El Salvador: 2024 Economic Overview

Image credit: Shutterstock / Elena Berd

Upon gaining independence, El Salvador showed promise as an emerging economic power in Central America, driven by its growing agricultural exports and strategic location. However, issues like corruption, civil war, and political instability led to severe economic difficulties and stagnation since the late 20th century.

With Nayib Bukele’s presidency, beginning in June 2019 and continuing with his reelection in February 2024, El Salvador stands at a turning point. His administration has reduced crime rates, advanced technology with Bitcoin adoption, and initiated major infrastructure projects, marking a crucial period for the country’s future. Here is a 2024 economic overview of El Salvador to get a sense of its trajectory.

Leading sectors

Energy, manufacturing, and telecommunications are the three most important sectors for foreign direct investment (FDI) in El Salvador, with significant growth potential for the future.

Renewable energy is driving the increase in FDI within El Salvador’s energy sector, reaching USD 98.3 million in 2023.

The country aims to attract USD 3 billion in renewable energy investment by 2029, according to Daniel Álvarez, head of the Río Lempa Hydroelectric Commission.

The goal is to achieve 99% renewable energy production by 2030 through geothermal, solar, wind, and biogas projects.

El Salvador’s manufacturing sector is vital, accounting for 95.7% of total exports, with major markets in the US, Central America, and Europe. In 2023, the US represented 35.6% of these exports.

To capitalize on nearshoring, the Bukele administration has improved the investment climate by reforming the Law of Free Zones, attracting international companies.

Efforts to reduce crime have enhanced business operations, boosting investor confidence.

Additionally, the Law of Innovation Promotion offers a 15-year tax exemption to tech companies, fostering technological advancements.

Despite these efforts, total exports in 2023 fell to USD 6.5 billion, an 8.67% decrease from 2022, due to logistical challenges and global inflation.

Tourism’s Hidden Potential

El Salvador’s tourism sector is emerging as a hidden gem for FDI. Historically overlooked due to high crime rates, the country’s improved security landscape attracted a record 3.4 million tourists in 2023, a 35% increase from 2022.

This figure surpasses Guatemala’s 1.8 million, Costa Rica’s 2.47 million, and Panama’s 2.9 million.

El Salvador’s tourism potential is vast, with natural parks, volcanoes, historic cities, and activities like surfing and Bitcoin adoption driving interest.

El Salvador expects to welcome over 3.8 million international tourists in 2024, representing a 12% increase on 2023.

A Bitcoin City

In September 2021, El Salvador became the first country to adopt Bitcoin as legal tender, aiming to boost financial inclusion and attract foreign investment.

Bukele has invested significantly in Bitcoin, holding around 2,381 Bitcoins by late 2023.

While domestic usage remains low, with many Salvadorans preferring cash, the initiative has drawn international attention and talent, enhancing El Salvador’s reputation as a tech hub. Future plans include developing “Bitcoin City,” powered by geothermal energy from the Conchagua volcano.

This innovative urban development aims to create a financial and technological ecosystem, fostering economic growth and attracting cryptocurrency experts, blockchain developers, fintech entrepreneurs, and other tech talent.

To attract experts, El Salvador offers tax incentives, a comprehensive regulatory framework, and citizenship programs for high-net-worth individuals.

The city is expected to be completed by 2030. One of the country’s most ambitious cryptocurrency projects is the issuance of Bitcoin-backed bonds, known as “Volcano Bonds.”

These bonds aim to raise USD1 billion to pay down sovereign debt and fund the development of Bitcoin City.

Initially planned for early 2024, the project is yet to proceed.

Crime Rate Plummets

Since Bukele assumed office in 2019, El Salvador has seen a dramatic reduction in crime rates, particularly homicides, largely due to aggressive security policies.

His administration implemented a state of exception, expanding police powers and suspending certain constitutional rights to detain suspected gang members without a warrant.

Military presence increased in high-crime areas, and extensive operations targeted gang activities.

Controversial legal reforms, such as harsher penalties for gang-related crimes and lowering the age for minors to be tried as adults, contributed to a significant drop in homicides, with a rate of 2.4 per 100,000 inhabitants in 2023, the lowest in Latin America.

Despite criticism from human rights groups and claims of underreported crime statistics, the country is now safer, creating a better climate for investment and daily life.

Bukele’s Second Term

Bukele, in his second term, is aiming for sustained economic growth, targeting foreign direct investment (FDI), which was only USD 750 million in 2023.

Central to his strategy is the continued use of Bitcoin to foster financial inclusion and technological modernization, despite mixed results from previous initiatives.

A key objective is fiscal reform to enhance revenue collection and public spending efficiency.

El Salvador faces significant debt, reaching USD30 billion in March 2024, or 82.8% of GDP. Bukele pledges to streamline spending, particularly in education and healthcare, which need robust financial backing.

Bukele remains committed to poverty reduction. Extreme poverty has doubled since 2019, affecting 170,000 households in 2023.

His administration seeks inclusive economic growth to reverse this trend and improve living conditions for Salvadorans.

El Salvador, under Bukele’s leadership, is poised at a critical juncture.

His ambitious plans for economic reform, technological advancement, and infrastructure development are set against a backdrop of significant social and financial challenges. As the country moves forward, the success of these initiatives will be crucial in determining its future trajectory.