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LatinNews Daily - 13 February 2023

In brief: IMF urges El Salvador to address bitcoin risks

*The International Monetary Fund (IMF) has issued a new statement following the conclusion of an Article IV consultation which estimates that El Salvador’s GDP grew 2.8% in 2022, driven by domestic demand. It says that “since March 2022, the unprecedented reduction in crime and strong remittances and tourism revenues have contributed to the robust activity and investment dynamics” and forecasts that GDP will grow by 2.4% in 2023. However, the IMF warns that vulnerabilities have “mounted in 2022” noting that “while the overall fiscal deficit narrowed to about 2.5% of GDP, international reserves fell to around two months of imports, and the stock of short-term domestic debt stands at 8.75% of GDP”. As regards the decision by the government led by President Nayib Bukele to adopt cryptocurrency bitcoin as legal tender which was implemented in September 2021, prompting alarm from IMF and credit ratings agencies, the IMF says that while risks have “not materialised due to the limited bitcoin use so far - as suggested by survey and remittances data - its use could grow given its legal tender status and new legislative reforms to encourage the use of crypto assets, including tokenised bonds.” It adds that “in this context, underlying risks to financial integrity and stability, fiscal sustainability, and consumer protection persist” and urges “greater transparency over the government’s transactions in bitcoin and the financial situation of the state-owned bitcoin-wallet (Chivo) remains essential, especially to assess the underlying fiscal contingencies and counterparty risks”.

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