HERE is an extract from the Monetary Policy Statement: “Pursuant to Government’s announcement in November 2021 on the country’s preference to introduce the central bank digital currency (CBDC) as opposed to cryptocurrencies, the (Reserve) Bank is actively exploring the feasibility of adopting a Zimbabwean CBDC including specific design considerations, opportunities and risks to the monetary and financial system.
In this context, the Bank is developing a clear roadmap for adopting CBDC, encompassing the feasibility and assessment stage currently taking place, policy design stage based on results of the feasibility study and implementation modalities.
The Bank shall keep the public informed through periodic updates on the progress of the CBDC programme.”
A CBDC would be a form of central bank electronic money that could be used to make everyday payments — in essence a “digital banknote”, a “digital Zimbabwe dollar”.
Zimbabwe has had a checkered history in managing its currency and, of course, when authorities have failed to manage the physical note, what then of a digital note?
Around 100 central banks are exploring CBDCs. In developed countries, there are two common motivations.
First, central banks are concerned that big tech companies, such as Meta/Facebook, could issue their own digital currencies to the users of their vast networks, enabling them to accrue excessive market power.
Second, many central banks are concerned by the decline in the use of physical cash, which some have said anchors public confidence in the monetary system.
With growing adoption of digital currencies, including cryptos, central banks, given their need to provide reliable and stable payment systems, are turning to digital bank notes for a solution.
Some are researching, some testing and a few are already distributing CBDC to the public. In the Bahamas, the Sand dollar — the local CBDC — has been in circulation for more than a year.
Sweden’s Riks bank has developed a proof of concept and is exploring the technology and policy implications of CBDC.
In China, the digital renminbi [called e-CNY,] continues to progress with more than 100 million individual users and billions of yuan in transactions.
And, just last month, the United States Federal Reserve issued a report that noted that “a CBDC could fundamentally change the structure of the US financial system.
In Africa, Nigeria banned bank trading of cryptocurrencies and then launched its own central bank digital currency, the e-Naira, while El Salvador, a small republic in Central America, became the first country in the world to adopt a cryptocurrency as legal tender.
There is a need to understand why countries are turning to virtual currencies. For example, the SWIFT messaging system enhances the US government’s ability to implement sanctions.
However, there is political will in certain countries, such as China, to create alternatives to the existing international payments system using CBDC technology. For developed countries and their competitors, the motivation is centred on foreign policy. But what of small and developing countries?
An analysis into Nigeria and El Salvador may provide some light on what strategies the RBZ could adopt.
Nigeria is Africa’s largest economy and its most populous country. El Salvador is a small republic in Central America.
But despite their many differences, they have two economic problems in common. First, a large proportion of their populations do not have access to bank accounts.
Second, their economies rely heavily on remittances, money sent back by people living abroad. But the money-transfer agencies that facilitate these cashflows can be slow and costly.
Nigeria introduced its e-Naira while El Salvador adopted Bitcoin. For Nigeria, e-Naira wallets are only available for people with bank accounts, but the plan is to extend access to anyone with a phone number in the future.
However, one of the questions Nigeria has to answer is that whether the country will be able to “fully achieve financial inclusion in the way that it is been promoted.”
There are a number of risks involved, including financial stability, if those with e-Naira wallets start using them as a deposit account. If that happens, rather than using commercial banks, people actually use e-Naira wallets to store their savings, which then means that the relevance of banks becomes redundant.
El Salvador has been using the US dollar as its currency since 2001, when it abandoned its own currency, the colón.
But in September 2021, El Salvador added Bitcoin to its list of official currencies. The motive behind adopting the Bitcoin as legal tender is geopolitical as well as aimed at increasing financial inclusion and ramping up remittances.
In November, El Salvador’s President Nayib Bukele announced plans for a Bitcoin City whose economy is centred on Bitcoin mining and is powered by a volcano.
In essence, El Salvador is standing up and saying we do not want the US dollar anymore, we want to be masters of our own domain.
What then of Zimbabwe? Just like Nigeria and El Salvador, Zimbabwe relies on remittances, in view of its huge disapora population.
Confidence in Zimbabwe’s financial system however is very low given the continued currency crisis that has seen the nation adopting the US dollar as legal tender and the source of referencing when it comes to pricing models by businesses.
The majority of the population does not trust the banking system and prefers holding cash rather than keeping deposits.
The informal sector has grown significantly, with some estimating it at above 40% of the overall economy and employing more than 80% of the active population.
Transactions in the informal sector are mostly cash, dominated by the US dollar. In the formal sector, transactions are mostly carried out through the banking system with most deposits being transitory.
Savings are almost non-existent given negative real interest rates as a result of stubborn inflation.
The banking sector income is dominated by non-interest income as banks cash on transactional activities rather than lending business.
It is clear that if the Reserve Bank of Zimbabwe introduces the CBDC, those using formal banking channels will move all their deposits into CBDC wallets, making the RBZ the only bank in principle.
Before even carrying out a feasibility study, the RBZ should answer the following questions:
• To what problem is an electronic Zimbabwe dollar the answer?
• How can a CBDC be a competitive payments option without exacerbating the already rising level of banking sector disintermediation that would have increasing negative consequences for credit allocation and financial stability?
• What additional monetary policy options would the electronic banknote provide to the RBZ and would these be proportionate to the central bank’s current mandate for monetary and financial stability?
• How can a CBDC ensure strong privacy safeguards while also meeting financial compliance rules?
• Which organisations will be able to access sensitive CBDC payments data, and for what purpose will that data be used?
• What are the main international and national security risks that arise from a CBDC, and how can these be managed?
- How can a CBDC be made secure against current and future threats without sacrificing useability?
- Is the country prepared to promptly meet the everchanging technological environment?
For the proportion of the economy that uses formal channels, the operations of the monetary system are already highly efficient, principally through the Real-Time Gross Settlement (RTGS) system, limiting the need for a CBDC.
In the informal sector, a CBDC will not be accepted, given the need for privacy.
Indeed, for a small country that has failed to manage its physical note, a CBDC will entrench its economic woes. The concept of this RBZ-controlled digital Zimbabwe dollar presents a lot of risk for very little reward.
*About the writer: Tinashe Kaduwo is a researcher and economist. He writes in his personal capacity. Contact [email protected] com whatsapp +26377337612