‘Central Bank Digital Currencies’ can boost Middle East’s financial inclusion: IMF

Digital currencies are gaining traction in the Middle East and Central Asia, with countries increasingly considering central bank-issued options to enhance financial inclusion, an analysis said.

In a blog, the International Monetary Fund noted that economies in these regions are also moving toward digital currencies to improve the efficiency of cross-border payments.

CBDCs are a form of digital money issued by a central bank, distinct from cryptocurrencies.

The analysis showed that 19 countries in the Middle East and Central Asia are currently in the research stage of developing nationally-issued digital currencies.

“Bahrain, Georgia, Saudi Arabia, and the UAE have moved to the more advanced ‘proof-of-concept’ stage. Kazakhstan is the most advanced after two pilot programs for the digital tenge,” said IMF.

Earlier in June, Saudi Arabia joined a China-dominated Central Bank Digital Currency cross-border trial, according to the Bank for International Settlements.

The trial will see the Saudi Central Bank becoming a “full participant” in Project mBridge, a collaboration launched in 2021 between the central banks of China, Hong Kong, Thailand, and the UAE.

Project mBridge, overseen by BIS, is a multi-CBDC platform developed to support real-time, cross-border payments and foreign exchange transactions.

On June 2, the Qatar Central Bank announced the completion of the infrastructure development for its CBDC project.

In a press statement, QCB said that the move aligns with global advancements in digital currency, aiming to enhance Qatar’s financial sector.

The apex bank noted that it will start testing and developing selected applications of the CBDC for settling large payments with local and international banks.

As of March, central banks in 134 countries, accounting for 98 percent of the world’s gross domestic product, were in various stages of evaluating the launch of a national digital currency, according to the Atlantic Council.

The US think tank also revealed that the Bahamas, Jamaica, and Nigeria have already fully launched a CBDC.

IMF said that adopting a CBDC, however, requires careful consideration. “Countries across these regions, spanning a diverse group of economies stretching from Morocco and Egypt to Pakistan and Kazakhstan, each must weigh their own unique set of circumstances.”

Cross-border payments

According to the IMF, CBDCs can potentially enhance the efficiency of cross-border payment services, which is crucial for oil-exporting countries in the Gulf Cooperation Council region, including Saudi Arabia, the UAE, and Qatar, as well as Bahrain, and Kuwait.

“That’s because cross-border payments tend to have frictions like varying data formats and operating rules across regions and complex compliance checks. CBDCs that address these inefficiencies could significantly cut transaction costs,” said the international financial institution.

The report added that CBDCs can also promote financial inclusion by fostering competition in the payments market and enabling more direct transactions with less intermediation.

Moreover, central banks can help keep costs lower as they are not profit-driven like commercial banks.

“Increased competition in the payments market from a CBDC could also encourage upgrading technology platforms and the efficiency of payment services, helping financial services reach more people,” said IMF.

Countries in the Caucasus and Central Asia, Middle East and North Africa oil importers, and low-income countries are particularly interested in this potential benefit.

The IMF further pointed out that designing CBDCs to work offline could promote financial inclusion in areas with unreliable mobile services, such as low-income and conflict-affected regions.

Additionally, using national digital currencies for cross-border transfers could reduce remittance costs and speed up transfer times.

Impacts on commercial banks

The analysis indicated that deposits constitute a significant portion of bank funding in the region, around 83 percent. A CBDC could compete with bank deposits, potentially impacting bank profits and lending, and posing implications for financial stability, the IMF noted.

However, the report added that financial institutions in the region generally possess adequate capital levels, profit margins, and liquidity buffers, which could mitigate strains on deposits.

CBDCs could enhance the pass-through into deposit rates by increasing competition among financial institutions, and they could also strengthen the bank lending channel of monetary policy. “However, the impact would likely be country-specific and is difficult to estimate due to limited CBDC uptake so far,” the IMF stated.

The report emphasized that policymakers play a crucial role in addressing potential risks posed by national digital currencies. It added, “While there are no clear prerequisites for adopting CBDCs, a healthy banking system, a sound legal system, and strong supervisory and regulatory capacity are essential for reducing risks.”

The IMF suggested that national digital currencies should be carefully calibrated to avoid competition with commercial bank deposits. “Design features are a crucial consideration. Our survey shows that selecting appropriate features for CBDC implementation is a key challenge for regional policymakers,” the report highlighted.

Introducing national digital currencies will be a long and complex process, and central banks should approach it with care.

The IMF also urged policymakers to determine if a CBDC serves their country’s objectives and whether the expected benefits outweigh the potential costs and risks to the financial system.