Published on : 06/09/2022 – 18:42
A year after its introduction as legal tender in El Salvador, alongside the dollar, bitcoin is playing on the nerves of Salvadorans. The government had spent several million dollars to buy cryptocurrency, but with the vertiginous fall of bitcoin afterwards, it lost half of it. The consequences could become serious for the country’s economy.
When El Salvador adopt bitcoin as official currency in September 2021, the cryptocurrency is worth $45,000. Three months later, it climbs to 68,000.
The stated aim of President Nayib Bukele is to facilitate the sending of money by Salvadoran emigrants, particularly from the United States to their country of origin, by avoiding bank charges. These transfers indeed represent more than a quarter of El Salvador’s GDP.
Salvadorans are getting into it
The beginnings are promising. The government says it will not go so far as to force companies to deal in bitcoin: it prefers to encourage. Cash is king in the country, more than half of the inhabitants do not have a bank account.
However, traders are getting into it and the Salvadorans are following. Out of 6.5 million inhabitants, the bitcoin payment application is downloaded 4 million times. Indeed, anyone who downloads the application receives a bonus of 30 dollars in bitcoins upon registration, which may explain this success.
The collapse of cryptocurrencies
The problems start with the bitcoin crash, currently under $20,000. According to the financial rating agency Moody’s, the government of Nayib Bukele would have spent 375 million dollars for the deployment of cryptocurrencies, including 106 million dollars coming from the Treasury to buy them. This investment has halved in just a few months. Or lost public money, say the specialists.
Thus, when it has to pay its debts, the country will have less funds at its disposal and may default.
El Salvador is not the only one to suffer the consequences of this decline. All investors, whether institutional players or individuals, suffered losses. The same goes for the Central African Republic, the second state in the world to adopt bitcoin, the very first on the African continent. Surprisingly in this context: as crypto-asset markets plunge, Bangui has just launched its own cryptocurrency, the Sango Coin.
An IMF loan of 1.3 billion will have to wait
According to experts, El Salvador’s adoption of bitcoin complicated negotiations with the International Monetary Fund (IMF). The country faces a high external debt, the servicing of which exceeds 80% of GDP. It is struggling with a large budget deficit and risks a recession. At the same time, the Salvadoran government is struggling to borrow in conventional financial markets.
The downgrade of its credit rating by Fitch Rating in February 2022 made borrowing more expensive for the country.
El Salvador was to obtain a $1.3 billion loan from the IMF. But the discussions are dragging on. The institution believes that the country has gone too far in adopting bitcoin as its official currency, which it considers too unstable for this purpose, and urges El Salvador to abandon it.
But President Bukele persists and signs. Lately, he bought 80 bitcoins for his country taking advantage of the drop to $19,000, bringing El Salvador’s basket to a total of 2,381 bitcoins. The president preaches patience and recommends to his fellow citizens to stop looking at the curve of the bitcoin-dollar exchange. For the greater good of their nerves and their wallets.
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