El Salvador's Bitcoin Bet Delays IMF Loan Approval

The International Monetary Fund (IMF) deems bitcoin's risks a crucial factor in ongoing negotiations for a credit program with El Salvador. As discussions focus on strengthening fiscal sustainability, productivity, and economic governance, addressing the risks associated with bitcoin's legal status is a key element.

El Salvador's Bitcoin Gamble Raises Concerns for IMF Loan

Washington, D.C. - The International Monetary Fund (IMF) has identified El Salvador's adoption of Bitcoin as a "key element" in the ongoing negotiations regarding a $1.3 billion credit program. The admission, made by IMF communications director Julie Kozack, underscores the heightened scrutiny surrounding the cryptocurrency's role in El Salvador's economy.

Since 2021, Salvadoran authorities have been engaged in talks with the IMF to secure the loan, but an agreement has yet to be reached. Kozack emphasized that the discussions center on "policies to strengthen fiscal and external sustainability, boost productivity growth, and strengthen economic governance." She further emphasized that "addressing the risks derived from Bitcoin is a key element of our discussions."

El Salvador's decision to make Bitcoin legal tender alongside the US dollar in 2021 made it the first country in the world to embrace the cryptocurrency at such a level. However, the adoption has faced significant challenges, with recent surveys indicating that approximately 88% of Salvadorans do not use Bitcoin.

Despite the mixed reception of Bitcoin, President Nayib Bukele remains a popular figure in the country, primarily due to his efforts to combat gang violence, which have significantly improved public safety. This success has had positive economic repercussions, according to Kozack, with "real GDP growth strengthening in 2023, driven by tourism and construction" and supported by remittances and improved security conditions.

The IMF spokesperson acknowledged that the Salvadoran economy grew 3.5% last year, accompanied by declines in inflation and the current account deficit. However, the negotiations between the Fund and El Salvador on the credit plan appear to be facing obstacles.

Independent economist César Villalona has attributed the impasse to Bukele's reluctance to accept IMF conditions, which include cuts to public spending and subsidies, as well as tax increases. Villalona maintains that such measures "have a political cost" and could erode Bukele's popularity.

Bukele's recent landslide re-election victory, with 84.65% of the vote, could potentially ease the path for negotiations with the IMF. However, the skepticism surrounding Bitcoin's role in El Salvador's economy is likely to remain a significant factor in the discussions.

As the negotiations continue, the IMF and El Salvador will need to find a balance between addressing the risks associated with Bitcoin and supporting the country's economic growth and stability. The outcome of these talks will have important implications for both El Salvador and the global economy's embrace of cryptocurrencies.