Since President Nayib Bukele took office on June 1, 2019, his administration has sought to attract foreign investment and has taken steps to reduce cumbersome bureaucracy and improve security conditions. The COVID-19 pandemic complicated implementation of reforms and dampened investment.
To respond to COVID-19, the Government of El Salvador (GOES) implemented several emergency measures, including travel restrictions beginning in February 2020 and a nationwide lockdown from March to June 2020. Unclear or conflicting wording among the numerous emergency decrees created uncertainty, complicated business operations, and increased the risks of inadvertent non-compliance. The discretionary application of emergency measures and severe penalties for non-compliance contributed to the uncertainty. Lockdown measures disrupted and limited business operations with even manufacturers of medical supplies and other essential products unable to receive formal permission to reopen. The Supreme Court found the GOES phased reopening decrees to be unconstitutional, mandating a complete nationwide reopening of the economy at the end of August 2020.
As a result of the lockdown and worldwide recession, El Salvador lost approximately 20 percent of formal jobs in 2020. El Salvador’s Gross Domestic Product (GDP) is forecasted to drop by 8.5 percent in 2020 according to the Central Bank, with recovery to pre-pandemic production in 2022.
Following the reopening, perceptions of the investment climate began to slowly recover. However, political gridlock and electoral uncertainty dampened business confidence. The victory of President Bukele’s New Ideas Party in the February 28 legislative and municipal elections should remove obstacles to governability during the remaining three years of Bukele’s presidential term. With a large majority of the seats in the Legislative Assembly, Bukele should be able to pass legislation and reforms. His administration has pledged to enact legislation to strengthen institutions and improve the regulatory environment to spur investment and create jobs. Policies and reforms, however, will take time to implement and show results.
Commonly cited challenges to doing business in El Salvador include the discretionary application of laws and regulations, lengthy and unpredictable permitting procedures, as well as customs delays. El Salvador has lagged its regional peers in attracting foreign direct investment (FDI). The sectors with the largest investment have historically been textiles and retail establishments, though investment in energy has increased in recent years.
The Bukele administration has proposed several large infrastructure projects, which could provide opportunities for U.S. investment. The GOES has established a technical working group to help prioritize investment projects and attract private sector participation. Project proposals include enhancing road connectivity and logistics, expanding airport capacity and improving access to water and energy, as well as sanitation. Having inherited a large public debt, the Bukele administration has begun pursuing Public-Private Partnerships (PPPs) to execute infrastructure projects. El Salvador awarded its first PPP project in October 2020 to expand the cargo terminal at the international airport. The contract award is pending legislative approval. It launched a second PPP to install highway lighting and video surveillance in January 2020 and extended the deadline to submit bids until March 15, 2021 due to COVID-19. With these two PPPs, the Bukele administration delivered on its commitment under the Millennium Challenge Corporation (MCC) Compact, which ends April 30, 2021.
As a small energy-dependent country with no Atlantic coast, El Salvador relies on trade. It is a member of the Central American Dominican Republic Free Trade Agreement (CAFTA-DR) and the United States is El Salvador’s top trading partner. Proximity to the U.S. market is a competitive advantage for El Salvador. As most Salvadoran exports travel by land to Guatemalan and Honduran ports, regional integration is crucial for competitiveness. Although El Salvador officially joined the Customs Union established by Guatemala and Honduras in 2018, implementation has stalled. The Bukele administration announced in 2020 that it would prioritize bilateral trade facilitation with Guatemala.
The Bukele administration has taken initial steps to facilitate trade. In 2019, the government of El Salvador (GOES) relaunched the National Trade Facilitation Committee (NTFC), which produced the first jointly developed private-public action plan to reduce trade barriers. The plan contains 60 strategic measures focused on simplifying procedures, reducing trade costs, and improving connectivity and border infrastructure. In 2020, NTFC technical committees continued working to implement the action plan, as well as develop a national trade facilitation strategy. However, the NFTC has not presented progress on the action plan. The NFTC did not convene in 2020.
|TI Corruption Perceptions Index||2020||104 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report “Ease of Doing Business”||2020||91 of 190||http://www.doingbusiness.org/rankings|
|Global Innovation Index||2020||92 of 131||http://www.globalinnovationindex.org/content/page/data-analysis|
|U.S. FDI in partner country ($M USD, stock positions)||2019||3,380||https://apps.bea.gov/international/factsheet/factsheet.cfm|
|World Bank GNI per capita||2019||4,000||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|