El Salvador’s Financial Outlook: A Shift Towards Fiscal Independence

The president of El Salvador, Nayib Bukele, has made a significant announcement regarding the country’s fiscal policy. During the commemoration of the 203rd anniversary of El Salvador’s independence, Bukele declared that he would present a deficit-free budget for 2025 to the Legislative Assembly. This is a noteworthy development, as it marks the first time in decades that the country is poised to operate without relying on debt to cover current spending.

Bukele emphasized his administration’s commitment to financial independence, stating, “I announce that this September 30 we will present before the Legislative Assembly for the first time in decades the first fully financed budget, without the need to take a single cent of debt for current spending.” He further elaborated that “El Salvador will no longer spend more than it produces annually.” This statement indicates a shift in fiscal responsibility and aims to foster economic stability.

In detail, Bukele’s plan posits that the country will not only avoid new debts but will also manage to pay existing liabilities from its own production. “We will not even lend money to pay the interest on the debts that we inherited; we will even pay that from our own production,” he noted. This proactive approach suggests a strong focus on generating revenue through local means rather than relying on external financing.

El Salvador’s Finance Minister, Jerson Posada, supported Bukele’s statement by highlighting that the upcoming budget will not involve issuing any debt, whether local or foreign. According to Posada, “it will be the first time in decades that the country will have a budget that will not issue a single cent of debt.” This move is expected to enhance the nation’s financial health and promote long-term economic growth.

Currently, Bukele enjoys an overwhelming majority in the Legislative Assembly, holding 57 of the 60 total seats. His party, Nuevas Ideas, controls 54 seats, while his allies occupy the remaining three. This political strength could facilitate the passage of the proposed budget and other significant reforms.

To provide context, the 2024 budget had a gap of $338 million out of a total spending plan of $9.1 billion. This deficit highlights the ongoing financial challenges that El Salvador faces. When Bukele assumed office in 2019, the budget deficit was approximately $1.2 billion, illustrating the need for strategic fiscal management.

One notable constraint for El Salvador is its inability to print money, as the country adopted the U.S. dollar as legal tender in 2001. This decision has led to significant limitations in monetary policy, particularly in times of financial distress. In a bid to innovate, El Salvador famously introduced bitcoin as legal tender in 2021, although this move has attracted mixed reactions both domestically and internationally.

Despite the ambitious adoption of bitcoin, there are no official records detailing the extent of the country’s bitcoin holdings. However, the website NayibTracker, which tracks Bukele’s bitcoin-related announcements, indicates that El Salvador currently holds approximately 5,874 bitcoins, valued at around $331.4 million. This figure represents an unrealized gain of 32.6%, or about $43 million, showcasing the volatile nature of cryptocurrency investments.

In a candid acknowledgment last month, Bukele admitted, “Bitcoin hasn’t had the widespread adoption we hoped for … it could have worked better, and there is still time to make some improvements, but it hasn’t resulted in anything negative.” This statement reflects the ongoing debate about the viability of cryptocurrency as a mainstream currency and its implications for the Salvadoran economy.

Additionally, the International Monetary Fund (IMF) recently announced that it has engaged in discussions with Salvadoran authorities regarding a potential program to support the country’s economic policies. The IMF’s focus is on strengthening public finances, enhancing bank reserve buffers, improving governance and transparency, and mitigating risks associated with bitcoin. These discussions indicate a critical need for a balanced approach to managing both traditional and digital financial assets.

As El Salvador navigates these complex financial landscapes, the upcoming budget proposal set for September 30 will be a pivotal moment. It represents not only an opportunity for fiscal reform but also a chance for the country to redefine its economic identity on the global stage.