Learn about barriers to market entry and local requirements, i.e., things to be aware of when entering the market for this country.
El Salvador continues to struggle to attract foreign direct investment (FDI) in comparison to the rest of Central America. El Salvador ranked 91st in 2019 for ease of doing business among the 190 economies measured. Initial optimism at the inauguration of President Nayib Bukele in June 2019 has since been tempered since a confrontation with the Legislative Assembly in February 2020 and then policies enacted unilaterally in response to COVID-19 in March 2020 which severely undercut the productive sector of the country for several months. Nevertheless, the private sector continues to work with the Bukele administration on a variety of policy and regulatory issues with some successes. The Bukele administration and El Salvador still considers the United States as its closest partner.
The World Bank reported net foreign direct investment (FDI) inflows Balance of Payments (BoP) in El Salvador was USD $724.8 million in 2019. In 2018, the United States accounted for one quarter of El Salvador’s overall FDI stock (second only to Panama). U.S. textile companies are the largest private employers in the country.
Leading contributors to the lack of FDI include inconsistency in enforcing commercial law, corruption, and security concerns. Bukele administration policies complicate FDI attraction, including transparency in policy making, lack of coordination within the GOES agencies responsible for investment, and a clear investment strategy. The security situation has improved, particularly under the Bukele administration. The International Monetary Fund (IMF) reported a GDP growth rate of 2.4% in 2019 which was expected to keep improving through 2024. Since the onset of the COVID-19 pandemic, the IMF lowered its GDP forecast for 2020 by 7.7 percentage points, forecasting a 5.4% drop in GDP in April 2020. The business sector remains worried about the country’s low growth rate, corruption, and security situation. Additional concerns relate to the deterioration of El Salvador’s fiscal situation, with increases in public spending and borrowing precipitated by the COVID-19 pandemic and its economic and human impacts.
Corruption remains a problem in El Salvador, which scored 34 points out of 100 on the 2019 Corruption Perceptions Index reported by Transparency International, which scores countries on their perceived levels of corruption. Soliciting, offering, or accepting a bribe are considered criminal acts and U.S. companies doing business in El Salvador are subject to the United States Foreign Corrupt Practices Act (FCPA).
In terms of U.S. exports to El Salvador, market entry requirements for importing goods and services are often related to environmental controls, consumer protection, and controlled products. U.S. and local companies have complained about customs and non-tariff barriers, including customs valuation, tariff code reclassification, labeling requirements, and the inconsistent application of customs regulations. Despite this, notable improvements have occurred in 2019 including simplification of customs procedures and improvements in getting products through at some border crossings. The Bukele Administration has worked well with the private sector and retailers to expedite approval of products for sale in the local market and streamline customs procedures. Some of these improvements could become permanent.
El Salvador’s procurement law calls for competitive contracts and applies to all Salvadoran public institutions. President Bukele will need to improve the perception of the competitive bidding and contracting process which tended to no bid contracts or shortlist contracts under the previous administration.
In August 2018, the FMLN Government discontinued diplomatic recognition of Taiwan in favor of the People’s Republic of China (PRC). Although PRC officials in El Salvador remain and there have been announcements of donations and assistance, in 2020 PRC attempts to gain influence in El Salvador has been less frequent.
Challenges remain since the assumption of power by the Bukele Administration. While GOES officials overall have been very cooperative and maintained a dialogue with the private sector and U.S. Embassy officials, progress has slowed with the attempt to combat the onset of COVID-19 in the country. Policy gridlock and fiscal constraints remain and slow meaningful progress.