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An Agreement with the IMF Will Not Be Enough to Save El Salvador

  • Finance Minister Alejandro Zelaya said that a possible loan from the IMF will not solve the financial problems of the Central American nation.
  • At the beginning of next year, El Salvador will have to face a payment of US $800 million for the maturity of a sovereign bond.
  • According to Moody’s, an agreement with the IMF would help the country improve its credibility and balance its finances.

The financial problems that afflict El Salvador will not end with the signing of a possible financial agreement with the International Monetary Fund (IMF) this year, said Finance Minister Alejandro Zelaya.

The Central American country urgently needs a new loan of some 1.3 billion dollars and the refinancing of its debt in order to face the threat of default in the coming months and to be able to cover its high fiscal deficit.

However, the official downplayed the importance of a possible agreement and its benefits to alleviate the heavy burden of the country that must pay high interest for the service of the foreign debt of more than 24,000 million dollars.

El Salvador’s problems have become more acute after President Nayib Bukele decided to tie the fate of the Salvadoran economy to Bitcoin (BTC). In September of last year, the government approved the use of BTC as legal tender.

Despite the potential risks, the protests within the country and the calls from different international financial organizations, including the IMF, Bukele went ahead with his Bitcoin plan and involved cryptocurrency in the country’s economic strategy.

Bukele’s Disagreements with the IMF

On several occasions, President Bukele has refused to meet with the officials of the fund and has mocked the strategists of the financial institution when they have advised him to revoke the decision to keep Bitcoin as legal tender.

The distance between the Salvadoran government and the IMF over the Bitcoin issue has widened in the last year. This makes the possibility that both parties will finalize a refinancing agreement soon more uncertain.

However, Zelaya confirmed on Thursday that his government is holding talks with the IMF. Although he pointed out that the fiscal impact of a possible agreement would be minimal, since the loan would represent a little less than 10% of the total budget of the nation.

"You have to put all these issues into context, but we're maintaining conversations and once we have something concrete we will announce it," Zelaya said.

For the risk rating agency Moody’s, the agreement with the IMF would help El Salvador improve its credibility for external credit and help balance its deteriorating finances affected by the crypto crisis.

"I've seen that some analysts believe that the deal with the IMF is going to completely improve the health of the country's public finances, and no, it is one part of our strategy for improvement," the official said.

On the Flipside

  • El Salvador is currently the country with the highest risk of default in the world due to the high cost of servicing the debt (4.9%) and the debt/GDP ratio (82.6%).
  • In January 2023, the sovereign bond for US$800 million that it will have to pay expires and its deep fiscal gap remains to be resolved.

Bukele has allocated huge financial resources from the country to buy the 2,300 bitcoins he has in reserve. Those Bitcoins are now worth less than half their purchase price, analysts say.

Both President Bukele and Minister Zelaya have dismissed the criticism, saying that the fiscal risk for these investments “is minimal.” The last purchase announced on Twitter by Bukele on May 9 was for 500 BTC at an average price of US$30,744.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss

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