The Service Sector in El Salvador Dominates the Country’s Economy

The service sector in El Salvador now dominates the nation’s economy

Central America’s smallest nation’s new System of National Accounts has ratified what many economists have already observed in practice: the service sector in El Salvador contributes the most to the country’s national economy. 

While traditional agricultural activities comprise only a small fraction of Salvadoran Gross Domestic Product (GDP), the service sector makes up almost 70% of the nation’s economic output. 

To be more precise, this nation of approximately six million inhabitants is dollarized and its economic participation structure is divided mainly among three sectors: service activities (69.3%), manufacturing industry (16.1%), and agricultural activities (5.9%).

In the first quarter of 2019, the net flow of Foreign Direct Investment (FDI) that was injected into the Salvadoran economy amounted to US $177.3 million.  These resources were mainly associated with the services sector in El Salvador, including finance (US $91.5 million) for operations of shareholding companies; the electricity sector with US $75.5 million (mainly for renewable energy projects), as well as air transport and logistics activities with US $59.1 million.

The service sector in El Salvador has also produced companies that are active in the area of software development.  Salvadoran companies have been able to win first place in the Gaming Pitch 2018 at the convention of the Latin American Association of Service Exporters; and Stonebot Studio, with its video game “The Last Friend,” was selected to be among the top 40 productions at the Media Indie Exchange event at the recent Electronic Entertainment Expo. 

Current conditions create opportunities

Experts believe that El Salvador’s current stability can enable the nation to experience sustained economic growth.  The country can hope to achieve this, however, only if policymakers develop strategies that incentivize investment rather than consumption.

The new Salvadoran administration of President Nayib Bukele has prioritized the service sector in El Salvador, as well as the country’s economic development as a whole.  For the past 70 years, El Salvador’s yearly GDP growth has rarely exceeded a rate of 2%. 

The country did surpass this figure, however, in years that coincided with the construction of large-scale projects or the sale of state assets. 

Although the nation was once considered to be the “Japan of Central America,” it has, until recently, lagged behind its regional neighbors in its ability to attract foreign direct investment.  While family remittances (mainly from workers in the United States) provide funds for Salvadorans to give a boost to the domestic economy through spending on goods and services, El Salvador’s Ministry of Finance views the attraction of greater investment, both public and private, to be the healthiest way to precipitate sustainable and balanced growth. 

Salvadoran policymakers are looking towards their neighbor, Panama, as a model that they might be well-served to follow.  Panama, for example, grows by an average of approximately 6% each year.  This is accomplished by investing the equivalent of 44% of its Gross Domestic Product (GDP), which represents a figure that is close to US $44 billion. 

El Salvador, meanwhile, maintains low rates, with an investment at the end of 2018 totaling approximately US $4.2 billion.  This figure is equivalent to only 16% of the national GDP.  Most of this capital investment, however, is in the service sector in El Salvador and is private in its funding sources. 

Through the Bukele administration’s recently developed and implemented “Cuscatlan Plan,” the government of El Salvador has established a five-year road map aimed at using resources in both the public and private sectors to grow the nation’s economy.