Wednesday, March 02, 2016

El Salvador's economy -- not as bad as you might think

With all the bad news about El Salvador related to gang violence and corruption investigations, you might expect that its economy would be in a tail spin.   In fact, the economy is not that bad -- not great, but also not in decline.

According to El Salvador's Central Reserve Bank (BCR), El Salvador's economy grew at a rate of 2.5% for 2015, the highest rate in 7 years.  The bank also reported that real wages grew at a rate of 7.2% last year.  Direct private investment in the Salvadoran economy grew $600 million to $1.23 billion, and foreign direct investment grew as well, a vote of confidence in the economy.  The inflation rate for the year was just 1%.

According to BCR figures, in 2015, El Salvador's exports grew by 4%, and its trade deficit fell by 5.9%.   El Salvador was one of only two economies in Latin America and the Caribbean to record such export growth.

Remittances from Salvadorans abroad, primarily in the US, continue to be a major economic force in the country.   Just in January 2016, families in El Salvador received $306.4 million in remittances, up $10 million from January 2015.   Total remittances for 2015 were $4.28 billion, up 3% from 2014.   Twenty percent of Salvadoran families receive remittances.

Some of the positive drivers for El Salvador are the significant drop in the price of petroleum and petroleum products, and the continued strength of the US economy. The drop in oil prices saved as much as $750 million for El Salvador which must import all of its gasoline and diesel fuel.  El Salvador's economy is highly tied to the US because it is El Salvador's biggest trade partner, because the country uses the US dollar for its currency, and because a strong US economy means jobs for Salvadorans in the US who send remittances home.

Still, El Salvador's growth of 2.5% in 2015, which is projected to be similar in 2016, is not strong enough to change the economic fortunes of many Salvadoran families.  That growth rate puts it in the bottom half of economies in Latin America.   The economy added only 5000 jobs to the formal sector (entitling workers to social security and public insurance benefits) through September 2015.   Until El Salvador can solve the tremendous drag on its economy caused by gang violence, can improve its educational outcomes, and can stop the flight of productive citizens to the north, one should not expect much better results.

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