Bitcoin is part of pitch as El Salvador courts IMF deal
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Adoption of Bitcoin, the first of its kind in El Salvador, will not be an obstacle for the government to reach a $ 1.3 billion loan deal with the International Monetary Fund, according to the president of the country’s central bank .
The cryptocurrency will lose its reputation as a speculative asset and prove its use as a legitimate payment system, central bank president Douglas Rodriguez said in an interview on Monday. He even expects Bitcoin’s notorious price volatility to help the economy grow more than the 9% the bank is forecasting this year.
“We don’t see any risk. Maybe, risks on the rise, ”Rodriguez said in a virtual interview from San Salvador. Bitcoin will become “a payment system, a financial inclusion system”.
This is something he said the nation pointed out to the IMF amid talks for a potential $ 1.3 billion extended fund facility. The IMF is expected to release its latest report on El Salvador’s finances and economy next month, which could revive discussions. Investors are keeping a close watch on the long-running negotiations, especially in the shadow of controversial political decisions under President Nayib Bukele, such as the replacement of top judges and the legal tender of Bitcoin.
Although the country does not have large dollar bond payments until 2023, it is heavily in debt and needs a deal with the multilateral lender to unlock international market access next year.
“We explained openly to the IMF: For us, Chivo and Bitcoin are just a method of payment,” said Rodriguez, who was appointed head of the central bank in September 2020. Rodriguez worked in two municipal governments while Bukele was mayor and joined Finance. Ministry in 2019 when Bukele became president.
Risks associated with adopting Bitcoin, the uncertainty of a deal with the IMF, and other policy measures have led fund managers to demand additional returns to hold El Salvador’s sovereign debt on US Treasuries to a peak of 1,115 basis points in September, above the threshold considered to be in difficulty. The IMF warned in June of the financial and regulatory challenges associated with the use of cryptocurrency, while Moody’s Investors Service said the move jeopardized a program with the fund. On Monday, the risk premium was 975 basis points, according to the JPMorgan Chase & Co indices.
Fund managers are also monitoring risks as the government considers possible pension reform. Although Rodriguez has said the changes will not affect the retirement age and guarantee a “dignified retirement”, it has not been defined whether all, all or part of the system will be nationalized, he said. .
The new role of Bitcoin
Adopting cryptocurrency is a way for Salvadorians to access more payment methods in a country where more than three-quarters of citizens are unbanked, Rodriguez said. He called it a means of inclusion for those the financial industry deems too low income or high risk.
Salvadorans started using the government’s Chivo wallet last month, which was preloaded with $ 30 in Bitcoin, to buy dips and sell rallies with fractional amounts of the cryptocurrency.
Businesses in the capital of San Salvador, from Starbucks and McDonald’s to local electronics stores, began to accept it in exchange for goods. Rodriguez reiterated that the use of the cryptocurrency is optional and expects it to be used alongside the US dollar.
The next step for the government is to provide Salvadorians living in the United States with identification numbers, a requirement for opening a Chivo account, he said. This could provide a cheaper way for those living abroad to send money back to El Salvador, Rodriguez added.
The central bank expects remittances to hit a record $ 6.3 billion this year, 31% more than in 2020, as the U.S. economy rebounds. Higher inflows could lead the bank to revise its growth forecasts up to 10% before the end of the year.
Although fees for using Bitcoin vary, companies, including Western Union, offer free methods of sending money digitally to El Salvador.
Bitcoin surged on Monday, threatening to challenge all-time highs reached earlier this year.
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