The International Monetary Fund (IMF) announced on December 18, 2024, that it has reached a staff-level agreement with El Salvador for a $1.4 billion loan under its Extended Fund Facility (EFF).
The agreement is currently at the staff-level stage and requires formal approval by the IMF’s Executive Board, expected by early February 2025. Approval hinges on El Salvador implementing agreed prior actions, such as fiscal reforms, enhanced governance, and measures to limit Bitcoin’s role in the economy. If approved, the program would unlock $1.4 billion in IMF financing and potentially catalyze over $3.5 billion in additional funding from international financial institutions.
The agreement outlines a multi-faceted reform plan to improve El Salvador’s fiscal and economic stability:
- Fiscal policy: The program aims to improve the primary fiscal balance by approximately 3.5 percent of GDP over three years. This includes measures already incorporated into the 2025 budget, such as reducing the wage bill, cutting spending on goods and services, and lowering transfers to municipalities. The reforms also target pension system sustainability and revenue mobilization to ensure public debt, which is projected to peak at 85 percent of GDP in 2024, begins to decline.
- Transparency and governance: The government will strengthen fiscal transparency by enhancing the reporting of debt, pension costs, state-owned enterprises, and procurement contracts. Anti-corruption measures will also be prioritized, with improvements to anti-money laundering and counter-terrorism financing standards.
- Reserves and financial buffers: Banks’ required liquidity buffers will increase from 11.5 percent of deposits to 15 percent by June 2026. The program also aims to enhance the central bank’s foreign reserve levels to better address economic shocks.
- Climate adaptation and business environment: Efforts to modernize infrastructure, reduce red tape, and implement climate adaptation strategies will continue, supported by development partners.
The IMF agreement directly addresses Bitcoin-related risks, proposing significant changes to its role in El Salvador’s economy:
- Voluntary adoption by businesses: Bitcoin will remain legal tender, but businesses will no longer be required to accept it. This move eliminates the mandatory acceptance provision in the original Bitcoin Law, making Bitcoin adoption entirely optional for the private sector.
- Limited public sector involvement: The government will gradually reduce its participation in Bitcoin-related activities. This includes phasing out the state-managed Chivo wallet and limiting its engagement in Bitcoin transactions and holdings. Taxes will only be payable in U.S. dollars, further diminishing Bitcoin’s role in public finances.
- Enhanced regulation and transparency: The government will implement stricter regulatory measures for Bitcoin and other digital assets to safeguard financial stability and protect consumers. Transparency and oversight will be strengthened to align with international best practices, addressing concerns about the cryptocurrency’s volatility and speculative nature.
While Bitcoin will technically remain legal tender, the proposed changes significantly weaken its practical utility in both private and public sectors. The requirement for businesses to accept Bitcoin is being removed, and the government’s involvement is being scaled back.
These shifts suggest that Bitcoin’s legal tender status may become largely symbolic, as its use will be voluntary and its integration into public finance will be minimal. Critics argue that this undermines the original vision of making Bitcoin a cornerstone of El Salvador’s economy, while proponents see it as a pragmatic step to balance innovation with financial stability.
Beyond Bitcoin, the agreement aims to stabilize El Salvador’s economy and restore investor confidence. Measures to reduce public debt, enhance fiscal transparency, and build financial resilience are expected to attract additional international funding. The IMF projects that these reforms will help El Salvador maintain steady economic growth, which has been bolstered by robust remittances and tourism despite temporary climate shocks. Inflation is declining, and the fiscal situation is gradually improving, supported by liability management operations that have lowered near-term financing needs.
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