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U.S. DEPARTMENT OF STATE
EL SALVADOR: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS





                           EL SALVADOR

                     Key Economic Indicators
    (Millions of current U.S. dollars unless otherwise noted)


                                      1992      1993     1994 1/

Income, Production and Employment:

Real GDP 
  (millions of 1962 colones) 2/    3,563.0   3,761.7   3,978.2
Real GDP Growth (pct.)                 4.8       5.1       5.8
GDP (at current prices)            6,543.1   7,600.9   8,784.4
By Sector:
  Agriculture                        606.9     651.8     797.2
  Energy/Water                       153.4     198.7     230.7
  Manufacturing                    1,236.3   1,447.8   1,669.8
  Construction                       186.0     237.5     279.8
  Rents                              367.7     400.9     450.9
  Financial Services                 172.7     213.5     247.7
  Other Services                     682.2     779.4     894.2
  Public Administration              461.2     495.9     550.3
  Net Exports of Goods & Services -1,028.5  -1,077.2  -1,228.9
Nominal Per Capita GDP             1,201.0   1,495.0   1,632.0
Urban Labor Force (000s) 3/            893       965     1,041
Unemployment Rate (pct.) 3/            7.9       7.8       7.5

Money and Prices:

Money Supply
  (M2 annual pct. growth)             31.4      35.7      21.4
Base Interest Rate 4/                16-18     16-19     16-19
Personal Saving Rate (on deposits)   12-14     11-15     11-14
GDP Deflator (pct. change)             8.9      14.9       8.8
Consumer Price Index                  19.9      12.0      10.0
Exchange Rate (colon/USD)             8.37      8.73      8.75

Balance of Payments and Trade:

Total Exports (FOB)                    597       731       823
  Exports to U.S.                    257.3     219.0     173.0
Total Imports (CIF)                1,698.5   1,912.0   2,142.0
  Imports from U.S.                    650       844       910
Aid from U.S. 5/                       270       161       215
Aid from Other Countries              20.0      44.3      30.0
External Debt                      2,337.5   1,924.0   2,051.0
Debt Service Payments (paid)           346       290       365
Gold and Foreign Exch. Reserves      554.2     645.0     780.0
Trade Balance                     -1,101.5  -1,181.0  -1,319.0
  Trade Balance with U.S.           -392.7    -625.0    -737.0


1/ 1994 figures are July Central Bank estimates.
2/ GDP at market cost; 1962 base currently being revised by
Central Bank to 1988; no dollar figures available.
3/ Ministry of Planning household survey.
4/ Loan rate.
5/ Excludes military aid.







1.  General Policy Framework

    The Salvadoran economy continues to reap the benefits of
sound economic programs, a commitment to a free economy, and
careful fiscal management.  Real GDP growth in 1994 reached an
estimated 5.8 percent, led by a strong performance in the
service and construction sectors, while inflation was held to
10 percent.  Exports, particularly to the reconstituted Central
American Common market, expanded notably during the year.  The
new president, Armando Calderon Sol, who took office in June
1994, has stated clearly his intention to pursue the trade
liberalization and economic reform programs begun by his
predecessor.  However, the post-war economic recovery is
fragile, heavily dependent on a favorable balance of payments
position maintained by large amounts of remittances from
Salvadorans abroad.

    El Salvador turned decisively toward market-oriented
economics in the four years under President Alfredo Cristiani
(1989-1994).  The Cristiani government rejected the
import-substitution model and pursued trade liberalization and
export-led growth.  From a structure with tariffs as high as
240 percent, the government established a system in which most
duties fall in a range of 5-20 percent.  Nontariff barriers and
import licensing were almost totally abolished.  The Central
American Common Market has been reactivated, with most commerce
duty-free.  Government agricultural monopolies were dismantled,
as were internal price controls on 240 consumer goods.  Trade
has grown 12 percent (higher than real economic growth) from
1993 to 1994; although the absolute value of merchandise
exports is still less than half the value of imports.

    The government's drive to liberalize trade has been matched
by reforms in the financial markets.  Parallel exchange rates
were abolished, and the foreign exchange market was opened to
both banks and dealers.  The colon, currently valued at about
8.7 to the dollar, has traded in a narrow range for the past
two years, maintained to a certain extent by modest
interventions on the part of the Central Bank and remittances. 
The banking system has been reprivatized.  Controls on interest
rates have been removed, allowing rates to return to real
positive levels.  A generally disciplined monetary policy has
reduced inflation from 12 percent in 1993 to an estimated 10
percent in 1994.

    Fiscal policy has been the biggest challenge for the
Salvadoran government.  The peace accords signed between the
government and the Faribundo Marti Liberation Movement (FMLN)
in December 1991 committed the government to heavy expenditures
for transition programs and social services.  International aid
has not been as generous as expected.  The government has
focussed on improving the collection of its current revenues,
relying more on its own resources than on foreign aid. 
Government revenues, half of them generated by the new Value
Added Tax (IVA), have increased substantially during 1993 and
1994.  The share of domestic taxes in GDP is expected to grow
from 9.4 percent in 1993, to 10.6 in 1994.  Efforts now are
underway to improve tax collection.  Government planners 
estimate that the IVA is presently contributing only 60 percent
of its potential revenue.  Overall, enhanced revenues --
including IVA and income tax and improved collection of import
duties -- and some expenditure reduction are expected to
sharply reduce the need for domestic financing of the deficit.

    The government completed implementation of an Integrated
Accounting System in the public sector in June 1994.  It has
also taken steps to improve its financial control over public
enterprises and is pursuing privatization of key institutions
-- the National Telecommunications Enterprise (ANTEL), parts of
the Hydroelectric Production Agency (CEL), and the Social
Security Institute (ISSS). Other important fiscal reforms
include the repeal of the wealth tax in April 1994, approval of
a new Customs Law in May 1994, and elimination of all import
duty exemptions in July 1994, including exemptions to public
enterprises.


2.  Exchange Rate Policy

    A multiple exchange rate regime that had been used to
conserve foreign exchange was phased out during 1990 and
replaced by a free-floating rate.  The colon depreciated from
five to the dollar in 1989 to eight in 1991 but has remained
relatively stable since.  Large inflows of dollars in the form
of family remittances from Salvadorans working in the U.S.
offset a substantial trade deficit.  The monthly average of
remittances reported by the Central Bank is slightly less than
$80 million, representing more than $900 million for 1994. In
addition, the Central Bank intervenes periodically in the
exchange market to moderate speculative pressures and smooth
out rate fluctuations.


3.  Structural Policies

    U.S. exports to El Salvador have increased over 60 percent
since 1991, accounting for some 40 percent of El Salvador's
total imports.  The key policy change driving this trend was
the government's decision to radically lower tariff barriers. 
El Salvador's open trade policies are not likely to be
reversed.  Although the country has run up huge trade deficits
in recent years, they have been more than offset by
remittances, short-term capital inflows, official transfers and
loans.  In fact, El Salvador's net international reserves are
estimated at $780 million as of December 1994, up 20 percent
over 1993.  Also contributing to the surge in imports is the
robust rate of economic growth and a post-war construction
boom.  Over 73 percent of imports in 1994 were in the
categories of capital and intermediate goods.

    Prices, with the exception of bus fares and utility rates,
are set by the market.  The 10 percent value-added tax is
applied equally to all goods and services, imported and
domestic, with a few limited exceptions (dairy products, fresh
fruits and vegetables, and medicines).  It has not proven to be
an impediment to import sales.  In October 1994, the government
suspended a price band mechanism, introduced in 1990 to
regulate tariffs on basic grains, and imposed a fixed tariff of
20 percent ad valorem.  However, Salvadoran officials have 
indicated that they plan to reinstitute price bands sometime in
1995, probably on a regional basis.


4.  Debt Management Policies

    El Salvador's external debt decreased sharply in 1993,
chiefly as a result of an agreement under which the United
States forgave about $461 million of official debt.  As a
result, total debt service decreased  by 16 percent over 1992. 
In 1994, El Salvador received $265 million in external aid,
from multilateral institutions, bilateral sources, and private
sources.  External debt crept up from $1.924 billion in 1993 to
$2.142 billion in 1994 and debt service rose correspondingly to
$365 million.  However, El Salvador has eliminated all payment
arrears, and its debt burden is considered moderate.

    The government of El Salvador has been successful in
obtaining significant new credits from the international
financial institutions.  Among the most recent loans are a
second structural adjustment loan from the World Bank, for
$52.5 million, another World Bank loan of $40 million for
agricultural reform, a $20 million loan from the Central
American Bank for Economic Integration to be used to repair
roads and a $60 million Interamerican Development Bank loan for
poverty alleviation projects.


5.  Significant Barriers to U.S. Exports

    There are no legal barriers to U.S. exports of manufactured
goods or bulk, non-agricultural commodities to El Salvador. 
Virtually all import licenses and prohibitive tariffs were
removed by the Cristiani administration.  U.S. goods face
tariffs from 5 to 20 percent with higher duties only applied to
automobiles, alcoholic beverages, textiles and some luxury
items.  As of January 1, 1995 the tariff on textiles will
decrease from 35 to 25 percent.

    Generally, standards have not been a barrier to the
importation of U.S. consumer-ready food products.  The Ministry
of Health requires a Certificate of Free Sale showing that the
product has been approved by U.S. health authorities for public
sale.  Importers also may be required to deliver samples for
laboratory testing, but this requirement has not been
enforced.  All fresh foods, agricultural commodities and live
animals must be accompanied by a sanitary certificate.  Basic
grains and dairy products also must have import licenses. 
Authorities also have not enforced the Spanish labeling
requirement.

    Restrictions on foreign banks entering El Salvador have
been removed.  Foreign banks now face the same requirements as
Salvadoran banks and can offer a full range of services.

    El Salvador officially promotes foreign investment in most
sectors of the economy.  The foreign investment law allows
unlimited remittance of net profits for most types of
companies, and up to 50 percent for commercial or service
companies.  Both electricity generation and distribution and
telecommunications remain in the hands of government 
monopolies.  The government is privatizing some services in
these industries, improving the prospects of U.S. exports in
these sectors.  One U.S. power company has already invested in
a local generating station.  It is possible that the government
will choose to accelerate this trend.

    El Salvador is a member of the GATT and expects to become a
member of the World Trade Organization.  The government is
drafted legislation to implement the full range of its Uruguay
Round commitments.


6.  Export Subsidies Policies

    El Salvador does not employ direct export subsidies.  It
does offer a six percent rebate to exporters of non-
traditional goods based on the FOB value of the export, but
exporters have found it very difficult to collect.  In
addition, exporters benefit from an exemption from the tax on
net worth.  Free zone operations are not eligible for the
rebate but enjoy a 10-year exemption from income tax as well as
duty-free import privileges.

    In October 1994, the Salvadoran Central Bank announced that
it would write off $5.7 million in credits granted to some
10,000 small businesses that sustained losses during the armed
conflict.  El Salvador is a not member of the GATT subsidies
code.


7.  Protection of U.S. Intellectual Property

    El Salvador's new law protecting intellectual property
rights took effect in October 1994.  Implementing regulations
have not yet been promulgated, but the law is being enforced. 
Local representatives of U.S. companies report a significant
drop in violations, particularly in the areas of sound and
video recordings.  However the government has been hampered by
resource limitations and a burgeoning crime rate that has
forced it to give priority to crime-related issues.  El
Salvador remains on the Special 301 watch list pending U.S.
government evaluation of the law's implementation.

    The new law addresses several key areas of weakness. 
Patent terms are lengthened to 20 years (15 for
pharmaceuticals), and the definition of patentability is
broad.  Compulsory licensing applies only in cases of national
emergency.  Computer software is also protected, as are trade
secrets.  Trademarks, however, are still regulated by the
Central American Convention for the Protection of Industrial
Property.  It is an occasional practice to license a famous
trademark and then seek to profit by selling it when the
legitimate owner wants to do business in El Salvador.  The
government is working on consensual amendments to the
convention to eliminate this problem.

    El Salvador is a signatory to the Geneva phonograms and
Rome copyright conventions.  The government has signed the
Berne convention on the protection of artistic and literary
works.  The National Assembly ratified the Paris Convention on
the protection of industrial property in January 1994.


8.  Worker Rights

    a.  The Right of Association

    Approximately 150 unions, public employee associations, and
peasant organizations represent over 300,000 Salvadorans, about
20 percent of the total work force.  Private sector workers can
form unions and strike, while public sector workers can form
employee associations, but may not strike.  (Despite the
restriction, there have been many strikes in the public
sector.)  Major reforms to the labor code were passed in April
1994, streamlining the process required to form a union;
extending union rights to agricultural, independent, and
small-business workers; and extending the right to strike to
union federations.

    b.  The Right to Organize and Bargain Collectively

    Only private sector unions and unions at autonomous public
agencies have the right to collective bargaining, though in
practice government workers do so as well.  The employment of
union officials is protected by law until one year after the
end of their term. This measure is generally respected, but
some organizers have been dismissed before receiving union
credentials.  The labor code reforms attempt to address this
problem.

    c.  Prohibition of Forced or Compulsory Labor

    The Constitution prohibits forced or compulsory labor
except in the case of calamity and other instances specified by
law.  This prohibition is followed in practice.

    d.  Minimum Age of Employment in Children

    The Constitution prohibits the employment of children under
the age of 14.  Exceptions may be made only where such
employment is absolutely indispensable to the sustenance of the
minor and his family, most often the case for children of
peasant families, who traditionally work with their families
during planting and harvesting seasons.  Children also
frequently work in small businesses as laborers or vendors,
despite the legal requirement that they complete schooling
through the ninth grade.  Child labor is not found in the
industrial sector.

    e.  Acceptable Conditions of Work

    In July the government raised the minimum wages for
commercial, industrial, service, and agro-industrial employees
by 13 percent.  The new rate for industrial and service workers
was 35 colones per day (about $4); agro-industrial employees
must be paid 26 colones (about $3), including a food allowance,
per day.  Despite these increases, approximately 40 percent of
the population lives below the poverty level.  The law limits
the workday to eight hours and the work week to 44 hours,
requiring premium pay for additional hours.  Occupational
safety remains a problem because of outdated regulations,
limited enforcement resources, and a reluctance to strictly
enforce regulations.

    f.  Rights in Sectors with U.S. Investment

    U.S. investment in El Salvador is distributed fairly evenly
inside and outside the so-called "maquilas" or free zones.  The
labor laws apply equally to all sectors, including the free
zones.  However, in practice businesses in the free zones
discourage union activity; those trying to form unions have
been fired.  The Ministry of Labor lacks the resources and
support from the legal system to adequately monitor the
activities of the companies in the free zones.



  Extent of U.S. Investment in Selected Industries.--U.S. Direct
Investment Position Abroad on an Historical Cost Basis--1993

                    (Millions of U.S. dollars)
                                                                
              Category                          Amount          

Petroleum                                              44
Total Manufacturing                                   (1)
  Food & Kindred Products                   (1)
  Chemicals and Allied Products             (1)
  Metals, Primary & Fabricated                7
  Machinery, except Electrical                0
  Electric & Electronic Equipment            -1
  Transportation Equipment                    0
  Other Manufacturing                       (1)
Wholesale Trade                                         2
Banking                                               (1)
Finance/Insurance/Real Estate                           4
Services                                              (1)
Other Industries                                      (1)
TOTAL ALL INDUSTRIES                                  104      

(1) Suppressed to avoid disclosing data of individual companies
Source: U.S. Department of Commerce, Bureau of Economic
Analysis

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