CBDCs: Fueling Africa's Economic Integration
By Tami Koroye
Africa's economic performance has maintained an unstable trajectory over the years, and this has necessitated many policymakers and economists to rethink the organisation of Africa's economy. The popular view is that economic integration among African states will be extremely beneficial in allowing Africa to compete effectively in the global market.
Africa stands at a critical juncture in its economic development, with the potential for Central Bank Digital Currencies (CBDCs) to revolutionise the continent's financial landscape. As nations across Africa strive for greater economic integration, CBDCs present a promising opportunity to foster financial inclusion, enhance cross-border transactions, and promote regional trade.
Conversations on structural integration in Africa have been ongoing since the post-colonial era, leading to the establishment of regional organisations like ECOWAS, SADC, and the African Continental Free Trade Agreement (AfCFTA). AfCFTA aims to create the world's largest free trade area and deepen economic integration across Africa. With the imminent implementation of AfCFTA, discussions are focusing on reliable structures to facilitate economic integration, including the adoption of Central Bank Digital Currencies (CBDCs) as a viable payment tool.
What are CBDCs?
CBDCs are digital versions of traditional sovereign currencies controlled by the central bank. They serve as a medium of exchange, store of value, and unit of account, retaining the status of legal tender. Nigeria has already launched its own CBDC, the e-Naira, while other African countries are researching and piloting their own CBDCs. This demonstrates Africa's embrace of CBDC adoption, seen as "new money" or "the future of money" in economic circles.
The Promise of CBDCs in Africa:
Statistics show that Sub saharan Africa is the most expensive place to send money. The World bank in 2021 noted that the cost of sending money across Tanzania-Kenya and Tanzania-Uganda is amongst the five most expensive cross boundary payment corridors alongside Angola-Namibia, South Africa-Angola and South Africa-Botswana. This trade barrier of sending money and trading within the continent will be alleviated swiftly by CBDCs.
CBDCs offer advantages for Africa's economic integration by facilitating regional trade and improving cross-border payments. Blockchain solutions streamline forex funds transfer, saving time and money. African traders using local currencies can benefit from CBDCs. Transaction costs can be reduced by up to 50% and processing times from days to seconds. CBDCs eliminate financial middlemen, enabling direct payments from the payer's account or wallet to the receiving country's central bank and then to the payee.
Financial Inclusion: CBDCs empower unbanked populations, enabling access to formal financial services and participation in the digital economy. Africa's growing mobile and smartphone adoption allows leveraging digital technologies for financial inclusion, fostering economic empowerment.
Cross-Border Transactions: CBDCs streamline cross-border transactions, lowering costs and enhancing efficiency in trade and remittances. Through blockchain technology, CBDCs enable faster, secure, and cost-effective cross-border transactions, promoting regional trade and economic cooperation in Africa with AfCFTA.
Improved Efficiency: CBDCs enhance trade efficiency by digitising transactions, ensuring speed, transparency, and security. Smart contracts automate trade processes, streamline documentation, and mitigate fraud risks, fostering trust and efficiency in regional trade.
Harmonised Standards: CBDCs can promote the adoption of common regulatory frameworks and standards within regional economic communities in Africa, ensuring a level playing field for businesses and fostering trust in cross-border transactions. Standardised regulations for digital currencies can facilitate cross-border cooperation, simplify compliance procedures, and promote a favourable business environment for regional trade.
CBDCs fulfil Africa's need for a digital payment system, positioning the continent in the global digital economy. They can "Africanize" the economy by reducing reliance on foreign currencies, improving local currency ratings, and boosting competitiveness. Seamless offline solutions can drive convenience and increase CBDC adoption, leading to currency improvement. Embracing this technology holistically brings possibilities, but challenges include limited infrastructure, cybersecurity risks, and regulatory complexities. Harmonising regulations and addressing foreign exchange controls are vital for seamless cross-border transactions in Africa's economic integration.
Necessary Steps To Take
For widespread CBDC adoption, addressing concerns, building trust, and promoting user acceptance are crucial. This includes addressing privacy, security, and usability concerns while providing user-friendly interfaces. Education campaigns are vital to help the public understand CBDC benefits.
Addressing these challenges will require collaboration among central banks, governments, regulatory bodies, technology providers, and other stakeholders. By carefully navigating these hurdles, Africa can overcome barriers to CBDC implementation and harness the full potential of digital currencies for economic integration and inclusive growth.
African countries can foster collaboration among central banks, governments, regulatory bodies, and technology providers to address challenges and develop harmonised frameworks for CBDC implementation. Regional collaborations within the African Union or economic communities can facilitate cooperation.
Significant investments in digital infrastructure are needed to support CBDC implementation. This includes expanding internet connectivity, improving mobile networks, and enhancing digital payment systems in both urban and rural areas for inclusive access. To promote financial inclusion, targeted initiatives like digital wallets, agent banking networks, and financial literacy programs should be implemented. Collaboration with telecom companies and fintech startups can extend services to the unbanked population.
Robust cybersecurity frameworks and regulatory guidelines are necessary for CBDCs. Collaboration with cybersecurity experts, secure platforms, encryption protocols, and identity verification systems are essential. Regulations should balance consumer protection, prevention of illicit activities, and innovation. Regular assessments and updates are crucial for adapting to evolving threats and technology.
African countries should launch education campaigns to generate trust and awareness of CBDCs. Engaging stakeholders through workshops and media platforms will dispel misconceptions and build confidence. Pilot projects should be conducted to evaluate CBDC feasibility and effectiveness. Testing in specific regions or sectors allows for valuable insights, identification of challenges, and iterative improvements. User and stakeholder feedback inform the design and functionality of CBDCs.
African countries should also establish standardisation frameworks for CBDC interoperability. Collaboration with international standard-setting organisations can develop globally recognized standards.
Implementing open APIs and payment gateways facilitates interoperability. Open APIs enable secure data exchange, while payment gateways convert currencies and enable cross-border transactions. Collaboration with financial institutions and payment service providers establishes interoperability networks. Partnerships with established platforms enhance cross-currency and cross-platform transactions. Leveraging blockchain and smart contracts enhances interoperability. DeFi platforms and blockchain interoperability protocols facilitate cross-chain transactions between CBDCs and private currencies.
Regulatory frameworks should establish guidelines for cross-currency transactions. Compliance with AML and KYC regulations ensures secure interoperability. Collaboration with international regulatory bodies aligns standards for cross-border interoperability.
For widespread CBDC adoption, addressing concerns, building trust, and promoting user acceptance are crucial. This includes addressing privacy, security, and usability concerns while providing user-friendly interfaces.
Policymakers across Africa should also work on frameworks that will encourage CBDC interoperability, and seek to harmonise laws, regulations and protocols covering the Digital ecosystem to reflect Pan African Ideologies. While a national approach to CBDCs might prove useful at the moment, a continental approach to digital currencies is needed for the full integration of African economies and plans should be in the pipeline.
Although CBDCs hold promise for African integration, concerns surrounding the technology cannot be ignored. These worries are detailed in an article we have already published, providing valuable insights into the potential risks and challenges associated with CBDC implementation. Interested readers can refer to our published article for a comprehensive understanding of the complexities surrounding CBDCs and their implications for Africa's economic landscape.