El Salvador is a compact Central American Country, bordered by Honduras, Guatemala and the Pacific Ocean which runs along its southern coast.
Its population of almost 7 million live within 8,100 square miles which makes El Salvador a relatively densely populated country compared to its neighbours.
The World Bank expects that the economy of El Salvador will grow by 4% in 2022, after following an 8% bounce in 2021 (rebounding from the aftermath of Covid-19). Also, the poverty rate, as measured by a $5.50 per person income, fell from 39% in 2007 to 22% in 2019.
Therefore, businesses are interested in the region, and specifically El Salvador, as a place to do business.
Doing business in El Salvador
The World Bank rates El Salvador as 90/190 in its ease of doing business rankings, which is a relatively low score. Unfortunately, despite numerous initiatives and an aggressive policing strategy; violent crime in the country remains stubbornly high.
That’s why businesses in El Salvador take professional advice before moving to the market to ensure they make the move with their eyes wide open to the risks of doing business. By seeking consultant support they can avoid potential missteps.
Using advisors, businesses can learn about the competitive advantages of the country and discover pockets of expertise in the local labour force. El Salvador’s exports are processed or manufactured goods, rather than agricultural products thanks to its high density. Key markets include chemical production, rubber production and plastics. It ships almost half of its exported tonnage to the US, which is by far its largest export market.
Starting a business in El Salvador is more difficult than it needs to be, thanks to bureaucracy. But businesses are usually surprised to discover that obtaining credit is remarkably easy. The DoingBusiness.org guide suggested in 2020 that El Salvador is the 25th easiest country in the world to raise finance.
Key economic characteristics
The economy of El Salvador has some unusual currency characteristics, which we’ll explore in more detail:
The primacy of the US Dollar
For example, in 2001 the country adopted the US Dollar as the national currency (and not simply as a reserve currency), which means that international trade, government business and even domestic purchases are transacted using the ‘greenbacks’.
El Salvador is also closely associated (perhaps more than any other nation-state) to Bitcoin. That’s thanks in part to its current President El Salvador President Nayib Bukele, who is an outspoken supporter of the ubiquitous cryptocurrency.
During 2020 and 2021, Bukele has taken steps to integrate Bitcoin more tightly into the economy, culminating in its status being promoted to legal tender. Other projects in the works include a delayed plan to launch a partially Bitcoin-backed government bond issue of $1 billion of notes.
International financial institutions such as the IMF wonder if this will create financial instability and could drive price inflation. The volatile price of Bitcoin makes it generally unsuitable as a national currency, so we are witnessing a very bold economic experiment.