Why is the IMF urging El Salvador to drop bitcoin as the official currency?
As soon as the President of El Salvador announced that he wanted to establish bitcoin as an official currency, the IMF was reluctant, as was the World Bank. But on January 25 the IMF published its annual report on the economic situation of El Salvador. It can be read that, if a contraction of 7.9% of the Salvadoran economy had been observed in 2020, the latter had risen by 10% in 2021. For 2022, the IMF expects growth of 3.2%. The country responded quickly after the 10-year interruption of growth caused by the pandemic. The IMF notes this beginning of an upturn thanks to “robust” external demand, “resilient” remittances and “good management” of the pandemic.
But the IMF warns: according to him, the use of bitcoin as an official currency carries “significant risks” for financial stability and integrity “and consumer protection”. This is why the IMF Executive Board urges the Salvadoran authorities “reduce the scope of the bitcoin law by removing the legal status of bitcoin.” “Some administrators have also expressed concern about the risks associated with issuing bitcoin-backed bonds,” the report adds.Public debt vulnerabilities have emerged. Persistent fiscal deficits and high debt service lead to large and growing financing needs“, concludes the report.
“Bitcoin City”
President Nayib Bukele is a fervent promoter of cryptocurrency, we understand that. Under his government, 1,630 bitcoins were thus acquired with public funds and the head of state also announced the issuance of a billion dollar bond in bitcoins. At the end of November, he also indicated that he wanted to build “Bitcoin City”, a new city powered by the energy of a volcano and funded by cryptocurrency debt.
Lhe Salvadorian government is in negotiations with the IMF for a loan of 1.3 billion dollars to clean up its debt. The government hopes in particular to obtain a loan of 400 million dollars from the World Bank, 400 million from the Inter-American Development Bank (IDB) and 200 million from the Central American Bank for Economic Integration (BCIE). All these loans depend on an agreement with the IMF.