IMF: Caucasus countries especially interested in potential benefit from adopting digital currency

Countries in the Caucasus and Central Asia, Middle East and North Africa oil importers, and low-income countries are especially interested in the potential benefit from adopting digital currency, according to Report, which cites the International Monetary Fund (IMF).

"CBDCs can advance financial inclusion by fostering competition in the payments market and allowing for transactions to be settled more directly and with less intermediation, in turn lowering the cost of financial services and making them more accessible. Unlike commercial banks, central banks can also help keep costs lower as they aren’t concerned with making a profit. Similarly, the resulting 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," IMF's experts say.

However, they believe that without remedying some of the barriers to increased use of digital accounts and payments—low digital and financial literacy, lack of identification, distrust of financial institutions, and low wealth—CBDC uptake may only have marginal benefits.

Almost two-thirds of countries in the Middle East and Central Asia are exploring adopting a central bank digital currency as a way to promote financial inclusion and improve the efficiency of cross-border payments.

Adopting a CBDC, however, requires careful consideration. Experts believes that 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.

Many of the 19 countries currently exploring a CBDC are at the research stage. Bahrain, Georgia, Saudi Arabia, and the United Arab Emirates have moved to the more advanced “proof-of-concept” stage. Kazakhstan is the most advanced after two pilot programs for the digital tenge.

"Deposits make up a large share of bank funding in the region, about 83 percent. Because a CBDC may compete with bank deposits, it could weigh on bank profits and lending and have implications for financial stability. However, lenders in the region generally have adequate capital levels, profit margins, and liquidity buffers, and their relatively high concentration may limit strains on deposits. Large banks are especially dominant in Gulf Cooperation Council countries," the IMF economists say.

They believe that for monetary policy, CBDCs could strengthen the pass-through into deposit rates by increasing competition among banks. A CBDC could also strengthen the bank lending channel of monetary policy. However, as our paper underscores, the impact would likely be country-specific and is difficult to estimate because CBDC uptake is limited so far.

"Policymakers can mitigate potential risks to financial stability. While there are no clear prerequisites to adopting CBDCs, a healthy banking system, a sound legal system, and strong supervisory and regulatory capacity are the most important for reducing risks. Design features to limit competition with bank deposits, such as using carefully calibrated restrictions on CBDC balances and transactions, could also help," the research says.