El Salvador: Land of Volcanoes, and… Crypto?
For many, the roots of economic disadvantage among countries are related to not being able to have a currency that is strong in the international markets. In modern times the American dollar is the prime currency used around the world for international trade and even as a store of value for people who distrust their local currencies. Latin America has been at the mercy of the dollar many times throughout modern history. The 80s are known in Latin America as the “Lost decade” or “La decada perdida”. Many Latin American countries suffered a severe crisis due to the first OPEC-related rise in oil prices in 1973. A second increase in the price of oil in 1979 and the U.S Fed driving up interest rates caused many Latin American countries to end up with large current account deficits and accumulated foreign debt (Frenkel, R., & Rapetti, M). El Salvador seems to be trying to break the circle of dollar dependency by switching to Bitcoin. But it could be just a reaction due to the U.S pulling resources from El Salvador due to the fear from U.S lawmakers of President Bukele going towards an authoritarian path.
From a macroeconomic perspective, not being able to borrow in your own coin can generate a huge amount of debt since you are borrowing on a foreign currency that tends to be more expensive than the domestic one. The GDP in 2020 of El Salvador was 24.64 billion and the national debt was 21.71 billion (O'Neill, A), which translates to a debt-to-GDP ratio of 89.18. A high debt-to-GDP ratio with a weak currency in comparison to the dollar would both slow down the repayment of the national debt as well as development of the country. Nevertheless, international aid and loans are also given in dollars making it even harder to create a currency that can compete internationally and ease the impact of borrowing in dollars. The Salvadoran government adopted the dollar as its currency in 2001. Even though that made their economy more stable and lowered the cost of borrowing, it limited Salvadoran governments’ freedom to spend money, especially in times of financial crisis (Kurmanaev, A., Avelar, B., & Livni, E.). That lack of freedom and ownership on their currency could be another one of the reasons why El Salvador is shifting to Bitcoin. The cryptocurrency is being used as a way to create a stronger financial path for El Salvador.
Currently the relationships between El Salvador and the U.S have deteriorated. Early in May the U.S was worried by the way President Bukele was running the country and his approach to checks and balances between the branches of the government. With the aid of a majority in Congress five judges on the top court of El Salvador and the attorney general were fired. The actions of Bukele were understood by the U.S as one step forward on the route of becoming an authoritarian President. These judges were known for their independence and the general attorney was investigating corruption within Bukele’s government. The U.S. and the international community condemned the firings of the Supreme Court judges and the attorney general (Kahn, C).
Around September, A senior U.S. official quietly told El Salvador’s government that anti-poverty assistance from Washington is at risk over President Nayib Bukele’s defiance of his country’s supreme court and congress (Goodman). The U.S government has manifested concerns regarding El Salvador’s going into an authoritarian path. Actions such as Bukele’s use of troops to intimidate legislators have raised red flags related to eligibility criteria to the Millennium Challenge Corporation, an independent U.S. foreign aid agency that has committed nearly $300 million in grants to El Salvador (Goodman).
Regardless of the events narrated previously, President Bukele is still very popular in El Salvador. This country went through a long period of time where violence on the streets and corruption by government officials were common for everyone. Since Bukele was elected violence has decreased and more government involvement with society has occurred. These factors have allowed him to control the narrative of the events occurring. The use of social media has been instrumental. With 3.1 million followers on Instagram, and different appearances in non-traditional social media channels the Salvadoran President has become very popular with the younger demographics of El Salvador.
The Bitcoin law went into effect on Sept. 7, enforcing taxes payable in bitcoin and obligating all businesses to accept it (Kurmanaev, A., Avelar, B., & Livni, E). The government has given $30 worth of Bitcoin to every Salvadoran citizen. On top of that, a network of 200 Bitcoin ATMs and a digital Bitcoin wallet app has been put in place. The primary purpose of these actions are to kickstart the Bitcoin economy. In a country of 6 millions of citizens, 70% of them are unbanked; many Salvadorans also send remittances from the U.S which make up 22% of El Salvador’s GDP (Kurmanaev, A., Avelar, B., & Livni, E). Bitcoin could be the way for many to save on remittances fees and to have access to financial services. In other words, President Bukele is advocating for a different way to access the global financial system and the banking system.
The Salvadoran dream is promising a lot of advantages to the international crypto investment community. From permanent residency to anyone who spends three Bitcoins; no capital gains tax since Bitcoin is legal tender, and not an investment asset, foreigners who move to El Salvador will not have to pay capital gains tax in the country or any profits made if the cryptocurrency’s value increases. President Bukele has also advertised the touristic value of his country adding to his proposal the beauty of the beaches and beach properties on sale (Nugent, C). Finally, El Salvador is known for its volcanoes, it’s well known that El Salvador wants to use the energy for crypto mining. One of the newest plans is to construct a “Bitcoin City'' near a volcano that will be funded by the cryptocurrency. In partnership with Blockstream, El Salvador plans to raise about $1 billion via a “Bitcoin Bond”, $500 million will go toward buying bitcoin and the other $500 million will go toward energy and bitcoin mining infrastructure (Kharpal, A).
These changes are controversial because of the concern on how Bitcoin could complicate El Salvador’s path out of pandemic recession. The cryptocurrency is known for its wide changes, going through hikes and downs. Even though the coin has tended to revalue through the last year, there is always a chance of extreme volatility. Also, the bitcoin rollout has complicated El Salvador’s relationship with the IMF. If these factors combined with an authoritarian path for President Bukele continues, El Salvador could be in a problematic situation. On the other hand, the promise of currency freedom and the bet on the future development of the cryptocurrency seems to outweigh the possible risk for now.
*Edited by Andy Colando
Work Cited
Frenkel, R., & Rapetti, M. (n.d.). Exchange rates in Latin America - Center for Economic and Policy Research. A Concise History of Exchange Rate Regimes in Latin America. Retrieved December 14, 2021, from https://cepr.net/documents/publications/exchange-rates-latin-america-2010-04.pdf.
Goodman | AP, J. (2020, September 3). US official warns El Salvador's president that aid at risk. The Washington Post. Retrieved December 14, 2021, from https://www.washingtonpost.com/health/us-official-warns-el-salvadors-president-that-aid-at-risk/2020/09/03/b57e501c-ee11-11ea-bd08-1b10132b458f_story.html.
Kahn, C. (2021, May 14). U.S. is concerned by the direction president Bukele is taking El Salvador. NPR. Retrieved December 14, 2021, from https://www.npr.org/2021/05/14/996760433/u-s-is-concerned-by-the-direction-president-bukele-is-taking-el-salvador.
Kharpal, A. (2021, November 22). El Salvador plans to create a 'Bitcoin City' and raise $1 billion via a 'bitcoin bond'. CNBC. Retrieved December 19, 2021, from https://www.cnbc.com/2021/11/22/el-salvador-plans-bitcoin-city-raise-1-billion-via-bitcoin-bond.html
Kurmanaev, A., Avelar, B., & Livni, E. (2021, October 7). Bitcoin preaches financial liberty. A strongman is testing that promise. The New York Times. Retrieved December 14, 2021, from https://www.nytimes.com/2021/10/07/world/americas/bitcoin-el-salvador-bukele.html.
Nugent, C. (2021, October 1). El Salvador's president Bukele uses Bitcoin for a rebrand. Time. Retrieved December 19, 2021, from https://time.com/6103299/bitcoin-el-salvador-nayib-bukele/
O'Neill, A. (2021, December 1). El Salvador - national debt 2016-2026. Statista. Retrieved December 14, 2021, from https://www.statista.com/statistics/531561/national-debt-of-el-salvador/.
O'Neill, A. (2021, October 26). El Salvador - national debt in relation to gross domestic product (GDP) 2016-2026. Statista. Retrieved December 14, 2021, from https://www.statista.com/statistics/460505/national-debt-of-el-salvador-in-relation-to-gross-domestic-product-gdp/.
Shumba, C. (n.d.). El Salvador president Nayib Bukele says he will use some of his country's bitcoin profits to build 20 schools. Business Insider. Retrieved December 14, 2021, from https://markets.businessinsider.com/news/currencies/el-salvador-bitcoin-schools-president-nayib-bukele-profits-build-2021-11.
