The Economy of El Salvador

The economy of El Salvador is the 3rd largest in the Latin American region based on GDP and purchasing power GDP, next to Costa Rica and Panama. The country’s GDP in PPP as of 2007 is approximately US$41.65 billion. The service has the biggest contribution to the economy at 60.7% of GDP in 2006, followed by the industry at 29.6%, and agriculture at 7.6% Its GDP per capita is about US$5800 but still experiences numerous social challenges and remains as one of the poorest countries in the region.

The agricultural sector suffers the most after hurricane Mitch hit the country particularly the low-lying coastal zones in 1998. About 3% of the coffee production was ravaged; 9% of sugarcane harvest; and 18% of basic grain production was lost. Then in 2001 a series of shocking earthquakes shake the country resulting to almost 25% of all private homes being badly damaged or destroyed. These calamities prompted international support and assistance in the forms of food, emergency supplies, cash aid, rescue operations, and damage assessment teams.

Inflation in the country has been stable and among the lowest in Latin America. Since 1997 average inflation is 3% reaching only as high as 5% in the past few years. Remittances from Salvadorians workers abroad are also key source of foreign income. In 2006 it reached a record of US$3.32 billion, 17% increase compare to last year) or just about 16.2% of the nation’s GDP. Major exporting commodities are coffee, sugar, shrimp, textiles, chemicals, and electricity. The country’s exporting and importing partners include the US, Guatemala, Germany, Costa Rica, Honduras, Mexico, and Japan. El Salvador ratified the Central American Free Trade Agreement (CAFTA) with the United States in 2004. CAFTA was a joint effort by the 5 countries of Central America and the Dominican Republic. The country together with the Guatemala, Honduras, and Nicaragua are negotiating a free trade treaty with Canada. In 2007, the 4 countries and Costa Rica initiated free trade agreement with the European Union.