El Salvador has reached a significant milestone in its economic recovery, securing a $1.4 billion loan agreement with the International Monetary Fund (IMF) after four years of tense negotiations. The deal, which follows El Salvador’s controversial decision to adopt Bitcoin as legal tender, marks a key moment for the country’s fiscal future.
The loan, set to be disbursed over 40 months, will provide much-needed financial support for El Salvador’s economy. The IMF’s announcement detailed that the funds are conditional on the country implementing a series of measures aimed at strengthening its fiscal policies. These include improving the primary balance, reducing the debt-to-GDP ratio, and stabilizing the country’s economic outlook.
The agreement comes after years of strained relations between El Salvador and the IMF, largely due to President Nayib Bukele’s 2021 decision to make Bitcoin an official currency alongside the U.S. dollar. The IMF had warned that this move could destabilize the country’s economy, and the IMF’s concerns were echoed by credit rating agencies, which downgraded El Salvador’s bonds. Investor confidence was shaken, and the country’s bond prices plummeted in response.
Despite these challenges, the IMF acknowledged the progress El Salvador has made in stabilizing its economy, including efforts to reduce inflation, improve fiscal management, and meet its short-term debt obligations. While the agreement is still subject to approval by the IMF’s executive board, it represents a significant step forward in resolving the economic tensions that have plagued El Salvador’s bond markets for years.
One of the most notable aspects of the agreement is the IMF’s emphasis on addressing the risks associated with Bitcoin. In response to criticism of the cryptocurrency’s volatile nature, the government has agreed to adopt legal reforms that make the use of Bitcoin voluntary for the private sector. These changes are expected to mitigate the financial risks associated with the cryptocurrency, which the IMF had previously warned could jeopardize El Salvador’s economic stability.
Furthermore, the government will gradually unwind its involvement with the Chivo wallet, the state-backed digital wallet launched in September 2021. The initiative, which offered citizens $30 worth of free Bitcoin in an effort to encourage widespread adoption, failed to live up to expectations. Although the program attracted millions of sign-ups, actual usage has been low. By 2022, fewer than 2% of remittances were sent through digital wallets.
In recent months, President Bukele has focused on stabilizing the country’s financial situation by taking steps such as buying back U.S. dollar-denominated bonds at a discount, paying off outstanding debts early, and restructuring pension obligations. These actions have helped restore investor confidence and have contributed to the current agreement with the IMF.
With this loan, El Salvador hopes to continue its fiscal recovery, though questions remain about the long-term viability of Bitcoin in the country’s financial system. The IMF’s cautious approach suggests that while El Salvador’s digital currency experiment may be winding down, the country’s economic reform efforts are on track for a more stable future.
