The Economic Outlook for El Salvador

With significant improvements to safety in recent times, things are looking positive for El Salvador. Once known as the most dangerous place in the world, the Central American country has been transformed, with historic reductions in homicide rates and gang violence.

El Salvador is now safer, but is it more economically prosperous?

In this blog, we will consider the economic outlook for El Salvador and explore the example they are setting to the rest of the world when it comes to cryptocurrency.

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The State of the Salvadoran Economy

The Salvadoran government boasts popularity of historic proportions, having achieved more than 80% of the vote in the February election. But despite Nayib Bukele’s extraordinarily successful efforts to reduce crime in the country, the economy still faces many challenges. The country was hit with serious challenges during the Covid-19 pandemic, leading to unplanned and significant expenditures.

Going back to 2019, El Salvador’s economy was on its knees. With significant inflation, reluctant foreign investors and high levels of crime, it was almost impossible for the economy to thrive. It has been estimated that 3% of annual GDP was being extorted by gangs. Since then, there have been some positive signs. Over the last five years, there has been an extraordinary reduction in crime and foreign direct investment has grown significantly. Even unemployment is down by around one entire percentage point.

But there is still a strong degree of uncertainty going forward around the Salvadoran economy. Since 2012, the year-by-year GDP growth rate has hovered around 2 to 2.5% each year, with the exception of significant pandemic-induced fluctuations. According to the IMF, this growth is expected to be around 1.9% in 2024, down from the 2.2% of 2023.

There is a belief that with the right strategy, El Salvador can thrive economically. According to the World Bank, “El Salvador has tremendous potential to drive a dynamic, inclusive, and resilient economic growth”, if they “can continue to prioritize ramping up investments in human capital” and “boost public and private investment, promote access to high-quality jobs, and foster a more dynamic, competitive, and innovative private sector.” But in a complicated country with a complicated economy, this is easier said than done. With liquidity issues and limited financing options, significant challenges lie ahead. Nonetheless, changes are being made.

Mining or Water?

Having previously banned all mining for metal as a means of protecting their water supply, the Salvadoran government now appears likely to reverse the ban.

Since Bukele took office in 2019, moves have been made that indicate a change is likely. For example, in 2021 the administration joined an international forum which provides advice on mining and also created a public entity designed to oversee extractive operations. The Salvadoran minister of the economy, María Luisa Hayem Brevé, discussing the fact Bukele had joined the Intergovernmental Forum on Mining, explained that “We are seeking to take advantage of the benefits that the IGF makes available to member countries for training and capacity building”. In October 2021, congress created funding to cover 140 staff in the newly-created public office for hydrocarbons, energy and mines.

It is believed there is as much as 1.4 million ounces of gold underneath the ground throughout El Salvador, as well as other metals, meaning it is likely fertile ground for large profits. Of course, environmental considerations have to come into account as well, with many environmental groups questioning whether the benefits of mining outweigh the costs.

Remittance to El Salvador

Whilst there have been many positive shifts in the Salvadoran economy in recent times, it is still highly reliant on remittance. In fact, according to economist Tatiana Marroquin, “Around 25% of the country’s GDP comes from the money that Salvadorans who have migrated send back to their families,”. She added: “We know that for around half of the families who receive the money, it’s their primary source of income or their only source of income.” With the clear need for new streams of money, El Salvador is taking new measures. You can send money to El Salvador and over 100 other countries around the world by using e-Pocket.

El Salvador’s use of Bitcoin

In 2021, Bitcoin became legal tender in El Salvador. They were the first country to do this. By late 2021, with the government behind on many internal and external payments, they spent hundreds of millions of dollars on the digital currency. In fact, according to Reuters, “The country’s “Bitcoin Office,” an official government entity, reports that government coffers now hold 5,750 bitcoins.” Indeed, according to Vice President Félix Ulloa, El Salvador would prefer to maintain Bitcoin’s legal tender status, than to receive significant funding from the IMF. He explained that the rising price of Bitcoin would allow the country to pay back their creditors.

Most Salvadorans still do not use the digital currency. El Salvador’s economy is still largely cash-based, meaning the population is highly sceptical of this form of money. In fact, 88% of Salvadorans did not use Bitcoin at all in 2023. This scepticism goes well beyond the Salvadoran borders, with only 1% of remittances being sent in Bitcoin as well.

Nonetheless, plenty of people are very positive about the prospects of crypto in El Salvador. In fact, authorities in Argentina are looking to team up with the Central American country to adopt Bitcoin. The Argentinian National Securities Commission (CNV) recently met with El Salvador’s Juan Reyes, the president of El Salvador’s National Digital Assets Commission (CNAD), to understand the process of adopting Bitcoin. CNV president Roberto Silva, explained that “El Salvador has emerged as one of the leading countries, not only in the use of Bitcoin … We want to strengthen ties with the Republic of El Salvador and therefore, we are going to explore the possibility of signing collaboration agreements with them.”

Argentina is determined to follow a similar path to El Salvador, who created CNAD for the express purpose of enhancing crypto in the country. The promise shown as result has created a model to be followed. CNV vice president, Patricia Boedo, certainly sees this promise, and wants to learn from El Salvador: “I had the opportunity to exchange experiences during the visit to that country, and it seems essential to me to continue strengthening ties with a Republic that is a pioneer in the subject, and that has vast experience in the subject.”

With economic turmoil in Argentina in recent years, partly reflected by astronomical inflation levels, Argentina is looking to embrace Bitcoin. A month after Javier Milei’s shock election win, the country’s foreign affairs minister legalised the use of Bitcoin as a means of settling legally binding contracts, as well as making payments within the country.

Conclusion

Like many countries in the Americas, El Salvador is facing challenges with their economy. Effective, strategic planning could see the country move beyond stagnant GDP growth. Tackling crime rates was complicated, but fixing the economy might be even more difficult.

It also remains to be seen in the coming years what becomes of Bitcoin in the country. Will it be an economic revolution? Only time will tell.

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