ElSalvador WT/TPR/S/23
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I. THE ECONOMIC AND TRADE ENVIRONMENT1
(1) Major Features oftheEconomy
1. ElSalvador islocated onthePacific coast ofCentral America, Guatemala liestothenorth,
Honduras totheeastandNicaragua tothesouth; thecountry hasnoaccess totheAtlantic coast.
Ithasanareaof21,000 km2.In1995, population amounted toabout 5.8million; withanaverage
growth rateof2.2percentduring 1990-1995 (Table I.1).2
Table I.1
Basic economic andsocial indicators, 1970-95
1970 1985 1990 1991 1992 1993 1994 1995
Population (thousands) 3,588.0 4,739.0 5,172.0 5,278.0 5,380.0 5,479.0 5,641.0 5,768.0
Urban population (%oftotal) 39.4 42.7 44.4 44.9 45.3 45.8 45.0 46.2
Total labour force (thousands) 1,653.0 983.0 1,952.0 1,933.0 2,002.0 2,113.0 2,136.0
Labor force, female (%) 20.4 25.1 25.1 25.1 25.2 25.2 33.0 ...
Total fertility rate
(births perwoman)6.3 ... ... ... 3.8 4.0 3.8 ...
Infant mortality rate
(perthous. livebirths)103.4 ... ... ... 46.0 45.0 42.0 56.0
Lifeexpectancy atbirth(years) 57.6 ... ... ... 66.3 67.0 67.0 64.0
GDP (1987, US$million)
-GDP atmarket prices 3,559.3 4,458.3 4,906.1 5,097.5 5,324.1 5,595.5 6,020.8 9,710.0
-GDP percapita 992.0 940.8 948.6 965.8 989.6 1,021.3 1,067.3 1,683.0
Share ofGDP (%)(based oncurrent prices)
-Agriculture 28.4 18.2 11.2 10.2 9.4 8.6 14.0 ...
-Industry 23.3 21.9 23.3 23.9 24.2 25.0 24.0 ...
-Manufactures 18.8 16.4 18.6 18.7 18.8 19.0 ... ...
-Services 48.2 59.9 65.5 65.9 66.4 66.5 62.0 ...
Annual growth rateaverage (%)
-Agriculture ... -2.5 7.4 -0.1 9.0 0.5 3.0 3.7
-Industry ... -2.2 1.1 5.9 1.4 4.3 5.3 7.0
-Manufactures ... -2.5 3.0 4.9 6.0 7.8 ... ...
-Services ... -1.5 2.8 4.0 5.5 7.6 7.3 6.3
Share inemployment (%)
-Agriculture ... ... 7.4 35.8 34.8 32.9 28.0 27.0
-Industry ... ... 23.0 18.1 18.0 19.0 20.1 19.7
-Services ... ... 69.6 46.0 47.2 48.1 51.9 53.3
Unemployment
-Total ... 17.0 10.0 8.7 9.3 9.9 7.7 7.7
-Urban ... 17.7 10.0 7.9 8.2 8.1 7.0 7.0
-Rural ... 16.1 ... 9.7 10.6 12.0 8.7 8.6
Table I.1(cont'd)
1Data usedinthisChapter were themost recent available atthetimeofcompletion ofdrafting ofthisreport
inSeptember 1996.
2World Bank (1996).WT/TPR/S/23
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1970 1985 1990 1991 1992 1993 1994 1995
School enrollment ratios (%)
-Primary school enrollment
ratio85 ... ... 76 78 88.7 ... 73
-Primary school enrollment
ratio, female83 ... ... 77 79 80 ... ...
-Secondary school enrollment
ratio22 ... ... 25 ... ... ... ...
... Notavailable.
Source: World Bank, World Tables, 1993, (STARS, version 2.5); Ministry ofExternal Relations; World Development Report (1996);
andtheInter-American Development Bank.
2. ElSalvador isoneofthemost densely populated countries intheWestern Hemisphere, so
thatlabour isabundant relative tolandandcapital. Despite thecountry 'stropical location, ElSalvador
isnotendowed withregular rainfall, orwithsuitable landforcertain crops. Nevertheless, exports
oftraditional agricultural goods suchascoffee andsugar areimportant. However, other sectors, such
asthetextile industry, havegained inimportance, benefiting fromtheavailability oflabour andexport
promotion régimes (Chapter III(3)). ElSalvador hasnotyetfullyexploited itsocean resources; today
theonlymarine product thatisbeing exploited inanymajor wayisshrimp (Chapter IV).
3. ElSalvador isamiddle-income country; in1994 GDP amounted toUS$6,020 million.
Percapita GDPamounted tosomeUS$1,067 in1994, having grown ofatanaverage rateof2.2percent
during 1985-1994.3Since 1990, following theendoftenyears ofarmed conflict andasaresult of
major economic reforms, realGDP hasbeen growing steadily, withrealgrowth reaching almost
6percentin1994(Chart I.1).More Central Bank dataindicate thattherealGDPgrewat6.1percent
during 1995. Despite thisrobust performance, theauthorities consider thatevenhigher ratesofgrowth
areneeded toconsolidate peace andtoalleviate poverty. Irrespective, theserespectable ratesofgrowth
already seem tohavetranslated intoageneral improvement inthewell-being ofthepopulation. For
instance, lifeexpectancy increased from62years in1987to67years in1994; infant mortality decreased
from103children perthousand livebirths in1970to50in1987, andcontinued declining to42deaths
perthousand livebirths in1994.4However, thetrickle-down effects ofprosperity havenotyetbeen
feltwidely since access tosome basic services suchashealth services, secondary education, safewater
andsanitation seems tobelimited.5There isaperceived needtoincrease investment inhuman capital.
3World Bank (1996).
4World Bank (1996).
5UNDP (1996).ElSalvador WT/TPR/S/23
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4. Traditionally, ElSalvador hasbeenconsidered anagricultural country. However, since 1970
thecontribution ofservices toGDP hasbeengreater thanthatofagriculture, while theimportance
ofthemanufacturing sector hasalsobeenincreasing. In1990, thecontribution ofagriculture toGDP
wasonly17percent, andthisdeclined tosome 15percentin1995 (Chart I.2). Thelowgrowth
inagricultural activity canbepartly attributed tothedeleterious effect ofthearmed conflict inthe
ruralareas, which ledtowidespread disinvestment. Theagrarian reform ofthebeginning ofthe1980s,
contrary toexpectations, alsoseems tohavehadanegative impact onagriculture; anewreform, begun
in1992, isstarting toreactivate agricultural production (Chapter IV(2)). Thehigher growth ofthe
manufacturingsectorispartlyrelatedtothegrowthofproductionforexportunderthereformprogramme
(discussed below), inparticular theproduction ofclothing, which ismainly produced inthefreezones
forexport totheUnited States. Thisdevelopment ofexports, which isrelatively newinElSalvador,
hasbenefited from theabundant supply oflabour, thecountry 'sproximity totheUnited States and
trading arrangements inthesector (Chapter IV(3)).
5. Table I.2shows theimportance oftheinformal sector which gained importance inElSalvador
during thearmed conflict. Thissector isreceiving particular attention intheauthorities 'general
campaign against taxevasion andtheenforcement oftheLawtoPromote andProtect Intellectual
Property Rights (LeydeFomento yProtección alaPropiedad Intelectual )(Chapter III(4)).WT/TPR/S/23
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Table I.2
Relative shares oftheformal andinformal sectors inproductive activities, 1989 and1994
(Percent)
Activity 1989 1994
Formal Informal Formal Informal
Agriculture 50.4 49.6 32.8 67.2
Mining 100.0 0.0 71.5 28.5
Industry 52.5 47.5 52.5 47.5
Electricity 95.0 5.0 100.0 0.0
Construction 51.4 48.6 55.0 45.0
Commerce 22.1 77.9 29.4 70.6
Transport 41.2 58.8 46.3 53.7
Financial Institutions 93.3 6.7 96.3 3.7
Services 74.34 25.7 73.6 26.4
Source: Government ofElSalvador.
6. Interms ofemployment, themost important sector istheservices sector, which in1995
employed morethan50percentofthetotallabour force(2.1million workers), followed byagriculture
andmanufacturing. Despite thedecline inagricultural activity, almost 30percentofthelabour forceElSalvador WT/TPR/S/23
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isengaged inagriculture, since some ofthenon-traditional crops arelabour intensive (Table I.1).
Therateofregistered unemployment hasbeendecreasing since1992aseconomic activity hasincreased;
in1995 unemployment wasestimated atsome 7.7percent. However, under-employment remains
animportant problem, reaching in1995, 22percent.6
7. International trade isimportant forasmall economy suchasElSalvador, andthishasgrown
further since thechange towards greater outward orientation atthebeginning ofthedecade. Despite
thisre-orientation, theremittances ofSalvadorians living abroad continues tobeamajor source of
foreign exchange forElSalvador. Thecivilwarresulted inamassive emigration ofSalvadorians,
mainly totheUnited States, and,while thiscaused some alleviation ofdomestic population pressures
andresulted inalargeinflow ofprivate remittances, italsoentailed asubstantial lossofhuman capital.
During 1985-1994, remittances amounted toanaverage of90percentoftotalprivate transfers to
ElSalvador.7
8. Theimpact oftheinflow ofremittances ontheSalvadorian economy hasbeenbeneficial both
atthemicro- andmacro-levels, buttheremittances havealsorendered macroeconomic management
somewhat more difficult. First, mostremittances arereceived bypoorurban andruralfamilies, and
provide acritical safety netforthesegroups. However, theseresources areusedmainly forconsumption
andnotforinvestment.8There is,therefore, aneedtodevelop further financial instruments and
institutions tobetter capture theseresources (Chapter IV(4)). Second, while theseprivate capital inflows
havefinanced thecurrent account deficit forseveral years, suchabundant foreign exchange flows have
alsocontributedtoinflationarypressures,realexchangerateappreciationandexternalsectorvulnerability
(seebelow).
9. Major constraints tothedevelopment oftheeconomy arethepoorcondition ofinfrastructure
andtheshortage ofaneducated andskilled labour force.9Theavailable infrastructure andthelow
productivity ofthelabour forceundermine theefforts oftheprivate sector tobecome more competitive.
Tosucceed inthenewdevelopment strategy ofexport-led growth, resources needtobeinvested in
infrastructure andhuman capital. Inconsequence, expenditure hasbeenre-directed towards theseareas
since theendofthewarandtheprocess ofprivatization ofsome State-owned institutions hasbeen
initiated.
(2) Recent Economic Developments
(i) Thereform programme
10. Theeconomic reform programme started in1989, prior totheconclusion ofthecivilwar,
andincluded amacroeconomic stabilization package andradical structural reforms, which arestillbeing
implemented. ThenewGovernment thattookoffice inmid-1994 continued thesame policies, stating
itscommitment tostrong economic growth andlowinflation, while deepening structural reforms,
increasing reliance onthemarket andreducing poverty. Theresults havebeenpositive: financial
imbalances havebeenreduced, economic growth hasresumed andinflation hasdecreased. Therate
6Data supplied bytheGovernment ofElSalvador.
7Secretariat calculations using World Bank data.
8World Bank (1995).
9These deficiencies were identified inWorld Bank (1995).WT/TPR/S/23
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ofgrowth ofrealGDPhasincreased from1percentin1989to6.2percentin1994, while inflation
hasfallen from17.5percentto10percentinthesameperiod (Table 1.3). More recent dataprovided
bytheauthorities show thatthegrowth ratereached 6.1percentin1995 while inflation increased
to11.4percentinthatyear.
11. Themacroeconomic reforms covered fiscal, monetary andexchange ratepolicy. Thefiscal
reform aimed atrationalizing government expenditure andincreasing taxcollection. Monetary policy
aimedatcontrollinginflation,whileexchangeratepolicyaimedatmaintainingastablenominalexchange
rate.Atthesametime, reforms regarding thefinancial andforeign exchange markets included: (i)the
unification oftheexchange rateandtheelimination ofexchange controls; (ii)theliberalization of
interest ratesandelimination ofcredit rationing; (iii)theprivatization ofbanks andother financial
institutions; and(iv)theopening upofforeign exchange houses.
12. Trade reform hasalsotaken place sothatmostnon-tariff barriers havebeeneliminated; tariffs
havebeenreduced fromanaverage of20.4percentin1989to10.1percenttoday. Tariff rates, which
today generally range from 5to20percent(with exceptions), aretobereduced toarange of0to
15by1999 (Chapter III).
Table I.3
Economic performance, 1985-94
(Percent)
1985 1989 1990 1991 1992 1993 1994
Annual rates ofrealgrowth
GNP anddomestic absorption
Gross national product -1.7 1.4 3.3 3.9 5.3 5.4 8.3
GDP atmarket prices -1.8 1.0 3.0 3.9 4.4 5.1 6.2
Private consumption, etc. -1.9 1.6 2.3 2.5 2.5 4.2 10.6
General gov'tconsumption 3.1 -1.2 0.9 4.4 0.2 -1.5 -14.9
Gross domestic investment -5.1 26.1 -29.2 22.5 25.5 6.0 10.0
Fixed investment -3.5 9.0 -17.3 18.9 24.1 10.3 10.3
Resource balance
-Exports ofgoods &NFservices -5.0 -13.5 44.1 -1.6 11.2 14.4 0.9
-Imports ofgoods &NFservices -4.1 6.1 0.4 4.2 13.1 6.8 6.0
Competitiveness indicators (change)
-GDP deflator 20.2 16.6 23.7 12.0 9.9 14.9 7.7
-Consumer price index 23.0 17.5 24.1 14.3 11.0 18.9 10.2
Monetary survey
-Money plusquasi-money (M2) 16.0 11.1 -18.0 20.3 14.3 33.6 23.4
-Money asmeans ofpayment (M1) 10.1 12.5 -23.3 16.6 13.7 23.8 5.1
Percent
Interest rates
Deposit rate 12.50 16.25 18.00 16.11 11.51 15.27 13.57
Lending rate 14.00 18.50 21.17 19.67 16.43 19.42 19.03
Table I.3(cont'd)ElSalvador WT/TPR/S/23
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1985 1989 1990 1991 1992 1993 1994
Share ofGDP
Private consumption, etc. 81.2 82.9 88.0 87.5 89.0 88.5 86.8
General gov'tconsumption 15.5 12.2 11.3 11.0 10.6 9.7 9.4
Gross domestic investment 10.8 15.3 11.8 13.8 16.2 16.3 17.8
Fixed investment 12.0 13.3 11.8 13.5 15.7 16.2 17.7
Gross domestic saving 3.3 4.9 0.7 1.5 0.5 1.8 3.8
Fiscal balance
Government current revenue ... 11.6 12.4 13.0 13.6 13.7 15.2
Government current expenditure ... 13.4 12.8 13.8 13.4 13.0 13.3
Government capital expenditure ... 4.9 2.5 4.1 6.7 4.6 4.3
Overall balance (-Deficit) ... -4.7 -0.4 -2.8 -4.6 -1.6 -0.6
... Notavailable.
Note: GDP andcomponants at1987 prices. Growth ratefor1985 calculated withdatafrom 1980-1985.
Source: World Bank, World Tables, (STARS, version 2.5). Fiscal balance datafrom Inter-American Development Bank.
(ii) Supply anddemand
13. After aslowdown intheeconomy during thelate1970s andtheearly 1980s theSalvadorian
economy started torecuperate, showing animportant acceleration inthegrowth rateofGDPafter1990.
Higher growth canbeattributed tothemacro-reforms undertaken in1989andtothesubsequent Peace
Accords. Asshown inChart 1.3,growth wasmainly ledbytheservices sector, associated witha
construction boom afterthewar.
14. Private consumption hasconsistently beenthemajor component ofdemand, which hasmarkedly
increased since1989following years ofrepressed demand during thewarandstimulated byhighinflows
ofremittances. Thecontribution ofnetexports todemand hastraditionally beeneither negative or
negligible. Thispattern seems tobecontinuing, despite efforts made bytheGovernment topromote
exports (Chapter III(3)). Thecontribution ofinvestment andgovernment consumption hasbeenpositive
butminor relative toconsumer demand.
15. Bothsavings andinvestment declined asapercentage ofGDP during thewar,andhaveyet
torecover topre-war levels. After asharp decline in1979(thestartofthewar), therateofinvestment
wasstable during the1980s andhasbeenshowing anupward trend since thebeginning ofthe1990
(Chart I.3).However, therateofsavings hasshowed amoreerratic pattern, and,sincetheearly1990s,
hasremained insingle digits (Table I.3). These lowlevels ofdomestic savings seem insufficient to
finance theinvestment required tocontinue thereconstruction oftheeconomy andthedevelopment
ofhuman capital.10
10ElSalvador hasrelied onexternal aidtofinance growth andadditional resources areneeded tomeet the
commitments ofthePeace Accords. Theexpected reduction ofexternal financial support means thatthere is
aneed relymore ondomestic savings tofinance these expenditures.WT/TPR/S/23
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ElSalvador WT/TPR/S/23
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(iii) Public finances
16. There hasbeenaclearimprovement infiscal performance, mainly attributed tothereforms
of1989, withacontinued decline inthefiscal deficit from4.7percentofGDP in1989, tolessthan
1percentin1994 (Table I.3); according totheauthorities thedeficit declined further in1996 and
isclose tobeing inbalance. Thispositive performance hascontributed tomacroeconomic stability
andreduced inflationary pressures.
17. Thefiscal reforms include ataxreform, thereduction andre-direction ofexpenditures and
themodernization oftheState. Thus, theauthorities haveindicated thatthereduction inthedeficit
wascaused byanincrease inthetaxcollection aswellasadecrease inexpenditure. Receipts ofofficial
development assistance andmedium- andlong-term credits havealsocontributed toreduce thefiscal
deficit.
18. Thetaxreform, which began in1989, simplified thetaxsystem sothatonlyafewuniversal
taxes remain inplace. Themain elements ofthereform were: (i)theelimination oftaxandduty
exemptions; (ii)thesimplification anddecrease ofincome tax;(iii)theelimination ofexport taxes;
(iv)theelimination ofthepatrimony andinheritance tax;(v)thereduction oftariffrates; and(vi)the
substitution, in1992, ofthestamp taxbyavalue-added tax(VAT). In1992, theonlyremaining taxes
were theVAT, some specific taxes oncigarettes andliquor11,income taxandimport duties.
19. TheVAT isauniversal taxof13percentforalldutiable goods andzeropercentforexports,
except thatbasicgoods andsome services areexempt fromthistax.12In1995, theVAT wasincreased
from 10to13percent, contributing tothedecrease inthefiscal deficit. While thishadanegative
effect ontherateofinflation in1995, theauthorities indicated thatinflation isstable andsubject to
adeclining trend.
20. Thestructure oftaxrevenues haschanged substantially inrecent years (Table I.4). First, the
collection ofimport duties hasincreased since1989despite thereduction intariffs. Thiscanbeattributed
totheelimination ofnon-tariff restrictions toimports, thebetter collection ofduties andareduction
insmuggling. Second, VAT hasnowbecame themajor source ofrevenues. Theauthorities stated
thattaxevasion wasstillaproblem despite theefforts made toenforce payment oftaxcollection.13
11These specific taxes arelevied onbothdomestically produced andimported products. Forimported goods
thetaxislevied upon thec.i.f. value plusthetariff.
12Exemptions include: beans, rice, maize, andmilk; medicines; andservices suchashealth, education,
public transport, financial services, electricity, water andsewerage services.
13AFiscal Crime Law, approved onJune1995, amends theCriminal Code (Código Penal )andtheCriminal
Procedures Code (Código deProcedimiento Penal )inmatters regarding taxevasion.WT/TPR/S/23
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Table I.4
Central Government current revenue, 1986-94
(US$ million; andpercent)
1986 1987 1988 1989 1990 1991 1992 1993 1994
Current revenue
(US$ million)574.1 541.5 554.0 518.8 414.7 526.3 568.1 783.4 993.0
Percentage
(a)Total taxrevenue 89.9 93.0 91.4 94.7 96.1 95.4 93.7 93.4 90.0
Taxes onincome 15.1 20.7 20.2 22.4 21.8 22.6 20.4 18.5 20.7
Taxes onwealth 2.0 4.0 4.3 4.6 3.8 4.0 3.2 2.2 2.0
Taxes ontransfer of
properties1.2 1.6 2.1 2.2 2.2 2.3 2.9 1.5 1.5
Taxes onexports 33.6 16.4 13.6 5.1 7.7 5.2 0.5 0.1 0.0
ofwhich coffee 33.3 15.9 13.3 4.8 7.6 5.2 0.5 0.1 0.0
Taxes onimports 7.1 9.6 7.7 12.1 14.0 15.1 16.3 14.5 14.5
Consumption
taxes9.7 12.2 15.6 16.6 14.3 13.3 11.3 8.5 7.0
Taxes onservices 1.4 1.9 1.8 1.6 1.5 1.5 1.1 0.6 0.8
Stamp tax 19.2 26.0 25.5 29.5 30.2 30.8 24.6 3.1 2.1
Value-added tax 0.0 0.0 0.0 0.0 0.0 0.0 13.0 42.4 39.9
Other taxes 0.6 0.7 0.4 0.8 0.7 0.7 0.4 1.9 1.5
(b)Non-tax revenue 10.1 7.0 8.6 5.3 3.9 4.6 6.3 6.6 10.0
Source: Government ofElSalvador.
21. Themodernization oftheState should havereduced fiscal expenditure byreducing thesize
ofthepublic sector andbymaking itmore efficient.14Indeed there wasaninitial reduction infiscal
expenditure in1989, caused byareduction ininvestment ininfrastructure andsocial spending rather
thanadecrease incurrent expenditure (i.e., salaries andwages). Current expenditure hasbeenfairly
stable since 1989, while revenues haverisenandthedeficit hasfallen. More recent datasuggest that
thefiscal deficit hasbeenpractically eliminated in1995 (Table I.3).
22. TheGovernment goalistore-direct expenditure towards education, housing, andbasic health
services, increasing expenditure inhuman capital to50percentofthetotalbudget. However, tomeet
these social goals while decreasing thereliance onforeign resources, there isneedtoincrease public
savings byenforcing compliance oftaxpayments, andbycontinuing themodernization ofthepublic
sector toimprove efficiency andreduce other current expenditure oftheGovernment.
(iv) Monetary policy
23. Thereform ofthefinancial sector included theprivatization ofbanks, andother financial
institutions andstrengthening ofbanksupervision, theliberalization oftheinterest ratesandcredit
allocation, andtheelimination ofexchange ratecontrols. TheCentral Reserve Bank (Banco Central
14Themodernization ofthepublic sector includes decentralization, privatization, revision oftheregulatory
framework, reform ofthepension system andprocurement.ElSalvador WT/TPR/S/23
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deReserva ,BCR) hasbeengiven greater autonomy. Today, therôleoftheBCRispurely monetary,
concentrating oncontrolling inflation andmanaging theexchange rate,while itsposition asaprovider
ofcredit bothtothepublic andprivate sector hasbecome negligible. TheBCRbylawisnotallowed
tofinance thepublic sector andfinancing totheprivate sector hasbeenreduced onlytoalimited number
ofactivities.
24. Thetwomainobjectives oftheBCRhavebeentomaintain astable inflation rateandastable
nominal exchange rateinviewofhighforeign exchange flows (i.e.,workers remittances), which have
putpressure bothoninflation andtheexchange rate. Open market operations arethemain policy
instrument.
25. TheBCR hasbeenlargely successful inbringing down inflation from24percentin1990 to
10percentin1994. However, in1995, despite restrictive monetary policies, inflation increased to
11percent; thisincrease seems toberelated totheriseintheVAT rateto13percent. Given the
targeting ofnominal exchange ratestability, itisimportant toachieve further reduction intherate
ofinflation toaratecomparable withthatofElSalvador 'smajor trading partners, otherwise thereal
exchange ratewillriseandthecompetitiveness ofthecountry 'sexports willsuffer.
26. TheBCR setbothdeposit andlending interest rates upto1990 when interest rates were
progressively liberalized, andtoday interest ratesaresetbythemarket, withveryfewlinesofcredit
being subsidized.15Once interest rateswerede-controlled, credit controls werealsoeliminated. The
Central Bank stopped allocating credit byeconomic activity andtransferred theprovision ofmedium-
andlong-term credit totheprivate financial institutions.
27. Thesterilization policies aimed atcontaining monetary expansion andmaintaining astable
nominal exchange ratehaveputpressure oninterest rates. Bothnominal lending anddeposit rates
haveremained wellabove 10percent,asshown inTable I.3.According totheauthorities, interest
ratesincreased further aftermid-1995, butdecreased in1996. Thecontinuing reform ofthefinancial
system should further reduce interest rates(Chapter V(4)). Inaddition, improved banking supervision
would reduce risk,which should alsocontribute tothereduction ofinterest rates.
(v) Exchange ratedevelopments
28. During 1981-1985 ElSalvador hadthree foreign exchange markets, theofficial market, the
parallel market andtheimportant black market (mercado extrabancario ),where mostremittances were
exchanged. In1986, theparallel andtheofficial market wereunified, while theblack market continued
toexist. However, thespread between theofficial exchange rateandthatsetontheblack market
increased, anditbecame more difficult toenforce exchange ratecontrols. Thus, in1989thereforms
oftheforeign exchange market included: (i)theunification oftheexchange rate; (ii)theelimination
ofexchange ratecontrols; (iii)theliberalization ofthecapital account (1991); and(iv)theopening
upofexchange houses.16
15According totheauthorities, subsidized credit remains available onlyforeducation, reconstruction ofthe
easternpart(zonaoriental)ofthecountryandareasaffectedbytheearthquakeof1986,andenvironmentalprojects
such asre-afforestation.
16Ramírez (1993).WT/TPR/S/23
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29. Since thereforms, ElSalvador hasadopted aflexible exchange régime. However, the
Government 'sgoalistomaintain nominal exchange ratestability, withtheCentral Reserve Bank
intervening when required tomaintain thistarget.
30. Chart I.4shows thattherealeffective exchange ratehasbeenappreciating since 1990. This
hasledtocomplaints fromexporters whoconsider thattheofficial exchange ratepolicy undermines
theircompetitiveness. However, producers ofmanufactured goods, whorelyheavily onimported
inputs,claimthatadevaluationwouldbedamagingtotheindustrialsector,particularlysincecompetition
inthesector hasincreased asaresult oftariff reductions.17
(vi) Balance ofpayments
31. Thecurrent account inElSalvador hasrunadeficit forseveral years; themerchandise trade
balance hasbeenindeficit, while theservices trade balance hasshifted between deficit andsurplus
(Table I.5). Growth inbothexports andimports resumed afterthewarinlinewitheconomic activity,
butimports havegrown atafaster ratethanexports. In1995, imports increased faster thantheaverage,
since importers, anticipating theincrease intheVAT, accumulated inventories; theincrease caused
thecurrent account toreach adeficit ofUS$275.6 million.
17However,arealdepreciationofthecurrencyshoulddiscourageimportsoffinalgoods,curtailingcompetition.ElSalvador WT/TPR/S/23
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Table I.5
External performance, 1989-95
(US$ million)
1989 1990 1991 1992 1993 1994 1995
Merchandise trade balance -654.5 -682.2 -818.0 -990.3 -1,056.2 -1,324.7 -1,691.1
Exports f.o.b. 497.5 580.2 588.0 597.5 731.7 1,249.3 1,661.3
Imports f.o.b. 1,152.0 1,262.4 1,406.0 1,587.8 1,787.9 2,394.6 3,118.7
Services netbalance -39.2 -23.0 -21.1 15.1 -211.8 21.6 26.0
Non-factor services balance 25.7 36.7 34.0 35.8 36.0 113.5 121.9
Factor services balance -64.9 -59.7 -55.1 -20.7 -247.8 -91.9 -95.9
Official transfers 282.4 223.2 178.5 226.5 220.3 284.1 194.4
Private transfers 236.8 345.4 542.8 707.9 823.2 1,001.1 1,195.1
Current account balance -174.5 -136.6 -117.8 -151.5 -78.8 -17.9 -275.6
Private capital -125.6 222.8 125.7 85.7 147.9 100.9 225.5
Official capital 150.1 1.1 25.2 161.1 129.8 176.8 123.5
Other capital n.i.e 56.0 -0.8 -84.9 -29.9 -73.4 -116.7 73.2
Capital account balance 80.5 223.1 66.0 216.9 204.3 161.0 422.2
Overall balance -93.0 -86.0 -52.0 65.4 125.5 143.1 146.6
Memorandum items
Terms oftrade (Index 1987=100,
US$based)106 99 100 88 89 ... ...
External debt 2,077.8 2,146.5 2,180.3 2,261.3 2,011.6 ... ...
Foreign exchange reserves 265.9 414.8 287.2 422.1 536.2 649.3 721.2
... Notavailable.
Source: Central Bank; International Monetary Fund; World Bank, World Tables, STARS version; andWTO Secretariat calculations.
32. Exports havealsoincreased, mainly fromthefree-zones andtax-free areas; exports fromthe
zones increased from US$198 million in1992 toUS$656.7 million in1995.18However, traditional
(especially coffee) andnon-traditional exports alsoincreased inthisperiod.
33. Chart I.5shows theimportance ofprivate transfers (ofwhich themajority areremittances)
andofofficial transfers infinancing thecurrent account deficit. Private transfers havebeenincreasing
continuously since theearly 1980s, becoming insome years themost important source offoreign
exchange forElSalvador. Official transfers, although notasabundant, havebeenastable source of
financing since 1985.
34. Thebalance onthecapital account hasbeenpositive since 1989. After asubstantial private
capital outflow in1989, private capital started toflowbackintothecountry. While official capital
inflows decreased in1990 attheendofthewar,theyagain increased afterthesignature ofthePeace
Accords tohelpfinance peace-related expenditure. Foreign exchange reserves continued toincrease,
mainly because oftheinflow ofremittances.
18Data supplied bytheGovernment ofElSalvador.WT/TPR/S/23
Page 14Trade Policy Review
35. External debthasalsobeenanimportant factor intheexternal accounts ofElSalvador. In
1990 external debtamounted tosome 45percentofGDP, butitwasreduced to23percentby1995
followingrenegotiationsduring1990-93withthecommercialbanksandtheParisClubaswellasthrough
thecancellation oftheUnited States 'andCanadian debt. Overall, therenegotiation meant areduction
ofUS$700 million intotalexternal debt. Inaddition, ElSalvador repaid US$129.3 million offoreign
debtduring 1995.19
36. Foreign direct investment inElSalvador increased substantially from1975to1990(Chart I.6).
Cumulative inflows increased fromlessthanUS$500 million in1975 toalmost US$3,000 million in
1990. Historically, thesector thathasattracted mostforeign capital hasbeenthesecondary (industrial)
sector followed bythetertiary (services) sector. However, cumulative investment inindustry decreased
from 63.1percentin1975 to56.5percentin1990, while investment inservices increased from
35.3percentto42percent. Theprimary sector hasnotattracted much foreign investment. Since
theopening upofthecapital account in1990, nofigures forforeign direct investment havebeen
available, since investors tendnottoregister attheMinistry ofEconomy (Chapter II).However, this
doesnotnecessarily mean thatforeign investment hasdecreased inimportance. Onthecontrary, the
opening upoftheeconomy andsolidmacroeconomic performance should bemoreconducive toforeign
investment thanbefore.
19Data supplied bytheGovernment ofElSalvador.ElSalvador WT/TPR/S/23
Page 15
(3) Composition andDirection ofTrade
(i) Composition oftrade
37. Trade ingoods andservices asashare ofGDPfellfromapeaked 52percentin1980tobelow
40percentin1989(Chart I.7).Asaresult ofefforts made toopentheeconomy andpromote exports,
theratiooftrade toGDP hassince recovered, reaching 48percentin1994.20
38. There hasalsobeensome variation inthestructure oftrade inrecent years (Chart I.8and
Tables AI.1toAI.4). ElSalvador hastraditionally beenanexporter ofagricultural goods; in1975,
outoftotalexports theshare ofagriculture amounted tosome 70percent,ofwhich coffee represented
more than30percent. Agricultural exports remain important, although theydecreased to50percent
oftotalexports in1994. Thedecrease tookplace mainly after1990, following thenationalization
ofmajor agricultural exports, andwhen theeffects ofagrarian reform ofthe1980s become evident
(Chapter IV.2); theproduction ofcotton, inparticular, which hadbeenamajor agricultural export,
hasceased. Exports ofchemicals andother manufactured goods have increased, mainly tothe
Central American Region. Chart I.8shows thatthecontribution oftextiles tototalexports hasbeen
decreasing; thisisattributed tothefactthatthese datadonottakeintoaccount exports originating
20Theauthorities estimate thatthecontribution oftrade toGDP increased from 49percentin1975 to
59percentin1995.WT/TPR/S/23
Page 16Trade Policy Review
inthefree-trade zones andtax-free areas, where mosttextiles andclothing arenowproduced. Infact,
exports originating inthefree-trade zone, andhence textiles andclothing exports, havebeenincreasing
rapidly, reaching US$656.7 million in1995 compared toUS$198 million in1992.
39. Thecompositionofimportshasremainedmorestable,importsofmanufacturedgoodsamounting
to71percentoftotalimports in1994(Table AI.1). Imports aremainly intermediate andcapital goods
tobeusedintheSalvadorian industry, which islargely anassembly industry. However, according
totheauthorities, imports offinalgoods havebeenincreasing because ofthereduction intariffs.
(ii) Direction ofmerchandise trade
40. Despite trade liberalization andefforts topromote non-traditional exports tomarkets outside
theCentral American Region, therehasbeennoappreciable change inthegeographical pattern oftrade
inrecent years. ElSalvador 'smost important trading partner istheUnited States, followed bythe
Central American countries, andtheEuropean Union (EU).
41. Although theshare ofmerchandise exports totheUnited States appear tohavedecreased in
recent years to22.6percentin1994(Table AI.3), thesedatadonottakeintoaccount exports originating
inthefreezones, thataredirected mainly totheUnited States. Apart fromtextiles andclothing exports
fromthezones, ElSalvador mainly exports agricultural goods totheUnited States andtheEU,while
exports ofmanufactured goods aredirected mainly totheCentral American Region.ElSalvador WT/TPR/S/23
Page 17
WT/TPR/S/23
Page 18Trade Policy Review
(4) Outlook
42. TheGovernment plans tocontinue thepolicies adopted since 1989, placing special emphasis
onacceleratinggrowth,controllingfiscalexpenditure,increasingtaxcollection,andmaintainingstability
ofboththeinflation rateandtheexchange rate. Thegoalistocreate astable macroeconomic
environment inorder topromote domestic andforeign investment andtointegrate thecountry more
fullyintotheglobal production chain bylowering thecostsofoperating inthecountry. Further efforts
needtobedirected atimproving infrastructure andreducing bureaucratic procedures (Chapter II).
Theauthorities plantocontinue reducing thesizeofStateownership through accelerated privatization,
while strengthening thepublic sector rôleasaregulatory andfacilitator ofprivate sector development.
Byreducing thesizeofthepublic sector, resources canthusbere-directed intomuch-needed fixed
investment.