Nearly all African countries are now exploring or in the pilot period of a digital currency, following Nigeria’s October 2021 introduction of e-Naira . Nigeria was the second country after the Bahamas to carry out a CBDC.
CBDCs are digital renditions of cash that are safer and less unpredictable than crypto assets since they are given and managed by national banks. South Africa and Ghana are running pilots while other nations are also in the examination stage.
The South African Reserve Bank is trying different things with a discount CBDC, which can only be used by financial institutions for interbank transactions, as a feature of the second period of its Project Khokha. The nation is also partaking in a cross-line pilot with the national banks of Australia, Malaysia and Singapore.
The Bank of Ghana, conversely, is also trying a universally useful or retail CBDC, the e-Cedi, which can be used by anybody with either a digital wallet App or a contactless smart card that can be used offline.
A considerable lot of these nations have various thought processes in giving CBDCs but for the locale, there are a few possibly significant advantages.
Promoting financial inclusion: CBDCs could bring financial services to individuals who beforehand didn’t have bank accounts, particularly whenever they want to use it offline. In remote regions without web access or internet, digital transactions can be made at almost no cost using straightforward feature phones.
CBDCs can be used to distribute targeted welfare payments, especially during sudden crises such as a pandemic or natural disaster.
They can also facilitate cross-border transfers and payments. Sub-Saharan Africa is the most expensive region to send and receive money, with an average cost of just under 8 percent of the transfer amount.
CBDCs could make sending remittances easier, faster, and cheaper by shortening payment chains and creating more competition among service providers. Faster clearance of cross-border payments would help boost trade within the region and with the rest of the world.
There are risks and challenges that need to be considered before issuing a CBDC, however. Governments will need to improve access to digital infrastructure such as a phone or internet connectivity. While the region has made significant strides, more investment is needed.
More broadly, central banks will need to develop the expertise and technical capacity to manage the risks to data privacy, including from potential cyber-attacks, and to financial integrity, which will require countries to strengthen their national identification systems so know-your-customer requirements are more easily enforced.
There is also a risk that citizens pull too much money out of banks to purchase CBDCs, affecting banks’ ability to lend. This is especially a problem for countries with unstable financial systems.
National banks will also have to consider what CBDCs mean for the confidential business for digital payment services, which has taken significant steps in promoting financial consideration through mobile money.
Credits: International Monetary Fund