El Salvador is reportedly on track to secure a $1.3 billion loan agreement with the IMF in the coming weeks. This agreement is expected to bring about changes in the country’s legal treatment of Bitcoin and align its fiscal policies to meet international financing standards.
According to the Financial Times, an IMF mission is currently in San Salvador to negotiate terms that would likely make the acceptance of Bitcoin voluntary for businesses, as opposed to mandatory. This shift in policy is in line with the IMF’s concerns about the risks associated with making Bitcoin legal tender. The pending agreement with the IMF could also pave the way for an additional $1 billion in lending from the World Bank and another $1 billion from the Inter-American Development Bank, providing El Salvador with much-needed access to external credit.
This change in approach marks a departure from El Salvador’s pioneering stance on Bitcoin as legal tender, which was introduced in 2021. The IMF has consistently opposed the mandatory acceptance of Bitcoin, citing concerns about financial stability. Matthew Sigel, Head of Digital Assets Research at Van Eck, highlighted that even if Bitcoin acceptance becomes voluntary, it will still remain legal tender in the country.
The new terms of the IMF agreement will require El Salvador to reduce its budget deficits by around 3.5 percentage points of GDP over three years through a combination of spending cuts and tax measures. Additionally, the country will need to pass an anti-corruption law and increase its reserves from $11 billion to $15 billion.
President Nayib Bukele, who recently won re-election, has been working to improve El Salvador’s economic standing on the international stage. The country’s efforts to attract foreign investment and implement sound financial policies have been well-received by officials involved in the negotiations with the IMF.
Despite El Salvador’s push to integrate Bitcoin into its economy, reports suggest that a majority of Salvadorans still rely on the US dollar for transactions, with only a small percentage using Bitcoin. Bukele’s ambitious plans to promote Bitcoin, including the creation of a “Bitcoin City” powered by geothermal energy, have garnered global attention.
The proposed IMF deal reflects a recognition of the limited domestic demand for Bitcoin in everyday transactions. El Salvador’s significant Bitcoin reserves, valued at over $600 million, highlight the government’s efforts to tie its economic policies to the performance of Bitcoin.
The potential announcement of the IMF package in the coming weeks would signify a significant shift in El Salvador’s unwavering support for Bitcoin. As the US considers creating a strategic Bitcoin reserve, it will be interesting to see how the IMF responds to such initiatives by major global players.
In addition to the developments with the IMF, President Bukele has also announced plans to aggressively sell gold reserves to bolster Bitcoin. With trillions of dollars’ worth of gold reserves in El Salvador, Bukele aims to “dilute” the price of gold in favor of Bitcoin.
Overall, El Salvador’s evolving approach to Bitcoin and its efforts to secure international financing signal a strategic shift in the country’s economic policies. The IMF agreement, if finalized, could open up new opportunities for El Salvador to strengthen its financial position on the global stage.