El Salvador’s President Nayib Bukele had bet the economic salvation of the country on Bitcoin, but things haven’t worked out in the manner that he would have hoped. The crypto coffers of the government have been cut in half and the adoption of Bitcoin throughout the nation hasn’t taken off. The most crucial aspect is that the country still needs a lot of cash and quickly, for meeting its debt payments that are set to go over $1 billion in the coming year.
All that comes on the back of Bitcoin’s price falling over 70% from its peak in November 2021, and over 55% since the moment Bukele had made announcements of his plan. In the meantime, the economic growth of El Salvador has gone down substantially, as it still has a high deficit, and the debt-to-GDP ratio of the country, which is a metric that is used for comparing what is owed by a country to what it is generating will hit around 87% in the current year. That has led to increased fears that El Salvador would fail to meet its loan obligations.
After combining these economic woes with another war on gang violence, you get all the readings of a country that is on the receiving end of a disaster. The Bitcoin experiment hasn’t paid off on the surface, but it’s not the fault of Bitcoin that this government is heading towards financial ruin. The government is losing out around $50 million on Bitcoin, which, when you look at the national budget, is less than 0.5%. If you count the entire numbers on display, according to the estimates this whole experiment and the costs associated with its implementation has cost nearly $374 million to the government.
That’s a big number when you consider that there are $7.7 billion of outstanding bonds for El Salvador, but it’s a small number, when you factor in the $29 billion economy. However, the optics don’t make for good reading. Negotiations with international lenders have stalled, and that’s mainly because they don’t want to spend money on a country that is throwing millions of dollars on an extremely volatile cryptocurrency. Rating agencies such as Filch, have given a poor credit score to El Salvador as the financial future of the country is uncertain after adopting Bitcoin as the legal tender. This has made it even more expensive to borrow cash for President Bukele.
When you look at the financial situation of El Salvador, it’s in a difficult situation right now, as there are plenty of bonds that have been trading at drastically discounted rates. The country’s economic policy is now at a stage, where it is considered to be magical thinking. They have already scared the IMF and the financial markets, and nobody wants to lend money to the President unless it is at drastically expensive rates that are around 20% or 25%. That means El Salvador is walking towards a debt default stage.
However, the tech-savvy and millennial President, who is the self-proclaimed “coolest dictator in the world” on Twitter, has bet his political future to gambling on crypto, so there is plenty of incentive for making things work out, and currently to pay off El Salvador’s debt. President Bukele is already gearing up to face re-election and wants to run the country for another five years, starting in 2024.
The Bitcoin Experiment In El Salvador
El Salvador was the world’s first country that adopted Bitcoin as legal tender back in September 2021. The goal behind it was that they would use public funds to purchase Bitcoin, and launch a virtual wallet nationally that would be called “Chivo”, which is slang for something cool in the native language. The virtual wallet would provide a no-fee transaction, and also let quick payments across borders.
El Salvador is a country that is mainly a large cash economy, and here nearly 70% of the people don’t have credit cards, bank accounts, or other financial services. It was thought that Chivo would be the solution as it would help conveniently get those people who weren’t part of the banking system onboard the system. Another part of the experiment included building a vast infrastructure of ATMs for Bitcoin transactions throughout the nation, and making it a mandatory requirement for all businesses to accept payments in Bitcoin.
Things were taken up another notch when the President announced in November that he planned to build an entire “Bitcoin City”, which would be in South Eastern El Salvador next to the Conchagua volcano. The city would be funded by Bitcoin and would provide a massive tax relief, while the geothermal energy from the volcano would provide power to Bitcoin miners.
To sum it all up, the government has currently spent nearly $375 million on their Bitcoin project, and that is including a $150 million trust for converting Bitcoin into dollars instantly, and a further $120 million that was for the $30 bonus Bitcoin that every citizen would get after downloading the Chivo wallet. It’s not a small sum, considering the minimum wage monthly in the country is around $365. You can also add the close to $104 million, which the government has admitted publicly that they have spent on Bitcoin.
These expenses along with the $50 million in losses incurred by the country on their Bitcoin portfolio, have meant that El Salvador has spent roughly $425 million on trying to make Bitcoin happen. However, it has been nine months since the start of this experiment, and it doesn’t appear to be reaping any value or benefits to the El Salvadoran government.
It seemed like a good idea and one that would be beneficial for El Salvador in the long run, but looking at the current statistics, they don’t make for pretty reading. The government has been trying to make Bitcoin happen but has failed in the long run, because businesses aren’t comfortable doing business with cryptocurrency. Bitcoin’s value has also depreciated quite a lot since November 2021, and that has had a negative impact on the Bitcoin experiment for El Salvador.
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