• The IMF is discussing with El Salvador to address the economic risks associated with Bitcoin’s adoption as a legal tender.

• Despite market volatility, El Salvador continues to buy Bitcoin and remains committed to its Bitcoin strategy under President Bukele.

The International Monetary Fund (IMF), the global financial institution, is currently communicating with El Salvador to mitigate the possible macroeconomic and fiscal impacts of the adoption of Bitcoin as an official currency. This is to ensure the generation of a clear plan to help stabilize and develop El Salvador’s economy and handle the challenges brought by cryptocurrency. 

On August 6, the IMF stated that negotiations with the Salvadoran authorities are ongoing. An IMF mission led by Raphael Espinoza also held both face-to-face and remote meetings to address key elements of the country’s economic stability. The major concerns are strengthening public finances, building up banks’ reserves, and increasing financial transparency. 

Ongoing Negotiations Focus on Fiscal Stability and Transparency

The IMF has proposed that El Salvador strive to enhance its primary balance by about 3.5% of GDP in the next three years. This target is focused on the proper management of public wages while guaranteeing that social services and infrastructure are not affected.

The IMF pointed out that these fiscal measures are necessary to assure the stability of the economies, given the risks emanating from Bitcoin’s price instability. 

The discussions also touched on the necessity of gradually building up the financial system’s reserves over time through a strategic plan. This plan is meant to guarantee that private sector credit and its growth are not jeopardized when the government attempts to decrease its domestic funding. Possible funding from the IMF and other MDBs is being explored to help. 

The IMF and Salvadoran officials admitted that the Bitcoin project could involve fiscal and financial risks. Although these risks have not been fully realized, both parties acknowledge that more can be done to ensure that risks are well understood and managed. 

El Salvador’s adoption of Bitcoin as legal tender in September 2021 under the leadership of President Nayib Bukele has received much attention. Earlier, the IMF predicted that this step could lead to macroeconomic, financial, and legal risks. Nevertheless, the Salvadoran authorities have not changed their course in the case of Bitcoin. 

El Salvador Continues to Accumulate Bitcoin Holdings

In the first half of this year, President Bukele declared a strategy of using Dollar Cost Averaging (DCA), where one Bitcoin would be bought daily. This strategy is to grow the Bitcoin portfolio over time without worrying about market trends. The DCA strategy is a way for El Salvador to systematically and gradually accumulate more Bitcoins and thus not be affected by market volatility. 

According to data from the Bitcoin Office’s Mempool, El Salvador has 5,835 BTC in its wallet, equivalent to $334.04 million. Even though the cryptocurrency market remains rather unstable, the government of El Salvador continues to purchase BTC, which proves that the country remains committed to integrating BTC into its economy. 

The current dialog between the IMF and El Salvador shows that regulating the use of Bitcoin and other cryptocurrencies is not without certain challenges. During these negotiations, the main effort is still being made to find the right balance that will allow the country to avoid Bitcoin’s negative impacts while ensuring the stability of its financial system.