El salvador Finance Profile 2012

Liberalization of foreign trade

Foreign trade is mostly liberalized and there is no fundamental state intervention in free trade. The government under President Saca continued its efforts to establish and deepen bilateral and multilateral free trade agreements, emphasizing privatization and liberalization as means for achieving economic growth and development. Trade statistics indicate that the United States is El Salvador’s leading trade partner, accounting for 35.6% import market share in December 2007 and serving as the destination for 50.8% of Salvadoran exports. By the end of 2007, a total of 13 free zones were operating in the country, of which 12 were used by maquila textile businesses. According to the U.S. Department of Commerce, these firms are mostly owned by Salvadoran, United States, Taiwanese and Korean investors, and collectively employ approximately 58,000 people.

El Salvador is also a member of the WTO, an active participant in the Summit of the Americas process and a signatory to free trade arrangements with Colombia, Taiwan, Mexico, Chile and the Dominican Republic. Negotiations on the establishment of a free trade agreement with Canada took place in 2007 and 2008, as were discussions on a new Association Agreement with the European Union which would include the establishment of a free trade area. The implementation of DR-CAFTA in March 2006 granted El Salvador preferential access to U.S. markets and further liberalized trade among the Central American countries.

Banking system

According to reports by the IMF, the OECD and the U.S. Department of Commerce in 2008, the Salvadoran banking system is sound and in general well managed and supervised. El Salvador is officially dollarized and has no domestic currency or monetary policy. Foreign banks are afforded national treatment under the 1999 Banking Law (Ley de Bancos) and amendments made in 2002. This law helped the Salvadoran banking system to achieve international standards, strengthened supervisory authorities, provided more transparent and secure operations for customers and banks, sharply limited bank lending to shareholders and directors, and increased the minimum capital reserve requirement for a bank to 100 million colones ($11.4 million). Foreign investors may obtain credit in the local financial market under the same conditions as local investors, with accounting systems generally being consistent with international norms. Oversight in the financial system is provided by the Superintendent of the Financial System. Interest rates are set by the market and have decreased significantly since the dollarization. The organization, operation and activities of microfinance institutions is regulated by the Non-Bank Financial Intermediaries Law (Ley de Intermediarios no Bancarios). According to the Law Against the Laundering of Money and Assets (Ley Contra el Lavado de Dinero y Activos), financial institutions are required to report suspicious transactions to the Attorney General and the Superintendent of the Financial System.

In order to reduce future effects of the global financial crisis on El Salvador’s banking system, the government requested an $800 million precautionary standby arrangement from the IMF that was approved in January 2009, and negotiated loans with the World Bank and the IDB for budget support and to increase the supply of bank credit.