Remittances, a Lifeline for El Salvador, Plummet Amid Pandemic

By Santiago Pérez

The slum in El Salvador where María Graciela Barrera lives is dotted with white flags, outside homes, serving as distress signals that people inside don't have enough food.

The coronavirus pandemic's economic fallout thousands of miles away in the U.S. is hitting people like Ms. Barrera, 89, who is no longer getting the $50 a month that two of her grandchildren send from Los Angeles.

"Since they lost their construction jobs because of the coronavirus, we are adrift," Ms. Barrera said one recent day after collecting a bag of basic goods distributed by a Catholic charity in San Salvador.

As the jobless rate among Hispanics in the U.S. surged to close to 20% in April, remittances to El Salvador plunged 40% from the same month last year, central bank figures show. Experts think the drop could be about 20% year-over-year in May and will exacerbate already difficult economic times for millions -- and fuel further waves of immigration in coming years.

Other than impoverished Haiti, no country in the Western Hemisphere relies more on remittances than El Salvador. One in four Salvadorans live abroad, mostly in the U.S., and more than two of every 10 dollars in the country's economy come from remittances, according to government estimates.

Remittances surpassed $5.6 billion last year, dwarfing the $724 million El Salvador received in foreign investment and topping the $4.8 billion worth of goods that the country exported.

"In some rural areas, no remittances means no income, not even for food, " said Dino Safie, the singer of a local Catholic rock band. He began distributing food to people like Ms. Barrera through his charity, Solidaritón, as the crisis intensified. "When you deliver to one of them, six neighbors appear begging for help."

The drop in remittances exposes a major flaw in El Salvador's development. Since a devastating civil war ended in the 1990s, the tiny Central American nation has spent so little on health, education and welfare programs, that 1.6 million Salvadorans had little option but to emigrate. The money they send back helps families survive and subsidizes government spending.

El Salvador, Guatemala and Honduras form the so-called Northern Triangle of Central America, a region that has become the top source of illegal migration to the U.S.

"The economic model that we have implemented in the three countries has turned people into a top export product. In essence, migrants are the main pillar of these economies," said Ricardo Castañeda, senior economist at the Central American Institute for Fiscal Studies, a think tank.

Of the $24 billion in remittances received by Central America last year, 88% went to the Northern Triangle countries. Meanwhile, the region's public spending on health, education and cash transfers to the poor is among the lowest in Latin America. Most of the money from abroad is used to buy basic goods or pay for doctor visits or school fees, surveys show.

El Salvador's per capita social spending was $320 in 2018, less than a third of that spent by Costa Rica, a haven of social stability and welfare, according to the United Nations' Economic Commission for Latin America and the Caribbean. Guatemala and Honduras, at $228 and $185 respectively, also trail Latin America's average of $938.

"In terms of thinking about how the region positioned itself before this crisis, low social expenditure was the weakness," said Seynabou Sakho, the World Bank's director for Central America.

The government of President Nayib Bukele acknowledges that low social spending and inequality are deeply rooted in El Salvador. But the country's use of the U.S. dollar, adopted in 2001 and which provided macroeconomic stability when remittances were rising, also makes El Salvador more vulnerable than its neighbors to external shocks.

Without its own currency, El Salvador can't cut interest rates to foster growth or boost government spending without increasing its dollar-denominated debt. In most of Latin America, when currencies weaken, households receive more local money for every dollar sent from the U.S. In El Salvador, all goods and services are denominated in dollars.

"Dollarization is like a tattoo. Once you have one, it's impossible to remove it without leaving scars," said Mr. Castañeda.

While Honduras and Guatemala have balanced budgets, low debt levels and funding costs similar to investment-grade Mexico, El Salvador's government is paying interest rates of almost 10% to borrow dollars, pushing up debt-servicing costs.

"Dollarization was seen as a tool to attract investment and generate more certainty for companies," said María Luisa Hayem, the country's Finance Minister. "Like any economic measure, it has its limitations at this time when other countries have more tools."

El Salvador's debt will exceed 90% of the country's economic output by year-end. The government plans to spend more than $1 billion in public health care, cash transfers to low-income households and payroll support to businesses to prevent mass layoffs. Bank of America expects the budget deficit to widen to almost 11% of gross domestic product. The economy is forecast to contract 8% this year.

"There are variables that no longer depend on us, such as remittances. Their recovery will depend on the reopening of restaurants, hotels or the construction sector in the U.S.," Ms. Hayem said in an interview.

Fusades, a Salvadoran think tank, estimates that a 30% jobless rate among Hispanics in the U.S. could result in a 36% drop in remittances to El Salvador this year. Just in the Washington, D.C., area, about 300,000 Salvadorans make a living as dishwashers, housekeepers or janitors.

Norma Lazo left rural Morazán in eastern El Salvador two decades ago. Her work as janitor in a federal court building allowed her to send some $200 to relatives back home every month.

The 55-year-old said that the cleaning contractor that she worked for fired her in March after she complained about the lack of protective equipment. She tested positive for Covid-19 a few days later and is now recovering in her north Washington, D.C., apartment, which she shares with 10 other people.

"I told my sisters [back home]: I won't be able to help you until I recover. Buy just what you need," she said. "They used the money to buy rice and beans. Now they ask for credit at the store. As soon as I can, I'll send something, even $20 would help."

The Salvadoran government's response to the pandemic has been among the most aggressive in Latin America. The 38-year-old Mr. Bukele, who was elected last year as a political outsider amid rising discontent over violence and poverty, was among the first leaders in the region to close borders, airports and schools in March.

Mr. Bukele, known for his black leather jackets and baseball caps worn back-to-front, implemented strict lockdowns, curbed public transportation and even created quarantine centers among controversial emergency measures that raised tension with other branches of government.

The measures have contained the pandemic so far. But the hard part comes next: ensuring that Salvadorans have enough to eat. One in four Salvadorans live in poverty, making less than $5.50 a day. The World Bank estimates that the country's poverty rate could increase by 5% or 10%, depending on the economic impact of the pandemic.

"Migration is related to the fragility of states, and that weakness is due to their inability to protect the population from the most basic perspective: health, education and the rule of law," said Manuel Orozco, a remittances and migration expert at the Inter-American Dialogue, a think tank.

Write to Santiago Pérez at [e-mail]