El Salvador

Executive Summary

The outgoing government of El Salvador (GOES) is generally perceived as unsuccessful at improving the investment climate.  Political polarization, cumbersome bureaucracy, an ineffective judicial system, and widespread violence and extortion have all contributed to this perception.  The GOES has taken some measures to improve the business climate, with very limited results. The most commonly cited impediments to doing business in El Salvador include the discretionary application of laws/ regulations, lengthy and unpredictable permitting procedures, and customs delays.

President-elect Nayib Bukele assumes office on June 1, 2019.  He has pledged to support investors and make El Salvador a more attractive destination for investment.  The incoming administration’s plans to improve the investment climate will be evident soon after Bukele takes office.

In 2015, El Salvador’s second Millennium Challenge Corporation (MCC) Compact entered into force.  The five-year USD 277 million Compact (plus USD 88.2 million from GOES funding) seeks to improve El Salvador’s investment climate by improving its productivity and competitiveness in international markets.  MCC Compact information is available at https://www.mcc.gov/where-we-work/program/el-salvador-investment-compact.

El Salvador began implementing the Simplified Administrative Procedures Law in February 2019.  This law seeks to streamline and consolidate administrative processes among GOES entities to facilitate investment.  In 2016, El Salvador adopted the Electronic Signature Law to facilitate e-commerce and trade, which is still pending implementation.

In August 2018, El Salvador recognized the People’s Republic of China and ceased to recognize Taiwan.  El Salvador signed several memorandums of understanding (MOUs) with China, but has not entered into negotiations with China for an investment or trade agreement.  Although the GOES announced the cancellation of its trade agreement with Taiwan in February 2019, the Supreme Court halted the cancellation in March 2019 and the agreement remains in force.

In November 2018, El Salvador officially joined the Northern Triangle Customs Union with Guatemala and Honduras following the ratification of the Accession Protocol by Legislative Assembly.  The Customs Union inaugurated the first integrated border post in El Salvador in December 2018. Northern Triangle countries continue technical-level negotiations to operationalize the Customs Union, harmonize customs regulations and procedures, interconnect automated systems, and finalize which goods will freely move within the single customs territory.  Full implementation of the Customs Union is targeted for 2020.

In recent years, El Salvador has lagged behind the region in attracting foreign direct investment (FDI).  The sectors with the largest investment have historically been textiles and retail establishments, though investment in energy projects has been increasing steadily.

In November 2018, El Salvador and Bolivia signed a Partial Scope Agreement that is pending ratification in the Legislative Assembly.  In 2018, El Salvador also ratified a free trade agreement (FTA) with South Korea, signed trade agreements with Cuba and Bolivia, and reinitiated long-stalled FTA negotiations with Canada.

In December 2018, El Salvador adopted the Regulatory Improvement Law (LMR), which establishes the Regulatory Improvement Institution (OMR), an MCC compact investment, as the government’s sole institution for regulatory reform.  OMR will coordinate the regulatory improvement process and the simplification of business procedures and paperwork.  In addition, El Salvador enacted the Law on the Elimination of Bureaucratic Barriers in December 2018 that creates a specialized tribunal to verify that regulations and procedures are implemented in compliance with the law.  The new tribunal has the authority to sanction public officials who impose administrative requirements not contemplated in the law.

Table 1

10. Political and Security Environment