
El Salvador has recently reached a significant technical agreement with the International Monetary Fund (IMF), setting the stage for a $1.4 billion financing program. This initiative is part of a larger $3.5 billion package with contributions from other multilateral organizations such as the World Bank, the Inter-American Development Bank (IDB), the Central American Bank for Economic Integration (CABEI), and the Development Bank of Latin America and the Caribbean (CAF).
This agreement signals a pivotal moment in the relationship between El Salvador and the IMF following the tension that arose when the country adopted Bitcoin as legal tender in 2021. The adoption of Bitcoin was initially met with skepticism by the IMF, which viewed it as a potential risk to financial stability.
The IMF had been urging El Salvador to implement measures to lower its country risk rating, such as increasing the value-added tax (VAT), currently at 13%. However, President Nayib Bukele had publicly opposed such tax hikes.
One critical aspect of the agreement involves a compromise regarding Bitcoin’s role in the Salvadoran economy. While Bitcoin remains legal tender, the government will no longer mandate its use among businesses and individuals, making its acceptance voluntary. This development addresses some of the IMF’s concerns about the widespread use of digital currency and its implications for financial stability.
U.S. Ambassador to El Salvador, William Duncan, expressed optimism about the agreement, stating, “This is a great step for the country and fills us with optimism for the future of El Salvador.” His remarks underscore the international community’s positive view of this new collaboration.
The IMF program is set to tackle key areas, including fiscal policy, governance, transparency, and digital assets. The fiscal policy component aims to improve the primary balance by 3.5% of GDP and reduce public debt to 85% of GDP by year-end, paving the way for a “firm downward path.”
The measures to achieve these targets are already incorporated into the 2025 budget, which has been fully funded for the first time in decades, primarily through $7.7 billion in expected tax revenue.
Additionally, reforms will focus on enhancing public sector efficiency, ensuring pension system viability, and boosting revenue mobilization to sustain fiscal stability and reduce borrowing costs. On the governance front, efforts will include establishing a robust anti-corruption framework and improving mechanisms to combat money laundering and terrorist financing, alongside efforts to streamline bureaucracy and modernize infrastructure.
The program also contemplates strengthening the banking sector’s liquidity framework to support private sector credit growth and bolster the central bank’s foreign reserves to enhance crisis management capacity.
Regarding digital assets, legal reforms will ensure that Bitcoin acceptance remains voluntary for the private sector, and will implement policies to limit public sector involvement in digital currency-related activities.
Financial experts from Exor Latin America note that the involvement of various international financial institutions in the funding program reflects a “sign of confidence in the country’s ability to manage its finances and execute structural reforms.” They added, “The support of these institutions is a positive indicator that El Salvador is committed to adopting responsible and sustainable economic policies.”
El Salvador’s economic progress, improvements in security, promising remittance figures, and growth in tourism have underpinned this agreement. The country has seen a 1.7% growth in family remittances, reaching $6.857 billion, and a projected 20% increase in international tourists, which is expected to generate $3.8 billion in revenue by the end of 2024.
Source: https://www.imf.org/es/News/Articles/2024/12/18/pr-24485-el-salvador-imf-reaches-staff-level-agreement-on-an-eff-arrangement