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Increased foreign direct investment in El Salvador is essential for the country’s economic recovery
El Salvador requires foreign capital growth above US $300 million to reach pre-coronavirus pandemic levels. Experts have noted that order and stability in the country’s public finances are the primary keys to attracting capital.
Foreign direct investment in El Salvador has grown very modestly in recent times. In 2019, however, investment in the country reached US $9.98 billion, and in 2020, it grew to the amount of US $10.03 billion.
According to the Salvadoran Central Reserve Bank (BCR) data, the sector that recorded the highest rate of growth was the communications and information sector, which reached an investment level of US $1.36 billion.
One reason for this inflow of capital may be due to the investments that national telephone companies have made to increase their installed capacity in response to a demand for expanded services and product offerings. Growth in demand in this area stems from the fact that thousands of Salvadorans have been teleworking and attending virtual classes due to the pandemic.
The transportation and storage sector also experienced a positive performance with total receipts of US $228.89 million in 2020, versus the US $122.29 million it had collected by the end of 2019. This is while the financial and insurance sector showed a decline at the end of 2020 with capital inflows of US $3.007 billion relative to $3. 099 billion in 2019.
In the wholesale and retail sectors, foreign direct investment in El Salvador also showed a drop, with $1.35 billion in 2019 and $1.34 billion in 2020.
Although El Salvador was hard hit by the economic effects of the pandemic, the economist and analyst for the Salvadoran government’s economic development organization (Fusades), Pedro Argumedo, has noted that until mid-2019, the FMLN party government’s negative relationship with the private sector also harmed foreign direct investment in El Salvador. This adverse circumstance created uncertainty, and the government did not pursue a coherent competitiveness and productivity agenda. “The lack of agreement between public and private sector entities created a less than favorable investment climate,” Argumedo explained. He went on to note that “even with the pandemic, investment grew by US $55 million.”
“The pandemic, with quarantines and uncertainty of purchasing capacity in households around the world, also caused investment to fall sharply and particularly in the El Salvador, where the quarantine was lengthy,” Argumedo stated.
The government economist has explained that by this year, external factors, such as US economic growth, will increase demand for Salvadoran products. As a result, many companies will need to increase their production capacity, which will positively influence the machinery and equipment procurement required to respond to an increase in demand.
Additionally, the speed at which the effort to vaccinate the nation’s population moves forward will affect the agility with which economic recovery in the country progresses. “In service operations and manufacturing plants, people have been social distancing. Where 100 people used to work now there are 40,” he asserts.
Stabilizing government finances would give more certainty to foreign direct investment in El Salvador
An agreement with the International Monetary Fund (IMF) to stabilize public finances is also essential to attract foreign investment, Argumedo says. “As long as there is a fear that the government might not be able to meet its fiscal obligations, many companies will remain reticent to make investments.”
The president of the Salvadoran Banking Association (ABANA), Raúl Cardenal, has given the go-ahead to the agreement that has been reached with the IMF that will alleviate the crisis.
Finance Minister Alejandro Zelaya has explained that the government is seeking the IMF to approve a 36-month extended $1.3 billion line of credit, similar to the program announced for Costa Rica.
For Argumedo, if the agreement with the Fund provides a clear direction as to how public finances are ordered, there will be fiscal clarity. This clarity will, in turn, facilitate the investment decisions that foreign capital makes in the country.
“Investment is the key variable for accelerating recovery (economic) because the other is consumption. The latter is slower because it depends on wages, and those tend to increase slowly. What gives dynamism to the country’s economy is investment.”
The economist mentions that it is critical for El Salvador to focus on recovering all the inflows of foreign capital that were on their way before the advent of Covid-19. The total figure could be estimated to be at $300 million. This would mean a recovery of the levels that were achieved in 2019.
Foreign direct investment in El Salvador in relation to its neighbors
For former Salvadoran Central Reserve Bank President Carlos Acevedo, it is vital to understand that 2020, due to the pandemic, was a bad year for the global economy. He believes that it is essential to examine how the other countries in the region are doing to understand how El Salvador has fared comparatively.
According to Honduran Central Bank (BCH) data, in the case of that country, foreign direct investment fell by 16% in 2020, or US $372 million, according to Honduran Central Bank (BCH) data. Most of the investment, or 51.4%, came from North America.
The Honduran private sector considers that the decline in foreign direct investment has been coming for more than six years. Reduced capital inflows have affected weak institutions and helped to create a lack of confidence in the rule of law.
While in Guatemala received US $250 million in foreign direct investment during the first quarter of this year, generating some 1,500 new formal employment positions.
Although the country shows signs of a steady but slow recovery, foreign investment levels have fallen by 81% since June of 2020.
During the first three months of 2020, the neighboring country recorded a net flow of foreign direct investment of $48.1 million. This amount is 81% less than the figure reported in the same period of 2019 amid the confinement conditions created by Covid-19.
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