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El Salvador has been in the limelight of the crypto world for the last few months. The president, Najib Bukele, spearheaded one of the boldest political and economic moves of the decade. Under his leadership, El Salvador became the first country to lawfully permit bitcoin legal tender. The move sparked a wildfire in the crypto world, with many considering Bukele a trailblazer for the country. While some lauded the move as a beneficiary to the economy and the global economy, many others opposed it vehemently. However, things changed after considering the economy of the country. Within the scope of this article, we will explore these reasons in more detail.
El Salvador Pre-Legalization
El Salvador is a small Central American nation that is home to over six million people. It used the El Salvador colón as its official currency and relied on the USD. The South American state has an economic ranking below the global average. Despite being in the middle of the region, the world still perceives El Salvador as one of the poorer nations.
A Struggling Economy
El Salvador has a GDP of $54.6 billion, and 7% of its population is unemployed. Almost 20% of its GDP comes from remittances, which amount to $4.5 billion. And about 88.2% of GDP goes towards clearing public debt. Furthermore, corruption and favoritism are prominent contributors to their current economic position. Various studies indicate that corruption is a major obstacle to economic and overall development in the region. Graft cases, favoritism, and unnecessary bureaucracy have made the economy biased and burdensome. The small economy of this country tried to grow over the last few years. However, with the covid-19 ravaging the world, the economy collapsed. Many businesses reported losses as things came to a standstill. While the economy bounced back in 2021, the country remains well below the normal economic levels as inflation destroys the already diminished economy. The economy of El Salvador is struggling under the weight of harsh economic times.
The Path to Bitcoin Legalization
Given the state of the economy, president Nayib Bukele, the biggest technocrat in the country, was tasked with finding a way to revitalize the economy. The popular president urged the legislature to legalize bitcoin. Bukele cited several reasons for the bitcoin legal tender:
Reducing the Strong Reliance on the US Dollar
Before the legalization of bitcoin as a legal tender, El Salvador used the El Salvador colón. They had to remove the currency from circulation, favoring the dollar. The economic turmoil experienced before 1990 caused this change. This disruption continues to exist today. The state can no longer decide how to mint the dollar under this new currency. Thus, securing financial independence through legal tender has become a lucrative option for the state.
Attracting Foreign Investment
Many upstarts are using cryptos to fund their growth in the crypto world. Many new companies or projects have sourced funding from investors worldwide via crypto. Due to the legal status of Bitcoin, the country is well suited for hosting companies in this field. Considering that governments are cracking down on cryptos, this stance is even more favorable for such companies. Hence, by making the country available to upstarts, the country could attract investors from around the world, which would boost its economy.
Reducing Transfer Costs
The economy of El Salvador relies heavily on remittances. According to 2001 estimates, 1.5 million Salvadorians emigrated to the US. They sent 1.5 billion dollars home. The figure now stands at $4.5 billion. However, sending money home is still problematic and costly, despite the growth. Legalizing bitcoin would consequently resolve the problems of transferring money overseas.
El Salvador is a small and struggling country in South America. Recent decades have seen much political and economic turmoil in the country. This turmoil and the COVID pandemic only worsened the already derelict Salvadoran economy. However, president Najib Bukele plans to try and change the direction of this economy through the use of crypto. The technocrat hopes to turn the economy around by legalizing bitcoin. The president suggests promoting foreign investment, reducing remittance costs, and finding alternative currencies. Legalizing bitcoin could potentially resolve the issues facing the Salvadoran economy. Nevertheless, only time will tell if the country’s economy gets the boost it so desperately needs.