The IMF’s cautionary remarks about the Central American country using Bitcoin as its official currency alongside the U.S. dollar came in a review note following a so-called Article IV consultation mission that assessed financial developments in El Salvador.
While the IMF team praised El Salvador’s efforts to boost financial inclusion, including by rolling out the Chivo e-wallet, which is part of the country’s cryptocurrency ecosystem, they stressed the need for “strict regulation and oversight” of both Chivo and Bitcoin.
IMF directors “stressed that there are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities,” while urging El Salvador lawmakers to remove Bitcoin’s status as legal tender.
The IMF’s cautionary note met with a critical reception by El Salvador President Nayib Bukele, who posted a dismissive meme on Twitter with the caption, “I see you, IMF. That’s very nice.”
Bukele, who has been a vocal advocate of Bitcoin, led the charge on its adoption as El Salvador’s legal currency. In September 2021, El Salvador became the first country in the world to start using Bitcoin as legal tender and, to encourage adoption, it launched the Chivo e-wallet that came pre-loaded with $30 worth of Bitcoin.
Dovetailing with its recent Article IV recommendations, the IMF expressed reluctance around El Salvador’s legal tender status for Bitcoin in the months prior to adoption.
“Adoption of Bitcoin as legal tender raises a number of macroeconomic, financial, and legal issues that require very careful analysis. So we are following developments closely and will continue our consultations with the authorities,” Gerry Rice, director of the IMF’s communications department, said in June 2021.
More recently, in a July 29 blog post announcing the release of two policy papers on digital currencies, the IMF acknowledged that “opportunities are immense” for digital forms of money, including cheaper transactions and the ability to boost financial inclusion. Still, the agency warned of a number of risks, including implications for domestic economic and financial stability, with the most far-reaching being implications for the stability of the international monetary system.
“The least stable of the lot, which hardly qualify as money, are cryptoassets (such as Bitcoin) that are unbacked and subject to the whims of market forces,” the IMF cautioned in the post.
Overall, in its Article IV assessment, the IMF team praised El Salvador’s leadership for “timely and effective” pandemic management, which they said helped the country’s economy mount a robust rebound from the COVID-19 recession. After contracting 7.6 percent in 2020, El Salvador’s GDP is poised to grow by 10 percent for all of 2021 and 3.2 percent in 2022.
The international agency cautioned, however, that the country’s public debt, poised to hit 96 percent of GDP by 2026, was on an unsustainable path.
“Fiscal vulnerabilities—stemming from the large public debt stock-to-GDP ratio—have grown during the pandemic and need to be promptly addressed,” IMF directors said in the note, urging the adoption of revenue and spending measures that would put public debt “on a firm downward trajectory.”