The International Monetary Fund (IMF) has said Nigeria and other countries that launched Central Bank Digital Currency (CBDC) may witness cash shortage as they push for increased adoption of the payment option.
The CBDC has been launched in Nigeria, Bahamas, Canada, China, Sweden, and Uruguay.
Nigerian banks had in December 2021 and early January faced cash crunch at some of their branches in Lagos, Abuja and Port Harcourt. Customers were denied access to cash at such branches, leading to long queues.
In a report obtained at the weekend, the IMF stated that access to payments through CBDC may trigger multiple hurdles, including shortage of cash, firms’ refusal to accept cash, and lack of or recurring disturbances of digital infrastructure.
The report titled: “Behind the Scenes of Central Bank Digital Currency-Emerging Trends, Insights, and Policy Lessons” noted that if cash availability falls beneath a certain level, some groups might experience difficulties in making payments.
According to the report, these groups include individuals in remote areas where private firms find it unprofitable to operate, with low income, and with different forms of impairments.
The report advised that a potential CBDC could hence be designed with universal access in mind noting that in countries in which cash usage is dwindling, access to payment is also a key concern as some segments of the population still rely on, or prefer, making cash payments, but may run into limitations.
The Central Bank of Nigeria (CBN) digital currency, e-Naira, was launched last October by President Muhammadu Buhari in Abuja. It was estimated that the adoption of e-Naira and its underlying technology, called blockchain, can increase Nigeria’s Gross Domestic Product by $29 billion over the next 10 years, among other benefits.
CBN Governor, Godwin Emefiele said the CBDC, otherwise known as the e-Naira, would bring about increased cross-border trade, accelerate financial inclusion, and lead to cheaper and faster remittance inflow.
CBN’s data showed that e-Naira wallets downloaded across the world have crossed the 700,000 mark while banks in Nigeria have integrated the e-Naira into their e-payment portals.
The IMF report outlined that some central banks are concerned that private payment service providers might not find extending services to all parts of the population sufficiently profitable and that declining use of cash will exacerbate the problem.
“Some jurisdictions are therefore exploring if a CBDC could help achieve or safeguard universal access to payments,” the report said.
According to the report, in countries where cash and check use is high, operational costs are elevated. And in some countries, existing digital payments are also relatively expensive.
“The CBDC is, therefore, a potential policy tool to offer digital forms of payments that are cheaper to operate. The non-profit nature of central banks means that they could potentially offer low-cost payments as a public good, potentially subject to the need to eventually recover costs,” the report stated.
The report noted that some features of cash, including anonymity and the lack of an audit trail, make it attractive for illicit transactions like tax evasion, money laundering, and terrorist financing. CBDC could potentially reduce this problem.
IMF pointed out that CBDC could potentially increase competition in a country’s payments sector in two ways: directly, by competing with existing forms of payments; and indirectly, should the CBDC be designed as a platform open to private payment service providers. The latter would ensure low barriers of entry for new firms seeking to roll out new payment services.
The report noted that all CBDCs that are currently circulating, either as official currency or through a pilot, are designed with restrictions that limit the competitiveness of CBDC versus bank deposits.