The outgoing government of El Salvador (GOES) is generally perceived as unsuccessful at improving the investment climate. Political polarization, cumbersome bureaucracy, an ineffective judicial system, and widespread violence and extortion have all contributed to this perception. The GOES has taken some measures to improve the business climate, with very limited results. The most commonly cited impediments to doing business in El Salvador include the discretionary application of laws/ regulations, lengthy and unpredictable permitting procedures, and customs delays.
President-elect Nayib Bukele assumes office on June 1, 2019. He has pledged to support investors and make El Salvador a more attractive destination for investment. The incoming administration’s plans to improve the investment climate will be evident soon after Bukele takes office.
In 2015, El Salvador’s second Millennium Challenge Corporation (MCC) Compact entered into force. The five-year USD 277 million Compact (plus USD 88.2 million from GOES funding) seeks to improve El Salvador’s investment climate by improving its productivity and competitiveness in international markets. MCC Compact information is available at https://www.mcc.gov/where-we-work/program/el-salvador-investment-compact.
El Salvador began implementing the Simplified Administrative Procedures Law in February 2019. This law seeks to streamline and consolidate administrative processes among GOES entities to facilitate investment. In 2016, El Salvador adopted the Electronic Signature Law to facilitate e-commerce and trade, which is still pending implementation.
In August 2018, El Salvador recognized the People’s Republic of China and ceased to recognize Taiwan. El Salvador signed several memorandums of understanding (MOUs) with China, but has not entered into negotiations with China for an investment or trade agreement. Although the GOES announced the cancellation of its trade agreement with Taiwan in February 2019, the Supreme Court halted the cancellation in March 2019 and the agreement remains in force.
In November 2018, El Salvador officially joined the Northern Triangle Customs Union with Guatemala and Honduras following the ratification of the Accession Protocol by Legislative Assembly. The Customs Union inaugurated the first integrated border post in El Salvador in December 2018. Northern Triangle countries continue technical-level negotiations to operationalize the Customs Union, harmonize customs regulations and procedures, interconnect automated systems, and finalize which goods will freely move within the single customs territory. Full implementation of the Customs Union is targeted for 2020.
In recent years, El Salvador has lagged behind the region in attracting foreign direct investment (FDI). The sectors with the largest investment have historically been textiles and retail establishments, though investment in energy projects has been increasing steadily.
In November 2018, El Salvador and Bolivia signed a Partial Scope Agreement that is pending ratification in the Legislative Assembly. In 2018, El Salvador also ratified a free trade agreement (FTA) with South Korea, signed trade agreements with Cuba and Bolivia, and reinitiated long-stalled FTA negotiations with Canada.
In December 2018, El Salvador adopted the Regulatory Improvement Law (LMR), which establishes the Regulatory Improvement Institution (OMR), an MCC compact investment, as the government’s sole institution for regulatory reform. OMR will coordinate the regulatory improvement process and the simplification of business procedures and paperwork. In addition, El Salvador enacted the Law on the Elimination of Bureaucratic Barriers in December 2018 that creates a specialized tribunal to verify that regulations and procedures are implemented in compliance with the law. The new tribunal has the authority to sanction public officials who impose administrative requirements not contemplated in the law.
|TI Corruption Perceptions Index||2018||105 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report “Ease of Doing Business”||2018||85 of 190||http://www.doingbusiness.org/rankings|
|Global Innovation Index||2018||104 of 126||http://www.globalinnovationindex.org/content/page/data-analysis|
|U.S. FDI in partner country ($M USD, stock positions)||2017||$3,037||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||$3,560||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
10. Political and Security Environment
El Salvador’s 12-year civil war ended in 1992. Since then, there has been no political violence aimed at foreign investors.
The crime threat level in El Salvador is critical and the Travel Advisory warns U.S. citizens of the high rates of crime and violence. A majority of serious crimes in El Salvador are never solved. El Salvador lacks sufficient resources to properly investigate and prosecute cases and to deter crime. For more information, visit: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/ElSalvador.html
El Salvador has thousands of known gang members from several gangs including Mara Salvatrucha (MS-13) and 18th Street (M18). Gang members engage in violence or use deadly force if resisted. These “maras” concentrate on extortion, violent street crime, car-jacking, narcotics and arms trafficking, and murder for hire. Extortion is a common crime in El Salvador. U.S. citizens who visit El Salvador for extended periods are at higher risk for extortion demands. Bus companies and distributors often must pay extortion fees to operate within gang territories, and these costs are passed on to paying customers. The World Economic Forum’s 2018 Global Competitiveness Index reported that costs due to organized crime for Salvadoran businesses are the highest among 140 countries. In 2017, the World Bank estimated that companies in El Salvador allocated 3.4 percent of their revenues to security and crime prevention, the highest in Central America.