The International Monetary Fund announced on May 27 that it had reached a staff-level agreement with El Salvador on the first review of its 40-month Extended Fund Facility arrangement, potentially unlocking nearly $120mn for the Central American nation. However, the payout is pending sign-off by the fund's executive board, and the deal faces complications over El Salvador's continued Bitcoin purchases despite explicit IMF warnings.

"Programme performance has been strong. Key fiscal and reserve targets were met with margins, and substantial progress continues in the ambitious reform agenda in the areas of governance, transparency, and financial resilience," the IMF stated in its press release.

The agreement specifically requires that "the total amount of Bitcoin held across all government-owned wallets remains unchanged, consistent with programme commitments" while mandating the unwinding of public sector participation in the Chivo wallet by the end of July.

The Washington-based lender has expressed confidence that El Salvador is sticking to its commitment to halt Bitcoin purchases. "I can confirm that they [El Salvador] continue to comply with their commitment of non-accumulation of bitcoin by the overall fiscal sector," Rodrigo Valdes, Director of the Western Hemisphere Department at the IMF, told the press last month.

But despite such reassurances and clear stipulations, the small Central American nation appears to have violated the terms repeatedly. According to a report by crypto publication Decrypt on May 28, El Salvador has purchased eight additional bitcoins, directly contravening the conditions of the $1.4bn IMF deal greenlighted in February.

Notably, the programme requires El Salvador to make Bitcoin acceptance voluntary and to confine public sector engagement in Bitcoin-related activities and transactions.

This follows a pattern of defiance from President Nayib Bukele's administration. In March, El Salvador announced the acquisition of another bitcoin chunk, bringing the nation's strategic reserve to more than BTC6,102. At that point, El Salvador had purchased 12 bitcoins since the IMF board approval announcement, with its holdings valued at approximately $550mn.

In late April, El Salvador appeared to have broken the Bitcoin freeze ordered by the IMF yet again, with data from El Salvador's Bitcoin Office indicating that the country acquired seven Bitcoins worth over $650,000 in the seven days leading up to April 27. As of today, the country possesses nearly BTC6,200 (valued at over $671mn) according to blockchain analytics firm Arkham Intelligence, indicating further increases.

Bukele's administration now faces a critical juncture as it balances its signature Bitcoin strategy with stringent IMF compliance requirements. While the country's fiscal performance has met other programme targets, its continued cryptocurrency acquisitions could jeopardise future funding tranches and complicate El Salvador's relationship with the fund at a time when external financing remains crucial for economic stability. It remains to be seen whether the IMF will eventually become stricter in its approach to El Salvador in the face of such apparent descent.