El Salvador WT/TPR/S/111
Page 1
I. ECONOMIC ENVIRONMENT
(1) INTRODUCTION
1. El Salvador's annual GDP growth ranged between 1.7% and 4.2% from 1996 to 2001,
reaching its peak in 1997.  The preliminary figures for the first half of 2002 show an average growth
of 1.7%.1  Impaired by a number of natural disasters, growth rates during this period were lower than
in the early 1990s.  Activities that experienced particularly high growth rates include construction,
and services such as commerce, restaurants and hotels, financial services, transport, and
communications, whereas the contribution of the agricultural sector to GDP and exports has declinedconsiderably.  While per capita GDP stood at about US$2,150 in 2001, net transfers from workers
abroad meant that gross disposable income per capita stood at US$2,420.
2. Economic policy has been guided by the objective to promote sustained growth by reducing
inflation, expanding the role of the private sector , and integrating the economy with the rest of the
world.  After El Salvador's economy was severely affected by Hurricane Mitch in 1998 and two majorearthquakes in 2001, reconstruction also became a major economic policy objective.  An important
feature of monetary policy has been the entry into force of the Law on Monetary Integration,
introducing the US dollar as legal tender in January 2001.  This brought about a reduction in financial
costs, but has not yet led to a significant increase in credit to the private sector.  The fiscal deficit
started to grow 1997, reaching 3.6% of GDP in 2001 , partly owing to reconstruction.  This led the
authorities, in 2002, to draw up a strategy in th e framework of the draft budget for 2003 for the
progressive reduction of the deficit with a view to its elimination by 2006.
3. El Salvador's current account balance posted continuous deficits between 1996 and 2001,
mainly caused by a strong deficit in the merchandise trade balance.  The slowdown of economic
activity led to a narrowing of the deficit in 2001.  In contrast to merchandise trade, services have
shown only minor deficits. Trade plays an increasingly important role in the Salvadoran economy;  in
2001, exports of goods and services accounted for almost 30% of the current GDP, while the share ofimports stood at about 43%.  El Salvador's main trade (including maquila) and investment partner is
the United States.
4. Current transfers from Salvadorans living abroad and foreign aid flows have contributed to
keeping the current account deficit under control and have played a major part in financing
consumption over the past few years.  This, in its tu rn, has made it possible to maintain a stable level
of national savings.  The challenge for El Salvador will be to channel a portion of these transfers into
boosting the level of savings and investment.
(2) 
STRUCTURE OF THE ECONOMY
5. With a population density of more than 300 persons per square kilometre, El Salvador is one
of the most densely populated countries in the western hemisphere.  Annual population growth hasbeen decreasing slightly over the past few years, dropping from 2.1% in 1996 to 1.9% in 2001.  This
has been accompanied by a strong trend toward s urbanization, which increased from 56.9% in 1996 to
                                                     
1 Information available online at the website of the Central Reserve Bank of El Salvador:
http://www.bcr.gob.sv/indic001.htm.WT/TPR/S/111 Trade Policy Review
Page 2
59.4% in 2001. Although all development indicators  have improved, some 39% of the population
continued to live in poverty in 2001, and 16% of the population even lives in extreme poverty.Although these indicators are still high, they reflect a substantial improvement in comparison with
1996, when according to the data provided by the authorities, some 52% of the population lived in
poverty, and 22% in extreme poverty.
6. The agriculture sector contributed 11.8% to GDP in 2001, down from 14% in 1996.  The
manufacturing sector, including the maquila industry, increased its contribution to GDP from 21% in1996 to 24% in 2001.  In that same year, services contributed some 62% to GDP.  In that percentage,
commerce, restaurants and hotels accounted for the largest share, contributing almost 20% to GDP.
7. Since El Salvador's last Review in 1996, various natural phenomena have affected its
economy  The World Bank has indicated that these disasters have been one of the main obstacles to
growth and development.
2 Hurricane Mitch (November 1998) entailed costs of infrastructure repairs
and damage to major crops which together were estimated at almost  400 million US$.3  In January
and February 2001, two major earthquakes hit the country, causing damage estimated at
US$2.2 billion or 16% of GDP.  At a subsequent conference, donors pledged financing in the amount
of US$1.3 billion, consisting of US$300 million in grants, US$700 million in new loans on favourable
terms, and US$300 million of reprogramming in existing loans. Furthermore, in summer 2001 theworst drought in two decades left an estimated 200,000 people in urgent need for food aid.
4
(3) MAIN ECONOMIC INDICATORS
(i) Production and employment
8. El Salvador's economy grew at an annual average rate of 2.8% between 1996 and 2001
(Table I.1).  Growth rates have been decreasing  since 1998, owing to damage caused by Hurricane
Mitch in late 1998, two major earthquakes and the global economic downturn in 2001, and low
international prices of major export goods.  After a 1.8% growth in 2001, the Salvadoran economygrew at an average rate of 1.7% in the first half of 2002 compared to the same period in 2001.
                                                     
2 World Bank (2002), El Salvador – Country Assistance Evaluation.
3 Ministry of Public Health and Social Assist ance of El Salvador, National Emergency Committee, La
Tormenta Tropical Mitch en El Salvador: Efectos, Respuesta y Análisis de las Experiencas , San Salvador, 1999.
Estimates based on:  Economic Commission for Latin America and the Caribbean, El Salvador: Assessment of
the damage caused by hurricane Mitch; implicati ons for economic and social development and for the
environment , February 1999.
4 Additional information can be found online at the following website of the World Food Programme:
http://www.wfp.org/newsroom/in_depth/central_america_el_salvador.html.El Salvador WT/TPR/S/111
Page 3
Table I.1
Basic economic indicators, 1996-01
1996 1997 1998 1999 2000 a2001a
I.     Gross domestic product (GDP)
Current GDP (US$ million) 11,135 12,008 12,465 13,139 13,739
Real GDP, rate of growth (%) 4.2 3.7 3.4 2.2 1.8
Current GDP per capita (US$) 1,885 1,991 2,025 2,094 2,148
  Gross disposable national income (US$million)c12,332 13,372 13,764 14,683 15,477
Net current transfers from abroad (US$million) 1,.360.9 1,.526.8 1,.581.5 1,797.1. 2,003.8
  Gross disposable national income per capita (US$million) 2,088 2,217 2,236 2,340 2.420
Sectoral breakdown (% of current GDP)b
Agriculture 13.0 12.5 13.0 12.3 11.8
Mining 0.4 0.4 0.4 0.4 0.4
Manufacturing 21.9 22.5 22.6 23.0 23.6
Electricity, gas and water 0.6 0.6 0.6 0.6 0.6
Construction 3.8 4.0 3.8 3.6 3.9
Commerce, restaurants and hotels10,315
1.7
1,783
......
13.5
0.4
21.1
0.63.7
20.1 19.9 19.9 19.6 19.8 19.8
Transport, storage, communications 7.7 7.8 8.2 8.5 8.6
Financial services 3.2 3.4 3.7 3.8 3.8
Real estate services 3.4 3.3 3.2 3.2 3.2
Housing 8.8 8.7 8.4 8.4 8.0
Communal, social and personal services 5.4 5.3 5.1 5.1 5.1
Public services7.4
3.03.49.15.55.8 5.8 5.6 5.5 5.5 5.4
Breakdown by expenditure (% of current GDP)
Total consumption 96.6 94.7 95.9 98.2 98.0
Private 87.5 85.0 85.9 88.3 87.9
Public 9.1 9.7 10.1 9.9 10.1
Gross fixed capital formation 16.1 16.6 16.2 16.9 16.5
Private 12.7 13.2 13.2 14.1 13.4
Public 3.3 3.5 2.9 2.8 3.1
Change in stocks -1.0 0.9 0.1 0.0 -0.5
Exports of goods and services 25.9 24.8 24.9 27.3 28.9
Imports of goods and services 37.6 37.1 37.3 42.5 42.9
Gross national saving97.7
88.3
9.3
15.812.1
3.7
-0.6
21.133.9
.. 14.2 16.6 14.5 13.5 14.7WT/TPR/S/111 Trade Policy Review
Page 4
1996 1997 1998 1999 2000 a2001a
II.   Fiscal indicators (% of GDP)
Revenue 11.8 11.7 11.3 12.1 12.0
Expenditure 12.9 13.6 13.5 14.4 15.5
Overall balance12.9
14.9
-2.0 -1.1 -2.0 -2.1 -2.3 -3.5
III.  Money and prices
Consumer price index (% change) 1.9 4.2 -1.0 4.3 1.4
M3 (% change) 27.5 9.5 9.9 3.3 2.5
Official exchange rate (Colón/US$) 8.75 8.75 8.75 8.75 8.75
Real effective exchange rate (1990 = 100) 148.9 152.6 155.6 154.9 163.0
Deposit rate (%, p.a.) 12.7 10.7 10.7 7.1 3.9
Lending rate (%, p.a.)7.4
20.18.75
139.5
12.016.7 15.7 15.1 15.1 12.2 7.8
IV.  Memo items
Population (million) 5.9 6.0 6.2 6.3 6.4
Terms of trade (1980 = 100) 116.6 116.5 109.1 103.0 […]
Net international reserves (US$ million)5.8
107.71,100 1,462 1,765 1,970 1,891 1,710
.. Not available.
a Preliminary figures
b Excluding imputed banking services, customs duties and value-added taxc Gross Domestic Product less property income paid to the rest of the world plus net current transfers.
Source: Salvadoran authorities, WTO Secretariat calculations, verified by the Central Reserve Bank of El Salvador.
9. According to Central Bank estimates, per capita GDP increased from some US$1,680 in 1995
to about US$2,150 in 2001.  Thanks to the large work force abroad, particularly in the United States,net transfers play an important role, generating a gross disposable income per capita in excess of the
GDP per capita.  In 2001, gross disposable income per capita stood at US$2,420, 13% higher than
GDP per capita.
10. The expenditure composition of El Salvador's GDP is characterized by a relatively high level
of private consumption, which is partly financed by remittances from Salvadorans living abroad.  In2001, consumption represented 98% of GDP.  Similarly, the marginal propensity to consume is high
owing to the effect of the remittances.
5  Thanks to the remittances, it has been possible to maintain a
relatively stable national savings rate in spite of the increase in consumption, since average annual
growth in disposable national income has exceed ed the GDP growth rate for 1997-2001 by more than
0.5%.  The national savings rate amounted to 14.5% of GDP in 2001.  The authorities have spoken ofa need to increase the savings rate, and hope to achieve this thanks in part to the contributions of
employees in the new pensions scheme.  The privat e investment rate stood at 13.4% of GDP in 2001.
11. Exports of goods and services have increased their contribution to GDP over the past years
(see below).  This development of Salvadoran foreign trade would seem to indicate a situation in
which merchandise exports have grown in parallel with and complementary to the migration oflabour.  At the same time, emigration has also led to an increase in consumption through the
remittances from abroad, boosting national welfare but at the same time causing an increase in the
demand for imports, including goods with compet e with domestic production.  The challenge for
                                                     
5 According to calculations made by the WTO Secretariat on the basis of information supplied by the
Central Reserve Bank of El Salvador, for every US dollar increase in gross disposable national income duringthe period 1997-2001, household consumption increased by US$0.78.El Salvador WT/TPR/S/111
Page 5
El Salvador will be to consolidate the gains generated by the movement of labour and reorient them
towards the medium and long term by ensuring that a growing share of remittances are converted to
savings, and channelling these increased savings towards increased investment.
12. Total employment increased from 2.05 million in 1996 to 2.45 million in 2001 (Table I.2).
The participation rate in the labour market increased as well and went hand in hand with a slight
decrease in the unemployment rate, which stood at 6.9% in 2001.  While employment shifted away
from agriculture, growth was particularly high in activities such as commerce and hotels, and
financial services.  Employment in manufacturing declined slightly between 1996 and 2001, from18% of the total to 17.6%.
13. In El Salvador, micro-enterprises are of great importance to the economy because of their
leading role in generating employment. A survey undertaken by the Salvadoran Government in 1999
estimated total employment in the urban informal sector at about 512,000 for that year, equivalent to
more than 20% of the economically active population.
6  Urban informal employment was particularly
important in commerce, manufacturing, and transport.
Table I. 2
Employment indicators, 1996 – 2001
1996 1997 1998 1999 2000 2001
('000)
Population 5,787 5,911 6,031 6,154 6,276 6,397
Economically active population 2,227 2,245 2,403 2,445 2.496 2.633
Urban area 1,314 1,335 1,494 1,534 1,568 1.636
Rural area 914 910 909 911 928 997
Employment 2,056 2,067 2,228 2,275 2,323 2,451
(%)
Participation rate 38.5 38.0 39.7 39.7 39.8 41.1
Unemployment rate 7.7 8.0 7.5 7.4 7.0 6.9
Employment by sector (%)
Agriculture and mining 28.2 26.4 25.1 22.2 21.7 21.9
Manufacturing 18.0 16.1 18.7 18.8 18.7 17.6
Utilities 0.4 0.7 0.4 0.4 0.4 0.4
Construction 6.4 6.7 5.4 5.8 5.1 5.4
Commerce and hotels 19.4 24.6 25.0 25.4 26.3 27.2
Transport 4.4 4.6 4.0 4.4 4.7 4.6
Financial services 1.3 3.0 3.7 3.7 3.8 4.1
General services 21.8 17.8 17.7 19.4 19.4 18.6
Source: Ministry of Economy and Central Reserve Bank of El Salvador.
                                                     
6 National Commission for Micro- and Small Enterprises, Características del Sector Microempresarial
Salvadoreño, 1999 , San Salvador, 1999.WT/TPR/S/111 Trade Policy Review
Page 6
(ii) Fiscal policy
14. The formulation of fiscal policy is mainly under the responsibility of the Ministry of Finance.
Fiscal policy is directed towards rationalizing and optimizing current expenditure and maintainingpublic investment levels, giving priority to human development-related areas such as education,
health, social security and training of human res ources.  The share of government spending in GDP
has traditionally been relatively low, but has been increasing over the past years, reaching 15.6 % of
GDP in 2001, while the share of revenue has remained low and stable (12% of GDP in 2001).  This
can partly be explained by a relatively high rate of tax evasion.  As in the case of smuggling, anumber of steps were taken such as the application of the Zero Tolerance Plan and the Special Law
for the Penalization of Customs Offences, which include provisions for penal action and the
temporary closure of establishments, inter alia .  El Salvador's fiscal balance has posted increasing
deficits since 1997;  in 2001, the non-financia l public sector deficit amounted to 3.6% of GDP
(Table I.3).  In 2002, in the framework of the dr aft 2003 budget, the authorities drew up a strategy to
reduce the deficit (see below).
15. While income tax and value-added tax (VAT) have increased in importance as dominant
income categories, representing some 27% and 51% of current revenue respectively in 2001 as
compared to 25% and 46% in 1997, revenue from customs duties has remained relatively stable in
nominal terms since 1997, ranging between US$141 million and US$148 million.  Reflecting thedecrease of El Salvador's average tariff in recent years and the growing importance of other revenue
sources, the share of customs duties in total government revenue has fallen from 12.2% in 1996 to
8.9% in 2001.  The ratio between revenue collected from customs duties and merchandise imports
was less than 4% in 2001.
Table I.3
Central Government Finances, 1996-2001
(In millions of US$)
1996 1997 1998 1999 2000 2001a
Revenue 1,330 1,312 1,401 1,414 1,585 1,650
Current revenue 1,310 1,286 1,387 1,393 1,489 1,599
  Taxes 1,080 1,132 1,209 1,275 1,344 1,449
Income tax 305 323 351 393 429 431
Value-added tax 541 593 650 669 714 809
Consumption tax 57 5,572 47 52 49 49
Property tax and other taxes 14 14 15 14 12 12
Customs duties 163 146 146 148 141 146
Non-tax and other revenue 230 154 178 119 145 150
Capital revenue and donations 19.5 25.9 14.6 20.8 95.8 51.8
Expenditure 1,540 1,438 1,636 1,681 1,884 2,143
Education 231 271 322 330 387 412
Public works 148 171 195 126 120 125
Defence and public security 231 233 260 259 280 287
Public health and social welfare 143 145 177 181 206 201
A g r i c u l t u r e 2 53 14 33 24 0 2 6
Balance -210 -126 -235 -267 -299 -493
a Preliminary data.
Source : Central Bank of El Salvador.El Salvador WT/TPR/S/111
Page 7
16. Following the earthquakes in 2001, the Legislative Assembly consented to the Government's
plan to issue a Eurobond for US$350 million.  In 2002, the authorities revised their overall public
sector deficit target for 2001-2005 to incorporate reconstruction costs of about 1.5% of GDP per year.
17. Increasing the share of investment expenditure in public spending has been a major objective
of fiscal policy in recent years, with a rise from 3.2% of GDP in 1999 to 4.3% in 2001.  Since 1996,
growth rates in public spending have been partic ularly high for education (with an annual average of
12% in nominal terms between 1996 and 2001) as well as for public health and social welfare (7%),
whereas expenses for public works, agriculture, and defence have stagnated or increased only slightly.
18. In the light of the revised figures presented in the 2003 draft budget, a non-financial public
sector deficit of 3.3% of GDP is expected in 2002.7  The draft 2003 budget aims to reduce current
expenditure by 3.6%, excluding education and health, to boost revenue by expanding the tax base, and
to maintain the level of indebtedness under control in compliance with the self-imposed precautionary
limit of 40% of GDP for the non-fi nancial public sector debt.  According to information provided by
the Salvadoran authorities, the ratio of public debt to GDP was 36% in August 2002, and is expected
to reach 38.8% in 2003.  Public investment is expected to reach 4.3% of GDP, 33% of which
represents reconstruction expenditures.  As regards the improvement of tax collection, a tax reform
programme is planned which includes a reform of the Income Tax Law, the reduction or elimination
of the VAT exemptions and a streamlining of customs procedures.  The authorities consider that therehas been a substantial improvement in the reduction of the underlying deficit (excluding the effects of
reconstruction expenses in the wake of two earthquakes in 2001) and that it could already be
eliminated by 2004.  However, an important expenditure component is the financing of the repayment
of the growing debt from the former pensions system, which has reached 7.9% of the budget.
(iii) Monetary and exchange rate policy
19. Responsibility for the conduct of monetary policy lies with the Central Reserve Bank of
El Salvador (BCR).  From 1993-2000, the BCR maintained a monetary policy directed towardscontrolling inflation by using the exchange rate as an anti-inflationary anchor.  However, this
considerably reduced the margin of manoeuvre of monetary policy, which was directed towards
neutralizing the effect of foreign currency remittan ces from abroad, and involved the maintenance, for
example, of relatively strict non-interest bearing reserve requirements.  Furthermore, the fixed
exchange rate system failed to eliminate the countr y-risk perception and ensured that the real interest
rates remained high, adversely affecting credit and investment.
20. In response to these difficulties, the US dollar was introduced as legal tender alongside the
Salvadoran Colón through the Law on Monetary Integration of 22 December 2000, which entered into
force on 1 January 2001.
8  The main objectives of this Law are to contribute to improving financial
conditions, to create a healthier and more competitive financial system, to increase the safety of wagesand savings, and to contribute to improving the economic institutions.  More specific monetary goals
included an interest rate decrease, a lowering of the country risk through increased institutional
stability, a greater variety of financial instruments and the avoidance of exchange rate crises.
21. In establishing the US dollar as legal tender together with the Colón, the Law on Monetary
Integration fixed the exchange rate between the Colón and the US dollar at 8.75, the same rate thathad been in place during the seven years prior to the adoption of the Law.  The US dollar also became
                                                     
7 The budget is available on-line at the Ministry of Finance website at http://www.mh.gob.sv/.
8 Official information on the Law on Monetary Integration may be found online at
http://www.interaction.gob.sv/doc-html/index.html.WT/TPR/S/111 Trade Policy Review
Page 8
the unit of account for the financial system;  all its operations and accounting have been dollar
denominated since 1 January 2001 when all deposits, credits, pensions and other operations were
automatically converted.  The authorities consider that the introduction of the dollar as a unit ofaccount for the financial system presents the advantage of eliminating the problem of passive losses
through currency conversions.
22. The Law on Monetary Integration prohibits the banks from charging any fees for exchanging
US dollar and Colón bills.  Salaries, wages and prices can be denominated and paid in US dollars,
Colóns or any other currency.  During the first six months of 2001, prices had to be labelled in bothdollars and Colóns, after which time the Law on Monetary Integration introduced the dollarization of
the economy.  As at May 2001, over 80% of the currency in circulation was in US dollars.  The
authorities consider that the dollarization also contributed to the soundness of the financial system.
23. Domestic interest rates decreased considerably in the wake of dollarization.  This was in part
due to US monetary policy, but also largely to the reduction of the country risk through theelimination of the exchange rate risk.  Although since 1996, interest rates have decreased – for
instance, average lending rates for Colón-denominated loans of up to one year fell from 16.7% in
1996 to 12.2% in 2000 – they remained high in real terms and well above US interest rates.  The
adoption of the Law on Monetary Integration provided additional impetus to the decline in interest
rates.  Since the Law entered into force in January 2001, average lending rates dropped from 11.5% to7% in July 2002, while deposit rates fell from 6.5% to 3.5%.  The spread between interest rates in
loans denominated in Colóns and US dollars has also dropped significantly, from more than
5 percentage points during the 1990's to about 1.5 percentage points in 2001.
24. With the entry into force of the Law on Monetary Integration, the functions of the BCR were
restructured.  According to the authorities, the role of the BCR is now to maintain monetary stability.
Although it still retains the function of providin g the financial system with working capital, the
function of the BCR as a lender of last resort is altered as a result of the Law.  The BCR can nowengage in repurchase operations only under exceptional circumstances which include sudden
contractions in financial system liquidity and cases of force majeure .  To that end, the BCR plans to
maintain a high level of international reserves in excess of the monetary base.  The Law also
converted the non-interest bearing legal reserve requirement of 20% to an interest bearing liquidity
requirement to which banks may resort for their short term liquidity needs.  The US dollar liquidityreserves deposited in the BCR by each bank must be proportional to its deposits.  The banks also have
a liquid assets requirement in proportion to their short term obligations.  Assets and liabilities in other
currencies have to be matched, or the exchange rate risk exposure has to be hedged.
25. El Salvador does not maintain controls on foreign exchange transactions.
26. The provisions of the Law on Monetary Integration, and in particular the prohibition on
issuing new Colóns, have meant that the Central Bank's capacity to influence prices is now limited.
The only remaining instruments for influencing demand are fiscal policy and income policy.  The
money supply had previously been influenced by public sector decisions backed by actions taken by
the monetary authorities, and this had an effect on price change.  Inflation rates have decreased from
double digit rates at the beginning the 1990's to 1.4% in 2001.  Accumulated inflation for the first ninemonths of 2002 reached 2.6%;  however, the annual variation for the past 12 months was only 1.4%
as of September 2002.  The maintenance of a fixed exchange rate and the resulting appreciation in
real terms contributed to this reduction by pushing down the cost of imports.El Salvador WT/TPR/S/111
Page 9
(iv) Balance-of-payments
27. El Salvador's current account registered continuous deficits between 1996 and 2001, which
ranged between US$91 million in 1998 and US$431 million in 2000 (Table I.4).  In 2001, the currentaccount deficit amounted to US$ 177 million, equivalent  to 1.4% of GDP, while in the first half of
2002, it reached US$98 million, 31% higher than the same period of the preceding year.  The
merchandise trade balance posted a persistent deficit which has shown a widening trend since 1997.
In 2001, the merchandise trade deficit amounted to more than US$1.9 billion.  At the same time, the
current account deficit was contained by a strong and increasing surplus in current transfers, mainlyconsisting of remittances from Salvadorans living abroad. In addition to private transfers, El Salvador
received public and other transfers for a total of US$393 million in 2001.
Table I.4
Balance of payments, 1996-2001
(US$ million)
1996 1997 1998 1999 2000 2001a
I. Current account -169 -98 -91 -239 -431 -177
Trade in  goods -1,433 -1,143 -1,306 -1,356 -1,740 -1,913
Exports 1,788 2,437 2,460 2,534 2,963 2,901
Imports 3,222 3,580 3,765 3,890 4,703 4,814
Services 10 -152 -149 -183 -235 -2
Receipts 10 476 588 641 698 1,076
Payments .. 628 737 823 933 1,078
Investment income .. -163 -163 -282 -253 -266
Receipts .. 75 111 113 141 169
Payments .. 238 274 395 394 435
Current transfers (net) 1,255 1,361 1,527 1,582 1,797 2,004
Private remittances 1,083 1,200 1,338 1,374 1,751 1,911
Public transfers and other 172 161 189 208 46 93
II. Financial account 334 665 1,063 653 373 343
Direct investment .. 59 1,103 162 178 278
Portfolio investment .. 116 -226 74 -26 34
Long and medium term debt (net) 334 271 245 368 401 -417
Other investments .. 219 -59 50 -181 449
III. Errors and omissionsb0 -205 -669 -206 -12 -344
IV. Overall balance 165 363 303 208 46 178
V. Financing
Reserve balance (increase -) -165 -363 -303 -208 -46 -178
.. Not available.
a Preliminary figures.
b Included in the financial account until 1996.
Source : Central Bank of El Salvador.
28. In addition to maquila exports, remittances from Salvadorans living abroad, mainly in the
United States, constitute an important source of foreign exchange for El Salvador.  Net current
transfers increased from US$1,390 million in 1995 to  just over US$2,000 million in 2001, equivalent
to 14.6% of GDP.  This strong contribution of foreign financing to national savings makes theWT/TPR/S/111 Trade Policy Review
Page 10
Salvadoran economy vulnerable to changes in the US business cycle.  Private remittances represent
96% of net transfers.
29. El Salvador's balance of trade in services features a deficit for most service categories
(Table I.5).  While the deficits are highest for tran sport and financial services, particularly insurance,
successive, relatively small surpluses have been recorded for tourism and communications.
Table  I.5
Trade in services, 1997-2001
(US$ million)
Description 1997 1998 1999 2000 2001
Balance -15.0 -148.9 -182.6 -234.9 -2.1
Revenue 475.8 588.4 640.6 698.4 1,075.6
Transport 180.5 187.5 213.8 248.6 281.8
Travel 149.4 206.2 222.3 216.9 201.1
Communications 78.3 98.3 81.2 86.3 108.8
Construction 1.6 5.7 6.8 14.0 15.6
Insurance 31.7 54.2 66.7 63.1 406.2
Banking 7.7 10.0 12.3 6.7 2.0
Information services 0.0 0.0 0.0- 3.9 0.2
Patent fees (royalties) 0.0 0.0 1.1 2.4 1.2
Personal, cultural and recreational services 0.0 0.0 0.0- 0.6 0.4
Government services 15.5 12.9 20.3 25.3 23.5
Miscellaneous services 11.1 13.6 16.1 30.6 34.8
Expenditure 627.8 737.3 823.1 933.3 1,077.7
Transport 261.4 324.7 330.9 405 395.9
Tourism 153.1 179.4 168.9 165.2 195.3
Communications 7.4 18.3 20.8 27.2 40.4
Construction 1.7 4.1 8.9 8.2 8.6
Insurance 87.4 89.3 113.5 113.2 173.4
Banking 17.5 16.9 31.4 38.1 40.1
Information services 0.0 0.0 11.8 14.1 9.6
Patent fees 0.0 0.0 20.3 20.5 22.1
Personal, cultural and recreational services 0.0 0.0 0.0.- 1.0 1.3
Government services 13.2 14.1 22.5 21.6 15.8
Miscellaneous services 86.1 90.5 94.1 119.2 175.2
Source : Central Bank of El Salvador.
30. El Salvador's foreign debt increased from US$2.5 billion in 1996 to more than US$3.1 billion
in 2001.  Net international reserves increased from US$683 million in 1995 to US$1,710 million in2001, reaching a high point of 1,970 million in 1999.El Salvador WT/TPR/S/111
Page 11
(4) MERCHANDISE TRADE AND INVESTMENT FLOWS
(i) Composition of trade
31. According to COMTRADE, whos e figures do not include maquila exports and imports of
related inputs, El Salvador's merchandise exports amounted to US$1,214 million in 2001, up from
US$985 million in 1995 (Chart I.1, Table AI.1).  El Sa lvador's most important export products are
coffee, sugar, clothing, and textiles.  However, the share of coffee in exports fell from nearly 38% in
1995 to 9.5% in 2001.  El Salvador's exports of chemicals cover a wide range of products;
medicaments are the most important product category.  In recent years, El Salvador has succeeded inexpanding its exports in various manufactured products such as iron and steel, machinery and
transport equipment, and clothing.
32. El Salvador's merchandise imports have increased in nearly all product categories
(Table A.I.2).  The share of manufacturing imports fell from 72% in 1995 to 66% in 2001, while
imports of agricultural products and fuels increased over the same period.  Machinery, transportequipment and chemicals account for a large share of manufactured imports.  Agricultural imports,
making up for over 19% of imports in 2001, include a wide range of food products.  Crude petroleum
and mineral fuels accounted for 13% of imports in 2001.
33. It should be noted that the exclusion of maquila exports and of imports of related inputs in
COMTRADE data results in a strong underestimation of exports in subsectors such as textiles and
apparel, as well of imports of necessary inputs.  According to Central Bank data, maquila exports
amounted to US$1,652 million in 2001, while imports of necessary inputs were US$1,161 million.
9
According to information provided by the Minist ry of Economy maquila exports are particularly
significant in sectors such as textiles, apparel, and electronic components.10
                                                     
9 Central Bank of El Salvador, online at: http://www.bcr.gob.sv/boletin.htm.
10 Database of the Ministry of Economy available online at:  http://www.minec.gob.sv/
default.asp?id=19&mnu=19.WT/TPR/S/111 Trade Policy Review
Page 12
Mining
3%Chemicals
11%Textiles
7%Clothing
3%Other
9%
Other Agriculture
17%
Sugars,beet
or cane, raw
6%
Mining
9%Fuels
6%Chemicals
15%Textiles
6%Clothing
6%Other
12%
Other
Agriculture
17%Coffee, not
roasted
9%
Food
preparations,
nes 3%
Other semi
manufacters
11%
Total: US$ 3865.6 millionChart I.1
Merchandise trade by product, 1995 and 2001
1995 2001
(a)    Exports (f.o.b.)
Total: US$ 985.2 million
(b)    Imports
Food
15%
Fuels
9%
Iron and steel
3%
Chemicals
17%
Other semi-
manufactures
12%Machinery
and transport
equipment
30%Other
12%
Agricultural
raw material
2%
Fuels
13.0%
Iron and
steel
4.6%
Chemicals
15.6%Other
13.1%
Machinery
and
transport
equipment
23%Agricultural
raw material
2.5%Food
16.7%
Other semi-manufactures
10.1%
Total: US$ 2627.7 million
Sourc e:   UNSD, Comtrade database.%
Total: US$ 1213.5 millionCoffee, not
roasted 38%
Other semi
manufacters
8%
Sugars, beet or
cane, raw 4%El Salvador WT/TPR/S/111
Page 13
(ii) Geographical distribution of trade
34. According to COMTRADE data, El Salvador's main export markets are the other members of
the Central American Common Market (CACM) and the United States (Chart I.2).  Guatemala wasthe market for nearly 27% of Salvadoran exports in 2001, up from less than 21% in 1995.  The
United States and Honduras absorbed 19% and 15% of Salvadoran exports, respectively.  While
exports to Latin American countries have experienced a clearly increasing trend since 1995, exports to
the European Union declined from nearly 31% in 1995 to less than 7% in 2001, largely owing to the
decrease in coffee exports.  Important European expo rt destinations include Germany, France, and the
Russian Federation. (Table AI.3).
35. El Salvador's trading partners have benefited from a growing market and a more open foreign
trade regime;  most have seen their exports to El Salvador increase in recent years (Table AI.4).  The
United States is El Salvador's most important trading partner on the import side, although its share fell
from 44% in 1995 to 34% in 2001.  Over the same period, the combined shares of the Latin Americanand Caribbean countries rose, from 33% in 1995 to 45% in 2001.  Import shares from most European
countries have remained relatively stable since 1995, with a combined share of 11% and Germany and
Spain being the most important exporters to El Salvador.  East Asian countries made up for 8% of
Salvadoran imports in 2001, down from 9% in 1995.
36. The inclusion of maquila exports and related imports results in a strong increase in the
United States' importance as a trading partner.  According to Central Bank data, the United States
absorbed more than 65% of El Salvador's merchandise exports and provided more than 49% of
imports in 2001.
11
(iii) Foreign direct investment
37. Foreign investment in El Salvador appears to have been encouraged by new legislation on
telecommunications and electricity (Chapter IV(4) and (5)(iii)), which opened these sectors to private
competition and foreign capital.  Moreover, the enactment of the Investment Law in 1999 abolishedmost exceptions to national treatment (see Chapter II(3) for details on exceptions).
38. Between 1997 and June 2002, accumulated foreign investment inflow in El Salvador
amounted to US$2361.4 million, of which more than US$800 million went to the electricity sector
and US$398 million to the communications sector (T able I.6).  Other sectors with important FDI
inflows include manufacturing, maquila, and financial services.  The most important foreign investorduring that period was the United States, followed by Venezuela and France.
12
                                                     
11 Central Bank of El Salvador, online at: http://www.bcr.gob.sv/boletin.htm.
12 UNCTAD, database on foreign direct investmentEl Salvador WT/TPR/S/111
Page 15
Table I.6
Accumulated Foreign Direct Investment by Sector, 1997-2002a
(In millions of US$)
1997 1998 1999 2000 2001 2002a
Industry 196.4 286.9 304.6 336.5 389.9 415.4
Trade 106.0 124.6 142.1 169.1 190.2 212.5
Services 54.1 60.3 66.0 70.0 90.0 107.5
Construction 11.1 11.1 11.8 12.2 12.3 12.3
Communications 3.5 254.5 288.6 291.0 352.6 397.7
Electricity 0.0 598.4 723.5 806.9 821.5 821.5
Agriculture and Fishing .. 21.0 21.0 40.0 40.0 40.0
Mining and quarrying 14.0 15.5 0.1 0.1 0.1 0.1
Finance 37.8 77.2 104.6 120.4 161.8 161.8
Maquila 57.2 134.4 137.6 156.9 182.6 192.7
Total 480.1 1,583.9 1,799.7 1,973.1 2,240.9 2,361.4
..  Not available
a June 2002
Source :  Central Reserve Bank of El Salvador.
(5) OUTLOOK
39. For 2002, the authorities expect a growth rate of 2 to 3%, an inflation rate ranging between
2 and 3%, and a fiscal deficit of 3.3% of GDP.  For 2003, the draft 2003 budget forecasts a GDP
growth rate of between 2.5% and 3.5%.  The authorities hope that a recovery of the world economy,
in particular the United States economy, will act as an engine for growth in 2003.  Other elements that
should contribute to sustaining growth are:  the maintenance of the level of remittances from abroad,increased benefits granted under the Caribbean Basin Initiative launched in 2000, the positive
expectations generated by the conclusion and negotiation of free trade agreements, and the potential
for the reduction of transaction costs thanks to the efforts made to develop the regional electricity
interconnection network, and improvements in the telecommunications sector, ports and the road
network.  The reduction that has taken place in real interest rates since the introduction of the Law onMonetary Integration should also help to stimulate growth.
40. It is hoped that in this macroeconomic environment, the public sector deficit can be reduced
by 1.6% of GDP, bringing the underlying deficit to only 0.2% of GDP.