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El Salvador is on the verge of reaching a big financial agreement with the International Monetary Fund (IMF), with plans to finish a $1.3 billion loan program within the next two to three weeks. The country will change its use of Bitcoin (BTC) as legal tender and take steps to lower its government deficit.
According to a Financial Times report, individuals familiar with the negotiations said an IMF mission has already arrived in San Salvador to finalize the specifics with President Nayib Bukele’s administration.
El Salvador To Modify Bitcoin Policy
The proposed pact is expected to result in an additional $1 billion in funding from the World Bank and another $1 billion from the Inter-American Development Bank in the following years.
This originates from the country’s decision in June 2021 to become the first government in the world to accept Bitcoin as legal money, a move that the IMF has long opposed owing to worries about supposed “financial stability and integrity.”
Under the present conditions of talks, El Salvador would remove the legal obligation for businesses to accept Bitcoin, making such transactions voluntary.
Furthermore, the government would pledge to decrease its budget deficit by 3.5 percentage points of gross domestic product (GDP) over the next three years, using a combination of spending cutbacks and tax increases.
Other obligations may include enacting anti-corruption legislation and increasing the country’s reserves from $11 billion to $15 billion.
Bukele’s Leadership Under Scrutiny
President Bukele’s administration has been under international scrutiny and criticism, particularly from the Biden administration, which had sanctioned several officials for alleged corruption. However, things look to be improving, with the US focusing on strengthening ties with El Salvador.
According to the Financial Times, while Bukele has positioned El Salvador as a cryptocurrency and tourism powerhouse, many Salvadorans still prefer the US dollar to Bitcoin for everyday transactions.
Despite these problems, Bukele has continued to amass Bitcoin as part of the country’s reserves, buying the cryptocurrency when prices fell. His recent social media posts show El Salvador’s Bitcoin holdings have grown substantially, currently worth more than $600 million—a 127% increase.
In his second term, Bukele aims to revitalize El Salvador’s economy and attract foreign investment. The report states that positive changes are obvious, with the country’s risk rating falling from 3,500 basis points over US Treasuries in July 2022 to just 398 basis points last week.
Bukele recently commented on the simultaneous rise in Salvadoran bond prices and Bitcoin, adding, “This is the first time in history that Bitcoin has driven sovereign bonds up in traditional markets.”
As negotiations with the IMF continue, the decision could have a huge impact on El Salvador’s economic landscape, as well as its ongoing connection with Bitcoin and the broader cryptocurrency market.
At the time of writing, BTC is trading just shy of $100,000, valued at $97,850. The market’s leading cryptocurrency experiences a 2.2% decline in price over 24 hours and a 1.3% increase over a week.
Featured image from DALL-E, chart from TradingView.com
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