The economy has largely recovered from the civil strife of the 1980s. Agriculture (mostly coffee) is the foundation of El Salvador's economy, providing about two-thirds of the nation's exports and employing nearly one-third of its labor force. The industrial sector is based in Salvador and has been oriented largely to the domestic and Central American markets. El Salvador enjoys one of the lowest levels of indebtedness in the region, with the bulk of foreign financing provided on a concessional basis.
In the 1970s, El Salvador was the most industrialized nation in Central America, although a dozen years of civil war eroded that position. The Crisitani administration, which came into power in 1989, began a comprehensive economic reform plan oriented toward a free market economy. A market-based currency exchange rate was adopted. Price controls were eliminated, as were the sugar, coffee, and cotton marketing monopolies. The nationalized banking system was largely privatized beginning in 1989. However, due to increased credit availability and public services prices, inflation doubled to around 20% in 1992.
Bolstered by peace, El Salvador's economy experienced brisk growth, with yearly GDP growth averaging 6.5% from 1990 to 1995. Inflation remained a problem, however, falling to 12% in 1993 and 8.9% in 1994, but rising to 11.4% in 1995. The latter increase was due in part to an increase in the VAT rate and oneoff increases in charges for telephone, electricity and water services. Unlike most of the Latin American economies, El Salvador was largely unaffected the "Tequila Effect" following the Mexican peso devaluation in 1995 because of the government's solid macro-economic management and the economy's low external debt.
In 1996 economic growth slowed to 2.1% as the government sought to rein in inflation, which, through tight monetary and fiscal policies, achieved a then-record low for El Salvador of7.4% for the year. Higher interest rates resulting in very expensive borrowing costs and pessimistic expectations combined to drive down domestic investment.
In 1997, GDP growth rose to 4%, led by a 14.3% increase in the financial sector, as El Salvador's banks expanded their operations, a 8.2% increase in manufacturing, and a 7.2% increase in retailing. Inflation dipped to the low level of 2%, while unemployment was officially reported as 7.7%. In 1998, the real growth rate moderated to 3.4%, below the 5% average annual growth for the period 1998 to 1998. In 1999, real growth increased to 4.9% while inflation stayed at 2%. In 2000, the country suffered the destructive impact of Hurrican Mitch which reduced the growth rate to only 2%. Inflation rose to 4.3%. In 2001, growth was again damped, in this case mainly by the US recession, the global economic slowdown, and the reduced investment activity following the 11 September 2001 terrorist attacks. GDP growth in 2001 was 1.4% in 2001, and was estimated at only 1.9% for 2002. Inflation declined to 3% in 2001 and was estimated at 1.9% for 2002. From 1999 to 2003, economic growth has averaged 2.55% a year.