The International Monetary Fund (IMF) is urging El Salvador to eliminate Bitcoin’s status as legal tender. Just four months after the Central American country adopted cryptocurrency in its economy.
“Bitcoin poses significant risks to financial stability and consumer protection.” The executive directors of the IMF said in their final statement on El Salvador’s Article IV consultation.
“There are great risks associated with the use of Bitcoin. Salvadoran authorities were urged to reduce the scope of the Bitcoin law, removing Bitcoin’s legal tender status.” Express the release.
Also in the statement, it was suggested to carry out further regulatory oversight of the “Chivo” digital wallet.
“The statements about Bitcoin and Chivo show that the tone of the statement is quite negative.” Said Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial Corp.
Opinions about the Bitcoin experiment in El Salvador are varied. “Some market observers see the adoption movement as a progressive step towards the financial inclusion of cryptocurrencies. However, others claim that it is a very irresponsible bet. reported Blockworks.
The IMF projects that El Salvador’s fiscal deficit will reach 5.75% of gross domestic product (GDP) during 2021 and around 5% of GDP in 2022, according to the release. Likewise, public debt is forecast to increase by around 96% of GDP in 2026. Given these circumstances, El Salvador is on an “unsustainable path,” according to the IMF.
El Salvador is on an “unsustainable path”
According to statements made by the International Monetary Fund (IMF), the debt is unsustainable with the country’s current economic policies. In addition, he added that El Salvador needs a readjustment of 3% of GDP to bring the internal debt to sustainable levels.
The primary balance is the fiscal balance adjusted for the payment of net interest on the public debt. It is a key indicator in determining a government’s ability to meet its economic obligations without taking additional loans. The IMF has forecast a primary balance of 0.0 by 2022.
Likewise, El Salvador has an $800 million eurobond, a debt instrument issued in a foreign currency, maturing in January 2023. According to Nathalie Marshik, the country is forecast to be in good shape economically, until the first half of 2022. , but then it will be totally “up in the air.”
According to statements made by the president of El Salvador, Nayib Bukele, who informs Through the social network Twitter when you make Bitcoin purchases on behalf of the country, El Salvador has at least 1,801 accumulated Bitcoins. Given the recent market sell-off, the country has likely lost millions of dollars on its cryptocurrency investments.
Article IV consultations are analyzes and assessments conducted by the IMF on an annual basis on all of its members. During the study, IMF officials visit the country to assess economic developments and discuss certain economic suggestions with each country’s central bank.
Investors fear a crypto winter is coming
As crypto investors are concerned about the sharp sell-off in Bitcoins and other digital assets, some fear the worst is yet to come.
Bitcoin, the world’s largest cryptocurrency, briefly dipped below $33,000 on Monday, its lowest level since July last year. Since then, it has rallied above the $36,000 mark. However, it is still 50% below an all-time high of almost $69,000 in November of last year.
Meanwhile, the entire cryptocurrency market has lost over $1 billion in value as major tokens like Ethereum and Solana also traded lower. Ethereum has dropped in price by more than half since it peaked in November, while Solana has also seen an even steeper drop, dropping 65%.
“It is during the crypto winters that the best entrepreneurs build the best companies.” Public David Marcus, former head of cryptocurrency for Facebook’s Meta platform, via Twitter.
The cryptocurrency market crash has come alongside a steep drop in global stocks. Experts say that the involvement of large institutional funds has meant that cryptocurrencies are increasingly linked to traditional markets. So far, the S&P 500 is down 8% since the beginning of the year, while the Nasdaq Index is down more than 12%.
However, downward movements in major cryptocurrencies have contributed to the growth of stablecoins, which are tied directly to the value of certain fiat currencies such as the US dollar.