A Double-Edged Sword?
El Salvador and the International Monetary Fund (IMF) have reached a staff-level agreement for a 40-month Extended Fund Facility (EFF) worth approximately $1.4 billion. This arrangement aims to support the country's economic reforms, but the agreement is conditional, requiring IMF Executive Board approval and the implementation of prior actions by the Salvadoran government.
While this development has been celebrated by some as a step toward fiscal stability and growth, the fine print reveals potential pitfalls, particularly in the context of El Salvador’s Bitcoin adoption and broader economic sovereignty.
The Strings Attached
The phrase staff-level agreement underscores that this deal is preliminary. It hinges on approval by the IMF’s Executive Board-a step that often comes with additional stipulations. Moreover, the IMF programme is expected to catalyze over $3.5 billion in additional financial support from institutions like the World Bank, the Inter-American Development Bank, and other regional banks. However “expected” is far from guaranteed, leaving El Salvador reliant on external actors whose priorities may not align with its domestic agenda.
The Programme
1. Fiscal Policy
The programme seeks to improve the primary fiscal balance by 3.5% of GDP over three years, aiming to reduce public debt-currently projected to peak at 85% of GDP in 2024. Measures include cutting the wage bill, reducing spending on goods and services, and limiting transfers to municipalities. While these efforts aim to ensure fiscal sustainability, they risk undermining local development and social support structures.
2. Transparency and Governance
The agreement promises enhanced fiscal transparency and anti corruption measures. This includes better reporting on debt, state owned enterprises, and procurement contracts. While these seem to be positive steps on the face of it, the IMF’s involvement could also steer El Salvador’s policies in ways that prioritise the external creditors over local needs.
3. Reserves and Financial Stability
Banks’ liquidity buffers will be raised gradually, with the goal of reaching 15% of deposits in mid-2026. Fund financing will bolster the central bank’s reserves, enhancing its ability to weather financial shocks. However, this increased dependency on IMF funds might compromise the country’s monetary sovereignty.
4. Bitcoin
The IMF has long expressed concerns about El Salvador’s embrace of Bitcoin. Under the new agreement, Bitcoin adoption will remain voluntary for the private-sector, while public sector involvement in Bitcoin related activities will be scaled back. The government's role in the Chivo Wallet will be unwound, and legal reforms will limit the public sector’s engagement with Bitcoin. These stipulations align with the IMF’s broader skepticism towards Bitcoin and could stifle El Salvador’s ambitions to leverage Bitcoin for economic growth.
El Salvador's economy has shown resilience, with steady growth fuelled by robust remittances, a tourism boom, and improved security. Inflation has decreased, and the current account deficit has narrowed. However, these gains could be jeopardized by the austerity measures and external dependencies embedded in the IMF programme.
Fiat Oligarchs Fighting Back?
If you look at the sources driving the narrative around this agreement-the IMF, Wall Street Journal, and Bloomberg- it becomes clear that this is part of the fiat system’s pushback against El Salvador’s bold Bitcoin experiment. These entities, often dubbed ‘fiat oligarchs’ have vested interest in maintaining the dominance of the traditional financial system.
Despite claims in the report, El Salvador has not scaled back its Bitcoin purchases. The government is still buying one Bitcoin daily. The assertion that legal reforms will make Bitcoin adoption voluntary is misleading; Bitcoin usage in El Salvador has always been optional. Salvadorans have the freedom to choose between U.S Dollars, Bitcoin and Tether, and Chivo is merely a national wallet among many available options.
This report seems designed to generate fear, uncertainty, and doubt (FUD). The agreement is still not finalised, and even if it is, El Salvador has alternative strategies. For instance, the country possesses significant gold reserves. By leveraging a loan to unearth and sell this gold, El Salvador could potentially buy more Bitcoin, turn a profit, and repay the loan with interest.
History warns us of the risk faced by leaders who challenged the global financial order. Figures like Saddam Hussein and Muammar Gadhafi faced severe consequences for attempting to shift their nations to a gold standard. Should President Bukele face similar threats, it could validate Bitcoin’s value proposition, driving adoption and strengthening the network.
An Unstoppable Train
Regardless of these challenges, the momentum behind Bitcoin and El Salvador’s experiment seems unstoppable. As the saying goes, “ First they ignore you, then they laugh at you, then they fight you, then you win” Whether through cooperation or defiance, El Salvador is charting a path that could redefine economic sovereignty in the digital age.
