After four years of negotiations, El Salvador secured a loan agreement of 1.4 billion USD from the International Monetary Fund (IMF). However, this agreement comes with many conditions requiring the Central American nation to significantly adjust its strategy regarding Bitcoin.
Major Changes in Strategy
According to the agreement:
• Bitcoin is no longer mandatory: The acceptance of Bitcoin will become voluntary for the private sector.
• Limit public role: The public sector will be restricted from participating in crypto-related activities, including reducing the government's role in the Chivo e-wallet program.
The IMF also emphasized that the risks associated with the Bitcoin project will be significantly reduced, in line with the fund's policy.
Economic Reforms and Funding Conditions
El Salvador must implement a series of economic reforms to meet the IMF's requirements:
• Improve budget balance: Increase the primary budget balance to about 3.5% of GDP over three years to reduce public debt, which has now reached 85% of GDP.
• Enhance transparency: The government will improve the anti-corruption framework and adjust banking regulations to international standards.
• Taxes still use USD: All tax transactions will continue to be conducted in USD instead of Bitcoin.
The agreement also paves the way for El Salvador to receive additional funding from development banks, potentially raising the total financial package to over 3.5 billion USD.
Challenges on the Bitcoin Journey
Since El Salvador declared Bitcoin as legal tender in 2021, the country has faced significant criticism from international organizations:
• Responses from financial organizations: The World Bank refused to support El Salvador in implementing the Bitcoin law, and the IMF has repeatedly recommended that the country stop using Bitcoin as legal tender.
• Economic impact: El Salvador's decision has led to a downgrade in credit ratings and warnings from organizations such as Moody’s and Fitch Ratings.
Although the Chivo wallet program attracted over 3 million users due to a Bitcoin promotion worth 30 USD, President Bukele recently admitted that the level of Bitcoin usage in the country did not meet initial expectations.
Conclusion
The agreement with the IMF presents an opportunity for El Salvador to improve economic stability but also marks a turning point in the country's Bitcoin strategy. Despite facing many challenges, El Salvador still has the potential to become a model for the integration of crypto and national economy if it implements the necessary reforms correctly.
