Good news for El Salvador! The International Monetary Fund (IMF) has given the green light to a new 40-month financial plan for the country. This Extended Fund Facility (EFF) arrangement unlocks roughly $1.4 billion, aimed at helping El Salvador’s economy grow and fix some existing financial imbalances.

A recent report, released on March 3rd, comes after El Salvador made some significant policy changes – importantly, these include adjustments to their Bitcoin project.

It’s worth noting, the 111-page IMF report is quite focused on Bitcoin, mentioning it a whopping 221 times! For comparison, President Bukele’s name pops up just eight times, and the US dollar is referenced 82 times.

With the Executive Board’s approval, El Salvador can immediately access about $113 million. Looking ahead, this whole agreement is expected to bring in even more financial backing, potentially exceeding $3.5 billion over the course of the program.

Bitcoin Limitations Central to Agreement

This landmark deal represents a key compromise, especially when it comes to President Nayib Bukele’s ambitious Bitcoin initiative. As we learned last month, El Salvador has already tweaked its Bitcoin Law through legislative reforms. These changes dial back the requirement for private businesses to accept Bitcoin and also prevent taxes from being paid using the cryptocurrency.

But the latest report takes things a step further, tightening the government’s involvement in Bitcoin-related economic activities. This includes restricting government Bitcoin transactions and purchases. The agreement also emphasizes the need for stronger regulation and oversight of digital assets, aligning with evolving global standards.

Furthermore, the report explicitly bans the government from accumulating any more Bitcoin, including through mining BTC.

“Voluntary accumulation of bitcoins includes purchase and mining of Bitcoins and excludes the accumulation of Bitcoins resulting from forfeiture, seizure, apprehension, custody or other form of property or possession by the government arising from law enforcement measures adopted in accordance with Salvadoran law.”

“The possible downsides of the Bitcoin project are being addressed according to IMF guidelines,” the IMF clarified. Recent legal changes have ensured that Bitcoin acceptance is now voluntary and that taxes are paid solely in US dollars. Plus, there’s been a push for greater transparency with the public crypto e-wallet, and plans are in place for the government to gradually step back from its involvement.

Economic Reform Package

The IMF-supported program is all about getting El Salvador’s economy on a more stable footing. It aims to tackle ongoing economic challenges using a comprehensive set of measures. Building on recent progress in security and economic growth, the program is prioritizing structural reforms to make the country’s finances more sustainable in the long run.

“Building on recent progress, the authorities’ IMF-supported program aims at addressing macroeconomic imbalances and strengthening governance and transparency, with the objective of boosting El Salvador’s growth prospects and resilience,” according to the IMF press release. Essentially, they want to help El Salvador grow stronger and more resilient.

As part of the program, El Salvador is expected to improve its primary balance by 3.5 percent of GDP over the next three years. This will initially be achieved by streamlining wage expenses, while still ensuring that important social programs and infrastructure projects get the funding they need. This kind of financial discipline could make it easier for El Salvador to access financial markets at better rates, potentially making its debt situation more manageable.

Growth and Recovery Context

The IMF points out that El Salvador’s economy has been steadily expanding, largely thanks to strong remittances (money sent home) and tourism. This positive trend follows significant improvements in security across the country. Also, the gap between what El Salvador earns and spends internationally has narrowed, inflation has come down, and recent moves to manage liabilities have reduced immediate financing pressures.

Much of El Salvador’s economic turnaround is rooted in remarkable improvements in security. Homicide rates have plummeted from some of the highest in the Western Hemisphere to among the lowest! This boost in security has really fueled economic recovery by attracting more tourists and investors.

Despite these positive developments, the IMF emphasizes that El Salvador still faces considerable economic hurdles. Public debt remains high, around 87 percent of GDP, and the hefty interest payments on this debt put a strain on government finances. Furthermore, the country’s financial reserves are still low, making it vulnerable, especially given that El Salvador’s economy is dollarized.

Market Implications and Outlook

Interestingly, the spreads on El Salvador’s sovereign bonds (a measure of risk) have already narrowed considerably. They’ve dropped from over 700 basis points in late 2023 to around 350 basis points just before this program was announced. This is a sign that the market is becoming more confident in El Salvador’s economic direction.

The success of this new program hinges on strong political will and widespread public support. President Bukele’s administration, fresh off a landslide re-election victory with about 85 percent of the vote in February 2024, certainly has significant political capital to push through these reforms. His party also holds a commanding majority in the legislative assembly, with 54 out of 60 seats.

“Decisive ownership and implementation and broad political and public support will be critical to ensure the program’s success,” the IMF statement highlights. They also stress that “agile policy-making and contingency planning will be essential to manage downside risks in the context of dollarization.” In other words, flexibility and backup plans are key, especially given El Salvador’s dollarized economy.

However, in a surprising twist, less than 24 hours ago, President Bukele shared a screenshot on social media showing El Salvador’s Bitcoin holdings. The screenshot indicated yet another purchase of 19 BTC, bringing their total stash to over 6,100 BTC!

So, will this be the final Bitcoin purchase for El Salvador in 2025, as per the IMF agreement? Will the country’s volcano-powered Bitcoin mining operations now cease? Or will President Bukele continue to champion Bitcoin, potentially defying the IMF and risking billions in crucial financial support?