El Salvador is approaching a second review of its IMF loan program

El Salvador, a small country in Central America, is on the threshold of a significant milestone in its economic relationship with the International Monetary Fund (IMF). In the second review of its 40-month Extended Fund Facility (EFF), the IMF positively assessed the country's economic performance, opening new horizons for extending the credit line. However, despite the optimistic outlook, the issue of Bitcoin remains a focus for both the IMF and the Salvadoran government.

Economic Growth and Its Causes

According to Rodrigo Torres, IMF Mission Chief in El Salvador, the country's economy is growing faster than expected. Key factors contributing to this growth include:

- Increased Confidence: Increased investor and public confidence in the government's economic policies.
- Record Remittances: El Salvador receives significant remittances from its citizens working abroad, fueling increased consumer spending.
- Active Investment: Attracting foreign investment in various sectors of the economy.

The IMF projects El Salvador's real gross domestic product (GDP) growth to be around 4% this year, with "very good prospects" for 2026.

Progress in Fiscal Policy

The IMF also noted positive changes in the country's fiscal policy. The authorities' commitment to fiscal consolidation remains strong, as evidenced by the following aspects:

- Primary Balance Target: This is on track for end-2025, demonstrating the stability of the financial system.
- Budget for 2026: The approved budget envisages further deficit reduction, which will allow for expanded social spending and the accumulation of reserves.

The Fund estimates that these measures will help reduce domestic borrowing and strengthen the country's financial stability.

Structural Reforms and Their Importance

The IMF paid special attention to the structural reforms implemented in El Salvador. These include:

- Actuarial Pension Study: This study aims to improve the pension system and its sustainability.
- Medium-Term Fiscal Strategy: The adoption of this strategy allows for more effective management of public finances.
- Financial Stability Reform: Includes new rules for bank resolution, crisis management, and a deposit guarantee system.

Furthermore, El Salvador has implemented Basel III standards, which strengthens bank liquidity, and adopted a new anti-money laundering and combating the financing of terrorism (AML/CFT) law, bringing regulations closer to international standards.

Bitcoin: A Challenge for the IMF and the Government

Despite positive economic indicators, the Bitcoin issue remains a major stumbling block in relations between El Salvador and the IMF. Since adopting Bitcoin as legal tender in the country, the government has faced a number of challenges, including:

- Asset Volatility: Bitcoin is subject to significant price fluctuations, posing risks to financial stability.
- IMF Requirements: The regulator is requiring the government to sell a portion of its Bitcoin holdings to secure further financing, raising debate about the appropriateness of this measure.

In Conclusion

El Salvador is at an important stage in its economic development, and the IMF's positive assessment opens new opportunities for the country. However, despite economic growth and progress in fiscal policy, the Bitcoin issue remains relevant and requires careful consideration. The government needs to find a balance between innovation and financial stability to ensure the country's sustainable development in the future.