El Salvador’s Bitcoin Adoption Experiment: Salvadorans Feel It Is a failure

Ratings agencies have downgraded El Salvador’s credit score.
Most people have not used their wallets beyond the $30 incentive.
Indicators signal ruin; however, economic doom is not certain yet.

In 2021, El Salvador became the first country to legalize Bitcoin. After adoption, the tourism industry grew by 30% and according to the tourism minister, nearly 60% of tourists are Americans. Also, the 41 year old president’s approval rating is more than 85%.

However, the economy is not exactly on a sustainable path. More than a year later, El Salvador is drowning in debt without a plan to recover. To top it off, a recent survey shows that an overwhelming majority of Salvadorans feel the plan is disastrous.

Why and how did El Salvador adopt Bitcoin?

The young president Nayib Bukele claimed that adopting Bitcoin would spur the economic engine of a country which was largely run on cash. More than 70% of the citizens did not have bank accounts when the plan was rolled out. Adopting Bitcoin would have brought this large chunk into the economy like most other developing countries.

Adopting the largest cryptocurrency by market cap would have made it easier for expatriates to transfer remittances back to relatives. Bitcoin transactions are relatively inexpensive. The president claimed that $400 million would be saved in remittance commission annually.

To realize a Bitcoin economy, the government introduced a Bitcoin wallet “Chivo” and set up Bitcoin atms across the country. Businesses were forced to accept Bitcoin payments. Awareness campaigns were conducted to teach citizens how to use the wallet and atms.

The total cost of the rollout including a $30 direct transfer to all citizens in their wallets and ‘unrealized losses in the nation’s Bitcoin portfolio’ was $425 million.

How strong is the Salvadoran economy?

The South American country has incurred a huge debt and has no clear plan to deal with it. The debt to GDP ratio is over 90% – a nightmare; The World Bank has slashed GDP growth rate projection from 2.4% in 2022 to 2.0% in 2023. Remittances account for 20% of the GDP.

Interestingly, in 2001, El Salvador replaced its currency colón with the US dollar in order to strengthen economic ties with the US and attract more foreign investment. However, as per an IMF research paper, the economy was macroeconomically healthy. Nevertheless, the ‘Dollarization’ improved the economy. Essentially, El Salvador cannot print any money.

IMF and JP Morgan have warned that the country’s economic growth plan is not sustainable. Fitch downgraded its credit score for El Salvador.

Surveys suggest Salvadorans feel the experiment is a failure

A study by El Salvador’s Chamber of Commerce shows that 86% of the businesses have never used Bitcoin for payments.

While the president claimed Chivo had 4 million users, a study by US National Bureau of Economic Research suggested that 80% users did not use their wallets after spending the $30 joining incentive.

The president’s approval ratings reflect the government’s stance on gang-violence. A renewed war on gang-violence caused that increase in ratings and not the $1 billion Bitcoin-city idea which is on hold

Looking ahead

Though JP Morgan and Fitch have given the economy poor scores, they have suggested that its near term debt could be cleared in a few years. As per analysts, if the country can cut spending on raise taxes, it may instill confidence in investors. However, given that it cannot print money at all, it is in a tricky situation. After the November midterm elections in the US, Bitcoin prices may drop. At least that’s what happened the last midterm elections. The country needs to announce a strong plan that is not completely dependent on Bitcoin.