El Salvador, the first country to recognize Bitcoin as a legal currency globally, has received warnings from the International Monetary Fund (IMF) against the risks involved in expanding its faith in cryptocurrency. According to a statement on Friday, after a visit to the Central American country, the IMF noted,” El Salvador’s bitcoin adoption “have not materialized, but caution is called for.”
— Nayib Bukele (@nayibbukele) February 11, 2023
A $600 million bond payment by the country last month amid investor reviews over El Salvador’s financing sources and fiscal policy led to the IMF’s annual visit.
As per IMF’s findings, last year, the country’s vulnerabilities, such as linkage to bitcoin, remained, as Salvadoran’s growth had been vigorous. The IMF asserted:
Considering the legal risks, fiscal fragility, and widely speculative nature of crypto markets, the authorities should reconsider their plans to expand government exposures to Bitcoin
El Salvador adopted bitcoin as its legal currency and the US Dollar in September 2021. This came after Nayib Bukele, the country’s president, advocated the adoption to bring more Salvadorans into the formal economy. The adoption meant that most residents lacking bank accounts, including neighborhood shopkeepers, had to accept crypto as a means of payment.
However, the IMF and the World Bank alerted that advocating for crypto as a means of payment could leave the country vulnerable to illegal activities, including money laundering, that could affect the country. In the past, the IMF’s dubbed “Article IV” visit has been critical since the government adopted cryptocurrency and shuttered IMF’s financing.
Notably, the report stipulated:
While the risks have not materialized because of the limited bitcoin use so far, the cryptocurrency’s use could grow given the new legislative reforms to encourage the use of crypto assets
Additionally, it noted, ” the underlying risks to financial integrity and stability, fiscal and sustainability, and consumer protection persist.”
The IMF stipulated that the country’s authorities needed to enable” greater transparency over the government’s transaction in bitcoin and the financial situation of the state-owned bitcoin wallet called Chivo.”
As per IMF, the real GDP is projected to increase by 2.4% in 2023, above the historical average. IMF highlighted the full recovery crediting the effective government response to the COVID-19 pandemic. However, IMF warned that a pronounced slowdown in the US could diminish exports, as well as remittances.
El Salvador’s growth prospects
Early last year, the IMF El Salvador team in an interview with Country focus, the team stipulated on the country’s rebound and the decision to make Bitcoin a legal tender. The team noted that they expected the economy to grow by around 10% of GDP in 2021, and 3.2% in 2022.
Additionally, the team was asked about the top challenges and priorities going forward for the country. They noted that they expected a medium-term growth in the country to decrease to almost 2%. This is below the historical average and it is due to the high public borrowing costs. However, they asserted that to increase the growth rates in the long term, more private investments are required. Further, healthier public finances would be more beneficial.
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