El Salvador Seeks $1.3 Billion IMF Loan Amid Bitcoin Policy Changes
El Salvador is preparing to adjust its Bitcoin policies and reduce government deficits to secure a $1.3 billion loan from the International Monetary Fund (IMF). The agreement is anticipated within two to three weeks, according to Financial Times.
An IMF delegation recently met with President Nayib Bukele’s government to finalize details. This loan could also unlock an additional $2 billion in funding from the World Bank and the Inter-American Development Bank. These funds aim to stabilize El Salvador's financial standing after years of global isolation.
The push for financial credibility began in June 2021 when El Salvador became the first country to adopt Bitcoin as legal tender. While this was seen as revolutionary by President Bukele, the IMF opposed it, cautioning about potential harm to financial stability.
Bitcoin Optional, Fiscal Deficit Reduction Planned
Under the new agreement, businesses will no longer be legally required to accept Bitcoin; acceptance will become optional. The government plans to reduce the budget deficit by 3.5% of GDP over three years through tax increases and spending cuts. Additionally, there are plans to strengthen national reserves from $11 billion to $15 billion.
The deal also includes passing an anti-corruption law. President Bukele's first term was marked by a significant campaign against violent gangs, leading to the incarceration of over 82,000 suspected gang members and the construction of a maximum-security prison known as The Terrorism Confinement Center (CECOT).
In February 2024, Bukele was re-elected with 85% of the vote, securing nearly all congressional seats. His tough stance on crime and unconventional policies have made him a divisive yet effective leader among many Salvadorans.
A Changing Relationship with the U.S.
U.S.-El Salvador relations have been complex. Initially, the Biden administration criticized Bukele’s policies and sanctioned some officials for alleged corruption. However, recent months have seen a shift towards closer ties. Bukele also maintains relationships with Donald Trump and entrepreneur Elon Musk.
Despite Bukele's vision of making El Salvador a cryptocurrency haven, most Salvadorans prefer using the U.S. dollar for transactions. Plans for a “Bitcoin City,” powered by geothermal energy, remain in early development stages.
Despite public skepticism, El Salvador continues to hold Bitcoin in its reserves, with Bukele purchasing the cryptocurrency during price drops. He recently announced that the country's Bitcoin reserves exceeded $600 million, reflecting a 127% gain. Bukele remarked:
“You can call it our first #Bitcoin piggy bank. It’s not much, but it’s honest work.”
During his second term, Bukele aims to revitalize El Salvador's economy and attract foreign investment. Indicators show progress: the country’s sovereign bond spread, which peaked at 3,500 basis points above U.S. Treasuries in July 2022, has significantly decreased to 398 basis points, suggesting improved market confidence.