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Economy

El Salvador's economy has been hampered at times by natural disasters such as earthquakes and hurricanes, by government policies that mandate large economic subsidies, and by official corruption. Subsidies became such a problem that in April 2012, the International Monetary Fund suspended a $750 million loan to the central government. President Funes' chief of cabinet, Alex Segovia, acknowledged that the economy was at the "point of collapse".

Gross domestic product (GDP) in purchasing power parity estimate for 2021 is US$57.95 billion growing real GDP at 4.2% for 2021. The service sector is the largest component of GDP at 64.1%, followed by the industrial sector at 24.7% (2008 est.) and agriculture represents 11.2% of GDP (2010 est.). The GDP grew after 1996 at an annual rate that averaged 3.2% real growth. The government committed to free market initiatives and the 2007 GDP's real growth rate hit 4.7%. As of December 2017, net international reserves stood at $3.57 billion.

It has long been a challenge in El Salvador to develop new growth sectors for a more diversified economy. In the past, the country produced gold and silver, but recent attempts to reopen the mining sector, which were expected to add hundreds of millions of dollars to the local economy, collapsed after President Saca shut down the operations of Pacific Rim Mining Corporation. Nevertheless, according to the Central American Institute for Fiscal Studies (Instituto Centroamericano for Estudios Fiscales), the contribution of metallic mining was a minuscule 0.3% of the country's GDP between 2010 and 2015. Saca's decision although not lacking political motives, had strong support from local residents and grassroots movements in the country. President Funes later rejected a company's application for a further permit based on the risk of cyanide contamination on one of the country's main rivers.

As with other former colonies, El Salvador was considered a mono-export economy (an economy that depended heavily on one type of export) for many years. During colonial times, El Salvador was a thriving exporter of indigo, but after the invention of synthetic dyes in the 19th century, the newly created modern state turned to coffee as the main export.

The government has sought to improve the collection of its current revenues, with a focus on indirect taxes. A 10% value-added tax (IVA in Spanish), implemented in September 1992, was raised to 13% in July 1995. Inflation has been steady and among the lowest in the region. As a result of the free trade agreements, from 2000 to 2006, total exports have grown 19% from $2.94 billion to $3.51 billion, and total imports have risen 54% from $4.95 billion to $7.63 billion. This has resulted in a 102% increase in the trade deficit, from $2.01 billion to $4.12 billion.

In 2006, El Salvador was the first country to ratify the Central America-Dominican Republic Free Trade Agreement (CAFTA) — negotiated by the five countries of Central America and the Dominican Republic — with the United States. CAFTA requires that the Salvadoran government adopt policies that foster free trade. CAFTA has bolstered exports of processed foods, sugar, and ethanol, and supported investment in the apparel sector, which faced Asian competition with the expiration of the Multi Fibre Arrangement in 2005. In anticipation of the declines in the apparel sector's competitiveness, the previous administration sought to diversify the economy by promoting the country as a regional distribution and logistics hub, and by promoting tourism investment through tax incentives.

In June 2021, President Nayib Bukele said he would introduce legislation to make Bitcoin legal tender in El Salvador. The Bitcoin Law was passed by the Legislative Assembly of El Salvador on 9 June 2021. Bitcoin officially became a legal tender on 7 September 2021. As part of the law, foreigners can gain permanent residence in El Salvador if they invest 3 Bitcoin into the country. The implementation of the law has been met with protests, with the majority of the country being against using Bitcoin as legal tender. According to a survey conducted by the Salvadoran Chamber of Commerce, as of March 2022 only 14% of merchants in the country processed at least one Bitcoin transaction.

El Salvador leads the region in remittances per capita, with inflows equivalent to nearly all export income; in 2019 2.35 million Salvadorans lived in the U.S. and about a third of all households received remittances. Remittances from Salvadorans living in the United States, sent to family members in El Salvador, are a major source of foreign income and offset the trade deficit. Remittances have increased steadily since the early 2000s, growing from $3.32 billion, or approximately 16.2% of GDP in 2006, to nearly $6 billion (around 20% of GDP in 2019, one of the highest rates in the world, according to the World Bank.)