Does the IMF Shield the U.S. Dollar in El Salvador?

In December last year, El Salvador's government negotiated a $1.4 billion loan agreement with the International Monetary Fund (IMF), which included a commitment to halt public Bitcoin (BTC) purchases. In February, the IMF’s board approved the loan.

However, since then, President Nayib Bukele has revealed that the country continues to add BTC to its reserves.

After a brief pause in its daily Bitcoin purchasing strategy, El Salvador resumed acquisitions in February, adding 7 BTC, equivalent to approximately $660,000. In March, the country acquired over 13 BTC, bringing its total holdings to more than 6,105 BTC, valued at over $527 million.

The IMF agreement provides El Salvador with $1.4 billion and can unlock up to $2.1 billion in additional financial support from the World Bank, the Inter-American Development Bank, and other regional development banks.

The loan aims to address fiscal policy challenges, focusing on reducing the deficit and public debt through spending cuts, improving governance and transparency, implementing anti-corruption measures, and strengthening banking liquidity buffers to withstand economic shocks.

This is not the first intervention of the IMF in El Salvador's financial governance. Since joining it in 1946, El Salvador has maintained a complex and evolving relationship with the organization. Over the decades, the IMF has provided financial assistance, policy recommendations, and economic surveillance, particularly during periods of fiscal instability and structural reforms. The adoption of the U.S. dollar as the official currency in 2001 was aligned, if not inspired, by the IMF-backed policies.

No wonder that El Salvador’s adoption of Bitcoin as legal tender in 2021 was strongly criticized by the IMF, officially due to concerns over financial stability and regulatory risks. Notably, the reversal of the country's Bitcoin policies is listed as one of the four key elements of the current loan program:

The potential risks of the Bitcoin project will be diminished significantly in line with Fund policies. Legal reforms will make acceptance of Bitcoin by the private sector voluntary. For the public sector, engagement in Bitcoin-related economic activities and transactions in and purchases of Bitcoin will be confined.

The conditions attached to IMF loans often spark debates about national sovereignty and policy autonomy. The IMF’s requirement for El Salvador to scale back its Bitcoin ambitions as part of the loan agreement underscores this tension. In El Salvador’s case, it is not just a matter of replacing its sovereign currency with Bitcoin—it is also the dominance of the U.S. dollar that is under threat.

On March 3, the IMF made a fresh request urging El Salvador to halt its Bitcoin accumulation.

President Nayib Bukele, however, remains resolute.

“No, it’s not stopping,” Bukele declared in a post on X. “If it didn’t stop when the world ostracized us and most ‘Bitcoiners’ abandoned us, it won’t stop now, and it won’t stop in the future.”