Economy
What the crypto collapse means for El Salvador's economy – South Carolina Public Radio
ADRIAN FLORIDO, HOST:
The recent collapse in the value of cryptocurrencies has left a lot of investors in those digital assets in a lot of pain. The collapse is also causing trouble in El Salvador, whose president, Nayib Bukele, last year adopted bitcoin as one of the country’s legal tenders alongside the U.S. dollar and has invested more than $100 million in bitcoin. To help us better understand what this could mean for El Salvador’s economy, we’re joined by Julio Sevilla. He’s an associate professor at the Terry College of Business at the University of Georgia. Julio Sevilla, welcome to ALL THINGS CONSIDERED.
JULIO SEVILLA: How are you, Adrian? Thanks for inviting me.
FLORIDO: Thanks for joining us. El Salvador was the first country to adopt bitcoin as an official currency. Can you remind us why President Nayib Bukele thought this was a good idea?
SEVILLA: Yes. So there were two reasons that the president provided often for this endeavor. One of them was that he wanted the people of El Salvador to have more access to technology and financing because many of them don’t have bank accounts, and he didn’t want them to only rely on cash. However, what has been seen is that these people are less likely to be using bitcoin. The other reason is that he thought it was an excellent investment for El Salvador because at the moment that he started with this plan last year, bitcoin and other cryptos were really booming, so he thought he was creating economic opportunities for El Salvador.
FLORIDO: Well, the president has invested more than $100 million in bitcoin. How much money does that represent for a country as small as El Salvador?
SEVILLA: So even for a country that is small for El Salvador, it’s not necessarily a large amount. The president took out $150 million from the reserves of the country to invest in these projects of bitcoin, and that represents around 4% of the reserves. So it is obviously not an amount that they can take for granted, but it’s not an amount that will necessarily, you know, bankrupt the country. The GDP is $25 billion right now. The debt of the country is more than $20 billion – so a very small amount. But still, you cannot really afford to make bad investments when your finances are precarious to start with.
FLORIDO: Do you have a sense of how everyday Salvadorans are feeling about the president’s investment in bitcoin?
SEVILLA: So it doesn’t seem to be a popular idea, but the plan of really popularizing bitcoin in the country hasn’t been successful. Just around two-thirds of the population downloaded the app. And even though they were offered $30 just for signing up – and based on some measures, just around 20% of those that signed up to the app are currently using it. So the idea of bitcoin doesn’t seem to be very popular among the majority of the people of El Salvador.
FLORIDO: Has Bukele faced any resistance from within his government to his decisions on bitcoin?
SEVILLA: The reality is that currently, the president doesn’t have a lot of checks in government. Interestingly, his popularity, at least until recently, continued to go up to a level of the 70s, 80%. So in Congress, basically, he can do anything he wants because, you know, his party has the qualified majority, and his legislators are very loyal to him. He actually swept the Supreme Court, the justices that were there before, you know, he was elected – he removed them with loyalists. So at this point, he controls the executive, the legislative and also the judicial power. So unfortunately, there’s no checks there. And that’s why he’s able to, you know, take these eccentric initiatives without much pushback.
FLORIDO: It sounds like the country’s economy is not going to collapse if bitcoin were totally to implode. But El Salvador has had a struggling economy for years. And I wonder if President Bukele’s devotion to bitcoin might have other consequences for the economy.
SEVILLA: It definitely does. But there are other repercussions from these decisions. For example, El Salvador is heavily in debt, and the president has been trying to negotiate with the International Monetary Fund to get this financing. But they have expressed that they are concerned with, in general, how the country is being managed with the fact that the president, you know, has no checks in the Supreme Court and that he is implementing these outlandish initiatives. But El Salvador has inflicted this damage on its own.
FLORIDO: I’ve been speaking with Julio Sevilla. He’s an associate professor at the University of Georgia’s Terry College of Business. Thank you so much for joining us.
SEVILLA: Thank you. Transcript provided by NPR, Copyright NPR.
Economy
Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Economy
Opinion: Higher capital gains taxes won't work as claimed, but will harm the economy – The Globe and Mail
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
Budget’s capital gains tax changes divide the small business community
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gains do raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Economy
Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg
Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.
The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
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