El Salvador’s Bitcoin Investment is not Working

The country of El Salvador was betting on Bitcoin to lead it to economic salvation. However, it seems that the gamble by NayibBukele, the president of El Salvador, does not seem to be paying off the way he had expected.

Problems Arise

The crypto coffers of the El Salvadorian government have been cut in half and the adoption of bitcoin in the country has been very slow. Moreover, the country is in desperate need of cash and quickly too because it has a debt payment worth $1 billion, which is due next year. These problems come at a time when the crypto market is in turmoil and Bitcoin has lost almost 70% of its all-time high value of $69,000 that it had hit last year in November.

It has seen a drop of more than 55% since the time the Bitcoin plan was announced by Bukele. Meanwhile, the country has seen its economic growth plummet and it has a very high deficit. Moreover, the debt-to-GDP ratio, which is used for measuring how much a country owes as compared to what it generates, is also getting worse for El Salvador. Statistics indicate that it will reach 87% in 2022, which has given rise to worries that the country will not be able to fulfill its debt obligations.

When you combine these economic problems with a renewed battle against gang violence, it paints a picture of El Salvador that is close to the edge.

Bitcoin Bet Fails

Market analysts said that it is quite apparent that the Bitcoin bet the country made has failed. However, it is important to note that it is not bitcoin’s fault that El Salvador is moving towards financial ruin. The paper loss on the world’s leading crypto is around $50 million and is unrealized as yet. According to the country’s finance minister, this is only a small proportion of the national budget, less than 0.5%.

The total of the Bitcoin experiment, along with all the costs incurred, is around $374 million. This figure does not make much of a difference in the long run because there are outstanding bonds worth $7.7 billion. Again, this may not seem like much, considering that the economy is worth $29 billion. However, things do not look good.

No Support

International lenders are not willing to negotiate with El Salvador anymore because they do not want to lend money to a country that is spending it on crypto known for its volatility. The credit score of El Salvador has suffered as well because its financial future is deemed uncertain since it adopted bitcoin as legal tender.

This means that borrowing cash would now cost President NayibBukele even more than before. Analysts said that El Salvador has ended up in a very difficult place for now because they have not paid much attention to their economic policy. They believe the country will default, or have to pay interest at rates as high as 20% to 25%, as no one will lend them money otherwise.