{"id":8305,"date":"2022-07-10T14:54:24","date_gmt":"2022-07-10T09:24:24","guid":{"rendered":"https:\/\/aayushbhaskar.com\/?p=8305"},"modified":"2022-07-10T17:24:02","modified_gmt":"2022-07-10T11:54:02","slug":"el-salvador-economy-crisis","status":"publish","type":"post","link":"https:\/\/aayushbhaskar.com\/el-salvador-economy-crisis\/","title":{"rendered":"Economic Crisis About To Hit El Salvador","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"
Recently, a small Central American nation, El Salvador, again made headlines.<\/p>\n
This was due to the impending economic crisis that is going to hit the country. Last year, El Salvador became the first country to make Bitcoin a legal tender, hoping it would save the nation from the economic fallout and reduce its dependence on the US Dollar.<\/p>\n
Yet, as it turns out, El Salvador President Nayib Bukele\u2019s cryptocurrency gamble has caused severe ramifications for the country\u2019s debt crisis. Bitcoin\u2019s value has reduced to 45% since September, when Bukele launched the plan.<\/p>\n
Resultantly, the $150 million Bitcoin investment has caused an extra burden on the country\u2019s exchequer. The investment is about 4% of the country’s reserve.<\/p>\n
Now let\u2019s go deep into the discussion and understand the causes and consequences of El Salvador\u2019s bleeding economy.<\/p>\n
<\/p>\n
El Salvador is the smallest and most densely populated country in Central America. Its history is replete with constant civil wars, high crime rates, inconsistent economic growth, and natural calamities.<\/p>\n
Also known for the highest crime rates in the world, El Salvador pegged its currency, El Salvadoran Colon, with the US Dollar in 2001 to save its economy from a major collapse and with the hope of attracting massive foreign direct investment and tourists to the country.<\/p>\n
However, even after the introduction of the US Dollar, the nation\u2019s economy could not witness any major foreign investment or tourists. It was due to high corruption and crime rates. Though the country has its own domestic currency, it is rarely used by the citizens.<\/p>\n
Moreover, as the country does not have a major export market and has high imports, there is a massive burden on the balance of payment. This has caused serious deficits in the budget and high debts.<\/p>\n
Thus, President Bukele passed a law making Bitcoin the legal tender to attract higher foreign investments and reduce its reliance on the US Dollar and foreign remittances as a reserve source.<\/p>\n
The reasoning was that the rise in Bitcoin\u2019s value would help the country reduce its debts and maintain the balance of payment.<\/p>\n
With this, El Salvador became the first country to recognize Bitcoin as an official currency. The government further announced that anyone could get citizenship in El Salvador by investing 3 Bitcoins in the country.<\/p>\n
It also devised a plan to build a volcano-powered crypto mining center and city and launch the first bitcoin-powered sovereign bonds<\/a>.<\/p>\n Even after all these initiatives, the experiment seems to have failed and has caused a further burden on the common people of the country. Now the question is how the Bitcoin-induced economic crisis has led the country to an almost economic collapse.<\/p>\n <\/p>\n El Salvador was already suffering from a major economic crisis before the Bitcoin Blunder. And making Bitcoin legal tender only added fuel to the fire.<\/p>\n The country\u2019s national debt has increased from $19 billion in December 2019 to more than $24 billion in 2022, with the debt to GDP ratio reaching as high as 87%.<\/p>\n Though the Bitcoin investment represents only 4% of the country\u2019s reserve, it certainly has affected the economy of El Salvador. This becomes disastrous for a country whose GDP is only $25 billion.<\/p>\n Apart from the debt repayment crisis, the falling US share market, along with rising inflation around the world, has caused a further headache for the country. As a result, major credit agencies have downgraded the country\u2019s credit rating. Now it has become more difficult to invite foreign investment.<\/p>\n For instance, Moodys has reduced the credit rating of El Salvador to Caa3, indicating that the country is on the verge of becoming a defaulter and is not a safer option for investments. Although remittances from abroad support about 25% of the economic activity, violence, and insecurity adversely affect the productivity and long-term growth of the nation.<\/p>\n Furthermore, Bitcoin Gamble has lessened the confidence of the International Monetary Fund to come in support of the country. El Salvador asked for $ 1.3 billion from the IMF to balance its current account deficit and debt repayment.<\/p>\n However, the organization has asked the government to remove Bitcoin as legal tender. It further asked to bring about economic changes to receive a bailout package.<\/p>\nWhat Led To This Economic Crisis<\/h2>\n