Exports and remittances drive recovery of the economy of El Salvador

The economy of El Salvador experienced a recovery of 3% compared to 2020 figures registered in the first quarter of 2021.  This was recently reported by the country’s Central Reserve Bank (BCR).  According to economists, this improvement was due to two main factors: exports and family remittances.

“After a bad year, it is natural to have positive growth rates in the economy. Last year (2020), growth during the first quarter was almost zero. Pure arithmetic shows that the rates are better this year.  However, it should be noted that the recovery that is taking place has been due to greater exports and remittances.   These have grown by 51% over the first five months of the year,” said the former president of the Central Reserve Bank of El Salvador, Carlos Acevedo. 

He further explained that of the total sum of remittances that Salvadoran families receive, 90% of the funds are used for consumption.   This kind of expenditure drives growth in other areas of the economy of El Salvador.

“Remittances are the gasoline consumed by El Salvador’s economy, and consumption is the engine of the country’s growth. Therefore, these signs of recovery have become visible,” asserted the economist.

The other engine that Acevedo points to are exports, which have increased considerably.  In the first quarter of 2021, the value of goods sold overseas reached US $ 2.7 billion.   This is equivalent to an increase of  US $ 795.2 million compared to the same period in 2020.

“So, both factors do not depend on the economy of El Salvador but, rather, on the performance of the US economy,” he went on to state. Furthermore, Carlos Acevedo believes that the government of El Salvador cannot take credit for its policies for the recovery of the economy of El Salvador. Still, instead, it is due to exports and remittances.  He also points out that growth of an order of about 3% is a typical rebound effect of an economy that begins to emerge from the depths of a crisis.

For his part, the economist Claudio de Rosa said that it is essential to be clear that the economy of El Salvador is growing based on what has been lost, that is, a recovery compared to 2020. Therefore, further progress must be made to reach 2019 levels of economic expansion.

“The economy fell sharply. What is transpiring now is a growth of recovery of what was lost. If the economy continues to make progress, we will probably have recovered a good part of what was lost during the pandemic by the end of the year,” explained De Rosa.

The economist agreed that one of the two great pillars of this recovery is the growth of family remittances made by Salvadorans, most of whom are residents of the United States.

“Family remittances have increased in the first months of this year, and that gives more dynamism to people to be able to buy.  It also serves to recover what was lost,” added De Rosa.

The analyst also pointed out that other factors influence the present state of the economy of El Salvador, such as the recovery of formal employment. As a result, figures related to this economic measure remain below 2020 levels.

“In general terms, I see an increase in government tax revenue.   In particular, the value-added tax (VA) has experienced a good recovery. This is due to an increase in economic activity. There has also been a slight recovery in formal employment with data as of March, but well below what was seen in January of last year”, explained De Rosa.

Economic activities

According to BCR data, in the first three months of this year, there was growth in 12 of the 19 economic activities that make up most of El Salvador’s Gross Domestic Product (GDP).   Among the sectors making gains are agricultural production (4.0%), manufacturing (2.6%), services such as health (9.4%), communications (8.3%), real estate services (6.1%), electricity (5.0%), financial and insurance services (3.6), public administration and defense (2.9%), among others.

The BCR has also confirmed with its reporting that remittances are the most significant driver.  Solely in May, Salvadoran citizens received a total of US $ 684.9 million in remittances.  This is a figure that set a new monthly record.  It was influenced, in part, by the celebration of Mother’s Day.

During this period, Salvadorans abroad sent a more significant number of remittances, with higher average amounts than in previous months.

As of May of this year, 9.6 million individual transactions were registered.  This figure represented year-over-year annual growth of 23.9%.  Additionally, the average amount per remittance rose to  US $ 311.  This number was 21% more than during the same month last year.  This data is understandable since in the same month in 2020, the United States was also in lockdown, and its economy had lost millions of jobs.

The BCR highlights a measurable recovery in export industries such as textiles and clothing and light manufacturing regarding exports.

The growth of the economy of El Salvador requires investment

Acevedo explains that to talk meaningfully about the growth of the economy of El Salvador, “we would have to expand at a rate of 8% to recover what we lost last year and to achieve the level at which we closed in 2019.”  Acevedo estimates that the economy will not reach this level of recovery until 2022.

The former president of the BCR also explained that a robust recovery depends on the investment flows generated in the country. Therefore, as he observes, “the government must develop policies to create an attractive investment climate to motivate foreign and domestic entrepreneurs.”

Acevedo believes that “The government must act to attract investment.   The current administration believes that with Bitcoin, they will attract capital, and it may be that some investment does come, which is positive.   However, El Salvador needs more or less US $ 600 million of additional private investment per year to achieve an increase in economic growth that is significant.”