President of El Salvador Nayib Bukele speaks during the opening of the 2021 ISA World Surfing Games May 29, 2021 in La Libertad, El Salvador. Credit – Rolan Barrientos – APHOTOGRAFIA/Getty Images
The cryptocurrency crisis, exacerbated by the dramatic collapse of fast-growing crypto exchange FTX in mid-November, has raised questions about the future of these digital currencies. Bitcoin, the largest and most well-known among them, has fallen to a two-year low in the past few days. But one of the cryptocurrency’s most prominent supporters is doubling down.
On Nov. 17, El Salvador’s President Nayib Bukele, who last year made his country the first in the world to adopt Bitcoin as legal tender, responded to the crypto slide a promise that the government would buy one bitcoin every day going forward. On November 22, the Bukele government sent a bill to El Salvador’s Congress that would allow it to sell $1 billion worth of so-called “volcano bonds” — government bonds denominated in US dollars and 6, Pay 5% interest per year to bondholders. to buy even more cryptocurrency and build a “Bitcoin City” on the coast.
It may be hard to understand why Bukele remains so enthusiastic about a policy that has been a disaster by almost any measure. Bukele’s attempt to get Salvadorans to use the notoriously volatile cryptocurrency has made the country look like a much riskier place to invest. Politicians have blocked El Salvador’s negotiations with the International Monetary Fund (IMF) for a $1.3 billion loan needed to plug large gaps in its public finances. Bukele’s government has courted alternative sources of finance and on November 9 announced new trade talks with China. But few economists believe Salvadoran Vice President Félix Ulloa’s claim that China stands ready to help El Salvador with the $21 billion debt it owes to foreign lenders. Unless it can find new creditors to service that debt, El Salvador risks defaulting early next year.
Although Bukele has declined to disclose how much taxpayer money he has spent on bitcoin, the best estimate based on his purchase announcements is $107 million, with an additional $200 million for administration and infrastructure — nearly 4% of the year 2023 of the developing country budget. El Salvador’s bitcoin holdings are now worth less than $40 million.
To top it off, Salvadorans just aren’t that into bitcoin: A face-to-face survey of 1,269 residents released by José Simeón Cañas Central American University (UCA) in October found that fewer than a quarter of respondents use the cryptocurrency in the In 2022, only 17% said Bitcoin adoption was a success, while 66% said it failed. And 77% want Bukele to stop using public funds to buy Bitcoin.
And yet, Bukele’s Bitcoin policies haven’t hurt his approval rating, which has reliably hovered above 85% since he took office in 2019. In fact, cryptocurrency is arguably giving the president exactly what he wants. On the world stage, bitcoin has diverted media focus from El Salvador’s long-standing problem with gang violence and from the authoritarian measures Bukele has taken to deal with it, including mass arrests, the ousting of Supreme Court justices who oppose his agenda, and introducing an unconstitutional candidacy for re-election in 2024. At home, bitcoin is an important part of the narrative Bukele is driving, both about El Salvador — as a rejuvenated, innovative country offering new opportunities to young Salvadorans — and his presidency. He doesn’t present himself as a classic strong man, but as a provocative young visionary who challenges the Western financial elite.
That means Bukele has little incentive to abandon Bitcoin despite mounting losses for his country, says Tiziano Breda, Central America analyst at Crisis Group. “This is Bukele’s Ultimate [goal] to rename the country,” he says. “And he doesn’t seem like someone who can admit mistakes. He will go to the final episodes of this experiment.”
Why Salvadorans Don’t Care About Bitcoin
Most credit the president’s sweeping crackdown on gang violence with his sky-high approval ratings. Bukele has overseen the arrests of more than 50,000 suspected gang members and a dramatic drop in El Salvador’s homicide rate. Watchdogs say this has come at the cost of “eviscerating human rights” for both gang members and innocent Salvadorans caught in the crossfire. But civil society resistance has been relatively weak, Breda says, with Bukele successfully dismissing protest groups and critical media as puppets for the two mainstream parties that ruled El Salvador three decades before him.
Though most Salvadorans dislike bitcoin, they view the politics as an eccentricity from Bukele rather than a serious threat to economic security, says Ricardo Castaneda, a San Salvador-based economist at the Central American Institute for Fiscal Studies. Growing concerns about public finances have not yet resulted in serious economic problems, he says: the government has protected the population from the worst of global inflation by subsidizing the price of petrol. And remittances from the US, which account for a staggering 26.7% of El Salvador’s GDP, have not slowed.
Bukele, meanwhile, insists that Bitcoin is the long-term solution to El Salvador’s economic woes. Like most crypto enthusiasts, he says the price will soon recover and El Salvador will eventually bring huge gains. Meanwhile, the President’s Twitter account shows an endless stream of retweets from foreign crypto influencers celebrating and sharing El Salvador’s coffee and beaches stories of the Salvadorans who left their country decades ago and now, apparently thanks to Bitcoin, have decided to return.
A looming credit crunch
However, there are clouds on the horizon for Bukele’s Bitcoin dream. El Salvador must find a way to pay off some $667 million in bonds maturing in January 2023 and another $1 billion in 2025. The government has announced plans to buy back portions of that debt by they used reserves from their central bank. hoping to inspire enough confidence in the market to allow it to sell new bonds. Analysts say such moves could help El Salvador avoid a default next year. But with dwindling cash reserves and unsustainably high levels of debt, the risk remains.
If Bukele can’t find buyers for his “volcanic bonds” or some other way to plug the budget hole, he could be forced to return to negotiations with the IMF. The lender would likely make a loan conditional on Bukele abolishing Bitcoin as legal tender and imposing stricter regulations on the use of cryptocurrencies to reduce the risk of criminal groups using El Salvador for money laundering.
Bukele will only accept those terms if the economy starts struggling enough for Salvadorans to feel, Castaneda said. “There’s already a small crack here,” he says, noting that 58% of respondents to the October UCA poll named El Salvador’s biggest problem as the economy — a 15% increase since May and the highest proportion in recent years ten years. (The drop in concerns about crime probably helped). “If things don’t improve, this bang just keeps getting bigger and then the applause turns to boos.”
Until then, Bukele will likely continue to roll the dice on Bitcoin. “He’s like a gambler in a casino who loses,” says Castaneda. “Instead of walking away or being more careful, they go all out.”