The U.S. Department of State’s Investment Climate Statements provide information on the business climates of more than 170 economies and are prepared by economic officers stationed in embassies and posts around the world. They analyze a variety of economies that are or could be markets for U.S. businesses. The Investment Climate Statements are also references for working with partner governments to create enabling business environments that are not only economically sound, but address issues of labor, human rights, responsible business conduct, and steps taken to combat corruption. The reports cover topics including Openness to Investment, Legal and Regulatory Systems, Protection of Real and Intellectual Property Rights, Financial Sector, State-Owned Enterprises, Responsible Business Conduct, and Corruption.
Executive Summary
El Salvador’s location, preferential trade terms under the Central American Dominican Republic Free Trade Agreement (CAFTA-DR), use of the U.S. dollar as legal tender, and recent improvements in the business environment are strengths as an investment destination. Significant levels of sovereign debt, the legacy of decades of gang violence and a lack of transparency in rulemaking are weaknesses.
GDP rebounded strongly from the pandemic to 11.2 percent growth in 2021. The economy grew 2.6 percent in 2022. The IMF forecasts real GDP will grow 2.4 percent in 2023.
Public debt is on an unsustainable path and creates uncertainty about El Salvador’s ability to honor its future commitments. El Salvador has engaged in negotiations with the International Monetary Fund (IMF) on a new lending agreement but to date those discussions are at an impasse.
For the last thirty years, El Salvador has lagged its regional peers in attracting foreign direct investment (FDI). This is attributed in part to widespread, gang-related crime and extortion. In March 2022, the Government of El Salvador (GOES) initiated a State of Exception (SOE) that suspended certain constitutional rights. The subsequent arrest of over 67,000 alleged gang members has significantly reduced gang-related activity. The implementation of the SOE has raised concerns about the rule of law and human rights of prisoners. Nonetheless, the SOE enjoys broad public support and is contributing to improved consumer confidence and optimism about economic conditions. Domestic companies and the Salvadoran diaspora have increased investment because of the safer environment, mainly in tourism, construction, wholesale, and retail sectors. Security improvements have not yet translated into significant new FDI. How the government will wind down the SOE and restore constitutional rights is not clear at this time.
In 2021 El Salvador became the first country in the world to adopt Bitcoin as legal tender (alongside the U.S. dollar). This brought significant publicity to El Salvador and has contributed to El Salvador’s increasing popularity as a tourist destination but has otherwise had minimal impact on the Salvadoran economy. Few Salvadorans use Bitcoin. Low levels of adoption have mitigated potential risks associated with Bitcoin. The IMF has recommended that El Salvador remove Bitcoin’s status as legal tender. El Salvador also enacted a Digital Assets Issuance Law that would allow the government to issue a sovereign blockchain-based digital asset and establishes a framework to regulate issuers of digital assets and digital assets services providers. The implications of the legislation will depend on implementing regulations still under development.
Sectors with the largest investment are textiles and retail establishments. Investment in energy has increased in the last five years. The Bukele administration has planned several large infrastructure projects which could provide opportunities for U.S. companies. Project proposals include enhancing road connectivity and logistics, expanding airport capacity, and improving access to water and energy, as well as sanitation. Given limited fiscal capacity for public investment, the GOES seeks to use Public-Private Partnerships (PPPs) for infrastructure projects.
A small country with no Atlantic coast, El Salvador relies on trade. The United States is El Salvador’s top trading partner. Proximity to the U.S. market is a competitive advantage. As most Salvadoran exports travel by land to Guatemalan and Honduran ports, regional integration is crucial for competitiveness. In 2018, El Salvador officially joined the Customs Union between Guatemala and Honduras. Progress on completing the Customs Union between the three countries has been slow, with differences existing on customs procedures, sanitary and phytosanitary standards, standards, quota management, and intellectual property rights. Senior GOES officials have expressed a strong desire to resolve all outstanding issues and expeditiously complete the full Customs Union. Completing the full implementation of the Customs Union would enhance El Salvador’s attractiveness as an investment destination.
The Bukele administration has attempted to reduce cumbersome bureaucracy. In 2019, the GOES relaunched the National Trade Facilitation Committee (NTFC). The NTFC has produced three jointly developed private-public action plans to reduce trade barriers, with measures focused on simplifying procedures, reducing trade costs, and improving connectivity and border infrastructure. The NTFC reported the implementation of 26 (out of 29) measures of its 2022 action plan.
In March 2023, the Ministry of Economy and the Secretariat of Commerce and Investment launched the first-ever trade facilitation strategy to attract investment and create jobs. The five-year strategy developed by the NTFC aims to digitize procedures, modernize the trade-related legal framework, improve logistical infrastructure, and coordinate border management to enhance competitiveness. The GOES intends to invest $140 million to implement the strategy.
On April 19, 2023, the National Assembly passed the “Law for the Promotion of Innovation and Manufacture of Technology.” The law grants a 15-year exemption from income and capital gains taxes, municipal taxes on company net assets, and duties and taxes on imports of raw materials, machinery, equipment, and tools needed for new technology-related investments. Qualifying activities include software programming, cloud development services, big data analytics, distributed ledger technology, artificial intelligence, and cybersecurity solutions, as well as the manufacture and assembly of hardware for technology equipment, semiconductors, robotic parts, nanotechnology, and drones. Companies with existing investments in El Salvador are not eligible for the new tax breaks, but existing companies can create new corporate entities for new investment and will be eligible. Companies already benefitting from special tax regimes under the International Services Law and the Free Trade Zone Law are not eligible for the new tax breaks. President Bukele signed the bill into law on May 4, 2023.
The principal complaint of businesses is that laws are passed and implemented quickly without meaningful, formalized consultation or assessing the impact on the business climate. The Legislative Assembly is not required to publish draft legislation and opportunities for public engagement are limited. Salvadoran law provides for greater opportunity for businesses to consult on implementing regulations, but businesses also complain that opportunities are infrequent for genuine two-way dialogue on the potential impact of regulations.
To access the ICS, visit the U.S. Department of State Investment Climate Statements website