By The Economist
Compiled by: CryptoLeo, Odaily Planet Daily
During the recent market decline, El Salvador increased its holdings by 7 and 5 BTC on February 25 and March 4, respectively, after reaching a $1.4 billion loan bailout agreement with the IMF. According to the agreement, the IMF has imposed regulatory restrictions on the current state of cryptocurrencies in El Salvador due to concerns about the high risk of BTC, but this has not stopped El Salvador from buying BTC. In fact, the IMF's concerns are unfounded. Since President Nayib Bukele took office, his obsession with cryptocurrencies and various "support" measures have not improved El Salvador's economy, and have even increased the deficit. Since the implementation of the president's crypto policy, El Salvador's deficit in crypto alone has also increased.
The Economist wrote an article about El Salvador’s journey towards crypto, which Odaily compiled below:
El Salvador has been on the brink of default for much of the period since Nayib Bukele assumed the presidency in 2019. High debt and interest payments, exacerbated by a large fiscal deficit, have been long-standing warning signs for the country’s economy. Low dollar reserves, weak investment and GDP growth, and stalled bailout talks with the International Monetary Fund have also stalled. Bukele’s relentless attacks on the judiciary, opponents, and the media have not done much to inspire his country.
Bukele is too obsessed with cryptocurrencies. In 2021, El Salvador became the first country to adopt Bitcoin as legal tender alongside the U.S. dollar. President Bukele has vowed to circumvent traditional capital markets and raise billions of dollars through tokenized blockchain bonds. He will buy $500 million worth of Bitcoin, build a "Bitcoin City," and develop geothermal energy to power Bitcoin miners. But traditional markets didn't buy it, and in the summer of 2022, several Salvadoran bonds traded for an average of less than 30 cents, when the government began to postpone public sector wages to ensure sufficient cash and investors prepared for the worst.
Unexpectedly, on February 26, the IMF board approved a $1.4 billion bailout loan, agreed in December after years of delays, to be disbursed over 40 months. To get the money, El Salvador made the usual promises of fiscal discipline—scaling down its cryptocurrency program. After a legal change in January, taxpayers are no longer paid in Bitcoin, and the private sector is allowed to accept Bitcoin payments on a voluntary basis.
As it applied for a debt deal with the IMF, El Salvador showed a resolute resolve to repay its debts. In part because Bukele wanted to surprise Wall Street skeptics, the country's bond prices have risen all the way back to par, and officials have used scarce dollars to buy back bonds at a deep discount, saving a large portion of future principal payments. The fiscal deficit, which rose to 10% of GDP in 2020, has returned to pre-pandemic levels of 2-3%, roughly in line with other countries. A crackdown on tax evasion, strong inflows of remittances and a slight economic recovery have boosted government revenues; energy subsidies and the phasing out of pandemic-era programs have slowed spending.
The loan reduces the risk of a debt default crisis, but El Salvador would be better off if it can get another $2.1 billion from other multilateral lenders, as hoped. Despite the deficit cuts, the country may not be able to hold out for much longer. With high debt and slow economic growth, it is unsustainable for El Salvador to continue raising funds at a 12% rate, as it did in early 2024. In a dollarized economy like El Salvador, a sovereign debt default is more costly because there is no lender of last resort to avoid bank runs or contagion. Local bank deposits are partly backed by government debt, so a default could "snowball" into a banking crisis or even lead to de-dollarization.
As for El Salvador’s concessions on Bitcoin adoption, it may be a blessing in disguise, more of a blessing than a concession. Bukele touts cryptocurrencies as providing financial services to two-thirds of unbanked adults and reducing remittance costs, which account for almost a quarter of the country’s GDP, but the main obstacles to crypto financial inclusion are the size of its economy and low digital economic literacy. Remittance costs are high because Salvadorans prefer to trade in paper money, which is an expensive business in itself, and criminal activity makes costs even higher. In addition, the Salvadoran government hastily launched the Chivo digital wallet, which can be paid in US dollars and Bitcoin. But the reality after the launch of the wallet is not ideal, with vulnerabilities and identity theft rampant - in order to steal the $30 Bitcoin reward when registering the wallet.
The IMF was wary of lending to El Salvador when Bitcoin was still El Salvador's legal tender. Bitcoin price volatility poses risks to financial and fiscal stability. Bitcoin can be used for money laundering and other criminal activities. The IMF said El Salvador will restrict "Bitcoin transactions and purchases." According to on-chain data, the country has actually been buying Bitcoin since the agreement was reached, but it may have to reduce or cancel these purchases in order to comply with the loan agreement. El Salvador now holds 6,100 Bitcoins, worth more than $500 million, with a floating profit of about $200 million, which is also a point of pride for Bukele.
The profits may seem huge, but the input costs of cryptocurrencies in El Salvador are greater than the benefits. Bukele's crypto promotion is popular, but the volume of crypto investment and crypto tourism is small, and the benefits of financial inclusion and more efficient payment methods are negligible. In short, cryptocurrencies have never really caught on in El Salvador. In 2022, when the hype was at its peak, a CID-Gallup survey found that only one in five companies accepted Bitcoin and only 5% of taxes were paid in cryptocurrencies. The recent data may be lower, as Salvadorans still strongly prefer cash and payment cards.
In addition, rating agency Moody's said that El Salvador spent a total of $375 million on crypto experiments - including the launch of Chivo, subsidized transaction fees, Bitcoin ATMs, etc., which far exceeds the profits of its current Bitcoin holdings, and these profits are still likely to decrease as Bitcoin falls. Bukele's crypto experiment delayed El Salvador's loan agreement with the IMF, leaving El Salvador's risk premium high and his country on the verge of debt default.
But Bukele’s approval ratings are sky-high, often above 90%. He calls himself “the world’s most popular dictator,” not because of his advocacy of crypto, but because of his tough crackdown on crime, which ignores due process and the rights of suspects. His obsession with crypto has done little to alleviate El Salvador’s economic woes. While Bitcoin may still be a reserve asset on the country’s balance sheet, its days as El Salvador’s legal tender are over. Bukele is just a crypto utopian whose wild ideas have come crashing down when they collided with reality.
