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The smallest country in Central America, El Salvador suffers from persistent low levels of growth and poverty reduction in the country has been moderate. However, inequality has declined during the last two decades and El Salvador is now one of the most equal countries in Latin America.
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The smallest country in Central America, El Salvador ranks third in population (6.5 million) among the six Central American countries. It is the most densely populated country in Central America and ranks in the 83rd percentile worldwide in terms of population density.
El Salvador has experienced modest economic growth in recent decades, with annual GDP growth exceeding 3 percent only twice between 2000 and 2020, but achieved a significant decline in poverty and inequality.
The poverty rate (based on a US$5.5 per person per day poverty line) declined from 39 percent in 2007 to 22.3 percent in 2019. Extreme poverty, measured as US$1.9 a day, declined from 13 percent in 1995 to 1.5 percent in 2019. Poverty reduction has been mostly driven by labor income and workers moving from low-paying jobs in agriculture to higher-paid jobs. In rural areas, remittances have also had a positive impact, but smaller when compared to labor income.
Driven by pro-poor growth and improved shared prosperity, El Salvador became the most equal country in Latin America and the Caribbean (LAC). The Gini index fell from 0.54 in 1998 to 0.38 in 2019, the lowest in the region. In urban areas, the reduction in inequality was led by labor income, while in rural areas it was driven by income mainly from pensions and remittances.
However, the COVID-19 pandemic has had a significant negative impact on people’s lives and families’ incomes. Although El Salvador was the Central American country most quickly to adopt strong containment measures against the outbreak and the Government rolled out a robust fiscal response to limit the pandemic’s impact on households and businesses, the pandemic could push poverty back to levels not seen since 2016, reversing years of progress.
Due to the pandemic, the poverty rate is expected to increase up to 5.9 percentage points. El Salvador has one of the largest shares of vulnerable population in the region (48 percent), and further decline in economic activity can result in a significantly higher share of people at risk of falling into poverty. The crisis also impacted growth in 2020, with GDP contracting significantly by 7.9 percent.
In 2021, growth is showing signs of recovery, supported by remittance-fueled consumption and exports. El Salvador’s economy is expected to grow by 8 percent in 2021 and 4 percent in 2022. COVID-19 vaccination has been successful, achieving close to a 60% vaccination rate by late September 2021, among the highest in the region.
Challenges persist, such as the need to advance reforms for fiscal sustainability. In 2020, the fiscal deficit was 9.2 percent of GDP and debt was 91.8 percent of GDP. Higher revenues brought on by the rebound in the economy and the phase-out of extraordinary expenditures will help moderate the deficit to 4 percent of GDP and the debt to 86.1 percent of GDP until 2022, but the challenge for debt management remains beyond 2023.
Crime and violence have also been a threat to social development and economic growth in El Salvador and are among the factors driving Salvadorans to migrate. Nevertheless, murder rates have declined dramatically since August 2019, bringing the country’s violence indicators closer to the regional average.
El Salvador also has a high exposure to natural hazards, such as earthquakes and volcanic eruptions, and is highly vulnerable to climate change impacts, including more frequent occurrences of floods, droughts, and tropical storms, all of which disproportionally affect poor and vulnerable populations.
Despite these challenges, El Salvador has great potential to boost its economic growth. The country’s strategic location, with access to many markets, a growing labor force, and a solid industrial base could help to expand trade to achieve stronger and more inclusive growth. Development goals could be achieved with a long-term commitment to structural reform, quality job creation and investment in human capital.
Last Updated: Oct 06, 2021
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LENDING
El Salvador: Commitments by Fiscal Year (in millions of dollars)*
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*Amounts include IBRD and IDA commitments
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Systematic Country Diagnostic: El Salvador, Building on Strengths for a New Generation
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EL SALVADOR +503 2526-5900
Calle El Mirador, Edificio Torre Futura, Nivel 9, oficinas 904 y 905, Colonia Escalón, San Salvador
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