San Salvador, 22 February 2022 (TDI): The International Monetary Fund (IMF) reports that El Salvador’s recovery will remain constrained amidst increasing risk associated with public debt which will greatly impact medium-term growth and growing financial needs.

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Alina Carare, part of the IMF El Salvador team, reports that GDP is expected to grow by just 3.2% in 2022 down from 10% in 2021. This drop is mainly due to an increase in external demand.

GDP growth rate remains low despite the country having some of the best vaccination rates in all of South America despite its dense population.

The US real GDP growth rate is also an important facet of El Salvador’s growth as one-fifth of El Salvador’s population lives in the US and sends money back as remittance which is a major part of the economy.

In 2021, this contributed to 25% of the country’s economy. The medium-term growth rate is expected to decline to 2% this is mainly due to changes in US policy stimulus and high public borrowing costs.

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Persistent budget deficits and continuous expansionary fiscal policies have caused the public debt-to-GDP ratio to rise immensely and unless actions are taken to curtail this, public debt will continue to grow.

The IMF El Salvador team suggests a permanent reduction in the fiscal deficit over a 3-year period which will cause the debt-to-GDP ratio to trend downward.

The team also weighed the options of making bitcoin a legal tender in the country, but given its volatility, they deemed it as too much of a risk in the short term.

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These risks include the exposure of banks and other financial institutions to price fluctuations. Additionally, crypto-assets can be used to elicit money for terror financing and for the evasion of tax.

Lastly, households and firms who store wealth in crypto assets could lose a large chunk of their savings if prices were to trend downwards.