The International Monetary Fund (IMF) has approved a new 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.
A new report published on March 3 follows El Salvador’s undertaking of significant policy reforms, including restrictions on its Bitcoin project.
The 111-page IMF report mentions ‘Bitcoin’ 221 times in total, while Bukele is mentioned just eight times and the US dollar 82 times.
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.
Bitcoin Limitations Central to Agreement
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.
However, 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,
“Voluntary accumulation of bitcoins includes purchase and mining of Bitcoins and excludes the accumulation of Bitcoins resulting from forfeiture, seizure, apprehension, custody or other form of property or possession by the government arising from law enforcement measures adopted in accordance with Salvadoran law.”
“The potential risks of the Bitcoin project are being addressed in line with Fund policies,” the IMF stated. Legal reforms have made Bitcoin acceptance voluntary while ensuring tax payments occur exclusively in U.S. dollars. Transparency of the public crypto e-wallet has been strengthened, with plans for the government to gradually withdraw its participation.
Economic Reform Package
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.
“Building on recent progress, the authorities’ IMF-supported program aims at addressing macroeconomic imbalances and strengthening governance and transparency, with the objective of boosting El Salvador’s growth prospects and resilience,” per the IMF press release.
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.
Growth and Recovery Context
The IMF argues that 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.
The country’s economic transformation stems largely from dramatic security improvements, with homicide rates dropping from among the highest in the Western Hemisphere to among the lowest. This security enhancement has driven economic recovery through increased tourism and investment.
Despite recent gains, the IMF argues that El Salvador continues to face substantial macroeconomic challenges. Public debt stands at approximately 87 percent of GDP, with high-interest costs placing pressure on fiscal accounts. External buffers remain low, creating vulnerability given El Salvador’s dollarized economy.
Market Implications and Outlook
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. This compression reflects 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 implement reforms, with its party holding 54 out of 60 seats in the legislative assembly.
“Decisive ownership and implementation and broad political and public support will be critical to ensure the program’s success,” per the IMF statement. “Agile policy-making and contingency planning will be essential to manage downside risks in the context of dollarization.”
However, less than 24 hours ago, President Bukele posted a screenshot of the country’s Bitcoin reserves indicating a further 19 BTC purchase, taking the total to over 6,100 BTC.
Will this be the last Bitcoin purchase by El Salvador in 2025? Will Volcano mining of Bitcoin now come to an end?
Or will the President continue to back Bitcoin and defy the IMF, potentially forfeiting billions in support?
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