IMF expert sees lifeline for CBN’s e-Naira in mobile money

Nigeria’s underperforming e-Naira, Africa’s first and the world’s second central bank digital currency (CBDC) introduced in October 2021 by the Central Bank of Nigeria (CBN) could yet find a lifeline for revival and success, an expert in the Africa department of the International Monetary Fund (IMF) has said.

But Jack Ree, senior economist on the Africa department of the IMF, who carried out a study on the eNaira last year, in an IMF podcast monitored in London at the weekend [full interview published inside this edition] said while there are issues yet with the e-Naira, the digital currency could yet become a hit if the monetary authorities tweaked the model that it currently operates on.

Twenty-one months after its introduction, the digital currency has disappointed in download numbers posting less than one million (just about 860,000 at the end of last November) suggesting it has not fully been embraced by Nigeria’s huge population as the downloads are less than one percent (-1%) of the total bank accounts in the banking system.

Besides the poor download numbers Ree said it was a little bit more disappointing to find how slow the e-Money was in terms of its usage because, as he said, “a lot of wallets that have been downloaded [are] not actually used, ” adding that “they were in  a state of dormancy.”

In the study he did for the paper he wrote last year for the IMF on the CBN digital currency, Ree said he “found that about 98.5% of the total wallets that have been downloaded were not used more than once.”

But the economist said while the Nigerian CBDC move appears to be faltering in terms of interests and downloads, he thinks that there could still be a breakthrough for the CBN in its quest to have a flourishing digital currency ecosystem.

“Nigeria was not able to still make a breakthrough in terms of mass adoption,” Ree said of the CBN’s efforts, adding that, “ … the Nigerian market is still very, very limited [in] adoption.”

He said Nigeria would have to consider the next two to three years as crucial if it wants to make a breakthrough with the digital currency.

Ree said: “And to make a breakthrough, the next two, three years will be very important. They will need to make the right strategy in terms of setting relationships with the mobile money. So that either complement or substitute, probably in Nigeria’s case is going to be a complementary model that makes sense. And maximising the synergies with the digital revolution or digital innovation that is going in the private sector, and then making a breakthrough in terms of remittances.”

According to him, Nigeria’s specific reason why it [CBDC) cannot work in remittances so far is because the official exchange rate has long been controlled, and now if you go to the black market, black market is very easily reachable and very large… transactions in the black market, the spread, until a while ago, has been like 78 percent.

The mobile money model which Ree is suggesting can provide a lift off to the CBN eNaira, would require providing incentives for mobile mobile providers, he said.

He explained the incentives thus: “So, maybe the traditional way of central banks in dealing with the integrating central bank system with the private sector providers is through regulation. So just forcing them to somehow implement their interoperability or at least link their mobile money wallets with the CBDCs wallet is one way. But then there is also a business case, for both the central bank and mobile money can win; because in countries like Nigeria where mobile money … are like 25, 26 mobile money operators.”

Because of the preponderance of the operators, it’s very difficult for any single mobile money operator to be dominant, Ree said, adding that “if you’re not dominant, the consumers will always be divided into various other mobile money [operators] and that makes the universal usage over your mobile money very difficult. So if your mobile money product is integrated with CBDC, and CBDC is more likely to be accepted by other merchants, that increases the motivation for people to actually get [the] mobile money wallet itself. So for mobile money to increase its own penetration in the public, a regulation like this, to mandate them to integrate — link it to the CBDCs — might actually be a good thing for them to enhance the attractiveness of the mobile money to the consumers,”  he added. The Central Bank of Nigeria (CBN) had introduced the CBDC e-Naira last October under the suspended Governor Godwin Emefiele backed by former President Muhammadu Buhari, who surprised many with his approval given the state of the country at the time. 

A number of reasons had been given for the decision to introduce the currency, including what Ree says was Buhari’s interest in doing something digital, “and Nigeria being seen as the champion of some sort of innovative digital revolution in Africa.”

But based on the central bank’s own account of their motivation, there were three big reasons, including the first motivation being financial inclusion, something not much of an issue with advanced central banks.

“But in Nigeria a lot of people don’t have bank accounts. It’s a big country, populous country, 38 million adults don’t have a bank account, which is almost 40 percent of [the] total of their population,” Ree said.

There was also the need to try to tap digital to drive penetration and close the financial inclusion gap.

“But Nigeria is one of the most advanced countries in sub-Saharan Africa in terms of mobile phone penetration. So most people just have, not fancy iPhones, but the simple fold-up phones or feature phones, everybody carries. So the gap between digital penetration and banking sector penetration basically makes people think that if we make all the financial access digital, probably we can just do a very quick and large fix to this financial inclusion gap. So that was one reason,” Rees said.

As one of the largest remittance recipients in the world, remittances were another reason for the eNaira’s introduction. Pre-pandemic Nigeria received annual remittance of close to $25 billion.

Along with many other developing countries, Nigeria thought of making remittances cheaper, so CBDC was the way to go.

“With the CBDC you can, in theory, bring down that [remittance fees] close to zero. So that was another big reason. Third reason is the presence of [a] large underground or informal economy in Nigeria. So the size of the informal economy in terms of employment is almost 80 percent in Nigeria because all our people in non-urban areas, they’re all sort of informal. So [an] informal economy means that a lot of money is going outside the banking system and not really tracked and really not captured by the tax net either.

So CBDC like the model that Nigeria uses, it’s so called account-based, which is different from crypto coins like Bitcoin, which is untraceable. The account-based CBDC should be, in theory, fully traceable if there is a need for some sort of tax audit and stuff. So that’s another motivation,” Ree explained.

The IMF senior economist also spoke about what Nigeria’s story could mean to the rest of Africa’s financial system, and noted that Nigeria’s first year experience really gives mixed signals to other African countries. “Positive signal is, in terms of the fact that Nigeria was able to build and maintain that system without the major breakage, which itself is something quite impressive from sub-Saharan African perspective because everybody would’ve thought that okay, probably it’s going to be a dead-on-arrival type of failed experiment and it didn’t happen.”  Regarding how the CBDC might work smoothly in  terms of a dual exchange rate system, Ree said “if your CBDC offers only the official rate – it’s hugely penalising, nobody’s going to want to go that route. Everybody’s going to just carry US dollars… But then Nigeria made a big move lately in terms of floating the exchange rate. So I think all the signs are quite hopeful and the new government definitely has a good opportunity for them to harness.”