IMF Asks El Salvador to Remove Bitcoin’s Legal-Tender Status

The Inter­na­tion­al Mon­e­tary Fund (IMF) is urg­ing El Sal­vador to remove bitcoin’s sta­tus as legal ten­der, just four months after the Cen­tral Amer­i­can coun­try adopt­ed the cryptocurrency. 

Bit­coin pos­es sig­nif­i­cant risks to finan­cial sta­bil­i­ty and con­sumer pro­tec­tion, IMF exec­u­tive direc­tors said in their con­clud­ing state­ment on El Salvador’s Arti­cle IV consultation. 

“[Direc­tors] stressed that there are large risks asso­ci­at­ed with the use of bit­coin,” the state­ment read. “They urged the author­i­ties to nar­row the scope of the bit­coin law by remov­ing bitcoin’s legal ten­der status.” 

There also needs to be greater reg­u­la­to­ry over­sight of Chi­vo, El Salvador’s bit­coin wal­let designed to be used for trans­ac­tions in the dig­i­tal cur­ren­cy, the IMF said. 

“The state­ment on bit­coin and Chi­vo shows this is too close to de-dol­lar­iza­tion for com­fort,” said Nathalie Marshik, head of emerg­ing mar­kets sov­er­eign research at Stifel Finan­cial Corp. “The tone of the state­ment is quite negative.” 

Reviews of El Salvador’s bit­coin exper­i­ment are mixed, Block­works pre­vi­ous­ly report­ed, with some observers view­ing the move as a pro­gres­sive step toward finan­cial inclu­sion and oth­ers claim­ing it’s an irre­spon­si­ble gamble.

The IMF projects that El Salvador’s fis­cal deficit will reach 5.75% of gross domes­tic prod­uct (GDP) in 2021 and about 5% of GDP in 2022, accord­ing to the state­ment. Pub­lic debt is also antic­i­pat­ed to rise to about 96% of GDP in 2026. Giv­en the cir­cum­stances, El Sal­vador is on an “unsus­tain­able path,” the IMF said. 

“The IMF fore­casts a pri­ma­ry bal­ance for 2022 yet says the debt is unsus­tain­able under cur­rent poli­cies,” said Marshik. “El Sal­vador needs a 3% of GDP adjust­ment to get the debt to a sus­tain­able level.”

Pri­ma­ry bal­ance, the fis­cal bal­ance adjust­ed for net inter­est pay­ment on pub­lic debt, is a key indi­ca­tor for deter­min­ing a government’s abil­i­ty to meet oblig­a­tions with­out tak­ing on addi­tion­al loans. The IMF pre­dicts a 0.0 pri­ma­ry bal­ance for 2022, up from its 2021 bal­ance of ‑1.1.  

El Sal­vador has an $800 mil­lion Eurobond, a debt instru­ment issued in an exter­nal cur­ren­cy, matur­ing in Jan­u­ary 2023. Marshik pre­dicts that the coun­try will be fine, finan­cial­ly, through the first half of 2022, but after that it will be up in the air. 

Based on state­ments from El Sal­vador Pres­i­dent Nay­ib Bukele, who reg­u­lar­ly Tweets when he makes bit­coin pur­chas­es on behalf of the coun­try, El Sal­vador holds at least 1,801 bit­coins. Giv­en the recent mar­ket sell-off, it is like­ly the coun­try has lost mon­ey on its bit­coin invest­ment, assum­ing that none of its hold­ings have been sold. 

Arti­cle IV con­sul­ta­tions are annu­al assess­ments con­duct­ed by the IMF on all mem­bers. Dur­ing the eval­u­a­tion, IMF offi­cials vis­it the coun­try to assess eco­nom­ic devel­op­ments and dis­cuss pol­i­cy with the country’s cen­tral bank.