IMF reaches $1.4 billion loan agreement with El Salvador

El Salvador has reached an agreement with the International Monetary Fund (IMF) after four years of negotiations strained by the country’s acceptance of Bitcoin as legal tender. According to an IMF statement, the two sides agreed on a $1.4 billion loan program to be disbursed over 40 months. In exchange, El Salvador agreed to take steps to improve its primary balance of payments and help reduce its debt-to-GDP ratio. The IMF praised the government’s efforts to improve its fiscal position, grow the economy, reduce inflation, and manage short-term debt. In 2021, President Nayib Bukele’s acceptance of Bitcoin led to a rift between the government and the IMF, triggering a credit rating downgrade, investor panic, and a plunge in bond prices. Although the agreement still needs approval from the IMF’s executive board, it will resolve issues that have long troubled investors in El Salvador’s bond market. The agreement also notes that Bukele’s government has made concessions on digital assets, which was previously a major sticking point. Legal reforms will allow the private sector to voluntarily accept cryptocurrencies. The IMF said the risks of El Salvador’s Bitcoin project will be “significantly reduced in accordance with IMF policies.” Additionally, the government’s involvement in Chivo, a local crypto wallet that has been fraught with technical difficulties, will be “phased out.” The government launched Chivo in September 2021 with the promise of giving away $30 worth of bitcoin for free to users who signed up. At the time, that amount was equivalent to a day’s wage, and it attracted more than 3 million sign-ups. But long-term use and adoption have struggled: the country’s central bank said in 2022 that less than 2% of remittances since its launch had been sent using digital wallets. Bukele has recently managed to turn things around by buying back dollar bonds at a discount, repaying others early, restructuring pension debt, and refinancing some domestic securities. The price of bonds due in 2052 has jumped to around 106 cents on the dollar from 30 cents in mid-2022, giving bond investors one of the best returns in the developing world. (Bloomberg) Previously, the Financial Times reported, citing anonymous sources, that El Salvador plans to relax the requirement for local businesses to accept Bitcoin in order to obtain more than $3 billion in loans. Sources said that by shifting to a policy that allows businesses to voluntarily accept Bitcoin, El Salvador could reach a loan agreement worth $1.3 billion with the International Monetary Fund. The deal will also reportedly unlock two loans, one $1 billion from the World Bank and another $1 billion from the Inter-American Development Bank. The Financial Times said that in order to obtain a loan from the IMF, the country also agreed to reduce its budget deficit, pass an anti-corruption law and increase reserves.