Halfway around the world from Latin America, Sri Lanka’s catastrophic debt crisis—and ensuant political turmoil—has prompted economic analysts to draw up lists of countries that could be next. With rising interest rates in the United States, debt hangovers from pandemic social spending, and surging energy prices, there is a serious possibility that other countries could soon be in similar trouble.
In Latin America, no country is more vulnerable to defaulting on its debt than El Salvador, according to a projection released this month by Bloomberg Economics. The International Monetary Fund (IMF) has vocally criticized the financial management of the government of President Nayib Bukele, who since coming into office in 2019 has allowed public debt levels to mount and gambled on accepting bitcoin as legal tender. The IMF says the latter poses risks to financial stability, financial integrity, and consumer protection.
Bukele’s government is due to submit an $800 million bond payment to lenders in January 2023. Currently, it lacks the funds to make the payment. To make up for this and other cash shortfalls, San Salvador since last year has been in slow-moving talks with the IMF to try to obtain a $1.3 billion loan.
But for El Salvador, getting a check from the fund is politically fraught. That’s because the IMF’s largest shareholder, the United States, is carrying out a high-profile sanctions campaign against what it calls “corrupt and undemocratic actors” in El Salvador. They include a handful of Bukele’s advisors, cabinet officials, and congressional allies, according to the U.S. Treasury Department and State Department. The most recent update to the State Department sanctions list was published Wednesday.
The U.S. sanctions policy wagers that cutting these actors off from travel and business links to the United States will dissuade them from engaging in corrupt activities at home; the Biden administration views corruption as a key cause of U.S.-bound migration from Central America.
Since U.S. President Joe Biden took office, Washington has openly accused Salvadoran officials of involvement in multimillion-dollar corruption schemes, inappropriately removing Supreme Court justices from their posts, and misusing public funds for personal benefit. The accused officials have generally pushed back, and Bukele has repeatedly mocked U.S. attempts to criticize him. (He responded to a leaked version of Wednesday’s sanctions list in El Faro last week with a tweet alluding to the history of U.S. interference in Central America.)
The tensions between El Salvador and the IMF emphasize the contradictions of Washington’s strategy toward the country. On the one hand, the IMF denying the Bukele government a highly sought-after loan could be seen as a straightforward consequence of not implementing reforms in response to Washington’s sanctions campaign. On the other, doing so could send El Salvador spiraling into an economic crisis that causes outward migration to skyrocket.
In a clue that Washington might want to preserve the option of an IMF deal, Salvadoran Finance Minister Alejandro Zelaya—who is responsible for negotiations with the IMF—appears to have been removed from the State Department sanctions list published Wednesday after being included in the El Faro leak.
If the IMF goes through with the loan to El Salvador, one key aspect to watch is whether the deal includes “good governance” requirements on political matters the United States has tried and failed to influence so far. Over vocal U.S. objections, Bukele has dismissed judges en masse, sought to curtail citizens’ ability to solicit public information from the government, and canceled an anti-corruption task force that was supported by the Organization of American States. Washington has also slammed Bukele’s campaign of mass arrests, which has seen more than 43,000 people detained since March on accusations of gang connections. Security policy, however, is not usually featured in IMF agreements.
If no deal is reached with the IMF, Bukele is weighing nationalizing some pension funds, issuing new taxes, and cobbling together other financing from sources such as the World Bank and Central American Bank for Economic Integration, El Faro reported. Even with a possible IMF deal, the country will still need to draw on several other sources of funding to balance its budget and repay creditors, Zelaya said last week.
Regarding the effectiveness of Washington’s naming-and-shaming anti-corruption strategy, Brian Winter of Americas Quarterly foresaw the current state of play last year, writing that “Central American governments now seem more comfortable ignoring, or openly defying, Washington than any time I can remember.”
While neighboring Central American countries could theoretically try to affect Bukele’s governance and security policies, most have so far refrained from pressuring him. Although Costa Rica, the Dominican Republic, and Panama announced they were launching a so-called Alliance for Development in Democracy last year, they have yet to speak up on Bukele’s mass arrest campaign, El Faro’s José Luis Sanz told Foreign Policy. And the fledgling Honduran government under President Xiomara Castro “still has to really show what its long-term commitment is to the fight against corruption and for human rights,” Sanz added.
Rather than criticizing Bukele’s mass detentions, security officials in both Honduras and Guatemala have shown interest in potentially replicating them, the International Crisis Group’s Tiziano Breda told Foreign Policy. As long as the Salvadoran president’s popularity remains high—a towering over 80 percent in May, according to one poll—there are few incentives for him to change course, Breda added.
In a recent El Faro piece with Roman Gressier, Sanz mused about the many Salvadoran—along with Guatemalan, Nicaraguan, and Honduran—officials who appeared on the latest U.S. sanctions list, as well as Washington’s frosty relationships with the countries in question.
“Can sanctions carry the weight of U.S. regional policy?” they asked. In another recent story, Sanz noted, “Nicaragua and its apparent immobility despite being internationally sanctioned for five years feeds skepticism about the real impact” of the latest U.S. sanctions list