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El Salvador’s $1.3B Bet: Bitcoin Policy Shift Paves Path to IMF Deal
12/09/2024 22:46
El Salvador seeks $1.3 billion IMF loan, plans Bitcoin policy changes and deficit reduction to stabilize economy.
Key Notes
- El Salvador seeks a $1.3 billion IMF loan, aiming to cut deficits by 3.5% GDP in three years.
- Bitcoin becomes optional for businesses; reserves increase to $15 billion; anti-corruption law also planned.
- Bukele re-elected with 85% support; Bitcoin reserves hit $600M, marking 127% gains amid economic focus.
In a bid to secure a $1.3 billion loan from the International Monetary Fund (IMF), El Salvador is preparing to tweak its trailblazing Bitcoin policies and reduce government deficits. The loan agreement is expected within the next two to three weeks, according to Financial Times.
An IMF delegation recently arrived in El Salvador, to finalize details with President Nayib Bukele’s government. This deal is more than just a loan — it could unlock an additional $2 billion in funding: $1 billion from the World Bank and another $1 billion from the Inter-American Development Bank. After years of global isolation, these funds could stabilize El Salvador’s financial standing.
The journey back to financial credibility began in June 2021 when El Salvador became the first country to adopt Bitcoin as legal tender. While President Bukele saw this as a revolutionary step, the IMF strongly opposed the move, warning it could harm financial stability.
Bitcoin Optional, Fiscal Deficit Reduction Planned
As part of the agreement, businesses will no longer be legally required to accept Bitcoin. Instead, it will become optional. The government will also aim to cut the budget deficit by 3.5% of GDP over three years. This will be achieved through a mix of tax increases and spending cuts. Additionally, plans include strengthening the nation’s reserves, increasing them from $11 billion to $15 billion.
Another element of the deal involves passing an anti-corruption law. President Bukele’s first term was marked by a bold and aggressive campaign against violent gangs. Using emergency powers, his administration jailed over 82,000 suspected gang members and built a massive maximum-security prison known as The Terrorism Confinement Center (CECOT).
In February 2024, Bukele was re-elected with a resounding 85% of the vote, securing almost every seat in Congress. His tough stance on crime and unconventional policies has made him a divisive but highly effective leader in the eyes of many Salvadorans.
A Changing Relationship with the U.S.
Relations with the U.S. have been complex. During his first term, the Biden administration criticized Bukele’s policies and sanctioned some of his officials for alleged corruption. However, in recent months, the U.S. has shifted toward building closer ties with the Central American nation. Bukele also maintains friendly relations with Donald Trump and entrepreneur Elon Musk.
While the president’s vision of El Salvador as a cryptocurrency haven has drawn global attention, most Salvadorans prefer to use the U.S. dollar for everyday transactions. Plans for a futuristic “Bitcoin City,” powered by volcanic geothermal energy, are still in early stages.
Despite public skepticism, El Salvador continues to hold Bitcoin as part of its reserves. Bukele often buys the cryptocurrency when prices drop. Recently, he announced that the country’s Bitcoin reserves had grown to over $600 million, reflecting a 127% gain. Bukele shared on social media:
“You can call it our first #Bitcoin piggy bank. It’s not much, but it’s honest work.”
During his second term, President Bukele is focusing on revitalizing El Salvador’s economy and attracting foreign investment. The efforts are showing concrete results: the country’s sovereign bond spread, which peaked at 3,500 basis points above U.S. Treasuries in July 2022, has dropped dramatically to 398 basis points, indicating improved market confidence.
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