El Salvador embraced Bitcoin, so why is it getting poorer?

By The Economist

Translated by CryptoLeo, Odaily Planet Daily

During recent market declines, El Salvador added 7 and 5 BTC on February 25 and March 4 respectively—moves made after reaching a $1.4 billion loan rescue deal with the IMF. On paper, the IMF has imposed regulatory restrictions on El Salvador’s national-level cryptocurrency activities due to concerns over Bitcoin’s high risk. Yet this hasn’t stopped El Salvador from continuing its BTC purchasing plans. In reality, the IMF's concerns are well-founded: President Nayib Bukele’s obsession with cryptocurrencies and his various "support" measures since taking office have failed to improve El Salvador’s economy—and have even widened its fiscal deficit. Since the president implemented his crypto policies, the country's deficit related specifically to cryptocurrency initiatives has continued to grow. The Economist published an article on El Salvador’s crypto journey, which Odaily has translated below: Since Nayib Bukele became president in 2019, El Salvador has spent much of its time on the brink of default. High debt and interest payments, exacerbated by massive fiscal deficits, have long served as warning signs for the nation’s economy. Low dollar reserves, sluggish investment and GDP growth, along with stalled bailout negotiations with the International Monetary Fund (IMF), have compounded the challenges. Bukele’s relentless attacks on judicial institutions, opponents, and the media have done little to inspire confidence in the country. Bukele is overly obsessed with cryptocurrencies. In 2021, El Salvador became the first country to adopt Bitcoin as legal tender alongside the US dollar. President Bukele vowed to bypass traditional capital markets and raise billions through tokenized blockchain bonds. He pledged to purchase $500 million worth of Bitcoin, build a “Bitcoin City,” and develop geothermal energy to power Bitcoin miners. But traditional markets weren’t convinced. By summer 2022, several of El Salvador’s government bonds were trading at an average price below 30 cents. The government began delaying public-sector wage payments to conserve cash, and investors braced for the worst. Surprisingly, on February 26, the IMF board approved a $1.4 billion bailout loan—agreed upon in December after years of delay—that will be disbursed over 40 months. To secure the funds, El Salvador made conventional commitments to fiscal discipline—including scaling back its cryptocurrency initiatives. After a January legal amendment, taxpayers are no longer required to pay in Bitcoin, and private sector adoption of Bitcoin payments is now entirely voluntary. In seeking the debt agreement with the IMF, El Salvador demonstrated a firm commitment to repaying its obligations. Partly driven by Bukele’s desire to shock Wall Street skeptics, the country’s bond prices rebounded to near par value. Officials took advantage of scarce dollars to buy back bonds at steep discounts, significantly reducing future principal payments. The fiscal deficit, which peaked at 10% of GDP in 2020, has now returned to pre-pandemic levels of 2–3%, roughly in line with other nations. Increased government revenue came from crackdowns on tax evasion, large inflows of remittances, and modest economic recovery. Spending was curbed by phasing out energy subsidies and pandemic-era programs. The loan reduces the risk of a debt default crisis—but the situation would be even better if El Salvador could secure another $2.1 billion in funding from other multilateral lenders, as many had hoped. Despite deficit reductions, the country may still not remain solvent for long. With high debt and slow economic growth, sustaining fundraising at the 12% pace projected in early 2024 is unsustainable. In a dollarized economy like El Salvador’s—where there is no lender of last resort to prevent bank runs or financial crises—the cost of sovereign default is especially high. Domestic bank deposits are partially backed by government debt, so a default could snowball into a banking crisis—and potentially even lead to dedollarization. As for El Salvador’s concessions on Bitcoin adoption, they may represent less of a retreat than a relief—a case of “a blessing in disguise.” Bukele promoted cryptocurrencies as a tool to provide financial services to two-thirds of unbanked adults and to lower remittance costs, which account for nearly a quarter of the country’s GDP. However, the main barriers to financial inclusion are the economy’s small size and low digital literacy. High remittance costs stem from Salvadorans’ preference for cash transactions—an inherently expensive process—while criminal activity further drives up expenses. Moreover, the government hastily launched the Chivo digital wallet, allowing payments in both dollars and Bitcoin. But post-launch realities were grim: rampant bugs and identity theft occurred—mostly aimed at stealing the $30 Bitcoin incentive offered during wallet registration. Even when Bitcoin was still legal tender, the IMF remained cautious about lending to El Salvador. Bitcoin’s price volatility poses risks to financial and fiscal stability, and the cryptocurrency could be exploited for money laundering and other illicit activities. The IMF stated that El Salvador would limit “Bitcoin transactions and purchases.” Yet according to on-chain data, the country has actually continued buying Bitcoin since the agreement. To comply with loan terms, however, it may now need to reduce or halt these purchases. El Salvador currently holds 6,100 BTC, worth over $500 million, with unrealized gains of around $200 million—something Bukele proudly highlights. The profits appear substantial, but the costs of cryptocurrency to El Salvador far outweigh the benefits. While Bukele’s crypto promotion has been popular, actual crypto investment and crypto tourism remain minimal. The gains from financial inclusion and more efficient payment systems are negligible. In short, cryptocurrency has never truly caught on in El Salvador. In 2022, at the height of the hype, a CID-Gallup survey found that only one in five businesses accepted Bitcoin, and just 5% of taxes were paid in crypto. Recent figures are likely even lower, as Salvadorans continue to strongly prefer cash and payment cards. Furthermore, rating agency Moody’s estimates that El Salvador has spent a total of $375 million on its crypto experiment—including launching Chivo, subsidizing transaction fees, and deploying Bitcoin ATMs—far exceeding the current profit from its Bitcoin holdings, which could shrink further if Bitcoin prices fall. Bukele’s crypto experiment delayed the IMF loan agreement, kept the country’s risk premium elevated, and brought El Salvador to the edge of debt default. Yet Bukele enjoys extremely high approval ratings, typically exceeding 90%. He calls himself “the world’s most popular dictator”—not because of his support for cryptocurrency, but due to his harsh crackdown on crime, during which due process and suspects’ rights have been routinely ignored. His obsession with cryptocurrency has done nothing to alleviate El Salvador’s economic struggles. Although Bitcoin may remain on the national balance sheet as a reserve asset, its days as legal tender in El Salvador are over. Bukele is merely a crypto utopianist—his radical ideas shattered upon collision with reality.