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El Salvador Table of Contents

El Salvador


Balance of Payments and the External Sector

In 1987 El Salvador was one of the few countries in the world to maintain a large current account deficit and experience a net outflow of private capital while achieving a large increase in international reserves. This increase was equivalent to almost 1 percent of GDP. These seemingly inconsistent results were reconciled by a flow of US$275 million in official aid to El Salvador, 90 percent of which came from AID.

El Salvador's total exports equaled approximately US$573 million in 1987, a decline of almost 20 percent compared with 1986. The country's weak export performance reflected a deterioration in its terms of trade, growing protectionism in Organisation for Economic Co-operation and Development (OECD) countries, and continuing stagnation of the CACM. Coffee prices fell 35 percent from their 1986 high levels, and other agricultural products, such as cotton, sugar, and nontraditional exports, did not compensate. In 1987 foreign assistance and emigrant remittances surpassed coffee as the most important sources of foreign exchange. Both continued to finance the country's balance of payments deficit by an amount equal to 10 percent of GDP. In 1987 remittances from Salvadorans living in the United States easily exceeded the country's debt-service payments.

The total value of imports in 1987 was approximately US$911 million. Import volume and value rose in 1987 by about 3 percent and 18 percent, respectively, stimulated by the recovery in the construction sector, the overvalued colon, and a moderate recovery in consumer spending (see table 6, Appendix). Raw materials continued to account for over 50 percent of total imports, followed by consumer goods (24 percent) and capital goods (23 percent).

Factor services in 1987 (income from factors of production employed outside the owner's locale, such as interest paid on or received from external debt), remained in deficit in 1987 at US$127 million. With exports falling, the country's debt-service ratio rose to 37 percent of exports in 1987. A large surplus in nonfactor payments, consisting primarily of insurance disbursements from the 1986 earthquake, negated a significant amount of the factor-service deficit, leaving a small US$14 million services account deficit.

Trade with other Central American countries continued to diminish in 1987. In 1977 El Salvador exported US$216 million, or about 25 percent of its total exports, to other CACM countries. In 1987, because of the stagnation of the CACM, exports to this market fell below US$100 million, or less than 15 percent of total exports. In turn, the fall of exports to CACM countries forced El Salvador to solicit other trading partners, such as the United States and Canada, which increased Salvadoran imports by their combined total of more than 100 percent between 1981 and 1987. Exports to these two countries accounted for almost 50 percent of Salvadoran exports in 1987. Even with rising demand, total exports dropped by almost 50 percent in dollar terms between 1977 and 1987.

Data as of November 1988