The smallest country in Central America geographically, El Salvador has the third largest economy in the region.
With the global recession in 2009, real GDP contracted by 3.1%. The economy slowed even further during 2010-12. Remittances accounted for 17% of GDP in 2011 and were received by about a third of all households.
In 2006, El Salvador was the first country to ratify the Dominican Republic-Central American Free Trade Agreement (CAFTA-DR), which has bolstered the export of processed foods, sugar, and ethanol, and supported investment in the apparel sector amid increased Asian competition.
El Salvador has promoted an open trade and investment environment and has completed a wave of privatizations extending to telecom, electricity distribution, banking, and pension funds.
The Salvadoran Government maintained fiscal discipline during post-war reconstruction and reconstruction following earthquakes in 2001 and hurricanes in 1998 and 2005, but El Salvador's external debt has been mounting over the last several years.
Taxes levied by the government include a value added tax (VAT) of 13%, income tax of 30%, excise taxes on alcohol and cigarettes, and import duties.
The VAT accounted for about 51.7% of total tax revenues in 2011. El Salvador's external debt amounts to about one-fourth of GDP.
In 2012, El Salvador successfully completed a $461 million compact with the Millennium Challenge Corporation (MCC) — a United States Government agency aimed at stimulating economic growth and reducing poverty — in the country's northern region, the primary conflict zone during the civil war, through investments in education, public services, enterprise development, and transportation infrastructure.
In January 2013, the MCC approved El Salvador as eligible for a possible second MCC compact.