Caribbean & Central America - April 2025

On 26 February the executive board of the International Monetary Fund (IMF) confirmed that it had approved a financing agreement worth US$1.4bn for El Salvador.

The deal is a 40-month arrangement under the Extended Fund Facility (EFF), which was agreed in December 2024 following almost four years of negotiations. It was delayed by IMF concerns around President Nayib Bukele’s decision to make the cryptocurrency bitcoin legal tender alongside the US dollar, El Salvador’s official currency, as well as a lack of financial transparency and the degradation of the rule of law during his time in office.

In a report laying out the board’s endorsement of the plan, the IMF said that these concerns had been relieved by a number of “prior actions” undertaken by Bukele. This includes the disclosure of financial statements from government agencies; reforms to the bitcoin law; increased transparency around public investments in bitcoin; and a new anti-corruption law which stipulates that high-level officials must disclose their assets.

The report highlighted the fact that El Salvador’s economy has been expanding steadily on the back of robust remittance inflows and tourism and a “greatly improved security situation”. Inflation has eased, external deficits have narrowed, and some debt rescheduling has reduced near-term financial needs. However it underlines that the country continues to face deep macroeconomic imbalances, high debt levels, and barriers to investment and productivity. 

The EFF package is therefore designed to support growth and resilience by rebuilding financial buffers, improving public finances and boosting governance and transparency while reducing bitcoin-associated risks, according to the IMF. Of the total US$1.4bn, 60% of the funds will be used to finance the country’s fiscal deficit, build a central bank liquidity buffer and other forms of budget support, while the other 40% is set to be used to increase international reserves.

At the same time, El Salvador is committed to improving the primary fiscal balance by 3.5% of GDP over the 40-month programme, including a 1.7% adjustment this year. Savings will be made by cutting the public sector wage bill, a process that already began with measures included in the 2025 budget, such as banning pay rises and ending a wage indexation mechanism known as the “escalafón” for all but the lowest earners in the health and education sectors. Spending on goods and services will also be reduced, as will cash transfers to local authorities. Further reforms of the civil service and the country’s pension system will also be required, according to the IMF, and the deal stipulates that a pension reform should be implemented by 2026. This will likely involve reducing pension payments or eliminating some specific pension schemes.

The deal also means that the use of bitcoin – which became legal tender in 2021 - must become voluntary (in effect taking away its formal legal tender status), as well as requiring that taxes be paid exclusively in US dollars. The agreement will also limit “public sector engagement in bitcoin-related activities and transactions,” prohibiting further bitcoin purchases for the duration of the programme.

In the short-term, the agreement reduces the risk of a sovereign default in El Salvador, staving off the possibility of an economic crisis. In the medium-term, the idea is to strengthen governance and transparency in order to improve the business climate and attract more investment and external financing. The IMF predicts that the Inter-American Development Bank (IDB), the World Bank, the Central American development bank (BCIE) and the Latin American development bank (CAF) could provide a further US$2.2bn over the course of the programme. 

The IMF also believes that the programme will allow El Salvador to access international capital markets at more affordable interest rates. This would make it easier to address shortfalls in infrastructure and human capital that the IMF says are holding back development. Bukele has already announced a raft of infrastructure projects in the east of the country, such as a new airport in La Unión, the expansion of the La Unión port and the expansion of the road network.

However, despite stipulating that at least 1.5% of GDP be spent on social programmes, the agreement requires cuts to public spending which will likely worsen public services such as health and education. Job losses and the required pension reform will also have a negative impact on the finances of a significant number of households. Rising unemployment and poverty due to austerity measures will likely hit Bukele’s approval ratings and could increase the risk of social unrest.

However Bukele is currently among the most popular leaders in Latin America and his Nuevas Ideas party dominates state institutions, limiting the possibilities for organised political opposition. Bukele’s increasing willingness to crack down on dissent will also limit the capacity of civil society to organise protests and demonstrations, meaning that the deal is unlikely to loosen his grip on power.

At the same time, there is a possibility that Bukele puts the future of the deal at risk. In recent weeks the president has announced on various occasions that the government had acquired more bitcoin, in a clear violation of the terms of the IMF agreement, and said that he was also planning more purchases in the future.

The Salvadorean president may be hoping that his close relationship with US President Donald Trump, who is also known to be favourable to cryptocurrencies, will limit any pushback from the Fund. For its part, the IMF says that Bukele’s “strong and stable” relationship with Washington will make for “a new, improved business and investment climate,” which it believes will attract significant investment in residential, commercial and hospitality developments. 

Looking ahead, it seems unlikely that the IMF will punish Bukele if he continues to flout the terms of the agreement. As a result, the Fund will strengthen his political position by reducing the risk of an economic crisis and boosting his legitimacy, giving the Bukele administration an opportunity to improve El Salvador’s economic prospects by attracting investment and external financing for key projects. Although the IMF claims that the agreement will improve governance and transparency, this is unlikely to be the case given Bukele’s control over state institutions. While this will increase corruption risks, it is unlikely to put off those investors who feel that they can secure deals by negotiating directly with the president. 

As a result, the deal looks set to enable the further consolidation of power by Bukele and his allies, furthering the ongoing process of democratic backsliding in El Salvador. It will also likely lead to increasing inequality as the Salvadorean elite linked to Bukele benefit from increased investment and financing while ordinary households suffer the negative effects of austerity. While it is possible that more spending on infrastructure attracts investors, it is unlikely that many well-paid, high-quality jobs will be created unless Bukele succeeds in improving the education system, a considerable challenge which would take time and money to overcome even if the political will were there.

IDB loan

On 25 March El Salvador’s 60-member unicameral national legislature approved a new US$500m loan from the Inter-American Development Bank (IDB) aimed at advancing macroeconomic and fiscal sustainability. It followed the recent agreement reached by the Nayib Bukele government and the International Monetary Fund (IMF). According to an IDB press release dated 20 March, this loan will provide the country with the fiscal space “to advance on reforms to increase tax revenue, reduce public debt, rebuild international reserves and improve financial governance and integrity”. It notes that the loan has a seven-year maturity, a three-year grace period and an interest rate based on the Secured Overnight Financing Rate (SOFR).