After adopting bitcoin as legal tender in El Salvador in June 2021, President Nayib Bukele has agreed to reform the Bitcoin Law to access a US$1.3 billion loan from the International Monetary Fund. At present, Article 7 of the law mandates businesses to accept bitcoin.
This form of exchange will become voluntary, as it should have been anyway.
Bukele’s government has been negotiating with the IMF for three years. Initially, the IMF firmly rejected any deal so long as El Salvador continued recognizing bitcoin as legal tender.
However, in recent negotiations, Bukele has used the Bitcoin Law as a strategic tool, turning it into an asset in his favor. As a result, El Salvador is set to soon receive IMF funds without losing its Bitcoin Law.
In at least three ways, Bukele played his critics when navigating debt negotiations.
1. Cryptocurrency Tourism Turned Lemons into Lemonade.
When El Salvador adopted the Bitcoin Law, its fiscal situation was precarious. The country’s debt was nearing 90 percent of GDP, and its risk premium was soaring. In July 2022, it reached 35 percent, driving up borrowing costs and shutting the country off from various financing sources. Therefore, El Salvador’s negotiating position was weak.
Public interest in bitcoin was minimal, with 70 percent of the population opposing the law, which was passed in just five hours by the Congress. Before announcing the policy in El Salvador, Bukele introduced the Bitcoin Law at a cryptocurrency conference in Miami, signaling that the law’s primary goal was international appeal and not mass adoption.
Following this and with little public scrutiny, Bukele purchased $180 million in bitcoin to start a trust fund that now holds over 5,000 BTC. Bukele bet on unconventional foreign support: crypto enthusiasts. They have contributed to a surge in tourism to El Salvador, thanks to improved security. With a reported rate of 2.4 homicides per 100,000 inhabitants in 2023, El Salvador now apparently enjoys the lowest official homicide rate in Latin America.
In 2023, tourism accounted for 11 percent of El Salvador’s GDP. Between January and July 2024, tourism increased by 22 percent compared to the same period the previous year. According to official data, most tourists came from the United States and Canada, and they injected around $2.2 billion into the economy in the first half of 2024.
2. The Salvadoran Bitcoin Fund More than Doubled in Value.
The all-but-finalized deal with the IMF comes during a bitcoin boom. Following Donald Trump’s US presidential victory, the price of bitcoin surpassed $100,000 for the first time. Bukele announced this represents an “unrealized gain” of $333 million in El Salvador’s bitcoin reserves. (It is an “unrealized gain” because it comes from the price increase, not from a sale.)
The country’s sovereign bonds have also benefited from bitcoin’s rising value, appreciating by 14.7 percent since November 5. El Salvador’s country risk premium has significantly improved, dropping to 5 percent. Foreign direct investment reached $760 million in 2023—four times higher than in 2022.
In October 2024, El Salvador closed a $1 billion refinancing deal with JPMorgan Chase, which represents about 14 percent of the country’s debt. This deal, which bypasses IMF dependence, focuses on projects to preserve the country’s largest river: the Lempa. El Salvador has also participated in the first ESG-oriented environmental debt swap JPMorgan has executed.
In August, JPMorgan raised its annual economic growth forecast for El Salvador to 2.5 percent. Their analysts contend the radical decrease in insecurity, combined with Bukele’s successful bet on bitcoin, has led to widespread improvements in the country’s sovereign bonds and overall finances.
3. Cryptocurrency Institutionalization Made the IMF More Accommodating.
The IMF has requested that El Salvador reduce government spending and increase revenue through a fiscal adjustment equivalent to 3.5 percent of GDP. The first year of the agreement will involve a 1.5 percent of GDP reduction in deficit spending. This is a healthy move that should have been in motion, regardless of any IMF loans.
On October 3, during negotiations, the IMF asked El Salvador to: (1) reduce the scope of bitcoin within the country and (2) limit the public sector’s exposure to bitcoin. This request was less drastic than the IMF’s initial demand to delegitimize the cryptocurrency altogether. Along with the IMF, the World Bank and the Inter American Development Bank are queueing up to lend $1 billion each, assuming IMF terms favorable to Salvadoran growth.
Since mid-2021, more countries have adopted cryptocurrency-friendly measures. President-Elect Trump has even announced he is considering a national bitcoin reserve. As influential entities back the evolution of cryptocurrencies, the IMF no longer has global support for ostracizing El Salvador.
In international-relations theory, Robert Keohane and Joseph Nye have argued since the 1970s that countries no longer interact solely based on military power. Today, nations engage with nonstate actors and depend heavily on soft power for negotiations. That means flows of trade, financing, information, and migrants can serve as leverage.
Nations are interdependent, and power is now defined by who holds a competitive advantage in each of these areas. The evolving negotiations between El Salvador and the IMF offer an intriguing example of how a developing country has strategically reshaped its offer over time. While the IMF deal might appear to be a setback for Bukele, a closer look reveals he has skillfully used the situation to his advantage.
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