The International Monetary Fund (IMF) reported this Monday, November 22nd, that it completed the review of Article IV regarding the economic behavior and outlook for El Salvador.
The published report focused on El Salvador’s policies to secure inclusive growth, improve fiscal sustainability, ensure financial stability, and reinforce economic governance.
The reports mention good things done accurately by the Bukele administration. Such as the management of the pandemic that has resulted in a quick economic recovery.
“Although the pandemic interrupted ten years of growth,” the sound management of the pandemic has helped El Salvador’s economy rebound quickly, says the report.
Robust external demand, resilient remittances, and sound management of the pandemic—with the help of the International Monetary Fund’s Rapid Financing Instrument (RFI, US$389 million) approved in April 2020—are supporting a strong recovery.” States the title IV evaluation.
Proactive measures taken by Nayib Bukele and his administration helped reduce the economic contraction of 2020.
In 2020, the Salvadoran government implemented economic measures to help the economy. For instance, it reduced the bank’s reserve requirements and implemented a debtor-relief payment.
“In the absence of such measures, the economy would have contracted considerably more than the recorded 7.9 percent fall in real GDP in 2020.” IMF report.
According to the IMF, the Salvadoran economy is expected to grow by about 10 percent in 2021 and 3.2 percent in 2022.
On the other hand, the reports stated that economic vulnerabilities are rising. The increased public debt and making Bitcoin a legal tender are some of the IMF worries.
According to the IMF, “Under current policies, medium-term growth is expected to be constrained by high financing costs.”
The IMF report states that the Salvadoran public debt increased by 14 percentage points of GDP during the pandemic; to about 85 percent of GDP by the end of 2021. This high debt will increase borrowing costs for the country.
Absent strong policy measures to correct fiscal imbalances and to ease these constraints on growth, public debt will grow beyond 95 percent of GDP by 2026.”
IMF title IV report.
The implementation of Bitcoin as legal tender was discussed in the title IV report. However, the plans to issue sovereign bonds announced on November 20th by President Bukele were not examined.
“Efforts to improve financial inclusion and raise growth are welcome. But risks arising from Bitcoin as a legal tender, the new payments ecosystem, and trading in Bitcoin should be addressed,” reports the IMF.
According to the IMF title IV report, “Bitcoin should not be used as a legal tender.” The high price volatility entails significant risks to consumer protection, financial integrity, and financial stability.
The IMF recommends narrowing the scope of the Bitcoin law and urges strengthening the regulation and supervision of the new payment ecosystem.
The International Monetary Fund IMF periodically undertakes Article IV missions to member countries. It is done to consult with government officials before they request IMF resources.
Click here to view the entire title IV report on El Salvador.
As usual, President Nayib Bukele wrote his opinion regarding the IMF title IV report in Tweeter.
The International Monetary Fund just published its technical evaluation of El Salvador for the year 2021. And although we obviously do not agree on some things, such as the adoption of Bitcoin, the analysis they make of our country is interesting.”