El Salvador Economic Crisis |
| Source: Wikipedia |
HISTORY
• Being geographically close to the US, EI Salvador developed dependencies on its neighbor
• This gradually led to economical, historical, and military interventions causing economic turmoil
• As the economy continued to weaken, so did its currency, the Colón. Circulation of Colón. seized by 2004 and the Dollar was adopted as its national currency
ECONOMIC POLICIES
• To reduce the strong dependence on the US dollar in its economy, bitcoin was announced as the legal tender
• This also aimed at reducing the costs of transfers and boosting local consumption
ECONOMIC POLICIES
• Since El Salvador couldn't print its own money to pay bills or boost spending, it had to cut its own spending or borrow more to make ends meet
• Instead, the president kept spending at high levels and invested the country's money into bitcoin
ECONOMIC FAILURE
• The country's bets on a rise in bitcoin's value have stalled, and the market value of El Salvador's $100 million in bitcoin holdings has dropped by about a third, raising the odds that it will default
• Large fiscal deficits and rising global interest rates have contributed to investor pessimism about El Salvador's capacity to repay its debt
CONCLUSION
• Even the IMF urged El Salvador to strip bitcoin of its status as legal tender because of its risks to financial stability
• Simply put, while Bitcoin was supposed to save the country from economic stagnation, it's causing more harm
This is happening as no one really uses bitcoin and the government keeps spending money to buy more of it, digging them deeper into debts.
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