Subchapters:
- Basic data
- Public finances and the state budget
- Banking system
- Tax System
Basic data
El Salvador is a small dollar economy dependent on investment, trade and remittance inflows from the US, making it vulnerable to external economic influences. 2021 saw a sharp economic recovery, with the country’s GDP growing by 10.2% and output returning to pre-pandemic levels. The large growth was mainly helped by the relaxation of strict anti-pandemic measures, which are among the most drastic in the region, and record remittances amounting to 25% of El Salvador’s GDP. Unsustainable public finances and a rapidly growing ratio of public debt to GDP, which is approaching 100%, remain the main risks for the economy. Economic growth is expected to be only very moderate in the coming years. The country is also dealing with relatively high inflation, which stood at 6% in 2021 and is expected to reach a similar level in 2022. In response, the Salvadoran government reduced import duties and fuel tax, however, these measures are unlikely to be sufficient. In 2021, unemployment in El Salvador was 9%. Check ebizdir for economical facts of El Salvador.
In September 2021, El Salvador became the first country in the world to declare the cryptocurrency Bitcoin legal tender. Bukele promoted the adoption of the digital currency as a way to get more Salvadorans (about 70% of whom are unbanked) into the formal economy. According to him, the use of cryptocurrency should make it faster and cheaper to send money from abroad, and thus increase the volume of money coming from abroad. However, the adoption of Bitcoin as legal tender has been negatively reacted to by financial markets and international financial institutions, which are skeptical of its use due to its high volatility. It should be noted that since Bitcoin was accepted as legal tender, the value of Bitcoin has decreased by 45%.
Due to the poor state of El Salvador’s public finances, the government is in talks with the IMF about a $billion loan. However, the growing political tension between El Salvador and the US, concerns about the erosion of democratic institutions or the adoption of Bitcoin as legal tender do not predict the approval of the agreement anytime soon. It should be noted that Salvador needs this loan very much in view of the current state of public finances.
El Salvador’s economy relies on exports of coffee, sugar, textiles and clothing, gold, ethanol, chemicals, and electricity, unable to rely on higher value-added industries due to the low quality of education. Fuels (oil, natural gas), machinery and transport equipment (mainly airplanes and helicopters), and textiles predominate in imports to El Salvador. El Salvador’s main trading partner is the United States, other partners include its Central American neighbors, Mexico and China.
| Pointer | 2019 | 2020 | 2021 | 2022 | 2023 |
| GDP growth (%) | 2.4 | -8.1 | 10.2 | 0.8 | 1 |
| GDP/population (USD/PPP) | 9,168.90 | 8,413.60 | 9,621.00 | 9,880.00 | 10,280.0 |
| Inflation (%) | 0.0 | -0.1 | 6.1 | 6.6 | 1.1 |
| Unemployment (%) | 6.4 | 12 | 9 | 7.5 | 7.3 |
| Export of goods (billion USD) | 5.9 | 4.9 | 6.4 | 6.9 | 7.1 |
| Import of goods (billion USD) | 12 | 10.3 | 14.4 | 15.1 | 15.3 |
| Trade Balance (Billion USD) | -6.1 | -5.2 | -7.7 | -8 | -8 |
| Industrial production (% change) | 3.4 | -5 | 7 | 2 | 1.8 |
| Population (millions) | 6.5 | 6.5 | 6.5 | 6.6 | 6.6 |
| Competitiveness | ON | ON | ON | ON | ON |
| OECD export risk | 05.VII | 05.VII | 05.VII | ON | ON |
Source: EIU, OECD, IMD
Public finance and state budget
| Public finance | 2021 |
| State budget balance (% of GDP) | -7 |
| Public debt (% of GDP) | 88.1 |
| Current account balance (billion USD) | -1 |
| Taxes | 2022 |
| AFTER | 25-30% |
| F.O | 0-30% |
| VAT | 13 % |
El Salvador has been struggling with high debt for a long time, because since 1990 governments have not managed to propose a balanced budget even once. El Salvador is thus the most indebted country in Central America, its debt amounts to around 90%, and this situation cannot be expected to improve in the near future. In 2021, the fiscal deficit was reduced to 5.6% of GDP thanks to a strong economic recovery after a decline in GDP the previous year, but it is expected to increase again to 7% of GDP in 2022.
The bond’s principal amount of US$800 million is due to be repaid in early 2023, and given El Salvador’s current budget situation, there is a risk that the country will not be able to meet the obligation. Due to the weak state of public finances, the government has been negotiating to provide billion USD with the International Monetary Fund (IMF), which, however, demands that Bitcoin be stripped of its legal tender status. Bukele’s government rejects this move and therefore continues to look for other solutions. As an alternative to multilateral loans, the government has announced plans for the first-ever issue of Bitcoin-backed bonds totaling $1 billion, but the issue (scheduled for March 2022) has been delayed for now. Considering the current value of Bitcoin, the question is whether this issue will happen, and if so, whether the issue will be successful.
Banking system
El Salvador’s banking and financial sector underwent changes following the reforms of 1990–1991. The reforms liberalized the hitherto state-controlled banking sector, allowed the entry of foreign entities, granted greater authority to the Central Bank, and created an autonomous bank supervisory body. At the same time, the capital market and foreign exchange operations were also liberalized.
Currently, the vast majority of banks are controlled by private entities, whether domestic or foreign. The legal framework for financial and banking operations consists of the Law on Banks and Financial Institutions (Ley de Bancos y Financieras), the Law on the Central Reserve Bank (Ley Orgánica del Banco Central de Reserva de El Salvador), both from 1991, and the Law on the Superintendence of the Financial system (Ley Orgánica de la Superintendencia del Sistema Financiero) of 1990. The creation of economic policy that affects the banking sector falls under the competence of the Central Reserve Bank (Banco Central de Reserva de El Salvador). The Superintendence of the Banking System (Superintendencia del Sistema Financiero) then oversees the fulfillment of conditions for the establishment, registration and operations of financial institutions.
There are 9 private banks and 2 state banks operating in the banking system.
Banks and financial institutions in El Salvador:
The main commercial banks are Banco Agrícola and Banco Cuscatlan, which are the first and third most important banks within the Central American region. Together with Banco Salvadoreňo and Banco de Comercio, these banks cover approximately 80% of all banking services. Important foreign banks include Citibank and First Commercial Bank of Taiwan. By law, all banking operations must be carried out in USD – the economy is fully dollarized. All commercial banks provide standard banking services.
Tax system
The Salvadoran tax system consists of income tax, value added tax, transfer tax, property tax and a set of municipal taxes. The system is relatively clear and stable.
Income tax FO and PO
Income tax is subject to the income of all natural and legal persons in the country if it comes from domestic sources. Income from abroad is not subject to tax. The tax burden on natural persons varies according to the amount of annual income or profit and ranges from 0% to 30%, persons with an annual income of less than USD 4064 are exempt from taxation. The standard corporate tax rate is 30%, there is no surcharge or alternative minimum tax. A reduced tax rate of 25% applies to legal entities with revenues of less than $150,000.
The
Dani Value Added Tax (Impuesto de Ventas) of 13% is levied on all goods and services except basic foods (rice, vegetables) and medicines. More information can be found at Deloittetax guides and highlights.
