Central bank digital currencies (CBDCs) have emerged as a significant topic of interest in the Middle East and Central Asia, with the aim of bolstering financial inclusion and streamlining cross-border payments. A recent paper has thoroughly examined the potential advantages and risks associated with the adoption of CBDCs in this region.
The majority of countries in the Middle East and Central Asia are in the early stages of exploring CBDCs, ranging from initial research to more advanced “proof-of-concept” stages. Nations such as Bahrain, Georgia, Saudi Arabia, and the United Arab Emirates are at the forefront of this financial revolution. Kazakhstan has taken the lead with successful pilot programmes for their digital currency, the tenge.
An important advantage of CBDCs is their potential to enhance the efficiency of cross-border payment services, especially crucial for major oil-exporting countries and members of the Gulf Cooperation Council. Current cross-border payments are complicated by issues such as varying data formats and compliance checks, and CBDCs have the potential to significantly reduce transaction costs and streamline the process.
Additionally, CBDCs have the capacity to promote financial inclusion by fostering competition in the payments market and facilitating more direct and cost-effective transactions. Increased competition may also drive technological advancements, thus expanding financial services to a broader audience.
Despite these potential benefits, several barriers must be addressed to ensure widespread use of CBDCs, including low digital literacy, lack of identification, and distrust of financial institutions, among others.
Another critical consideration is the impact of CBDCs on financial stability, particularly in a region where bank deposits constitute a significant portion of bank funding. The introduction of CBDCs could potentially compete with these deposits, thus impacting bank profits and lending. Policymakers will need to carefully navigate these risks and implement measures to safeguard financial stability.
The selection of appropriate design features is crucial to the successful implementation of CBDCs. Choices such as offline usability and cross-border transfer capabilities will play a pivotal role in determining the effectiveness of CBDCs in promoting financial inclusion and payment efficiency.
The journey towards adopting digital currencies is undoubtedly complex, requiring thorough consideration of potential costs and risks. It is essential for central banks to assess whether CBDCs align with their country’s objectives and if the benefits outweigh the potential drawbacks.
To support countries in their exploration of CBDCs, the International Monetary Fund (IMF) is actively involved in capacity development and surveillance. By assisting policymakers in evaluating the need for CBDCs and helping them formulate policies and regulatory frameworks, the IMF aims to minimize monetary and financial stability risks associated with the adoption of digital currencies.
In conclusion, the road to adopting CBDCs is filled with challenges and complexities. While the potential benefits are significant, a cautious and strategic approach is essential to ensure the successful implementation of central bank digital currencies in the Middle East and Central Asia.