The Salvadoran economy at the start of 2023
Our review of the state El Salvador is in at the beginning of 2023 turns today to the economy. At the end of 2022, Salvadorans who were polled responded that the economy was the biggest challenge facing the country today.
Inflation was the dominant economic concern for Salvadoran families at the end of 2022 according to polling by the UCA. El Salvador was hit by the same inflationary trends impacting the rest of the globe, with annual inflation for 2022 in the country reaching 7.2%. During 2022, inflation for the cost of the basic foodstuffs for the average Salvadoran household in urban areas reached 13.5%, producing a monthly cost of $240.37, an increase of more than $28 per month. By comparison, the monthly minimum wage in El Salvador for most sectors is currently $365.
Local media carry stories like this one and this one where reporters go into city markets to ask the local vendors how much the prices of staples like cheese, beans, corn and plantains have risen. "Mucho," is the usual reply.
According to the El Salvador's Central Reserve Bank, the Salvadoran economy grew 2.2% in the last four months of 2022 in comparison to the same period in 2021, resulting in annual growth for the year of 2.8%. The bank is currently forecasting annual growth of between 2% and 3% in 2023. Leading sectors of growth in the past four months were electricity generation and construction.
According to an International Monetary Fund (IMF) review at beginning of 2023:
The economy is estimated to have expanded by 2.8 percent in 2022, driven by domestic demand. The full recovery of activity from pre-pandemic levels was driven by the effective government response to the health crisis. Since March 2022, the unprecedented reduction in crime, and strong remittances and tourism revenues have contributed to the robust activity and investment dynamics. Meanwhile, annual average inflation reached 7.2 percent last year.
In 2023, the IMF forecasts real GDP growth at 2.4%, with inflation moderating somewhat to 4.1%. The full IMF report which highlights potential risks as well as suggestions for changes in government fiscal policy can be found here.
Such a growth rate, after recovering smartly from the pandemic contraction of the economy in 2020, would continue El Salvador's economic growth in its historical range of fairly sluggish increases in the 2-4% range .
The rating agency Moody's recently maintained the junk bond rating on El Salvador's government debt but did see a lower likelihood of the government failing to make payments on that debt. Fitch Ratings' evaluation was similar.
Family remittances reached $7.742 billion in 2022, $620 million more than El Salvador received for all of the goods it exported last year. Remittances now equal more than 25% of El Salvador's gross domestic product, showing how much the country continues to depend on the money sent home from those who migrated to find a better life abroad.
By investing in its people, El Salvador does have the opportunity to spur economic growth the World Bank concluded last October:
Despite challenges, El Salvador has great potential to boost a dynamic, inclusive and resilient economic growth. The country can continue to prioritize ramping up investments in human capital to foster accumulation and strengthening the effectiveness of the social protection system. El Salvador can also enhance public and private investment, promote access to high-quality jobs and foster a more dynamic, competitive, and innovative private sector. To reduce vulnerabilities, the country can also promote a sustainable and equitable fiscal policy, strengthen resilience to disaster risk and pandemics and consolidate governance and institutions.