The Salvadoran economy continues to benefit from a commitment to free markets and careful fiscal management. The impact of the civil war on El Salvador's economy was devastating. From 1979-90, losses from damage to infrastructure and means of production due to guerrilla sabotage as well as from reduced export earnings totaled about $2.2 billion. But since attacks on economic targets ended in 1992, improved investor confidence has led to increased private investment.

Moderate climate and a hard-working and enterprising labor pool comprise El Salvador's greatest assets. Much of the improvement in El Salvador's economy is a result of free market policy initiatives carried out by the ARENA governments, including the privatization of the banking system, telecommunications, public pensions, electrical distribution and some electrical generation, reduction of import duties, elimination of price controls, and enhancing the investment climate through measures such as improved enforcement of intellectual property rights.

One of the biggest challenges in El Salvador has been to manage the decline in the coffee sector, formerly the backbone of the economy, and to develop new growth sectors for a more diversified economy. The collapse of worldwide coffee prices has caused substantial reduction in coffee production and decreased rural employment. While as recently as 1988, coffee exports accounted for more than half of export earnings; in 2002 they were 3.5%. El Salvador has sought to create new export industries through fiscal incentives for Free Trade Zones, and currently there are 15 Free Trade Zones in El Salvador. The largest beneficiary has been the maquila industry, which directly provides 90,000 jobs, and primarily consists of cutting and assembling clothes for export to the United States. The apparel industry has greatly benefited from the Caribbean Basin Trade Partnership Act, which allows these goods to enter the United States duty free under certain conditions.

Fiscal policy has been the biggest challenge for the Salvadoran Government. The 1992 peace accords committed the government to heavy expenditures for transition programs and social services. Although international aid was generous, the government has focused on improving the collection of its current revenues. A 10% value-added tax, implemented in September 1992, was raised to 13% in July 1995. The VAT is the biggest source of revenue, accounting for about 58% of total tax revenues in 2002.

Remittances from Salvadorans working in the United States sent to family members are the biggest-single source of foreign income and offset the substantial trade deficit. Remittances transferred through the banking system and, therefore, counted by the Central Bank, have increased steadily in the last decade and reached an all time high of $1.93 billion in 2002--13.6% of GDP. As of February 2003 net international reserves equaled $1.6 billion. Beginning January 1, 2001, the Salvadoran Government approved the "Monetary Integration" law that made the U.S. dollar legal tender alongside the colón. Dollars have gradually replaced colóns, which are no longer printed. In practice the economy has become dollarized, with the colon only used in isolated rural areas.

El Salvador obtains concessional loans for development projects from the World Bank, Inter-American Development Bank, the Bank for Central American Integration, and certain other international institutions. Starting in August 1999, El Salvador also has sold bonds in private international financial markets. These sales have been used to fund Salvadoran Government operations. As of February 2003, the Salvadoran Government has sold $2.15 billion in bonds. El Salvador's external debt in early 2003 was about $5.07 billion.

Natural Disasters
El Salvador suffered from two earthquakes at the beginning of 2001 and from Hurricane Mitch in 1998. Hurricane Mitch hit El Salvador in late October 1998, generating extreme rainfall of which caused widespread flooding and landslides. Roughly 65,200 hectares were flooded, and 374 people were either killed or remain missing. The areas that suffered the most were the low-lying coastal zones, particularly in the floodplain of the Lempa and San Miguel Grande Rivers.

Reconstruction from Mitch was still underway when in January and February 2001 the country experienced two devastating earthquakes that left nearly 2,000 people dead or missing, 8,000 injured, and caused severe dislocations across all sectors of Salvadoran society. Nearly 25% of all private homes in the country were either destroyed or badly damaged, and 1.5 million persons were left without housing. Hundreds of public buildings were damaged or destroyed, and sanitation and water systems in many communities put out of service. The total cost of the damage was estimated at between $1.5 billion and $2 billion.

Response
The Hurricane Mitch disaster prompted a tremendous response from the international community governments, nongovernmental organizations, and private citizens alike. The U.S. Government has provided $37.7 million in assistance through USAID and the U.S. Departments of Agriculture and Defense.

Following the 2001 earthquakes, the U.S. Government responded immediately to the emergency, with military helicopters active in initial rescue operations, delivering emergency supplies, rescue workers, and damage assessment teams to stricken communities all over the country. USAID's Office of Foreign Disaster Assistance had a team of experts working with Salvadoran relief authorities immediately after both quakes, and provided assistance totaling more than $14 million. In addition, the Department of Defense provided an initial response valued at more than $11 million. For long-term reconstruction, the international community offered a total aid package of $1.3 billion, more than $168 million of it from the United States.

Manufacturing
El Salvador historically has been the most industrialized nation in Central America, though a decade of war eroded this position. The industrial sector has shifted since 1993 from a primarily domestic orientation to include free zone manufacturing for export. maquila exports have led the growth in the export sector and have made an important contribution to the Salvadoran economy.

Trade
Exports in 2002 grew 4.5% while imports grew 3.3%. As in previous years, the large trade deficit was offset family remittances and to a much lesser degree foreign aid. El Salvador is pursuing an aggressive strategy to increase exports, especially manufactured and nontraditional products, and to attract foreign investment. The negotiation of trade agreements that reduce trade and investment barriers is a central part of this effort. The biggest of these negotiations are the ongoing U.S.-Central American free trade agreement (CAFTA) talks. The CAFTA negotiations are expected to conclude December 2003. El Salvador has already signed free trade agreements with Mexico, Chile, the Dominican Republic and Panama, and increased its exports to those countries. El Salvador, Guatemala, Honduras, and Nicaragua also are negotiating a free trade agreement with Canada. The five Central American countries are considering creating a Customs Union, and they have already harmonized their customs duties and numerous products.

U.S. support for El Salvador's privatization of the electrical and telecommunications markets has markedly expanded opportunities for U.S. investment in the country. More than 300 U.S. companies have established either a permanent commercial presence in El Salvador or work through representative offices in the country. The Department of Commerce maintains a Country Commercial Guide for U.S. businesses seeking detailed information on business opportunities in El Salvador.