El Salvador and IMF Make Progress on Bitcoin Risk Mitigation and Economic Reforms

• El Salvador is set to improve its fiscal balance by 3.5% of GDP over three years, streamline public spending, and seek support from the IMF and multilateral development banks.
• Despite progress on structural reforms and transparency measures, the IMF and El Salvador have not reached a consensus on Bitcoin’s role in the country’s financial strategy.

Over the past few months, the International Monetary Fund (IMF) has been working with Salvadoran authorities to enhance macroeconomic imbalances while enhancing growth and resilience. The two parties had major discussions about boosting bank finances, strengthening public finances, improving governance, as well as addressing Bitcoin risks.

While major risks associated with Bitcoin have materialized for El Salvador, the IMF said that neither party has commonly agreed on the need to boost transparency along with other measures to ensure financial and fiscal stability. The IMF noted:

Progress has been made in the negotiations toward a Fund-supported program, focused on policies to strengthen public finances, boost bank reserve buffers, improve governance and transparency, and mitigate the risks from Bitcoin.

President Nayib Bukele has been firm on his Bitcoin adoption strategy and making the asset a part of the country’s reserves in order to pay back its huge debts. Recently, the IMF outlined that the agreements involve boosting the primary fiscal balance by 3.5% of GDP over three years through fiscal consolidation.

El Salvador will achieve this by streamlining the public wage bill while preserving social programs and infrastructure spending. Additionally, the Latin American country will work on bolstering the financial system reserve buffers while supporting private sector credit and growth and reducing dependency on domestic financing with potential backing from the IMF and multilateral development banks.

El Salvador and IMF Work on Structural Reforms: Does Bitcoin Fit In?

The IMF and El Salvador are working on structural reforms, including a multi-year strategy to improve transparency, governance, and the investment climate. Thus, they are working on legislative proposals with international standards to deal with the issues of money laundering, corruption, and procurement issues. However, the two parties couldn’t come to a common agreement on the involvement with Bitcoin. The IMF said:

On Bitcoin, while many of the risks have not yet materialized, there is joint recognition that further efforts are needed to enhance transparency and mitigate potential fiscal and financial stability risks from the bitcoin project.

In September 2021, El Salvador became the first country to recognize Bitcoin as legal tender. Recently, the LatAm country also said that it would make trade payments to Russia in Bitcoin, per the CNF report. President Nayib Bukele’s administration has generated revenue from Bitcoin through various channels, including passport and citizenship programs, transaction fees, and mining operations.