El Salvador: IMF Issues Statement on Bitcoin Risks in 2023 Economic Developments and Outlook

By Tsunami On Feb 12, 2023

The International Monetary Fund (IMF) has issued a statement following a virtual and in-person mission to El Salvador. The statement highlights the country’s economic developments, outlook and risks, as well as its fiscal policy.

El Salvador’s government has implemented policies aimed at improving security, diversifying the economy, reducing trade costs and enhancing digital skills. Despite adverse shocks, the economy has grown at a robust pace, with an estimated 2.8 percent growth in 2022. However, vulnerabilities have also mounted, including a rising current account deficit and declining international reserves.

Under the baseline, the economy is projected to grow by 2.4 percent in 2023, driven by private consumption, public investment, and tourism. However, risks to the outlook remain high, including a slowdown in the US, policy slippages, and shocks due to climate change. The IMF emphasizes the need for a comprehensive and ambitious fiscal and financing plan to bring debt back to a sustainable path and to facilitate international capital market access.

Efforts should be made to increase tax revenues, reign in the public wage bill, eliminate energy subsidies, and strengthen the pension system. The IMF also stresses the importance of preserving achievements from the anti-evasion plan and giving consideration to increasing consumption tax rates.

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While the Salvadorean economy has seen robust growth in recent years, the IMF mission highlights that risks to the outlook are high and tilted to the downside. One of these risks is the increasing use of Bitcoin in El Salvador. Despite being recognized as legal tender in the country, Bitcoin poses significant risks, including its volatile value, limited regulatory framework, and potential for illicit activities such as money laundering.

The use of Bitcoin as a currency in El Salvador may lead to further macroeconomic imbalances, with potential consequences for the financial stability of the country. The IMF mission recommends that the government takes steps to mitigate these risks by establishing a clear regulatory framework for cryptocurrencies and ensuring that measures are in place to detect and prevent illegal activities.

“Given the legal risks, fiscal fragility and largely speculative nature of crypto markets, the authorities should reconsider their plans to expand government exposures to bitcoin,” the IMF said.

In addition, the IMF stresses the need for increased financial education and awareness among citizens to ensure they are fully aware of the risks associated with cryptocurrencies. This includes educating the public on the volatile value of Bitcoin and its potential to be used for illegal activities.

The IMF mission highlights the need for the Salvadorean government to take steps to mitigate the risks associated with Bitcoin and other cryptocurrencies, while also promoting its responsible use. This includes implementing a clear regulatory framework, increasing financial education and awareness, and monitoring for illegal activities. By doing so, the Salvadorean economy can continue its robust growth while also ensuring financial stability and security.

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