El Salvador President Nayib Bukele. — Bloomberg
WASHINGTON: El Salvador reached a deal with the International Monetary Fund (IMF) after four years of negotiations that were strained by the country’s adoption of bitcoin as a legal tender.
The Central American nation and the Washington-based lender agreed on a US$1.4bil loan programme to be disbursed over 40 months, according to a statement by the IMF.
In exchange, El Salvador had agreed to adopt measures that will improve its primary balance and help cut its debt-to-gross domestic product (GDP) ratio.
The IMF cited the government’s work in improving its fiscal situation, growing the economy, bringing down inflation and managing its near-term debt obligations.
President Nayib Bukele’s adoption of bitcoin in 2021 put the government at odds with the IMF, sparking credit downgrades, spooking investors and sending prices for bonds into a tailspin.
While it still needs the okay from the IMF’s executive board, the deal would bring conclusion to an issue that has long vexed investors in El Salvador’s bond markets.
The agreement also points to concessions by Bukele’s government as it relates to the digital asset, a previous major sticking point.
Legal reforms will make acceptance of the crypto currency voluntary for the private sector. The risks of El Salvador’s bitcoin project, the IMF said, will be “diminished significantly in line with IMF policies”.
In addition, the government’s participation in the local crypto wallet known as Chivo – a project that has been fraught with technical difficulties – will be “gradually unwound”.
The government released Chivo in September 2021, and promised US$30 worth of free bitcoin to people who signed up.
The offer, which represented about a day’s wages at the time, attracted more than three million sign-ups.
But long-term usage and adoption floundered: The country’s central bank said in 2022 that fewer than 2% of all remittances had been sent using digital wallets since the launch.
Bukele has more recently orchestrated a turnaround by buying back US dollar notes at a discount, paying off other bonds early, restructuring pension debt and refinancing some of its domestic securities. — Bloomberg
