How can central bank digital currency help African countries?
Central bank digital currency (CBDC) is a digital form of money issued and regulated by a central bank. It can be used as a means of payment, a store of value, and a unit of account. Unlike cryptocurrencies, CBDCs are backed by the full faith and credit of the issuing authority and are not subject to the volatility and security risks of private digital assets.
In recent years, several African countries have shown interest in developing and piloting CBDCs for various reasons. According to a survey by the Bank for International Settlements (BIS), 80% of African central banks are actively researching CBDCs, 40% are experimenting with them, and 20% are running pilot projects. Some of the countries that have launched or announced CBDC initiatives include Nigeria, Ghana, South Africa, Kenya, Morocco, and Tunisia.
Potential Benefits of CBDCs for Africa
CBDCs could offer several benefits for African countries, such as:
• Improving financial inclusion: CBDCs could provide access to digital financial services for millions of unbanked or underbanked people in Africa, especially in rural and remote areas where physical infrastructure is lacking or costly. CBDCs could also enable low-cost and convenient transfers of money within and across borders, which could benefit migrant workers and their families. CBDCs could also facilitate the distribution of social welfare payments and humanitarian aid in times of crisis .
• Enhancing payment system efficiency: CBDCs could reduce transaction costs, processing times and intermediaries in the payment system, making it faster, cheaper and more transparent. CBDCs could also improve interoperability and competition among payment service providers, fostering innovation and consumer choice. CBDCs could also reduce the reliance on cash, which is costly to produce, distribute and maintain .
• Strengthening monetary policy: CBDCs could provide more accurate and timely data on economic activity and money demand, which could help central banks to conduct monetary policy more effectively. CBDCs could also enable the implementation of unconventional monetary policy tools, such as negative interest rates or helicopter money, which could stimulate aggregate demand in times of recession or deflation .
• Promoting regional integration: CBDCs could facilitate cross-border trade and payments within Africa, especially in the context of the African Continental Free Trade Area (AfCFTA), which aims to create a single market for goods and services among 54 African countries. CBDCs could also foster monetary cooperation and convergence among African countries, paving the way for a possible regional or continental currency union.
Potential Challenges and Risks of CBDCs for Africa
CBDCs also pose several challenges and risks for African countries, such as:
• Investing in digital infrastructure: CBDCs require adequate digital infrastructure, such as internet access, mobile devices, electricity supply and cybersecurity measures, to ensure their availability, reliability and security. However, many African countries face significant gaps in digital infrastructure development and affordability, which could limit the adoption and usage of CBDCs. Moreover, CBDCs could expose the payment system to cyberattacks or technical glitches that could disrupt its functioning.
• Managing financial stability: CBDCs could have implications for financial stability, depending on their design and regulation. For instance, if CBDCs offer higher returns or lower risks than bank deposits, they could trigger a large-scale shift of funds from banks to CBDCs, reducing banks’ liquidity and lending capacity. This could undermine the role of banks as financial intermediaries and affect credit creation and economic growth. Alternatively, if CBDCs are too restrictive or unattractive compared to other forms of money, they could have low adoption and impact .
• Balancing privacy and transparency: CBDCs involve trade-offs between privacy and transparency in the payment system. On one hand, CBDCs could enhance transparency by providing traceable records of transactions that could help prevent fraud, tax evasion, money laundering and terrorist financing. On the other hand, CBDCs could raise privacy concerns by allowing central banks or other authorities to monitor users’ financial activities and personal data. Therefore, finding the optimal balance between privacy and transparency is crucial for ensuring public trust and acceptance of CBDCs.
- Coordinating with other countries
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