In September 2021, President Nayib Bukele of El Salvador made a bold move: he rolled out the country’s first-ever Bitcoin policy. He touted the cryptocurrency as a way to help the 70% of his country’s population that doesn’t have bank accounts and he promised to use it to encourage financial inclusion.
As part of the strategy, El Salvador launched an exchange for its citizens to trade Bitcoin. It also enacted tax incentives for residents who use Bitcoin to buy and sell goods.
The law came into force with the hope of boosting economic growth, which has been lagging for years. The country’s GDP has fallen by 4.2% annually in the past three years, largely because of high unemployment and a weak currency.
To boost his popularity, Bukele began promoting the new cryptolaw as a way to increase financial inclusion and bolster his image as a benevolent leader who wants to help his people. Those are important goals, but it’s unclear if the policy has worked as intended.
Now, with the price of Bitcoin falling and the country’s cash reserves dwindling, it seems that Bukele may have to give up on his cryptocurrency dream. A recent report in Bloomberg reveals that the government has lost $65 million, or two-thirds of its entire stockpile of crypto tokens.
While Bukele’s losses are on paper, the real cost is borne by taxpayers. In addition to the lost money, his gamble has also cost El Salvador a chance to avoid defaulting on $667 million in debt due in January 2023 and another $1 billion in 2025, analysts say.
The dwindling Bitcoin reserve means the government has less than four months’ worth of imports, a dangerous level for an economy that depends heavily on foreign-trade dollars. It also makes it harder for the country to pay interest on its debt, which is backed by the US government and the IMF.
That’s not good news for the government, which has little hope of raising the funds it needs to stay afloat. The Central American country’s debt to GDP is already high, and its cash reserves are shrinking.
But that’s not stopping the president from buying more Bitcoins, according to a Bloomberg report released Monday. Last night, he announced that he had purchased 80 BTC at $19,000 each, adding to his previous purchases of a total of 2,301 coins.
By his own calculations, based on tweets that he’s made, the President has spent more than $104 million to acquire these tokens. At their current value, these tokens are valued at $43,719,000.
If the President continues to keep buying coins at a loss, his gamble could eat into his country’s finances even more, and it would put the government in a precarious position for the foreseeable future. The government had to sell a portion of its bonds in order to reassure markets that it was ready to avoid default, but the country’s debt to GDP remains at an alarmingly high level and cash reserves are rapidly depleting.