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 cryptocurrency slide on Nov. 17 with a pledge that the government would buy one Bitcoin every day in the future. On Nov. 22, Bukele’s administration sent a bill to Congress in El Salvador that would allow him to sell $1 billion in so-called “volcano bonds” — government debt, denominated in US dollars and paying $6 .5% a year to bondholders – to buy even more cryptocurrency and build a coastal “Bitcoin City”.
It may be difficult to understand why Bukele remains so enthusiastic about a policy that has been, by almost every measure, a disaster. Bukele’s attempt to get Salvadorans to use the notoriously volatile cryptocurrency has made the country look like a much riskier place to invest. The policy stalled 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 been looking for alternative sources of cash, announcing new trade talks with China on Nov. 9. But few economists believe Salvadoran Vice President Félix Ulloa’s claim that China is willing to help El Salvador with its $21 billion debt burden. owes to foreign lenders. If it can’t find new creditors to help pay down that debt, El Salvador runs the risk of default early next year.
Although Bukele has declined to disclose how much taxpayer money he has spent on Bitcoin, the best guess, based on his buyout announcements, is $107 million, with an additional $200 million in administration and infrastructure, equivalent to nearly 4%. of the developing country’s 2023 budget. El Salvador’s Bitcoin holdings are now worth less than $40 million.
To be fair, Salvadorans aren’t that keen on Bitcoin: An in-person survey of 1,269 residents released by José Simeón Cañas Central American University (UCA) in October found that less than a quarter of respondents had used the cryptocurrency in 2022. Only the 17% said the Bitcoin launch was a success, while 66% said it was a failure. And 77% want Bukele to stop using public funds to buy Bitcoin.
A government employee is seen at a Chivo state e-wallet ATM in San Salvador, Nov. 17, 2022.
Marvin Recinos—AFP/Getty Images
Still, Bukele’s Bitcoin policy hasn’t hurt his approval rating, which has remained reliably above 85% since he took office in 2019. Indeed, the cryptocurrency is likely giving the president exactly what he wants. On the global stage, Bitcoin has drawn media attention from El Salvador’s longstanding problem with gang violence and the authoritarian moves Bukele has made to address it, including mass arrests, ousting of opposing supreme court judges to his agenda and launch an unconstitutional bid for re-election in 2024. At home, Bitcoin is a key part of the narrative Bukele is pushing, both of El Salvador – as a rejuvenated and innovative country, offering new opportunities to young Salvadorans – and of his presidency. He doesn’t present himself as a classic strongman, 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, a Central America analyst at Crisis Group. “It’s Bukele’s top [goal] to rename the country,” he says. “And he doesn’t seem like someone who can admit to failure. He will go on to the last consequences of this experiment.
Why Salvadorans don’t care about Bitcoin
Most credit the president’s extensive crackdown on gang violence for his sky-high approval ratings. Bukele oversaw the arrest of more than 50,000 suspected gang members and a dramatic drop in El Salvador’s murder 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 pushback from civil society has been relatively weak, Breda says, with Bukele successfully dismissing protest groups and critical media outlets as puppets of the two establishment parties that ruled El Salvador for three decades before him.
While most Salvadorans don’t like Bitcoin, they view the policy more as Bukele’s eccentricity than a serious threat to economic security, says Ricardo Castaneda, a San Salvador-based economist at the Central American Institute for Fiscal Studies. Growing concern about public finances has not yet translated into serious economic pain, he says: The government has protected the population from the worst global inflation by subsidizing petrol prices. And remittances from the United States, which make up a staggering 26.7% of El Salvador’s GDP, have not slowed down.
Soldiers listen as El Salvador’s President Nayib Bukele addresses them near a military barracks on the outskirts of San Juan Opico, west of San Salvador, November 23, 2022.
Marvin Recinos—AFP/Getty Images
Bukele, meanwhile, insists that Bitcoin is the long-term solution to El Salvador’s economic woes. Like most cryptocurrency enthusiasts, he says the price will rise soon and eventually bring huge profits to El Salvador. Meanwhile, the President’s Twitter account shows an endless stream of retweets from foreign crypto influencers: they celebrate El Salvador’s coffee and beaches and share stories of Salvadorans who left their country decades ago and now, ostensibly 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 parts of that debt using its central bank reserves, in the hope of inspiring enough confidence in the market to allow it to sell new bonds. Analysts say such moves could help El Salvador avoid default next year. But with shrinking cash reserves and unsustainably high levels of debt to pay, the risk will remain.
If Bukele can’t find buyers for his “volcanic bonds” or another way to plug the fiscal hole, he may be forced to return to negotiations with the IMF. The lender likely made the loan conditional on Bukele by removing Bitcoin as legal tender and introducing stricter regulations on the use of cryptocurrencies, to reduce the risk of criminal groups using El Salvador to launder money.
Bukele will agree to those terms only when the economy starts to struggle enough for Salvadorans to hear it, according to Castaneda. “There’s already a small crack there,” he says, noting that 58% of respondents to the October UCA poll identified El Salvador’s biggest problem in the economy: a 15% increase since May and the highest percentage of the last decade. (The drop in crime concern probably helped.) “If things don’t improve, that crack will get bigger and bigger, and then the cheers will turn to boos.”
Until then, Bukele will likely continue to roll the dice on Bitcoin. “He’s like a gambler in a casino that he’s losing,” Castaneda says. “Instead of walking away or being more careful, they go all in.”
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