El Salvador At Crossroads: IMF Deal Hinges On Bitcoin Rejection — Will Bukele Forgo His Dream?

Unlocking necessary funding to grow its economy might cost El Salvador and President Nayib Bukele the abandonment of Bitcoin BTC/USD.

According to Bank of America economist Alex Muller, El Salvador is in pursuit of a deal with the International Monetary Fund (IMF), which can provide the little Central American country the ability to secure much-needed external financing from global investors.

Muller’s recent visit to El Salvador revealed a government increasingly inclined to engage in fruitful negotiations with international partners, particularly the IMF, seen as a linchpin for the country’s debt sustainability.

“The government is more focused on getting an IMF program, which is the key to ensure public debt sustainability,” Muller stated.

In recent years, El Salvador has achieved excellent results in terms of economic growth and domestic security. The GDP has risen to $35 billion, almost $10 billion higher since President Nayib Bukele took office in 2019, and unemployment has dropped to 5%.

Additionally, the nation has significantly curtailed its crime rates, transitioning from one of Latin America’s most dangerous countries to boasting one of the lowest crime rates in the region.

“El Salvador has gone from having a war-like crime rate before Bukele (106.8 per 100,000 people in 2015) to one of the lowest in the Latin America region (2.4 in 2023),” Muller said.

Despite these advancements, El Salvador grapples with a debt-to-GDP ratio exceeding 70%—a figure the IMF deems too high for an emerging economy.

El Salvador’s international dollar bonds in recent months have substantially rallied in recent months, yet yields remain above 10%. This enormous interest burden does not allow El Salvador to obtain significant resources for its medium and long-term development plans.

Chart: El Salvador’s Dollar Bonds Rallied Over 60% From A Year Ago

Battles of Necessity And Battles Of Choice

Bukele has successfully clinched a second term, winning the elections with more than 70% of the vote. His party, New Ideas, is poised to secure 58 of the 60 available seats in the 84-member Legislative Assembly.

But a program with the IMF could provide El Salvador the necessary confidence boost to bring foreign investors closer.

“The difference between now and the last three years – during which El Salvador has been discussing a potential program with the IMF – is that President Bukele is getting more involved,” Muller wrote.

As what seems like a marriage is about to be celebrated, there’s one last hurdle to overcome.

The path to an IMF agreement is fraught with the contentious issue of Bitcoin’s legal tender status. The IMF’s stance, as articulated in its Article IV report, opposes Bitcoin as legal tender, presenting a precondition that challenges El Salvador’s innovative yet controversial financial experiment.

“Public policy students are taught that leaders must distinguish between battles of necessity and battles of choice. For El Salvador, we believe Bitcoin is a battle of choice, whereas obtaining an IMF program is a necessity in the sense it would unlock the external financing to make the economy thrive,” Muller stated.

The ball now goes to Bukele, a fervent advocate for Bitcoin. The choice before him and his nation is stark: adhere to the IMF’s demands and forsake the digital currency dream, or uphold the Bitcoin standard and risk the stability offered by the IMF’s support.

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Image: Wikimedia