El Salvador, under the leadership of President Naib Bukala, made history when it became the first country to legalize Bitcoin. More than a year has passed since then and the experiment is far from successful. 375 million dollars have been invested and 60 million dollars have already been lost. Disappointment and uncertainty overwhelm the small country located in Central America, and no critical issue in the difficult economic situation of 6.5 million citizens has been answered.
The Bitcoin currency received legal status in El Salvador in June 2021 after the Congress voted in favor of the bill submitted by President Bucala. El Salvador’s economy at the time was mainly run on cash, as only about 30% of the citizens had bank accounts or credit cards, with the rest of the citizens not being part of the financial system. Remittances outside the country, carried out by immigrants, then accounted for more than 20% of its gross domestic product. The purpose of the law was to help people making money transfers with the high fees.
Bitcoin supporters around the world, of course, supported the move, and even treated the event as an image changer. In contrast, critics focused on the fact that Bitcoin is known for its wild volatility, and therefore is not suitable to function as an official currency.
Before long, the International Monetary Fund joined the critics and openly warned against the unprecedented move. El Salvador was saddled with mounting debt and faced with high payments on sovereign bonds, so President Bukala announced a $1 billion issuance of bitcoin-backed bonds. The International Monetary Fund continued to pressure El Salvador to drop the experiment that didn’t take off and publicly urged it to do so, which it failed to do. Even the remaining hedge funds that were still willing to help the country refinance its debt.
In less than three years, Bukala’s government added another 5 billion to the debt of the tiny economy equal to 28 billion dollars, thus bringing the public debt to almost 86% of GDP. This budget deficit was equal to 5.6% of GDP the previous year, and is expected to be No less big this year, so say economists.
Bitcoin was supposed to save the economy but failed because almost no one uses it. Residents testify that although it is the hottest topic to talk about, most people only talk, and do not adopt it as a currency. According to surveys published earlier this year, although the government spent more than $200 million on Bitcoin ATMs and an electronic wallet that gave each account holder $30 in Bitcoin as a sign-up gift – most users used the money they received as a gift to purchase products or converted it to dollars.
But Bokla’s government continued to spend money and buy more and more. Bokla promised to build the world’s first crypto city, as a metropolis powered by energy from a nearby volcano, with an airport, residential and commercial areas, and a central square designed to look like a bitcoin symbol from the sky. In addition, President Bukala promised that “Bitcoin City” will be a tax haven for crypto investors and miners.
However, the “Reuters” news agency reveals the huge gap that has opened up in the year that has passed since the promises were put on the air. In a recent visit to the shadow area of the Conchagua volcano in the east of the country, there were no heavy machinery, construction workers or raw materials to be seen to suggest any progress towards the completion of the vision.
One of the main problems is that the decline in the value of Bitcoin and other cryptocurrencies has kept investors away. In the year since the country adopted Bitcoin as an official currency, it has lost about 60% of its value, from $47,000 per Bitcoin to about $19,000. El Salvador still faces sagging economic growth and a high deficit. El Salvador’s debt-to-GDP ratio — a key measure used to compare what a country owes with what it produces — is set to hit nearly 87 percent this year, raising concerns that the nation is ill-equipped to service its loan obligations.
Data published in “Bloomberg” show that El Salvador is at the top of the ranking of emerging market countries vulnerable to insolvency. Even as it retires some of its debts, the country’s domestic and multilateral obligations pose a real threat, in part because the world’s biggest lenders are reluctant to give cash to a country betting its future on one of its most volatile assets.
“The government describes the developments as successful, but most local commentators and international observers feel cheated,” the resident of the country told CNBC. “It seems that most people used the digital wallet mainly to get the free money from the government, but did not use it regularly given the volatility and fees.” In addition, many large companies still advertise that they accept bitcoin inputs, but provide various excuses for not accepting the currency, including regretting that their system is down or that the bitcoin wallet is not in use. Big chains like McDonald’s, Starbucks and most mall merchants will accept Bitcoin – but most people, as mentioned, don’t use it. “It’s mostly tourists who use Bitcoin,” she adds.