President Nayib Bukele has bet big on bitcoin to fix El Salvador’s struggling economy and is forging ahead with a scheme to mine the cryptocurrency.
Bitcoin may only be worth around half what it was at its historic peak in November 2021, but Bukele is apparently still a believer. On 5 June, a firm named Volcano Energy announced plans to build a 241 megawatt renewable energy facility in Metapán municipality, Santa Ana department, in order to establish “one of the world’s largest bitcoin mining farms”.
According to a company statement, the Salvadorean government “will play a crucial role in the planning and execution of this initiative, securing a preferred participation equivalent to 23% of the revenues. The investors will own 27%, and the remaining 50% will be reinvested in expanding energy production capacity and advancing bitcoin mining”. The scheme has received funding from Hong Kong-based firm Tether, which operates the fintech platform tether.to.
According to Volcano Energy CEO Josué López, the funding arrangement will benefit the Salvadorean government. “This exchange of equity for economic freedom will enable El Salvador to reap the benefits of this project without having to spend a single penny,” López told Forbes in an article published on 11 June. However, it is worth pointing out that the project is still in its early stages. Although a location has been found, the plant designs, approval of engineering plans, and other permissions still need to be addressed.
Despite Volcano Energy’s claim that “El Salvador’s rapid progress towards economic freedom and self-reliance is gaining momentum,” it could be months before the project comes into operation, and revenues will depend on the price of the notoriously volatile bitcoin. Even if the price skyrockets, the government’s share of revenue will not make a significant contribution to public finances. More certain is the fact that the country’s economy is in need of a shot in the arm. Relief had looked to be coming in the form of a deal with the International Monetary Fund (IMF), but these plans were scuppered at least in part by Bukele’s decision to make bitcoin legal tender in September 2021.
For now it seems that Bukele is doubling down on his attempt to fix the economy without relying on an international institution like the IMF, but there are signs that his efforts are becoming increasingly desperate as he has blocked the release of key economic data. In the meantime, poverty rates are rising [EB-23-03] and many Salvadoreans are failing to see any positive impact from the bitcoin experiment on their daily lives.
Bukele blocks IMF report
El Salvador’s complex relationship with the IMF took its latest turn in April, when the Bukele government blocked the publication of the lender’s latest report on the country’s finances.
Under normal circumstances, the IMF would publish the results of a fact-finding mission to a country. These reports generally highlight areas of progress, or flag issues of concern. However, in El Salvador’s case, “the authorities have not consented to publication of the staff report and the related press release,” reads a statement from the IMF.
This raises questions over what Bukele is trying to hide and is a particular concern given longstanding criticism over a lack of transparency during his time in office. In an article published 20 April, economist Carlos Argueta told local media outlet El Faro that the report may have contained data on debt, inflation, and growth that is “not convenient” for Bukele. In the same article, El Faro reported that sources told its journalists that the move is “a bad sign about the transparency of the Salvadorean government,” as the country has joined a select club of countries that have blocked IMF reports in the last three years comprising Antigua and Barbuda, Tajikistan, Laos, Turkmenistan, Azerbaijan, and Eritrea.
It also adds to the intrigue as to whether El Salvador and the IMF will reach an agreement to help relieve the country’s fiscal pressures. While Bukele appears intent on using bitcoin to boost the economy, behind the scenes the two parties continue to communicate, according to Nigel Chalk, acting director for the Western Hemisphere at the IMF. “We're engaging with the country authorities in El Salvador. We've actually been talking to them for some time,” said Chalk at a press conference on 13 April. “So there is a potential for a programme there,” he said, adding that “we’re willing to help”. With Bukele no doubt mindful of the need to improve the country’s fiscal situation ahead of the 2024 presidential elections, it seems unlikely that a deal with the IMF is on the cards, although it appears that the lender’s door remains open if Bukele decides to change tack.
Bitcoin underused
A poll released by Instituto Universitario de Opinión Pública de la Universidad Centroamericana (Iudop) on 26 June showed that bitcoin had failed to win over El Salvador’s public since it was adopted. According to the Iudop poll, as many as 71.1% of respondents said that it had done ‘nothing’ to improve their economic situation, while 13.8% said it had done ‘little’, 5.7% ‘some’, and 4.3% ‘a lot’. Only 2% of total remittances from abroad are transferred via crypto wallets.
