El Salvador Finance for Development

El Salvador

Financing for Development in El Salvador

Confronting Debt Challenges

El Salvador is the smallest country in Central America. It has a limited natural resource base. About 60% of the population live in rural areas and over 80% of agricultural producers work farms of less than 3 ha. With social indicators among the worst in Latin America and a per capita income of U.S.$1,580 in 1995, it also ranks as one of the poorer countries in the region.

Since 1992, the World Bank has supported the government of El Salvador's strategic effort to consolidate peace and place the country on a path towards sustainable development. Currently, eight loans are under implementation worth a total of U.S.$298 million.

In December 2001, the World Bank announced the new assistance strategy up to $270 million to El Salvador over the next three years. This includes a $142.6 million Earthquake Emergency Reconstruction and Health Services Extension Project. The loan carried a seven-year maturity with five years grace.

Like in all poor countries, debt has become a serious problem for El Salvador. It is not the only problem but, as long as it exists, peoples and their governments will find it exceedingly difficult to climb out of poverty. Not only does the "debt" force the country to divert their extremely limited resources to the rich countries like the United States but it has become a tool in the hands of the North in all its economic agenda.

Financial Sector Reform and Resource Mobilization

On January 16, 1992, the Government of El Salvador and the Frente Farabundo Marti para la Liberacion Nacional (FMLN) signed a Peace Accord putting an end to the 12-year conflict. El Salvador's civil war had no winner but many losers. The conflict cost some 75,000 lives, leaving thousands of people displaced, orphaned, or disabled, and provoked a mass migration which eventually left about one in five Salvadorans living outside the country. The war also caused large material losses -- war-related damages are estimated to have totaled some U.S.$1.5 billion in infrastructure alone.

The World Bank, through its Country Assistance Strategy (CAS), have been supporting emergency and basic health care facilities, judicial reform, rural community development, environmental services and land administration in El Salvador. It also provides for possible support for education, local development, urban poverty reduction and to help youth at risk. World Bank loans and technical assistance will be complemented by support from the IFC, aimed at helping Salvadoran industry gain access to finance to improve its competitiveness.

This has been accompanied by structural reform initiatives by the government, including trade liberalization, financial sector strengthening, re-privatization of state-owned financial institutions and other enterprises, pension reform and the improvement of the competitive environment for private investment.

In January 2001, these were complemented by the government's decision to adopt the U.S. dollar as legal tender in a two-currency system.

Addressing Systemic Issues

Although economic recovery has been impressive since 1992, per capita GDP remains below pre-war levels. Economic expansion has been led by the non-tradable sectors, and merchandise exports, although growing, remain substantially below levels in the early 1970s. High growth needs to be sustained but it must also be broad-based to reduce poverty.

The government's strategy is to shift El Salvador's competitive base from low-cost labor to high productivity -- moving from a comparative to a competitive advantage. A priority of the government is to ensure that the financial sector facilitates productivity-based growth.

Improving agricultural growth and productivity remains a priority for El Salvador, but sustained progress in poverty reduction will also require increasing access by the poor to non-agricultural rural activities, which can yield higher and more stable incomes.