The Salvadoran economy faces five challenges

Salvadoran economic policymakers must address critical internal factors beyond the global economic slowdown, a recent fall in coffee prices, and the ups and downs in oil production and prices.

According to the latest report from the Central Reserve Bank (BCR), it is predicted that the economy could grow by around 3.2% this year. However, to achieve this goal, it is necessary to address specific challenges that face the Salvadoran economy.

Improve the investment climate

Salvadoran businessmen and economists have agreed that an improvement in the environment for investment in the country would catalyze the Salvadoran economy to expand at a greater pace.

In the opinion of the economist of the Salvadoran Foundation for Economic and Social Development (Fusades), Pedro Argumedo, the administration of President Nayib Bukele must prioritize the formulation of action strategies to improve competitive capabilities.

Central America’s INCAE Business School estimates that the Salvadoran economy must strive to ensure that US $1.5 billion of foreign investment reaches the country each year. This would enable El Salvador to catch up with its peers in Central America.

But to achieve the above, Argumedo believes that it is necessary for El Salvador’s Investment and Export Promotion Agency (Proesa) to be clear about its role in the investment attraction process and develop a long-term plan to reach established goals. Argumedo asserts that it is only by being attentive to inconveniences and roadblocks experienced by current and potential investors. It must act to be able to maneuver and articulate a plan that guarantees the injection of capital into the Salvadoran economy.

Take advantage of free trade agreements to boost the Salvadoran economy

Taking advantage of current trade agreements with more than 40 nations worldwide would also increase the flow of imports and exports of Salvadoran goods.

El Salvador’s close relationship with other countries is also evident through the flow of remittances from Salvadorans living abroad. The Salvadoran Central Bank recently detailed that this influx of financial resources grew at a rate of 4.9% in 2021 to account for 24.09% of the nation’s GDP. It is worth remembering that more than 90% of the money that Salvadorans send from abroad comes from compatriots in the United States.

Facilitate commercial procedures and the flow of goods

In addition to other vital imperatives, it is necessary to respond effectively to the Salvadoran private sector’s repeated complaints concerning the difficulties in initiating and maintaining commercial activities in the country.   The most widespread improvement sought by members of the country’s business community is a streamlining of procedures and the time it takes to incorporate a commercial entity. As an initial step towards the creation of a more favorable business climate, the Interunion Commission for Trade Facilitation (Cifacil), which brings together the leading business associations in the country, has already recognized that local authorities have demonstrated a willingness to improve the conditions for conducting foreign trade through new customs regulations.

Hence, facilitating the flow of merchandise and speeding up procedures in El Salvador and the Central American region in its entirety is precisely one of the objectives of the proposal for a new General Customs Law that the private sector has recently made.

The Inter-American Development Bank (IDB) has asserted that agile procedures and streamlined processes will positively impact the business climate in the Salvadoran economy. The organization also points out that these conditions will improve citizens’ perception of government efficiency and the quality of service provided to the private sector.

For the IDB, digital procedures are faster, more economical, and less corruptible. The full adoption of an electronic government and other facilitators, such as electronic signatures or an electronic clinical file, for example, is part of the modern infrastructure that will serve to make the Salvadoran economy achieve higher performance levels.

Put public finances in order

Like many developing economies, El Salvador faces the critical task of keeping its fiscal house in order. Although they have recognized the country’s progress in maintaining financial stability, organizations such as the International Monetary Fund (IMF) have also reiterated the need to implement and update a Fiscal Responsibility Law that limits the country’s expenditures and encourages greater revenue generation.

The IMF, in particular, has recognized El Salvador’s progress in reducing its fiscal deficit and stabilizing its debt but has advised economic policymakers to undertake additional efforts to further reduce the national shortfall.

The need to put disciplined efforts into place to avoid the acquisition of unnecessary debt, comply with previously made financial commitments, maintain a stable political and social climate, and maintain adequate sovereign risk ratings are also considered to be further essential challenges for the Salvadoran economy.

Protect pensions and social welfare coverage

Last but not least, the country must think about the future and how to guarantee that Salvadorans have a full and dignified life from birth to old age. Four years after the pension system reform, 2022 is shaping up to be a suitable year for discussions for a new change. These, while perceived to be less radical than those of September 2017, do involve addressing the fundamental need to expand coverage.

The Pension Fund Administrators have insisted that any reform to the system must be studied technically and requires the participation of all of the parties involved.