Facing the default, El Salvador has reportedly agreed on a deal with the IMF that was worth $1,4 bln and which brought some changes to its experimental cryptocurrency policies. According to this arrangement, the use of Bitcoins will be optional in private areas, while the government’s interference with the cryptocurrencies will be reduced.
It is a step that joins a set of measures aimed at trying to overcome the economic crisis and lower the public debt that has reached 85 percent of GDP. This is a significant stride in the direction of fiscal integration and presupposes the stimulation and establishment of following financial assistance in the scale of $3.5 bn from the World Bank and regional development banks.
IMF Agreement Signals Change in Bitcoin Policy
The elements of the $ 1.4 bln deal include actions aimed at increasing El Salvador’s fiscal strength to enhance the country’s primary balance by 3.5 % in three years. This comes after several months of taking time to work out the details of the IMF and the Salvador Government.
A peculiar feature of the deal is the change in the status of Bitcoin in the national economy. As Bitcoin is still legal tender in the country, the uptake for it by the private sector will now be purely a matter of choice. This policy change has been appreciated by the international communities and financial institutions.
“Exempting the use of Bitcoin as voluntary is the middle of the road policy, which means allowing liberalization while avoiding putting the business or anyone into unknown territory,” said IMF’s Caroline Masters on Thursday.
Furthermore, the government has declared that taxes would be paid in US dollars only, and the use and acceptance of Bitcoin would be formally shunned in the country’s public sector. The Chivo e-wallet, backed by the state and praised as a way to promote the use of Bitcoin, will also gradually shrink its activities.
Bitcoin’s Declining Market Value
This means that a significant plummet followed the announcement of the IMF deal in the Bitcoin price. The cryptocurrency is trading at around $105,000 after it pushed through $100,000 and even touched $108,000. S&P Citi analysts partly blame this decline on the U.S. Federal Reserve’s policy on interest rates, which has made risk-sensitive assets contractionary globally.
This market volatility has supported the Salvadoran government’s decision to limit the use of Bitcoin, particularly in the public sector. Nevertheless, economic challenges were observed in 2012 mainly due to the global crisis, but El Salvador can count on remittances, increased tourism flow, and a better security situation.
“The new agreement with the IMF and the willingness of the country to push through with economic reform are strong signals of its willingness to open up more for foreign direct investment,” said David Gomez, an economist with the Latin American Institute for Financial Studies.
More Sources of Funding on the Way
Apart from the IMF loan, El Salvador is to get $3,5 billion in extra funding from the World Bank and the regional development banks. These funds will go to the development of infrastructure, social services, and other changes spelt out under the IMF deal.
For self-finance, the Salvadoran government has also stressed its efforts on fiscal discipline. Through cases of decreased spending in public projects and enhanced efficiency in tax collection, officials hope to achieve more employment of debts.
The IMF deal is a plus for El Salvador and its efforts in overcoming challenges resulting from its previous experience with Bitcoin. The voluntary adoption model might be a benchmark to be followed by other nations who are likely to adopt cryptocurrencies in the future.
Looking Ahead
As in most of the Central American nations, El Salvador’s IMF cooperation is anticipated to open a new chapter of macroeconomic stability and enhanced growth. Thus, the nation is set on the right course to integrate innovation with the fiscals so as to create a sustainable future base.
Though some people have reacted angrily about making the acceptance of Bitcoin voluntary, it fits into a global trend of tentative embrace of the technology. Realizing that the Salvadoran economy has faced some challenges, more money from international organizations should help El Salvador to withstand the blows. Keep following The Bit Journal and keep an eye on crypto news and developments.
FAQs
What prompted El Salvador to make legal tender acceptance of Bitcoin optional?
This was in a $1.4 billion deal with the IMF in a bid to calm the troubled domestic economy. The voluntary model of integration seeks equal adoption and innovation but without putting pressure on users and businesses to adopt Bitcoin.
Will Bitcoin remain legal tender in El Salvador?
Yes, Bitcoin is still legal tender, but the use has been made to be optional in the private sector only. There is a decrease of public sector participation through the acceptance of taxes in United States dollars only.
What other conditions are contained in the IMF agreement?
This agreement establishes fiscal reforms that aim for an enhanced primary balance of at least 3.5% over the next three years, lower public debt and extra funds of $3.5 billion from the World Bank and regional banks.
How about Bitcoin’s price as a result of this news?
Bitcoin has now dipped to slightly over $100,000 after breaching an ATH of around $108,000. Most of the decrease is due to general market factors and, more specifically, the US Federal Reserve policy with respect to interest rates.
What is the future of the Chivo e-wallet supported by the state?
Chivo e-wallet, which was launched to support the usage of Bitcoin, will slowly be shut down as the government decreases the influence of the public sector on cryptocurrencies.
Follow us on Twitter and LinkedIn and join our Telegram channel to be instantly informed about breaking news!
