El Salvador Revises Bitcoin Law to Limit Public Sector Exposure, Secures $3.5B Financing Deal Including IMF Support

El Salvador has reached a significant milestone in its financial and economic reform efforts by securing $3.5 billion in financing following revisions to its Bitcoin law that limit public sector exposure. This financing includes a $1.4 billion Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF), as well as contributions from the World Bank, the Inter-American Development Bank, and other regional development banks. Mitigating Bitcoin-Related Risks A key aspect of this deal is a revised approach to Bitcoin, where its use in the private sector will now be voluntary, and public sector involvement in Bitcoin-related activities will be scaled back. Additionally, Public taxes will continue to be paid exclusively in U.S. dollars.  These changes also include gradually unwinding its role in the Chivo e-wallet platform. Per IMF, legal reforms will ensure robust regulation and supervision of digital assets, prioritizing financial stability and consumer protection. IMF Long Urge on Bitcoin Risks El Salvador’s decision to adopt Bitcoin as legal tender in 2021 faced repeated criticism from the IMF. The global financial institution has warned the government on multiple occasions about the potential fiscal risks and negative financial consequences of fully embracing Bitcoin. Per an October 4 report, the IMF reiterated its concerns regarding the widespread use of Bitcoin in the country, encouraging a more cautious approach to the crypto. At the time, Julie Kozack, the IMF’s Director of Communications, confirmed that the agency addressed concerns about El Salvador’s growing exposure to Bitcoin. The IMF has urged tighter controls on Bitcoin usage and more rigorous oversight to minimize the public sector’s engagement with the digital asset. Strengthening Fiscal and Economic Stability Notably, the latest financing agreement aims to enhance El Salvador’s fiscal and external stability while supporting inclusive growth. The IMF has outlined a fiscal consolidation strategy to improve the country’s primary balance by 3.5 percent of GDP over three years. This effort includes measures already incorporated into the 2025 budget, such as reducing the wage bill and government spending while protecting vulnerable groups and prioritizing essential public investments. Additionally, El Salvador will implement structural reforms to address public debt, projected to peak at 85 percent of GDP in 2024. Efforts to modernize the civil service, ensure pension system sustainability, and increase revenue mobilization will form the backbone of this strategy. Transparency and Reserve Buffers Transparency and governance improvements are central to the reform agenda. Early efforts include enhancing fiscal responsibility frameworks and strengthening anti-corruption measures.  These steps will involve more detailed reporting of debt, procurement contracts, and state-owned enterprise activities. The government also plans to modernize its infrastructure and adopt climate adaptation strategies to bolster the business environment.