The President Bukele promises to continue buying bitcoin despite the $1.4 billion agreement with the institution prohibiting it.
The recent agreement between El Salvador and the International Monetary Fund (IMF) has reignited the debate on the Bitcoin experiment in the Central American country. The new restrictions imposed by the IMF to obtain a $1.4 billion loan would seem to undermine President Nayib Bukele‘s Bitcoin strategy.
The restrictions imposed by the IMF
On March 3, the IMF presented the new restrictive conditions for El Salvador as part of the financing agreement. Among the requests are:
- prohibition of voluntary accumulation of bitcoin by the public sector;
- prohibition of mining activities;
- restrictions on the issuance of tokenized debt instruments linked to Bitcoin;
- modifications to the Bitcoin Law to eliminate the obligation to accept it as legal tender.
Méndez Bertolo, IMF executive director for El Salvador, said that the program aims to “improve governance, transparency and resilience” of the Salvadoran economy, stating that “the risks related to Bitcoin are mitigated” by the new provisions.
Bukele’s response
Despite the apparent capitulation to IMF requests with parliamentary approval of amendments making bitcoin acceptance optional, President Bukele stated on X:
The economic situation
El Salvador, with its 6.5 million inhabitants, is facing several economic challenges:
- public debt of 101.7% of GDP in 2023 according to the World Bank;
- economic growth estimated at 3% for 2025 based on IMF data;
- 8.6% of the population lives on less than $3.20 per day according to Statista data from 2022;
- remittances from abroad constituting 23.7% of GDP in 2022 according to Wikipedia.
With interest on public debt of 4.54% of GDP and over $1.2 billion in annual interest payments, the country would have turned to the IMF to obtain a new loan according to Unseen Finance, former IMF member and former central banker, in an article on Substack.
Unseen Finance stated:
“Countries turn to the IMF when they are in the most desperate financial conditions. The IMF did not intervene to impose an agreement on El Salvador. El Salvador did not ‘give in’ to IMF pressure to obtain a loan. The decision to request a loan is up to each country and its government.”
The former IMF member continued:
“El Salvador has been in financial difficulty for decades, long before President Bukele inherited the situation. Bitcoin supporters must accept that the request for an IMF agreement was already a 99% probability since 2019. However, the government tried to postpone the need to formally turn to the IMF for a few years and attempted to minimize the request when it became reality. In my assessment, Bitcoin has neither materially improved nor worsened El Salvador’s financial situation.”
The agreement with the IMF, in addition to the direct loan of $1.4 billion, provides for a total financial package of about $3.5 billion, including support from the World Bank and the Inter-American Development Bank.
The relationship between IMF and El Salvador
The adoption of Bitcoin as legal tender in September 2021 represented a breaking point between the Central American state and the institution, with the IMF repeatedly expressing concerns about:
- financial stability risks;
- asset volatility;
- potential facilitation of illicit activities;
- impact on the country’s credit rating.
Before the current agreement, negotiations were at a standstill precisely because of Bukele’s Bitcoin policy.
According to Unseen Finance, El Salvador still needs to have the necessary changes validated by the IMF to obtain loan approval. The verification has not been completed, so there could be further modifications or regulations. If El Salvador does not comply with the agreements, the loan will not be approved. If the loan is approved, the IMF will periodically verify compliance with the terms, with subsequent disbursements every six months, until the completion of the loan, which must be repaid within 10 years.
Reactions to the agreement
Bukele’s statement raises many questions. Samson Mow, CEO of Jan3, commented:
“If there is a loophole for continued buying, I didn’t find it in the document. If the plan is to just outright “defy” the IMF, I don’t think that is good for the additional loans, or to present an image of a serious stable country.”
John Dennehy, founder of the educational initiative Mi Primer Bitcoin, highlighted the contradiction in El Salvador’s official positions. The IMF document includes a Letter of Intent (LOI) signed by the Salvadoran government on February 11, from which the following commitments emerge:
- the government formally declares that “it will no longer accumulate new bitcoins in its portfolio,” as agreed with the IMF;
- the document clearly defines what constitutes “public sector” and prohibits any new accumulation of bitcoins (except for seizures);
As Dennehy pointed out, it is logically impossible for both positions to be true simultaneously: either the government will respect the agreements signed with the IMF, giving up the accumulation of bitcoin, or it will follow Bukele’s provocative line, risking consequences in terms of international financial relations.
The IMF statement is clear:
“Program commitments will limit government involvement in Bitcoin-related economic activities, as well as government transactions and purchases of bitcoin.”
Despite such restrictions, according to Unseen Finance, El Salvador will be able to keep the more than 6,100 bitcoins already purchased since the current reserves “do not threaten the country’s fiscal stability.”
Furthermore, the IMF report underlines the need for greater transparency regarding the “Bitcoin Office” and its role in the country’s strategy. According to the document, the office will have to make public the information on wallets linked to its operations.
