RESTRICTEDWORLD TRADE
ORGANIZATIONWT/TPR/G/111
6 January 2003
(03-0001)
Trade Policy Review Body Original: Spanish
TRADE POLICY REVIEW
EL SALV ADOR
Report by the Government
Pursuant to the Agreement Establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establising the World Trade
Organization), the policy statement by the Government of El Salvador is
attached.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on El Salvador.El Salvador WT/TPR/G/111
Page 3
CONTENTS
Page
I. INTRODUCTION 4
II. SOME OF THE MOST IMPORTANT ACHIEVEMENTS 4
(1) MODERNIZATION OF THE STATE 4
(2) C OMPETITIVENESS 6
(3) F ISCAL AND MONETARY POLICY 7
(4) F OREIGN TRADE 8
(5) FREE TRADE ZONES 9
(6) T RADE OPENNESS 9
III. VISION FOR THE FUTURE AND NEW CHALLENGES 10WT/TPR/G/111 Trade Policy Review
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I. INTRODUCTION
1. The progress and development achieved by El Salvador in the recent period is the fruit of a
sustained effort lasting more than 12 years.  By defining a clear vision for the future with appropriate
objectives, the country has dealt successfully with the challenges posed by the armed conflict and
gradually achieved macroeconomic, political and social stability.
2. In 1989, the Government's chief priority was to find a peaceful solution to the armed conflict.
Accordingly, it entered into negotiations with the guerrilla movement which culminated in the
signature of peace accords in 1992.  This process has been hailed as world exemplar of transition from
a state of armed conflict to a situation of demo cracy and peace, achieved through political will.
3. At the same time, the Government introduced a number of economic stabilization and
adjustment measures, supported by reforms aimed at establishing a market-economy model.
4. The first democratically elected government since the signing of the peace accords took office
in 1994.  Much of its five-year term was devoted to consolidating peace and implementing and
enforcing the Accords that had been signed, which cost the country about US$2.457 billion.  Despite
all the benefits that flowed from this, the economic effort and opportunity cost in terms of investment
for social development were considerable.
5. El Salvador also required far-reaching reforms to provide better conditions for economic
growth and investment, and social improvements for its population.  To this end, a reform programme
was developed to strengthen the State in its subsidiary role and as facilitator of private-sector
investment, emphasizing the reconstruction and expansion of basic infrastructure.
6. With the foundations for the country's economic, social and political growth consolidated,
since 1999 the present Government, through its "New Alliance" plan, has been focusing its efforts on
achieving sustainable economic growth, based on more active participation in international trade andon increased productivity.  Growth in exports, attraction of foreign investment and diversification of
both products and markets, are among the factors expected to boost development and help consolidate
sustainable democracy – the  basic tools for eradicating poverty.
II. SOME OF THE MOST IMPORTANT ACHIEVEMENTS
(1) 
MODERNIZATION OF THE STATE
7. In 1996 the country embarked upon a public-sector modernization programme, whose key
elements included privatization of public services, concessions and State decentralization. The
programme resulted in the merger and closure of a number of public institutions (for example, Public
Safety, Justice and the Interior were all merged to form a Ministry of Governance), in order to
maximize resources, generate synergies and increase efficiency in the provision of services. ThePublic Administration Procurement and Contracting Law (LACAP) was passed in 2000, consolidating
all laws regulating this area at the municipal and central government levels into a single piece of
legislation.  This made government procurement and contracting more transparent in all public
institutions at every level of government.
8. In the infrastructure sector, a Law on Telecommunications was passed that promoted private-
sector participation in the provision of public telecom services, and encouraged development of a
competitive telecommunications market with a view to achieving efficient world-class services at
competitive prices.  Following privatization of  the national telecommunications firm, foreign
investment in the communications sector has increased by 84 per cent since 1998.  The opening up ofEl Salvador WT/TPR/G/111
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the sector has made it possible to increase the number of fixed-line operators from one to nine; and, as
a result, the number of fixed phone lines has grown by 84 per cent in just four years.  The mobile
telephony segment currently has four operators, and the number of subscribers has risen from 137,000
in 1998 to 908,000 in 2002 – an increase of 560 per cent.
9. Reforms were also introduced to restructure the electric-power sector.  The General
Electricity Law, promulgated in 1996, separates the industry into four segments: generation,transmission, distribution and marketing; and it introduces competition in generation, as well as in the
large volume energy consumption market and at the retail level through brokers.  Following
privatization of the five distributors (CAE SS, DEL SUR, AESCLESSA, EEO and DEUSEM) along
with the thermal power generation plants in 1998, the generation and distribution segments are both
now open to private-sector invest ment. Over US$350 million has been invested in the sector as a
whole, including thermo-electric expansion proj ects, refurbishment of hydroelectric plants,
rehabilitation of transmission systems and the crea tion of new distribution lines in rural areas.  In
2002, construction was completed on the 93 km transmission line providing electric power
interconnection between Honduras and El Salvador.  This is the first project in the Electrical
Interconnection System for Central America (SIEPAC).
10. As part of the effort to improve and modernize the country's infrastructure, particularly in the
transport sector, the road transport system was reorganized by the launching of a new public
passenger transport system.  In May 2002 the Highway Fund (FOVIAL), financed through a special
tax on gasoline consumption, was set up to improve the efficiency of preventive maintenance on the
country's roads.  By September that year, the FOVIAL routine maintenance programme was covering
over 4,000 km of highways across the country, representing about 80 per cent of the entire network.
11. In October 2002 the Legislative Assembly approved bidding documents to place management
and operation of the country's busiest port (Acajutla) in private-sector hands, under a 25-year
concession.  The contract requires the concession-holder to undertake a series of infrastructure
investments, and to streamline and modernize port facilities.  In addition, a program to revive port
activity in the eastern part of the country has begun, with a view to promoting and facilitating
international trade.  A new port, to be built in the department of La Unión, will be placed underprivate-sector management and is expected to play a key role in creating a development pole in that
area.
12. In the financial sector, the Insurance Companies Law entered into force in 1996, regulating
the constitution and functioning of such enterprises, along with the activities of insurance brokers.
The aim of the legislation was to safeguard the rights of the public and guarantee competition,transparency and security in the system.  In March 2001, Fitch Ratings classified 69 per cent of the
country's insurance companies within the category-A range.  The profitability of the sector grew from
5.5 per cent in March 2001 to 11.13 per cent in March 2002.
13. In addition, in late 1996 the Pension Saving System Law came into effect and the Pensions
Superintendency was created, to form the pillars of a new private pension system.  The basic missionof this innovative system is to provide pensioners with an adequate income, funded from contributions
paid into individually owned accounts.  By March 2002, about 939,000 workers were affiliated to the
new system, covering 36 per cent of the economically active population.
14. In 1999 a new Banks Law was passed to enhance the security and soundness of the financial
system, based on international principles of banking regulation and supervision.  Within the
framework of its multilateral commitments, El Salvador participated in the negotiations on financial
services and accepted the Fifth Protocol to the General Agreement on Trade in Services (GATS),WT/TPR/G/111 Trade Policy Review
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incorporating this into national legislation through Legislative Decree 653, of 13 March 1999.  These
improvements to sectoral regulation partly explain why firms such as Fitch Ratings see the
Salvadoran financial system as one of the most modern in Central America, having rated 67 per cent
of the country's banks in the category-A range in March 2002.
(2) COMPETITIVENESS
15. El Salvador has made major efforts to attract local and foreign investment, with a view to
boosting the country's economic and social development by creating jobs and raising productivity.  In
the legal framework, reforms were made to the Trade and Commercial Registry Laws, and a new
Investment Law was passed providing greater transpar ency to local and foreign investors alike.  The
regulatory framework for investments in El Salvador is completed by provisions negotiated within
bilateral, regional and multilateral agreements.  El Salvador is a member of the World Bank'sMultilateral Investment Guarantee Agency (MIGA); to date it has signed 24 bilateral investment
agreements, of which 16 have entered into force.
16. The National Investment Office (ONI) was esta blished as part of the Ministry of the
Economy, in order to facilitate the installation and operation of local and foreign investments and
reduce the time needed for investment formalities.  The ONI operates as a single window throughwhich investors, both local and foreign, can complete all the relevant procedures through a new
centralized management system.  The following institutions participate in this: the National
Registration Centre, the Ministry of Finance, the Salvadoran Social Security Institute, the
Superintendency of Corporations and Business Enterprises, the Ministry of the Interior, the
Directorate-General of Statistics and Censuses, the Ministry of Foreign Affairs and the Ministry of the
Economy.   At the same time, the National Commission for the Promotion of Investment in
El Salvador (PROESA) was created in 2000, with a mission to promote El Salvador's image abroad
and attract foreign investment into the country.  This Commission identifies potential investors and
helps them look for business opportunities in El Salvador, providing them with information, contacts
and the necessary services to guide them in carrying out the investment.  The Commission is headed
by the Vice President of El Salvador, supported by the Ministers and Vice-Ministers of the Economy
and Foreign Affairs, together with entrepreneurs from the private sector.
17. El Salvador has made significant progress in the intellectual property domain, with the aim of
strengthening both local and foreign investments.  In 2000, the country submitted to a voluntary
review of compliance with its obligations under the TRIPS Agreement.  At the present time, the
Government, acting through the Ministry of the Economy, is working to modernize secondary
legislation on this subject, for which it has appr oved a new Law on Trademarks and Other Distinctive
Signs.  In late 2002, El Salvador won the Cyber Champion Award for Latin America, which is given
to countries or individuals that have taken steps to ensure legal use of software.  The award was
accepted by the Vice President of the Republic.
18. In addition to focusing on attracting foreign investment, the Government is also working
through the Ministry of the Economy to nurture greater competitiveness in the different productivesectors, in order to create conditions for an expansion of exports.  This will be achieved by
diversifying the export basket and strengthening productive capacity among small and
micro-enterprises, together with export partnershi ps and effective promotion.  Technical assistance
programmes are currently being carried out through the Inter-American Foundation (IAF).  Activities
include cooperative fishing ventures; assistance for small-scale farmers; and activities to improve the
environment by creating alternative systems for solid waste management and establishing small
environmental groups in the communities of San Salvador, Ilopango and Mejicanos.El Salvador WT/TPR/G/111
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(3) FISCAL AND MONETARY POLICY
19. Despite a number of economic difficulties faced in the international domain during these last
four years, and bearing in mind recent natural disasters (including hurricane Mitch in 1998 and two
earthquakes in 2001), El Salvador's macroeconomic performance has outstripped that of other Latin
American countries.  While its real GDP grew by an average of  2.5 per cent  between 1999 and 2001,
the regionwide figure amounted to just 1.6 per cent.
20. In the fiscal policy domain, significant progress has been made in reforms to the tax system,
aimed at expanding the taxpayer base and bolstering tax receipts.  This has begun to yield positive
results: both value added tax (VAT) and income tax increased their share of total tax revenue in 2001,
jointly accounting for 86 per cent of total revenues received.  There is also less reliance on receipts
from customs duties, which in 2001 represented just 10 per cent of total tax revenue, compared to15 per cent in 1996.
21. As part of the modernization of tax administration, the Ministry of Finance introduced a
KAIZEN-ISO 9000 quality and continuous improvement system in several of its dependencies,
including the Directorate-General of Customs Revenue as from 1999.  Implementation of the new
system has generated benefits such as continuous improvement of operational procedures,standardization of services, elimination of bureaucratic procedures and discretionary staff actions; and
customs clearance procedures have also been streamlined.
22. In 1999, the Teledespacho  system was developed to enable customs users to submit goods
declarations electronically in advance of the cargo's arrival in the country.  Then in February 2002 a
full on-line tele-clearance system was installed on the Internet, which cuts time spent filling out the
customs declaration form by 30 minutes per client.  The greatest benefit of the system, however, is
that declarations can be submitted 24 hours a day, 365 days per year.
23. In the public expenditure domain, recent years have seen greater emphasis placed on the
social development areas.  Social expenditure f unded out of the national budget between June 2001
and May 2002 was up by US$111 million on the previous period – an increase of 15.5 per cent.
Expenditure has been targeted mainly on education programmes aimed at reducing the illiteracy rate,
and also on health and local development programmes.
24. At the same time, poverty indices have been cut substantially from their 1996 level of 52 per
cent.  Nonetheless, despite the reduction achieved in 2001 (39 per cent), it remains a national priority
to lower poverty rates still further.
25. In keeping with the emphasis on social expenditure, an educational reform programme
(EDUCO) was implemented with major participation by communities and parents, gaining plauditsfrom the World Bank.  In 1995 the Healthy School Programme was inaugurated.  Apart from serving
students' didactic needs, this also satisfies some of their basic nutrition and health requirements,
thereby helping to reduce school dropout rates.  The educational reform has also managed to cut the
illiteracy rate from 17.2 per cent in 2000 to 15 per cent in 2001, by providing basic literacy courses to
360,000 people.
26. Until 2000, the Central Reserve Bank (BCR) pursued a monetary policy aimed at controlling
inflation.  This achieved considerable success: from a level of 20 per cent in the early 1990s, inflation
has not exceeded 4.3 per cent since 1998, and fell as low as 1.4 per cent in late 2001.  Low inflation
increases welfare and reflects the macroeconomic stability achieved by El Salvador in recent years.
One of the most important monetary policy achievements was Law on Monetary Integration, which
established the US dollar as legal tender throughout the country as from 1 January 2001.  The mainWT/TPR/G/111 Trade Policy Review
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objectives of this legislation are to eliminate exchange-rate risk and concomitant currency crises,
create a sounder and more competitive financial system, protect wages and savings, and encourage
investment through lower interest rates.  The latter have fallen substantially since the start of
monetary integration, and are currently the lowest in the region.
(4) FOREIGN TRADE
27. As a result of the policy of trade openness pursued by the country in recent years, trade has
increased substantially, especially in certain sectors of the economy.  Exports grew from 21.1 per cent
of GDP in 1996 to 28.9 per cent in 2001, while imports expanded from 33.9 per cent to 42.9 per cent
in the same period.  El Salvador's main trading partners are the other Central American countries,
while the United States is its leading partner outside the region.
28. Although agriculture continues to account for a large proportion of El Salvador's foreign
sales, the export basket has diversified, partly as a result of international factors such as sagging prices
among its main export products (coffee and sugar).  Coffee exports slumped from 37.6 per cent of the
total in 1995 to 9.5 per cent in 2001, and the importance of this economic sector has diminished.
Despite a steep drop in domestic production and investment in this sector, major efforts are being
made to find new ways to achieve added value and export speciality varieties (gourmet and organic)to take advantage of market premiums on such types of coffee.
29. Sugar output has fluctuated sharply since 1996; after growing by nearly 7 per cent in 1999,
production then declined by over 13 per cent in the two following years.  In order to guarantee
fairness, rationality and transparency throughout the production chain, the Government worked with
the private sector in drafting the bill for the current Sugar Agro-Industry Production, Industrialization
and Marketing Law.   Although Central America applies a technical standard requiring sugar sold to
the region to be fortified with vitamin A, in El Salvador there is no licence for importing the product.
30. As part of the effort to open up new markets for Salvadoran exports, free trade agreements
have played an increasing role in the economy since 1996.  As a result of the free trade agreement
with Mexico which came into force in March 2001, exports to that country rose from US$9.9 million
in September 2000 to US$16.7 million a year later.  By September 2002, the figure had climbed by a
further 39 per cent to US$23.2 million.
31. A free trade agreement with the Dominican Republic came into force in October 2001.  While
exports to that country amounted to US$8.6 million in 2001, they have since grown by 93 per cent to
total US$16.6 million in 2002.
32. The free trade agreement with Chile entered into force on 1 June 2002.  From El Salvador's
point of view, its greatest benefit is the access it gives to a market of 15 million people, which isexpected to result in increased exports and job creation.
33. El Salvador has recently ratified a free trade agreement with Panama, which could come into
force during the first half of 2003.  In the meantime, the two countries apply the Preferential Trade
Agreement signed on 11 August 1970.
34. In short, El Salvador signed four trade agreements between March 2001 and June 2002, of
which three have already entered into force.  Keenly aware of all the benefits derived from these, the
Government is persisting with its policy of openness by negotiating a free trade agreement with
Canada; and in January 2003 it will start negotiations for one with the United States, its main trading
partner outside the region.El Salvador WT/TPR/G/111
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(5) FREE TRADE ZONES
35. Development of El Salvador's free trade zones has been a key element in terms of job
creation, promotion of foreign investment and exports, and diversification of the country's
development poles.  The increase in the number of free trade zones has been directly proportional to
the benefits they have generated.  By late 2001, as many as 81,200 direct jobs had been created in free
zones, of which 80 per cent were occupied by women.  A further 162,400 indirect jobs were createdduring the same period.
36. Central Bank data for 2001 show that exports from the maquila industry were up by
116 per cent from their 1996 level, while imports of the inputs needed by this industry grew by
111 per cent during the same period.
(6) T
RADE OPENNESS
37. El Salvador is a member of the Central American Common Market (CACM), along  with
Costa Rica, Guatemala, Honduras and Nicaragua.  Since 1996, the Central American integration
process has undergone major changes, particularly with ratification and implementation of the
Guatemala Protocol to the General Treaty on Ce ntral American Integration. In 2002, most imports
from the region were subject to a zero tariff, except for certain products such as coffee, sugar, alcohol,distilled alcoholic beverages and petroleum products.
38. As part of the process of furthering Central American integration, El Salvador has been
working with Guatemala to establish a customs union; Honduras and Nicaragua joined this effort in
June 2000, followed by Costa Rica on 20 June 2002. Concrete steps taken have included
harmonization of the common external tariff among CACM countries at 76.45 per cent.
39. In March 2002, the regulatory part of a Central American Treaty on Investment and Trade in
Services was signed;  lists of reservations to this treaty were being negotiated in September 2002.  Inaddition, an agriculture agreement and a treaty on procurement are currently under negotiation.
40. El Salvador is an active participant in the negotiations for the Free Trade Area of the
Americas (FTAA).  This initiative was launched in December 1994 with the aim of progressively
eliminating barriers to trade in goods and services; negotiations are scheduled to be completed in
2005.
41. El Salvador also participated in the Doha Ministerial Conference in November 2001, where it
was agreed to extend the free-zone schemes for an additional period to end in 2010.  In addition, an
extension was requested for the scheme covering the Law for the Reactivation of Exports, which
allows for the drawback of 6 per cent of f.o.b. value on exports outside Central America.
III. VISION FOR THE FUTURE AND NEW CHALLENGES
42. To make progress on a sustainable basis, it is not sufficient to focus on past achievements;
El Salvador needs to work hard to consolidate them, and at the same time set objectives for the future
that address the country's priority needs.
43. Fiscal policy objectives will be to optimize current expenditure and maintain levels of
investment – the latter being targeted on educati on, health, local development, social security and
human capital formation, among other sectors.  A concurrent aim is to increase fiscal revenue, which
will entail expanding the tax base by combating evasion, and improving the efficiency and quality of
tax administration.WT/TPR/G/111 Trade Policy Review
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44. Aware of this reality, El Salvador is increasingly working towards greater trade openness,
which in the short run encourages exports, but in the medium and long-term helps combat poverty on
a sustainable basis.  The country also intends to continue fulfilling all commitments assumed under
bilateral, regional and multilateral treaties.
45. To take maximum advantage of the benefits of free trade, conditions need to be created to
improve competitiveness in all sectors of the econom y.  This essentially involves promoting and
diversifying investments and exports by creating a favourable business climate;  providing major
support for small and medium-sized enterprises and microenterprises to help them become more
competitive and take advantage of the benefits that openness offers;  improving the training of human
resources;  and fostering technological innovation, which, despite progress over the last few years,
remains a major challenge for the future.
46. With its "New Alliance" programme, the Government aims to promote progress and
consolidate democracy through efforts targeting employment, security, solidarity and future vision.
To this end, it will continue to foster competitiv eness in the different sectors, in order to expand
exports.  As security is a key factor for attracting investment, work is under way to strengthen public
and legal security in the country.  Lastly, the Government's vision for the future is to achieveenvironmentally-friendly sustainable development and integration with Central America and the rest
of the world.
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