 2020, the economy contracted sharply by 7.9%, with GDP in PPP terms decreasing to 58.6 billion US dollars. Inflation turned negative at -0.4%, reflecting deflationary pressures amid the economic impact of the COVID-19 pandemic. Government debt surged to 95% of GDP, highlighting the fiscal strain imposed by the crisis and the government’s response measures. The economic recovery following the 2020 downturn was pronounced. In 2021, GDP in PPP terms increased substantially to 67.6 billion US dollars, with GDP per capita rising to 10,710 US dollars PPP. Real GDP growth rebounded strongly at 11.9%, while inflation was recorded at 3.5%. Government debt decreased slightly to 88% of GDP, suggesting improved fiscal conditions as the economy regained momentum. From 2022 to 2024, El Salvador’s economy continued its upward trajectory. GDP in PPP terms reached 74.5 billion in 2022, 79.9 billion in 2023, and 84.2 billion in 2024. Correspondingly, GDP per capita rose to 11,753, 12,547, and 13,173 US dollars PPP in these respective years. Real GDP growth rates during this period ranged from 2.8% in 2022 to 3.5% in 2023, and 3.0% in 2024. Inflation rates stabilized at relatively low levels, decreasing from 7.2% in 2022 to 1.0% in 2024, reflecting effective inflation management amid ongoing growth. Government debt as a percentage of GDP exhibited notable fluctuations over the decades. During the early 2000s, debt levels increased significantly, reaching 70% of GDP by 2012. In the subsequent years, government debt stabilized around 85% of GDP in 2023 and 2024. This elevated debt ratio highlights ongoing fiscal challenges faced by El Salvador, despite the overall positive trends in economic growth and inflation control. The interplay of these macroeconomic indicators over time provides a detailed picture of El Salvador’s economic evolution, encompassing periods of hardship, recovery, and sustained expansion.