Wednesday, December 8

Chronicles bitcoiners in El Salvador: bitcoin bond, goodbye to the IMF?

Key facts:
  • El Salvador has been requesting a loan of USD 1.3 billion from the IMF for months.

  • The expected revenue from the sale of the bitcoin bond is USD 1 billion.

If you can’t beat your enemies, buy Bitcoin. That may appear to be the most recent financing strategy proposed by the President of El Salvador, Nayib Bukele.

El Salvador has been requesting a loan of USD 1.3 billion from the International Monetary Fund (IMF) for at least eight months. Since March 2021, the Minister of Finance, Alejandro Zelaya has insisted in need of this loan to cover budgetary costs until 2023, as well as to alleviate the burden of the national debt.

While the IMF has not ruled out the possibility of the loan, its lean does not look entirely favorable. Even less so after the adoption of bitcoin as legal tender in the country was announced in June. The lender’s communications director, Gerry Rice, has considered that this move “raises a number of macroeconomic, financial and legal problems.”

And although Zelaya said in June that, despite the Bitcoin Law, the last drafts were about to be finalized to apply an economic adjustment plan and secure the loan with the IMF, five months have passed since such declarations and the international body remains elusive about the future of the loan.

Bitcoin to the rescue?

Perhaps it is a coincidence that the amount expected to be raised by issuing the so-called volcanic bond is one billion dollars, a figure very similar to that of the loan requested from the IMF. Nevertheless, the objectives and conditions of the two loans are very different.

As we have explained in CriptoNoticias, 50% of the proceeds from the bond will go to buy bitcoin and the other 50% to invest in mining equipment and develop the energy infrastructure of Bitcoin City. That is, everything that is collected already has a destination. And the bills don’t pay themselves, so to speak: there are tons of other expenses to cover for which El Salvador is still a bit tight.

According to the proposed budget for 2022, recently introduced before the Legislative by the Minister of Finance, El Salvador requires USD 7.9677 million to cover its projects for the coming year.

The transparency portal does not update the official revenues of the State since 2018. Source: Fiscal Transparency Portal.

The income of El Salvador until 2018 (year in which the Transparency portal stopped being updated), they barely reached USD 6 billion. Although, according to that same portal, the growth projection for 2022 reaches USD 7,000 million.

All this leads to think that another billion dollars would still be missing to cover the estimated costs for the fiscal year next year, a figure that also matches the amount of the loan requested from the IMF. All this without mentioning the USD 18,450 million in external debt that, according to the Central Bank, weigh on the country.

Bitcoin bonds: a challenging precedent

Although El Salvador will most likely continue to need IMF support in order to achieve its government goals, the raising of private capital by a State through public and open networks is a clear challenge for financing agencies like the IMF, used to powerfully influence world politics through the conditions they establish for their loans. This, in the long run, will undermine their power.

The fact that small states and with economic urgencies understand that in order to finance themselves they will be able to issue bonds for investment in bitcoin, not only will it expose them to an exponential rise driven by the exit of circulation of the multiple units of BTC that they buy, but they will also be able to maintain their sovereignty and deciding how to use that money.

The latter, it should be clarified, does not necessarily have to be good for the population of countries that launch bonds. That a state buys bitcoins with debt does not imply that the funds will be used wisely or that they will be free from corruption.

Nayib Bukele and Samson Mow explaining bitcoin bonuses during the Feel the Bit party. Image by Iván Gómez.

However, unlike most government bonds today, which vary in attractiveness depending on the country’s risk and depending on the established return on investment conditions, bonds issued to buy bitcoin would be more attractive to certain investors because they already The investment confidence would not have to be placed only in the issuing country, but in the expectation of growth in the price of bitcoin.

In any case, even with the pioneering advantage that El Salvador has in the issuance of these bonds, the aforementioned figures suggest that organizations such as the World Bank and the International Monetary Fund will continue to be relevant for government financing, even if they exist. bonds to buy bitcoin. Simply, as has happened since 2009 for individuals, now Bitcoin opens an alternative for states that do not want to submit to conditions of supranational organizations.

Disclaimer: The views and opinions expressed in this article belong to its author and do not necessarily reflect those of CriptoNoticias.

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