El Salvador signed the Central American Free Trade Agreement (CAFTA) — negotiated by the five countries of Central America and the Dominican Republic — with the United States in 2004. CAFTA requires that the Salvadoran government adopt policies that foster free trade. El Salvador has signed free trade agreements with Mexico, Chile, the Dominican Republic, and Panama and increased its trade with those countries. El Salvador, Guatemala, Honduras, and Nicaragua also are negotiating a free trade agreement with Canada. In October 2007, these four countries and Costa Rica began free trade agreement negotiations with the European Union. Negotiations started in 2006 for a free trade agreement with Colombia.
The government has focused on improving the collection of its current revenues with a focus on indirect taxes. A 10% value-added tax (IVA in Spanish), implemented in September 1992, was raised to 13% in July 1995.
Inflation has been steady and among the lowest in the region. Since 1997 inflation has averaged 3%, with recent years increasing to nearly 5%. From 2000 to 2006 total exports have grown 19% from $2.94 billion to $3.51 billion. During this same period total imports have risen 54% from $4.95 billion to $7.63 billion. This has resulted in a 102% increase in the trade deficit from $2.01 billion to $4.12 billion.
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