El Salvador is a small, dollarized economy with a population of 6.3 million people closely tied to the U.S. through trade and remittances. Between 2000 and 2023, Gross Domestic Product (GDP) grew at an average annual rate of 2.1 percent. During the same period, official poverty declined by 14 percentage points. Furthermore, with a GINI coefficient of 38.8 in 2022, inequality remained among the lowest in the region.
However, and despite a full recovery from the COVID-19 pandemic, with growth reaching 3.5 percent in 2023, poverty has since increased from 26.8% in 2019 to 30.3% of the population in 2023. Furthermore, around 10 percent of the population is now estimated to be living in extreme poverty compared to just over 5% in 2019.
Recent growth, which is expected to moderate to 2.9 percent in 2024, has been driven primarily by public investment, exports, and private consumption, supported by increased foreign demand, higher remittances, and improved business environment perceptions. Additionally, since 2022, strict security measures have significantly reduced crime and gang violence, which contributed to above-average growth and potentially higher-quality job creation. However, sustaining this momentum is challenged by ongoing structural obstacles, including systemic deficiencies in public service quality, a high debt burden, and increased vulnerability to natural disasters.
These factors depress productivity, hinder human capital development, and limit labor market integration, particularly for women. Despite progress in women’s economic empowerment, significant gaps remain. In 2023, the labor force participation rate among females was 46.1% compared to 76.5% for males. Data from Findex shows that while 36 percent of adults in El Salvador have a bank account, only 29 percent of women have access to one.
While stronger economic activity boosted government revenues by 6.8 percent in 2023, higher government spending (12.3 percent rise) increased the fiscal deficit to 4.7 percent of GDP. Public debt peaked at 84.9 percent of GDP and sovereign spreads remained high, with limited financing options. Since 2021 authorities have been working on successfully negotiating an IMF program to help address these fiscal challenges. At the same time, perceptions around overall governance and quality of institutions have declined since 2016 and remain at levels below the regional average.
To enhance productivity, attract Foreign Direct Investment (FDI), diversify the economy, and further reduce poverty and inequality, comprehensive reforms are needed to address inefficiencies in labor markets, enhance poor skills acquisition, particularly among women and vulnerable groups, and improve infrastructure and resilience to climate change and other potential natural disasters. This will be key to reducing overall risk perceptions about institutional capacity and the economy’s long term growth potential as well as its ability to consolidate gains in terms of reducing poverty and inequality.
Last Updated: Oct 18, 2024
