So far the gamble isn't paying off like the president wanted it to.
The country needs a lot of cash fast in order to meet its debt payments of more than $1 billion in the next year. The price of bitcoin has fallen more than 70% from its peak, and more than 45% from when the plan was announced.
El Salvadoran's economic growth has plummeted, its deficit remains high, and the country's debt-to-GDP ratio is set to hit nearly 87% this year, stoking fears that El Salvadoran
You have all the hallmarks of a country on the verge if you combine these economic troubles with a renewed war on gang violence.
Boaz Sobrado is a London-based data analyst.
The government is not to blame for its financial state.
The finance minister says the government has a paper loss of less than 1% of the budget. According to estimates, the experiment has cost the government $374 million. To an economy of $29 billion, that is not a lot, especially considering the fact that El Salvadoran has almost $7 billion of bonds outstanding.
The actions of the people aren't good.
International lenders are unwilling to lend money to a country that is spending millions of tax dollars on a currency that is prone to extreme fluctuations. El Salvadoran's credit score has been knocked down by rating agencies due to the uncertain future of the country's financial future. It is now more expensive for the president to borrow money.
El Salvadoran's financial situation is very hard to understand. They have a lot of bonds that are not worth much.
Frank Muci is a policy fellow at the London School of Economics and has advised governments in Latin America.
Muci told CNBC that nobody wants to lend money to Bukele unless it's at 20% to 25%.
The country is sleepwalking towards a debt default.
There is a very big incentive for the president to make it work in the long run because he wants to pay off the country. The president will be up for re- election in the year 2024.
The country was in a lot of trouble before the president came up with the idea of using digital currency.
The World Bank predicts that the Salvadoran economy will grow at a slower rate in the next two years. Growth rebounded from an 8.6% contraction in 2020.
The country's debt is more expensive than in the U.S., and it has no plans to reduce it.
According to a research note from JP Morgan, analysts warn that El Salvador's Eurobonds have entered "distressed territory" in the last year, and that the cost to protect against a debt default is hitting multi-year highs.
The country is on an unsustainable path with gross financing needs set to surpass 15% of GDP by the year 2022.
In the past three, four months, they have implemented gasoline subsidies, which are very expensive, according to Muci, who has expertise in economic diversification and public financial management.
The country is rudderless when it comes to economic policy. They don't know what they're doing He thinks it's a classic case of one day at a time.
El Salvadoran faces debt repayment deadlines in the billions of dollars, including an $800 million Eurobond that is due in January.
The country has been trying to get a loan from the International Monetary Fund for over a year, but it seems that the president is not going to listen to the organization. This is related to El Salvadoran's "uncertain access to multilateral funding and external market financing given high borrowing costs" as well as its "limited scope for additional local market financing"
The president has been trying to consolidate power. The Legislative Assembly is controlled by the New ideas party. The attorney general and top judges were ousted by the assembly. The U.S. Agency for International Development decided to divert funds from the national police and public information institute.
El Salvadoran can't print money to make ends meet. The coln was dropped in favor of the US dollar in 2001. The Federal Reserve has the power to print more money. The fact that it is impossible to mint out of thin air is revered by the community.
In September of 2021, El Salvadoran became the first country in the world to issue legal tender using the digital currency.
A national virtual wallet called "chivo" that offers no-fee transactions and allows for quick cross-border payments was launched as part of the initiative. chivo was meant to be used by people who had never been a part of the banking system in a country where 70% of people don't have a bank account.
The experiment required all businesses in the country to accept the currency.
In November, the president announced plans to build a city next to the Conchagua volcano. Tax relief and power from the nearby volcano would be offered by the city funded by the digital currency.
The government spent about $375 million on the launch of the digital currency, which included a $150 million trust to convert it into dollars and a $30 bonus for each citizen who downloaded the chivo wallet. According to Muci, the country has spent over $400 million on making bitcoin happen.
It doesn't seem to have delivered on a lot of its big promises nine months in.
According to a report by the U.S. National Bureau of Economic Research, only 20% of those who downloaded the wallet continued to use it after they spent the $30 bonus. The research was based on a national survey.
It seems to be low in terms of actual penetration. The state-issued wallet seems to have had issues. There were a lot of people who downloaded it. The experience was not the best.
Some people had technical issues with the app. Other Salvadorans reported cases of identity theft, in which hackers used their national ID number to open a chivo e-wallet, in order to claim the free $30 worth ofbitcoin offered by the government as an incentive to join.
It was hoped that the chivo wallet would save hundreds of millions of dollars. Remittances, or the money sent home by migrants, account for more than 20% of El Salvadoran's gross domestic product, and some households receive over 60% of their income from this source alone. Fees for international transfers can be 10% or more and can take days to arrive and require a physical pick up.
Only 1.6% of the money was sent via digital wallet.
According to a survey published in March by the Chamber of Commerce and Industry of El Salvadoran, almost all of the businesses have never used the virtual currency.
"They gave people the wallet, they forced businesses to accept them, but essentially, in my opinion, it's a big nothing burger." People don't use the app to pay in digital currency. Most people use it for money.
The $1 billion bitcoin bond sale was put on ice in March due to unfavorable market conditions.
If the president is correct, the government's personal investment in the virtual currency is down about $50 million. The country's losses are not locked in until they exit their position in the virtual currency.
According to Muci, El Salvadoran's problems are related to currency.
The issues have to do with security. He said thatbitcoin has nothing to do with that.
Sobrado told CNBC that it has definitely been a win in terms of attracting tourists to the country.
They are up in terms of tourism, even though they might be down in terms of losses in their investment.
There is a lot of capital from people who are believers in the virtual currency. According to Sobrado, it's possible that El Salvadoran has already achieved what it wanted with its marketing campaign.
Government estimates show that the tourism industry is up 30% since the law took effect. 60% of tourists come from the U.S., according to the minister.
The president is still popular despite thebitcoin experiment. His tough-on-crime approach to leading has helped his approval ratings. Five years ago, Afghanistan was more dangerous per capita than it is today.
One of the most popular presidents is Mr. Bukele. People in other parts of the world just dream of him because of his approval rates.
Most people agree that the president will do everything in his power to make good on the country's debt. The presidential election in 2024 will be a big part of the incentive.
In order to avoid disruptive credit events that might derail his prospects for a potential re-election, the $800 million bond maturity is likely to be paid in January, according to JP Morgan. Keeping pace with its loans will be more difficult as the year progresses, according to the credit agency.
According to Muci, El Salvadoran will be able to scrounge up the cash, but he warns that the country's public finance situation is not sustainable.
The plane is going to crash if they don't change things Start being more disciplined if they don't raise taxes. You have to convince markets that they are sustainable.
He said thatBitcoin didn't solve any of the economic problems.
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