Six months after El Salvador became the first nation to make bitcoin legal currency, El Salvador’s president Nayib Bukele is preparing to launch a controversial Bitcoin “volcano bond”, as early as this week.
The 10-year estimated $1 billion volcano bond is part of El Salvador’s plan to change the way the country relies on energy, as well as a way to increase the Latin American nation’s bitcoin stocks and to finance a new “bitcoin city” powered by geothermal energy.
The so-called “volcano bonds” are the first of their kind, issued by El Salvador’s state-owned energy company LaGeo on the Liquid Network, and could help El Salvador with their mounting debt.
“We believe that between March 15 and 20 is the right timing; we have the tools almost finished. But the international context will tell us…I didn’t expect the war in Ukraine,” Finance Minister Alejandro Zelaya told a local TV channel.
“If this is a failure, a lot of doors close,” Carlos Acevedo, a former president of the country’s central bank, told the Financial Times. “This issue is going to define a lot.”
In an interview with Country Focus, the IMF El Salvador team discussed the challenges that El Salvador has been facing and how the country is rebounding. The nation’s increase in public debt was brought up as a constraint to medium-term growth prospects.
“Medium-term growth rates in El Salvador to decline to around 2 percent as policy stimulus in the US wanes. This is below the historical average, and it is because of high public borrowing costs. Persistent budget deficits and continuous expansionary fiscal policies—despite the strong economy—have resulted in a rapidly growing public debt-to-GDP ratio.”
In January president Bukele took to Twitter to defend the 1 billion dollar project that will see the construction of a natural gas power plant, noting in the Twitter thread that it will “generate 380 MW of electricity, 24/7, cleaner and cheaper than other producers in the region”.
He added:
“El Salvador doesn’t have an energy deficit, in fact, we can produce twice the energy that we consume”.
The IMF has shared their concerns over El Salvador’s decision to legalise Bitcoin in September last year, emphasising the need for strict regulation and oversight, adding there are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection. In a statement, the IMF noted that El Salvador is on an “unsustainable path", adding that "El Salvador needs a 3% of GDP adjustment to get the debt to a sustainable level.”
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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