The Economist: How did El Salvador, embracing Bitcoin, get poorer?

During the recent market downturn, El Salvador increased its BTC holdings by 7 and 5 coins on February 25 and March 4, respectively, after reaching a $1.4 billion bail-out protocol agreement with the IMF. On the protocol side, the IMF imposed regulatory restrictions on El Salvador's national encryption status due to concerns about the high risk of BTC, but this did not stop El Salvador from continuing its BTC purchasing plan. In fact, the IMF's concerns are unfounded. Since President Nayib Bukele took office, his obsession with cryptocurrency and various 'support' measures have not improved El Salvador's economy, but have even increased the deficit. Since the implementation of the president's encryption policy, El Salvador's deficit in encryption has worsened. This article is sourced from an article by The Economist, compiled, translated, and written by CryptoLeo and Odaily. (Previous summary: El Salvador President: Will not stop increasing the position in BTC, Bukele dismisses IMF loan ban) (Background supplement: El Salvador weakens the position of BTC as a Fiat Currency, does the market really need to panic?) Since Nayib Bukele took office as president in 2019, El Salvador has been on the brink of default for most of the time. High debt and interest payments exacerbated by a huge fiscal deficit have been a long-term warning signal for its national economy. With low USD reserves, weak investment and GDP growth, and stalled negotiations with the International Monetary Fund for a bail-out, Bukele's relentless attacks on judicial institutions, opponents, and the media have not had much positive impact on his country. Bukele's obsession with cryptocurrency is excessive. In 2021, El Salvador became the first country to adopt BTC as a legal tender alongside the USD. President Bukele vowed to avoid traditional capital markets, raise billions of dollars through tokenized blockchain bonds, purchase $500 million worth of BTC, build a 'BTC city,' and develop geothermal energy to power BTC miners. However, the traditional market did not respond positively. In the summer of 2022, the average trading price of several El Salvadoran bonds fell below 30 cents, prompting the government to delay public sector salaries to ensure sufficient cash flow, while investors prepared for the worst. Unexpectedly, on February 26, the IMF Board approved a $1.4 billion bail-out loan, which was reached after several years of delay and will be disbursed over 40 months. To secure this money, El Salvador made the routine commitment of fiscal discipline — reducing its cryptocurrency projects. After amending the law in January, taxpayers no longer pay in BTC, and the private sector's acceptance of BTC payments is voluntary. During the debt protocol application to the IMF, El Salvador showed a firm determination to repay its debts. Part of the reason is that Bukele wanted to surprise Wall Street skeptics, and the country's bond prices rebounded to face value levels. Officials used scarce USD to repurchase bonds at a significant discount, saving a large portion of future principal payments. The fiscal deficit rose to 10% of GDP in 2020 but has now returned to pre-pandemic levels of 2-3%, roughly in line with other countries. Combating tax evasion, significant inflows of remittances, and a slight economic recovery have increased government revenue; the gradual phasing out of energy subsidies and pandemic-era programs has slowed expenditure. This loan reduced the risk of a debt default crisis, but El Salvador may not be able to hold out for much longer. With high debt and slow economic growth, if El Salvador continues to raise funds at a rate of 12% as it did in early 2024, it is unsustainable. In a dollarized economy like El Salvador's, without a lender of last resort to prevent bank runs or financial crises from spreading, the cost of sovereign debt default is higher. Local bank deposits are supported by government debt, so a default could snowball into a banking crisis and even lead to de-dollarization. As for the concessions El Salvador made in adopting BTC, it may be a 'blessing in disguise,' more of a stroke of luck than a concession. Bukele touted that cryptocurrency could provide financial services to two-thirds of adults without a bank account and reduce remittance costs, which account for nearly a quarter of its GDP, but the main obstacles to encryption financial inclusion are its economic scale and lower digital literacy. The high remittance costs are due to Salvadorans' preference for cash transactions, which are inherently expensive, and criminal activities make costs even higher. In addition, the Salvadoran government hastily launched the Chivo digital Wallet, which can be used for payments in USD and BTC. However, the reality after the Wallet's launch was not ideal, with rampant vulnerabilities and identity theft — all to steal the $30 BTC reward for registering the Wallet. When BTC was still El Salvador's Fiat Currency, the IMF was cautious about providing loans to El Salvador. BTC price fluctuations pose risks to financial and fiscal stability. BTC may be used for money laundering and other criminal activities. The IMF stated that El Salvador will restrict 'BTC transactions and purchases.' According to on-chain data, since reaching the protocol, the country has actually been buying BTC, but to comply with the loan protocol, the country may have to reduce or cancel these purchases. El Salvador currently holds over 6,100 BTC, worth over $500 million, with a profit of around $200 million, which is also a point of pride for Bukele. The profits may seem significant, but the costs of introducing cryptocurrency to El Salvador exceed the benefits. Bukele's encryption propaganda may be popular, but the volume of encryption investments and encryption tourism is small, and the benefits of financial inclusion and more efficient payment methods are negligible. In short, cryptocurrency has never become truly popular in El Salvador. In 2022, when speculation peaked, a CID-Gallup survey found that only one-fifth of companies accept BTC, and only 5% of taxes are paid in cryptocurrency. This recent data may be even lower, as Salvadorans still strongly prefer cash and payment cards. In addition, rating agency Moody's stated that El Salvador spent a total of $375 million on encryption experiments — including the launch of Chivo, transaction fee subsidies, BTC ATMs, etc., far exceeding the profits from its current BTC holdings, and these profits could decrease as BTC falls. Bukele's encryption experiment delayed El Salvador's loan protocol with the IMF, keeping El Salvador's risk premium high, and his country on the brink of debt default. However, Bukele's approval rating is extremely high, usually exceeding 90%. He claims to be the 'most popular dictator in the world,' not because of his promotion of cryptocurrency but because of his severe crackdown on criminal activities, during which due process and the rights of crime suspects are ignored. His obsession with cryptocurrency has not alleviated El Salvador's economic plight. Although BTC may still be an asset on the country's balance sheet, its days as El Salvador's Fiat Currency are over. Bukele is just a cryptocurrency utopian, and his crazy ideas collide with reality, leading to their downfall. Related reports: Taiwan's Central Bank criticizes El Salvador: ...