Report: June 29, 2017
The government of El Salvador (GOES) has not been effective in improving its investment climate. In recent years, El Salvador has lagged behind the region in attracting foreign direct investment (FDI), in both absolute terms and as a proportion of GDP. The Salvadoran Central Reserve Bank (“Central Bank”) estimated FDI inflows of less than USD 345 million between January and September 2016, significantly less than the over USD1 billion average for other countries in the region during the same period. Political polarization, cumbersome bureaucracy and regulations, an ineffective judicial system, and widespread violence are barriers to investment in El Salvador.
Contraband and counterfeit products, especially cigarettes, liquor, toothpaste and cooking oil, remain widespread. The Distributors Association of El Salvador (ADES) estimates that around 50 percent of the liquor consumed in El Salvador is smuggled. Most contraband cigarettes come in from China, Panama, and Paraguay and undercut legitimately-imported cigarettes, which are subject to a 39 percent tariff. According to ADES, most contraband cigarettes are smuggled in by gangs, with the complicity of Salvadoran authorities. A February 2017 study by CID Gallup Latin America, noting the link between contraband cigarettes and gang finances, estimated that 32 percent of the 940 million cigarettes consumed annually in El Salvador are contraband. Gallup estimated that, during 2014, the GOES lost USD 15 million in tax revenue due to cigarette smuggling.