GuShiio.com El Salvador spent US$375 million on crypto experiments, which far exceeds the profits it currently earns from holding Bitcoin.
Author: The Economist
Compiled by: CryptoLeo, Odaily Planet Daily
During the recent market decline, El Salvador increased its holdings of BTC by 7 and 5 BTC on February 25 and March 4 respectively, following a $1.4 billion loan bailout agreement with the IMF. In terms of the agreement, the IMF imposed regulatory restrictions on El Salvador’s national-level encryption status due to concerns about the high risk of BTC, but this did not stop El Salvador’s BTC purchase plan. In fact, the IMF’s concerns are unreasonable. Since crypto President Nayib Bukele’s obsession with cryptocurrencies and various “support” measures have not improved El Salvador’s economy or even increased its deficit. Since the implementation of the president’s crypto policy, El Salvador’s deficit on crypto alone has also intensified.
The Economist wrote an article on El Salvador’s path to encryption, which Odaily compiled as follows:
Since Nayib Bukele became president in 2019, El Salvador has been on the verge of default for most of the time. High debt and interest payments, exacerbated by huge fiscal deficits, have served as long-term warning signs for the country’s economy. Dollar reserves are low, investment and GDP growth are sluggish, coupled with deadlock in bailout negotiations with the International Monetary Fund. Bukele’s relentless attacks on the judiciary, opponents and the media have not shown much incentive to his country.
Bukele is too obsessed with cryptocurrencies. In 2021, El Salvador became the first country to use Bitcoin as legal tender along with the US dollar. President Bukele has vowed to avoid traditional capital markets and raise billions of dollars through tokenized blockchain bonds. He will buy $500 million worth of bitcoins, build a “Bitcoin City” and develop geothermal energy to power bitcoin miners. But traditional markets did not pay for it. In the summer of 2022, the average trading price of several Salvadoran government bonds was below 30 cents. At that time, the government began postponing public sector wages to ensure sufficient cash, and investors were prepared for the worst.
Unexpectedly, on February 26, the IMF’s board approved a $1.4 billion bailout loan that was agreed in December after years of delay and will be released within 40 months. To secure the money, El Salvador made a regular commitment to fiscal discipline to scale back its cryptocurrency projects. After the law was revised in January this year, taxpayers no longer pay in Bitcoin, and the private sector accepts Bitcoin payments entirely voluntarily.
In the process of applying for a debt agreement from the IMF, El Salvador showed firm determination to repay its debts. Partly because Bukele wanted to surprise Wall Street skeptics, the country’s bond prices were recovering back to face value levels, and officials used scarce dollars to buy back bonds at sharp discounts, saving a large portion of future principal payments. The fiscal deficit rose to 10% of GDP in 2020 and has now returned to its pre-epidemic level of 2-3%, roughly the same as other countries. The crackdown on tax evasion, large inflows of remittances and a slight recovery in the economy have increased government revenue; the phasing out of energy subsidies and epidemic-era plans has slowed spending.
The loan reduces the risk of a debt default crisis, but it would be better if El Salvador could get another $2.1 billion in loans from other multilateral lenders, as it hopes. Despite reducing the deficit, the country may not last long. With high debt and slow economic growth, it is unsustainable for El Salvador to continue to raise funds at the 12% rate as it did in early 2024. In dollarized economies such as El Salvador, default on sovereign debt is more costly because there is no lender of last resort to avoid bank runs or financial crises spreading. Local bank deposits are partially backed by government debt, so defaults could “snowball” into a banking crisis or even lead to de-dollarization.
As for El Salvador’s concession in the adoption of Bitcoin, it may be a “blessing in disguise” and more of a blessing than a concession. Bukele boasts that cryptocurrencies can provide financial services to two-thirds of adults without bank accounts and reduce the cost of remittance, which accounts for almost a quarter of the country’s GDP. However, HP’s main obstacles are the size of its economy and low digital economy literacy. Remittances are expensive because Salvadorans prefer to trade through paper money, which is an expensive business in itself, and criminal activity makes the cost even higher. In addition, the Salvadoran government has rushed to launch the Chivo digital wallet, which allows for payments in US dollars and Bitcoin. However, the reality after the launch of the wallet was not ideal, and loopholes and identity theft were rampant in order to steal the $30 Bitcoin reward when registering the wallet.
When Bitcoin was still legal tender in El Salvador, the International Monetary Fund was cautious about providing loans to El Salvador. Bitcoin price fluctuations pose risks to financial and fiscal stability. Bitcoin may be used for money laundering and other criminal activities. The International Monetary Fund said El Salvador would restrict “Bitcoin transactions and purchases.” According to on-chain data, the country has actually been purchasing bitcoins since the agreement was reached, but may have to reduce or withdraw those purchases in order to comply with the loan agreement. El Salvador now holds 6100 bitcoins worth more than US$500 million, with a floating profit of about US$200 million, which is something Bukele is proud of.
The profits may seem huge, but the input costs that cryptocurrencies bring to El Salvador are greater than the benefits. Bukele’s crypto promotion is popular, but the volume of crypto investment and crypto tourism is small. Financial HP and more efficient payment methods The benefits brought by it are negligible. In short, cryptocurrencies never really became popular in El Salvador. In 2022, when the hype peaked, a CID-Gallup survey found that only one in five companies accepted Bitcoin and only 5% of taxes were paid in cryptocurrencies. This figure may be even lower in the near term, as Salvadorans still have a strong preference for cash and payment cards.
In addition, rating agency Moody’s said that El Salvador spent a total of US$375 million on crypto experiments, including the launch of Chivo, subsidized transaction fees, Bitcoin ATMs, etc., which far exceeds the profits it currently holds in Bitcoin, and these profits are still likely to decrease as Bitcoin falls. Bukele’s crypto experiments delayed El Salvador’s loan agreement with the IMF, leaving El Salvador’s risk premium high and his country on the verge of default on its debt.
But Bukele’s approval rating is extremely high, usually exceeding 90%. He claims to be “the most popular dictator in the world,” but this is not because he advocates cryptocurrencies, but because of his severe crackdown on criminal activities, in which due process and the rights of criminal suspects are ignored. His obsession with cryptocurrencies has not alleviated El Salvador’s economic woes. Although Bitcoin may still be a reserve asset on the country’s balance sheet, its days as a legal tender in El Salvador are over. Bukele is just a cryptocurrency utopian whose crazy ideas collide with reality.
Welcome to join the official social community of Shenchao TechFlow
Telegram subscription group: www.gushiio.com/TechFlowDaily
Official Twitter account: www.gushiio.com/TechFlowPost
Twitter英文账号：https://www.gushiio.com/DeFlow_Intern
