• The move was likely spurred by the CAR's deepening security relations with Russia. It thus appears both as a potential step towards circumventing current international sanctions against Russia and further reducing French influence by moving the CAR away from the CFA franc zone.
• The adoption of a volatile cryptocurrency will have far-reaching consequences, threatening the CAR's position in the Economic and Monetary Community of Central Africa (CEMAC) block.
• The experience of El Salvador, where Bitcoin adoption has been slow, indicates limited everyday use and rising default risk.

The CAR's adoption of bitcoin threatens its position within the CEMAC

The CAR is a member of the CEMAC region (Cameroon, Chad, CAR, Equatorial Guinea, Gabon, Congo-Brazzaville) and the CFA franc zone, with its official currency, the CFA franc, pegged to the euro and backed by the French Treasury. During a special meeting held on 6 May, the Bank of Central African States (Banque des États de l'Afrique Centrale: BEAC), the regional central bank, banned the use of cryptocurrencies in any financial transactions in the CEMAC region. This decision was designed to safeguard financial stability and preserve customer deposits, the BEAC stated. The CAR's decision to adopt the bitcoin as legal tender could thus trigger sanctions by the CEMAC, which would both limit the CAR's access to deposits held in CEMAC accounts and increase the risk of domestic debt defaults. The CAR will also face challenging bitcoin implementation issues. The CAR is a very small economy, accounting for roughly 2.6% of overall CEMAC GDP, and years of civil war has left most of the population displaced and poor. The country also lacks sufficient infrastructure (such as access to electricity, internet, and mobile coverage, combined with a large digital divide) to be able to attempt to implement a volatile cryptocurrency as a generalised form of legal tender.

Bitcoin's adoption has implications for the CAR's relationship with the International Monetary Fund (IMF)

The CAR is on an IMF staff-monitored programme (SMP) to unlock future concessional assistance under an Extended Credit Facility. Concessional funding will be required to meet pressing socio-economic and reconstruction needs. The IMF has previously stated its concerns about the adoption of bitcoin as legal tender, which could jeopardise the CAR's standing under the SMP and future disbursements, significantly exacerbating the country's problems in meeting its fiscal financing needs. Non-payment risk in the CAR for local and foreign currency debt has thus increased as a result of the bitcoin initiative, while fiscal programme implementation will become increasingly difficult.

El Salvador's pioneering use of Bitcoin indicates limited everyday use alongside increased default risk, suggesting a similar path for the CAR

El Salvador on 7 September 2021 became the first country globally to make a cryptocurrency, bitcoin, its legal tender, alongside the US dollar. Salvadoran President Nayib Bukele's initial arguments in favour of bitcoin were to increase financial inclusion, allow cheaper and faster transfer of remittances, and attract investment and income from bitcoin mining and tourism. However, all available evidence to date suggests limited adoption and use of bitcoin in El Salvador. A National Bureau of Economic Research survey, conducted in February, recorded little use of bitcoin in day-to-day transactions: only 20% of respondents added any additional funds to the government-sponsored Chivo Wallet app after spending a USD30 incentive bonus. Only 1.6 % of remittance inflows during January-April 2022 were sent via digital wallets, according to the Central Reserve Bank of El Salvador, while just 5% of Chivo users have made tax payments with the app.

The bitcoin initiative has further increased an already elevated risk of sovereign default for El Salvador

Much of the adverse fallout has been caused indirectly, through reputational damage among investors and creditors given strong IMF opposition to the move, complicating the government's financing plans. Average risk spreads over US treasuries measured 2,434 basis points on 16 May, four times wider than a year ago, clearly precluding new bond issuance for the foreseeable future and instead flagging strong expectations of debt restructuring and capital write-offs. Negotiations with the IMF regarding a three-year USD1.3-billion Extended Fund Facility have been stalled for over a year, with the legal tender status of bitcoin being a major roadblock given the risks it poses to financial stability and public finances from the lack of regulation, price volatility, and the contingent liability of free, government-backed convertibility between bitcoin and US dollars. Moreover, the government has postponed its planned USD1-billion sale of "bitcoin bonds" targeting cryptocurrency investors, to be invested in purchases of bitcoin and development of a bitcoin mining-oriented city to harness thermal energy, originally scheduled to take place in March. Even if successful, however, it would not have helped to fund the conventional budget given the planned issue's specific use of proceeds.

Posted 07 June 2022 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence and

Jeremy Smith, Sr. Economist, Economics and Country Risk, S&P Global Market Intelligence and

Thea Fourie, Director, Economics, S&P Global Market Intelligence and

Veronica Retamales Burford, Senior Research Analyst, Latin America Country Risk, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.