Development Progress| Challenges Ahead | World Bank Assistance | Project Achievements | Contacts

El Salvador is a lower middle income country with a distinguished record of first generation structural reforms (trade liberalization, re-privatization of the financial sector and other state enterprises, comprehensive tax reform and improvements in the competitiveness environment for private investment).  [1]

Coming out of a costly decade-long civil war in the 1980s, its strong record of economic reforms since the early 1990s has resulted in major benefits in terms of improved social conditions, diversification of its export sector, and access to international financial markets at investment grade levels. However, important development challenges still exist as a result of the slow down in economic growth and social progress over the last few years, in addition to the persistent presence of high levels of crime and violence.

Facilitated by a dollarized monetary regime, macroeconomic stability has resulted in low inflation, reduced business uncertainty, and low interest rates. With a strong commitment to an outward oriented development strategy, El Salvador has subscribed free trade agreements with the Dominican Republic (1998), Mexico (2000) Chile (2001), and Panama (2002). El Salvador was also the first country to ratify the Central America Free Trade Agreement (DR-CAFTA) with the United States and the first to begin implementation on March 1, 2006.

More recently, the economy is showing signs of recovery with growth reaching 4.2 percent in 2006, the highest growth rate since 1999. Indicators reveal a pickup in broad economic activity since the end of 2005, driven by a strong performance of the agricultural and construction sectors, as well as private sector services. In addition, higher than expected remittance growth is providing an added boost to consumption (remittances were 17 percent of GDP in 2006 and are expected to reach at least 18 percent in 2002007.). The pickup in economic activity has occurred despite the sharp spike in oil prices of the recent months, while tax revenues improved near expectations and public sector deficit targets have been relatively constant, around 3% of GDP sine 2005.

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CHALLENGES AHEAD

El Salvador’s major challenge remains lifting economic growth rates, which have been relatively low since the late 1990s. GDP growth slowed during 2000-2004 averaging a bit less than 2 percent, compared to about 4 percent in the 1990s. This situation has recently begun to improve as the economic growth rate was of 4% in 2006 and is expected to reach that same level in 2007.

Poverty levels declined significantly  between 1991 and 2002 (close to 27 percentage points), extreme poverty was halved in the same period, and impressive progress was also made in social areas—including basic education enrollment, infant and maternal mortality, access to reproductive health services and access to safe water. However, progress in the fight against poverty slowed after 2002—mostly due to the coffee crisis, the 2001 earthquakes, and the slowdowns in the global and domestic economies. Moreover, income inequality, already high by international standards, has increased slightly since the mid-1990s, highlighting the challenges facing El Salvador’s poorest families.

The persistently high levels of crime and violence have negatively affected the image of the country and the investment climate (55 homicides per 100 thousand persons were took place in 2006). Crime and violence in El Salvador also undermines social capital and erodes the assets and incomes of the poor, for example by devaluing property values in unsecure neighborhoods, impeding safe access to education (when gangs take over schools) and reducing employment opportunities, particularly at night because of the dangers of public transportation. Abroad national, consensus is nedeed on how to tackle the complex social, economic, and political nature of violence and crime in El Salvador, while preserving human rights and civil liberties.

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WORLD BANK ASSISTANCE TO EL SALVADOR

President Elías Antonio Saca's Administration came to power in June 2004 with a comprehensive development program that addresses growth, fiscal consolidation and poverty alleviation. The plan features an agenda of policies and investments aimed at restoring growth, generating employment and improving equity through expanding access to basic infrastructure and markets, along with parallel efforts to redress the recent trends of fiscal deterioration and to deepen improvements in public financial management.

Approved in January 2005, the Bank's Country Assistance Strategy (CAS) supports the three main pillars of El Salvador’s development plan: accelerating growth, improving equity and enhancing security. The central component of the CAS is a series of Development Policy Loans (DPLs) to support the Government’s strategy to accelerate broad-based growth. The DPLs provide quick-disbursing budget support in line with policy performance and are complemented by selective investment operations in areas where the Bank has global expertise. In order to work in close partnership with El Salvador, the World Bank recently opened a new office in San Salvador.

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PROJECT ACHIEVEMENTS

With the support of the World Bank, El Salvador has successfully piloted innovative approaches in a number of key areas, such as the highly successful EDUCO community-based education program (s), the Earthquake Reconstruction and Health Services Extension Project (RHESSA), and the Judicial Modernization project. As of May of 2007, the Bank began the execution of the Protected areas consolidation and administration project (PACAP) in coodination with the Ministry of Environment and Natural Resources (MARN). Some of this projects are considered global best practice and has provided an example for the development of similar programs throughout Latin America.

As of September 2007, the Bank's portfolio contains three active projects with $121 million in undisbursed balances.

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For more information on World Bank assistance to El Salvador, including lending breakdown and project reports, see: Projects and programs.

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