El Salvador has been seeking a $1.8 billion AUD loan from the International Monetary Fund (IMF) to help revive its debt-crippled economy. Now, the IMF is taking an increasingly hardline stance against Bitcoin as legal tender in the country.
Despite being Latin America’s smallest country, El Salvador made big steps when led by its 40-year-old president Nayib Bukele, it adopted BTC as legal tender and a means of payment. At that time, the price of Bitcoin was a little over $72,000 AUD.
Now, BTC has fallen to $51,837 AUD at the time of writing, almost half of its all-time high of about $90,000 AUD. With such price volatility, the IMF is concerned that
“ … there are large risks associated with the use of bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities.”
-The IMF
As such, the IMF board is urging El Salvador to ditch Bitcoin as legal tender. Is this another instance of arm twisting by Big Brother trying to lord it over the tiny country, or genuine concern?
El Salvador’s fate tied with that of BTC
By the time of publishing, El Salvador had bought about 1,500 Bitcoin worth over $77 million AUD at the time. Even as the price of BTC plummets, the president has been buying the dip at what he calls “cheap prices.”
In so doing, Bukele has tied his own and his country’s fate to the fate of Bitcoin in more ways than one. While the country has been using the U.S. Dollar as legal tender since 2001, the president thought BTC would help the country bypass international transfer fees and regulations.
Even though less than 30% of the country has access to electricity and internet, the law requires all capable businesses to accept payment in BTC. Bukele hopes this will improve access to the financial system and incentivise investors, and he has already set up a crypto wallet called Chivo to facilitate this.
The country stands to make massive gains if BTC reaches the promised $100,000 USD ($141,000 AUD), and Bukele is openly banking on that to help it grow more than the forecast 9%.
Volcano-powered Bitcoin city
The IMF predicts that El Salvador’s ratio of public debt to GDP could reach 96% in 2026, making it unsustainable. It also has dollar bond payments due in 2023.
Despite this, the Salvadoran president has even bigger plans for Bitcoin than making it legal tender. He has already announced plans to build a Bitcoin city powered by a volcano. The project will be funded by a $1.4 billion AUD Bitcoin-backed bond, which some early investors are already waiting for.
If the standoff with the IMF is not resolved to El Salvador’s advantage, things could end badly for the country. Already, there have been protests by citizens over fears that it could bring economic instability and heighten inflation.
The world is watching
The youthful Salvadoran president is also facing international scrutiny over “controversial” political decisions such as replacing top judges in the country. This IMF-BTC standoff only raises the country’s already high profile.
But this could be exactly what the president has been hoping for all along—international limelight and a seat at the big table. The world is certainly watching.
