El Salvador, the first Central American nation to adopt the U.S. dollar as its official currency, is facing mounting economic headwinds. A new report from FUNDE, a leading local research and policy organization, warns that the country's economic growth in 2024 will fall well below central bank expectations, driven by a steep decline in public infrastructure investment and persistently high inflation that is crushing household purchasing power.
Growth Engine Stalls: Construction and Public Investment in Freefall
According to the report, the construction sector—a key economic driver—plummeted by nearly 17% in April 2024 compared to the same month in 2023. Otto Rodriguez, coordinator of macroeconomic projects at FUNDE, attributes this collapse to a reduction in public investment recorded in the fourth quarter of 2023. He warns that without a swift restoration of government spending, both construction and the broader economy will struggle to recover.
Roberto Rubio, executive director of FUNDE, stated, "The growth forecasts released so far have not taken into account this loss of economic momentum; they will likely be revised downward again." While tax revenues in the first half of 2024 increased by roughly $500 million year-on-year, the fiscal deficit still reached $56 million, highlighting significant expenditure pressure.
Purchasing Power Eroded as Inflation Bites
At the microeconomic level, the report paints an even more troubling picture: Salvadorans' real purchasing power remains severely damaged. Data from 2023 shows that a minimum-wage worker had to spend 7 out of every 10 dollars on food, leaving almost no disposable income for other goods, savings, or investments.
FUNDE noted that despite various government interventions, El Salvador still records the highest inflation rate among all fully dollarized economies. Soaring living costs are directly undermining the effectiveness of social welfare programs promoted by President Nayib Bukele. The benefits of any economic recovery are being offset by rising prices, failing to translate into improved living standards for ordinary citizens.
Government Response: Farmers' Markets and Tariff Cuts
Facing persistent inflationary pressure, the Bukele administration has rolled out several measures. These include expanding the government-backed "Farmers' Markets" to allow consumers to buy agricultural products directly at lower prices, and eliminating import duties on food and agricultural goods to boost supply and stabilize prices. However, these steps have not fundamentally reversed the high-inflation trend.
Analysts point out that El Salvador's structural economic issues—heavy reliance on remittances, a weak industrial base, and high public debt—make it difficult for short-term policies to cure inflation. The FUNDE report calls for a re-evaluation of fiscal expenditure priorities, urging the government to increase productive investment while controlling inflation to restore growth momentum.
Moreover, the dollarized monetary system deprives El Salvador of independent policy tools such as interest rate adjustments or currency devaluation to combat inflation shocks, further complicating economic management. If public investment remains weak and global commodity prices fluctuate, the Salvadoran economy may face a prolonged slowdown.