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El Salvador, the first country to recognize Bitcoin as legal tender globally, has received warnings from the International Monetary Fund (IMF) about the risks involved in expanding its faith in cryptocurrencies. According to a statement On Friday, after a visit to the Central American country, the IMF noted that “bitcoin adoption in El Salvador” has not materialized, but caution is called for.”
“#Bitcoin the risks have not materialized.” https://t.co/mI2mdJTy6G
— Nayib Bukele (@nayibbukele) February 11, 2023
A $600 million bond payment by the country last month amid investor reviews of El Salvador’s sources of financing and fiscal policy led to the annual IMF visit.
According to the IMF findings, last year, the country’s vulnerabilities, such as the peg to bitcoin, remained, as El Salvador’s growth had been robust. The IMF stated:
Given legal risks, fiscal fragility, and the largely speculative nature of crypto markets, authorities should reconsider their plans to expand government exposure to Bitcoin.
El Salvador adopted bitcoin as legal tender and the US dollar in September 2021. This came after Nayib Bukele, the country’s president, championed the adoption to attract more Salvadorans into the formal economy. The adoption meant that most residents without bank accounts, including neighborhood merchants, had to accept cryptocurrencies as a means of payment.
However, the IMF and the World Bank warned that advocating for cryptocurrencies as a means of payment could leave the country vulnerable to illegal activities, including money laundering, that could affect the country. In the past, the IMF’s so-called “Article IV” visit has been critical ever since the government embraced cryptocurrency and shut down IMF financing.
In particular, the report stipulated:
While the risks have not materialized due to the limited use of bitcoin thus far, the use of the cryptocurrency could grow given new legislative reforms to encourage the use of crypto assets.
In addition, he noted, “underlying risks to financial, fiscal and sustainability integrity and stability, and to consumer protection persist.”
The IMF stipulated that the country’s authorities should allow “greater transparency about the government’s bitcoin transaction and the financial situation of the state-owned bitcoin wallet called Chivo.”
According to the IMF, real GDP is expected to increase by 2.4% in 2023, above the historical average. The IMF highlighted the full recovery and credited the government’s effective response to the COVID-19 pandemic. However, the IMF warned that a sharp slowdown in the US could lower exports as well as remittances.
El Salvador’s growth prospects
At the beginning of last year, the IMF El Salvador team in an interview with Country focus, the team stipulated about the country’s rebound and the decision to make Bitcoin a legal tender. The team noted that they expected the economy to grow around 10% of GDP in 2021 and 3.2% in 2022.
In addition, the team was asked about the main challenges and priorities for the future of the country. They indicated that they expected the country’s growth to slow to almost 2% in the medium term. This is below the historical average and is due to the high costs of public borrowing. However, they asserted that to increase growth rates in the long term, more private investment is required. Furthermore, healthier public finances would be more beneficial.
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