El Salvador

Growth mainly dependent on US activity

In 2024, despite the rebound in tourism (8% of GDP) brought about by the improvement in security, El Salvador's growth slowed due to severe flooding which impacted agriculture, construction and investment. Activity was also affected by the US slowdown, a trend that is set to persist in 2025. The weaker US economy will weigh on exports. In addition, a new development is that despite inflation being moderated by fiscal tightening and dollarisation, household consumption could be restricted by the slowdown observed in remittance growth (24% of GDP in 2023) from US-based expatriates (2.5 million people, of which 0.75 million are illegal), all of whom accounted for 93% of total expatriates in 2023. These remittances are likely to be eroded not only as a result of the economic slowdown but also by the Trump administration's tougher migration policy. The fiscal tightening agreed with the IMF as part of the new programme will also weigh on consumption.

Tourism, which reached a record level in 2024 (3.9 million visitors, +17% compared to 2023 and +81% compared to 2019), will continue to benefit from the low crime rate and will encourage consumption, but will also be exposed to the US slowdown (39% of visitors in 2024 came from the US). The US slowdown will also impact export growth (the US is El Salvador’s leading trade partner, making up 36% of the total in 2024). Textile exports from maquilas will suffer in particular: they represented 31% of total exports in 2023 and 68% of exports to the US. Textile exports already fell by 10% in 2024. Electrical and electronic equipment, plastics, coffee and sugar are the other principal exports. While El Salvador seems to be better protected from tariff measures owing to its membership of the regional free trade agreement CAFTA-DR and the US trade surplus, the Trump administration could still use the migration issue as leverage to renegotiate the agreement.

Despite these headwinds, investment will support activity and will benefit from a rebound in construction and infrastructure projects thanks to public-private partnerships (PPPs). However, investors will be torn between the low level of crime and institutional drift.

Consolidation of public finances after an agreement with the IMF

In 2024, the budget deficit narrowed slightly on back of post-election spending cuts and the fight against tax evasion. The 2025 budget, passed in December 2024 as negotiations with the IMF were concluding, endorsed El Salvador’s commitment to fiscal consolidation. The latter will begin with a wage freeze and the elimination of 11,200 vacant positions in the public sector as a precursor to civil service and pension system reforms, and spending efficiency measures. The government will also continue to broaden the tax base. Spending will be prioritised on health, education, security and defence (37.4% of the total). Recourse to external debt will be limited to capital expenditure, which should take the form of concessional loans. This will result in a reduction of the overall deficit and an increase in the primary surplus, i.e., excluding debt interest (5% of GDP). The authorities have committed to adjusting the primary balance by 3.5% of GDP over three years. These efforts will be supported by the historic agreement with the IMF reached in February 2025 after four years of negotiations when bitcoin was stripped of its legal tender status (dating from 2021) and its use became voluntary, particularly for the payment of taxes. In addition, the authorities have committed to further reducing the public sector's exposure to bitcoin and the “Chivo” e-wallet. The agreement with the IMF involves an Extended Credit Facility of USD 1.4 billion over 40 months, with an immediate disbursement of USD 113 million. It could release up to USD 2.1 billion in additional loans from the World Bank and the Inter-American Development Bank.

El Salvador’s public debt is mainly denominated in US dollars (96%) and carries interest rates of 7% or more (at January 2025). Private creditors, mainly bondholders, hold 59%, and multilateral creditors 33%. Its external share represents approximately 68%. The interest burden (5% of GDP in 2024) will remain high and will absorb 19% of the 2025 budget. The agreement with the IMF followed on from major debt rescheduling that began in 2022. In a context of narrowing spreads (350 basis points at the end of 2024 compared to 700 at the end of 2023), three bond buybacks took place in 2024 to extend maturities and reduce short-term financing needs (18.5% of GDP in 2024). In April and November 2024, the country issued two bonds of USD 1 billion each. In addition, in October 2024, El Salvador carried out a debt-for-nature swap. It enabled the government to buy back USD 940 million of bonds maturing between 2027 and 2052, while saving USD 350 million in interest that will be spent on restoring the Rio Lempa River.

While still moderate, the current account deficit persisted in 2024. The rise in the trade deficit was mitigated by robust remittances (+2.4% in 2024 compared to 2023), lower prices for imported raw materials and higher service exports, driven by a booming tourism sector. Financed by market debt operations, multilateral loans and FDI, the deficit will not vary much in 2025. This will be linked to the continued recovery of imports and the slowdown of exports, impacted by the weakening of US demand. The growth of remittances will slow down due to a less favorable US economic situation and the tightening of migration policy. Tourism revenues will remain solid (8.1% of GDP in 2023), supported by the excellent security climate. Foreign exchange reserves, even if they increase from USD 2.8 billion in January to USD 3.5 billion in December 2024, will only cover 3 months of imports.

Landslide re-election of President Bukele as hardliner on crime

Re-elected in February 2024 after claiming a landslide 85% victory and an overwhelming majority in Congress (54 out of 60 seats for his Nuevas Ideas party), the start of Nayib Bukele’s second term until 2029 has been focused on fiscal consolidation. His victory was based on his crackdown on crime and gangs, which has earned him massive popularity (90% support). The homicide rate dropped from 54 per 100,000 inhabitants in 2018 to 1.8 in 2024. However, opponents and civil liberties groups criticize the repression, which includes muzzling the press, suspending the rights of the defence and unlimited preventive imprisonment. Since the declaration of a state of emergency in March 2022, 83,000 suspects have been arrested, including at least 30,000 innocent people according to NGOs. Of these, 8,000 have been released. The overwhelming domination of Congress by the presidential party has allowed controversial measures to be passed, such as the lifting of the ban on gold mining (December 2024) and the removal of the requirement for constitutional amendments to be ratified by two different legislatures, allowing the president to amend the Constitution immediately (February 2025). The supermajority of more than two-thirds of the seats that Bukele had in the previous Congress already allowed him to appoint his allies to key positions in the Supreme Court and gave him the opportunity to run for a second consecutive term.

On the international stage, El Salvador will maintain its ties with the US, its main trading partner, while adapting to the tightening of US migration policy. Under its new status as a “safe third country” granted by the new Trump administration, the country allows the US to deport illegal migrants there, regardless of their nationality. Bukele has also offered to take US prisoners in El Salvadorian prisons in exchange for financial compensation. The proposed cooperation could strengthen ties to Washington and mitigate possible protectionist pressures under the Trump presidency. Last, without compromising its close relationship with the US, El Salvador should benefit from Chinese funding, particularly for its infrastructure projects.

Last updated:March 2025