Almost a year after El Salvador adopted bitcoin as legal tender, the country has achieved very low economic growth, with a large fiscal deficit and almost 90% of gross domestic product (GDP) in public debt, according to the newsletter of Frank Muci, member of the London Institute School of Public Policy, LSE.
The bulletin goes on to mention that the USD 800 million sovereign bond (bond that was issued by the Congress of El Salvador in 2003 to have the resources of the country) will mature in January 2023, which it has an implicit probability of default of 48%. “International financial markets believe that there is a fair chance that El Salvador will stop scheduled payments for the next eight months, after a year of bitcoin adoption in the country,” the bulletin adds.
“Most practitioners and academics agree that sovereign default has significant costs. This is especially true in dollarized countries, such as El Salvador, where late payments by the government could trigger a bank run. Like other emerging markets, local banks, insurance companies, and pension funds in El Salvador have a lot of national government debt and some foreign government debt on their balance sheets.”
Frank Muci, member of the LSE School of Public Policy.
The scenario in El Salvador has become very risky to the extent that Salvadorans prefer to deposit their dollars in safe banks in the United States, instead of local banks, mention the bulletin. He adds that these large outflows of cash to the US will put pressure on the liquidity of the national banks of the Central American country, which will lead to its total insolvency.
The bulletin ends by saying that, although the situation is complex for Salvadorans, there is the possibility that the country’s rulers pay the debt in order to continue maintaining international financing. According to Muci’s perspective, the bankruptcy of the country (default) will be avoided by the presidency, especially considering that the elections are approaching again and the adoption of Bitcoin has not resulted in a significant improvement for the country. However, this does not resolve the environment of uncertainty in which the country’s population finds itself.
Bitcoin has not benefited the economy of El Salvador
Since the adoption of bitcoin as legal tender in El Salvador, the country has reported that inflation fell slightly in the last month, but the population still considers that this law “has not benefited their family economy”, as reported by CriptoNoticias.
In addition to this, as a consequence of the recent bear market that the cryptocurrency has experienced since November 2021, the historical maximum price of USD 67,800 is now worth USD 30,000, which is 55.7% less in a matter of a few months. Bitcoin is no longer a solution for the country and has become part of national concerns, according to a recent CriptoNoticias report.
Instead of helping improve the country’s economy, the purchases made by the salvadoran government of bitcoin, at the time when its price was at its highest, currently led to losses in the national reserve of the leading cryptocurrency. El Salvador currently has a total of 2,301 bitcoins in its reserve, which would be more than 69 million US dollars, according to the CriptoNoticias calculator.
Not only El Salvador is in decline
The World Bank, in your report updated Global Economic Outlook, lowered the global growth forecast to 2.9%, that is, 1.2% less than what was projected in January, when he placed it at 4.1%. This expected reduction is mainly due to the effects of the more than 100 days that Russia was invading Ukraine, which impacted the global economy with an increase in the price of raw materials.
“Growth will slow further in 2023, to just 1.9%, before picking up slightly to 2.4% in 2024. The regional slowdown reflects tightening financial conditions, weakening external demand growth , rapid inflation and high policy uncertainty in some countries”.
World Bank.
El Salvador did not escape this reduction and its projection is 1.3% lower than the World Bank had done at the beginning of 2022, placing the forecast for economic growth at 2.7% as the lowest rate in Central America, according to the report.
With all this in the Salvadoran panorama, adding the debt crisis that the government has, if bitcoin does not manage to recover to higher prices, it could be said that the plans to use cryptocurrency to improve the economy will not have the impact that is expected. wait. However, it cannot be considered a loss until those bitcoins are reported as being sold below their purchase price.