As El Salvador's financial problems worsen, the IMF advises the country to abandon its bitcoin plans.
The International Monetary Fund (IMF) is urging El Salvador to withdraw bitcoin's legal tender status, just four months after the Central American country adopted the cryptocurrency.
Bitcoin poses significant risks to financial stability and consumer protection, according to the IMF executive directors' final statement on El Salvador's Article IV consultation.
Directors emphasized that there are significant risks associated with the use of bitcoin, according to the statement. They urged officials to limit the scope of the bitcoin law by removing bitcoin's legal tender status.
The IMF also stated that there should be more regulatory oversight of Chivo, El Salvador's bitcoin wallet designed to be used for digital currency transactions.
"The statement on bitcoin and Chivo shows this is too close to de-dollarization for comfort," said Nathalie Marshik, Stifel Financial Corp.'s head of emerging markets sovereign research.
According to Blockworks, reactions to El Salvador's bitcoin experiment have been mixed, with some seeing it as a progressive step toward financial inclusion and others seeing it as an irresponsible gamble.
The IMF expects El Salvador's fiscal deficit to reach 5.75 percent of GDP in 2021 and around 5 percent of GDP in 2022.
In 2026, public debt is expected to reach approximately 96 percent of GDP. El Salvador is on a "unsustainable path," according to the IMF, given the circumstances.
"The IMF forecasts a primary balance for 2022, but the debt is unsustainable under current policies," Marshik explained. El Salvador requires a 3% GDP adjustment to reduce its debt to a manageable level.
The fiscal balance adjusted for net interest payments on public debt, known as the primary balance, is a key indicator for determining a government's ability to meet obligations without incurring additional debt.