Central Bank Digital Currencies (CBDCs) are gaining attention as a potential tool to enhance financial inclusion and reduce financial costs, particularly in the Middle East and Central Asia. A recent survey conducted by the International Monetary Fund (IMF) reveals insights into the feasibility and implications of adopting CBDCs in these regions. While the findings highlight promising aspects, they also underscore the need for careful consideration and highlight several constraints.
The IMF survey indicates that CBDCs could play a significant role in improving financial inclusion. By providing a secure and accessible means of payment, CBDCs have the potential to reach individuals who currently lack access to traditional banking services. This could be particularly transformative for underserved populations in the Middle East and North Africa (MENA) region, where nearly 48% of adults do not have access to formal financial services.
Economic and Operational Considerations
Despite the promising potential, the IMF’s stance on CBDCs is cautious. Surveying 19 central banks in the region, the IMF notes that while CBDCs could enhance financial inclusion and reduce costs, they may not be essential for achieving these goals. Instead, the IMF suggests that improving existing digital payment systems could be a more practical and immediate alternative.
The IMF has been extensively researching the evolution of CBDCs and advising member nations on their integration into monetary systems. A senior IMF official highlighted the potential benefits of a global CBDC platform, particularly in reducing payment costs through capital controls. However, the official also emphasized the complexity and risks involved in implementing CBDCs.
Regional Initiatives and Experiments
Several countries in the Middle East and Central Asia are actively exploring the use of CBDCs. For instance, Saudi Arabia’s central bank recently participated in a cross-border CBDC experiment in collaboration with the Bank for International Settlements (BIS). Such initiatives aim to assess the feasibility of CBDCs for international trade and domestic transactions.
IMF Managing Director Kristalina Georgieva has suggested that:
“CBDCs could potentially replace cash in island economies, highlighting their versatility. However, the survey concluded that introducing digital currencies will be a long and complex process that central banks must approach with caution.”
Policymakers need to evaluate whether a CBDC aligns with their country’s objectives and if the benefits outweigh the potential costs and risks.
The IMF survey also sheds light on the challenges and constraints associated with CBDCs. One significant concern is the competition between CBDCs and traditional bank deposits. Since 83% of banks’ funding comes from deposits, CBDCs could potentially compete with these deposits, impacting banks’ profits, lending capabilities, and overall financial stability.
The survey revealed that 19 central banks in the region are exploring the issuance of CBDCs. For oil-exporting countries in the Gulf Cooperation Council (GCC) and other developed financial markets in the Middle East, the focus is on enhancing the efficiency of both domestic and cross-border payments. In contrast, for oil-importing countries, the Caucasus, Central Asia, and low-income nations, the primary goal is expanding financial inclusion.
Addressing Non-Monetary Barriers
While CBDCs offer several marginal benefits, they do not address all barriers to financial inclusion. Issues such as low financial literacy, distrust of financial institutions, and lack of identification remain significant hurdles. Therefore, the successful adoption of CBDCs will require a comprehensive approach that includes addressing these non-monetary barriers.
The IMF survey highlights the potential of CBDCs to enhance financial inclusion and reduce costs in the Middle East and Central Asia. However, it also underscores the need for a cautious and well-considered approach. Policymakers must carefully evaluate the feasibility of CBDCs, considering both the potential benefits and the associated risks.
As countries in the region continue to explore and experiment with CBDCs, the future of financial inclusion looks promising. By leveraging the potential of digital currencies, the Middle East and Central Asia can make significant strides towards achieving greater financial access and economic stability.
