El Salvador's Bitcoin Bet: $3.5 Billion IMF Deal

El Salvador's Bitcoin Ambitions May Cost the Country $3.5 Billion in IMF Funding

The International Monetary Fund (IMF) has approved a 40-month arrangement under the Extended Fund Facility (EFF) for El Salvador, providing access to approximately $1.4 billion to boost the country’s growth prospects and address macroeconomic imbalances. The Executive Board’s approval allows immediate disbursement of around $113 million, with the arrangement expected to catalyze additional financial support exceeding $3.5 billion over the program period.

The landmark agreement marks a pivotal compromise for President Nayib Bukele’s Bitcoin initiative. As disclosed last month, El Salvador’s legislative reforms narrow the scope of the country’s Bitcoin Law by removing the digital asset’s mandatory acceptance requirements for the private sector and prohibiting tax payments in Bitcoin. The latest report further restricts government engagement in Bitcoin-related economic activities, including Bitcoin transactions and purchases. The agreement stipulates enhanced regulation and supervision of digital assets in alignment with evolving international practices. Further, the report bans any government Bitcoin accumulation, including mining BTC.

The IMF-supported program aims to stabilize El Salvador’s economic landscape through comprehensive measures addressing persistent macroeconomic challenges. Building on recent improvements in security and economic growth, the program focuses on structural reforms to address fiscal sustainability. Under the program, El Salvador’s primary balance is projected to improve by 3.5 percent of GDP over three years, initially through rationalization of the wage bill while protecting priority social and infrastructure spending. This fiscal consolidation may facilitate market access at more favorable terms, potentially reinforcing debt sustainability.

El Salvador’s steady economic expansion is supported by robust remittances and tourism following significant improvements in security conditions. External deficits have narrowed, inflation has fallen, and recent liability management operations have reduced near-term financing needs. Despite recent gains, the country continues to face substantial macroeconomic challenges, including high public debt and low external buffers, given its dollarized economy.

El Salvador’s sovereign bond spreads have already narrowed considerably from over 700 basis points in late 2023 to approximately 350 basis points ahead of the program announcement, reflecting growing market confidence in the country’s policy direction. Successful implementation of the new program depends heavily on political commitment and public support. The Bukele administration, securing re-election with approximately 85 percent of the vote in February 2024, possesses substantial political capital to