IMF says eNaira drawing global interests, makes positive observations
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The International Monetary Fund (IMF) has said the launch of Nigeria’s eNaira is drawing substantial interest from the outside world, including from central banks, due to the size and complexity of the country’s economy, with other countries and regions, such as China and the Eastern Caribbean Currency Union, conducting CBDC pilots with a subset of their citizens.
The IMF, in its country focus publications on Nigeria, also revealed that it is ready to collaborate with the authorities on data analysis, cross-country studies, sharing the eNaira experience with other countries and discussing further evolution of the eNaira including its design, regulatory framework, and other aspects.
Being the first in Africa and second in the world after the Bahamas, Nigeria’s central bank officially launched the eNaira on October 25, 2021, in form of a Central Bank Digital Currency (CBDC) to facilitate cross-border trade, with the benefits of lowering the cost of transactions, improved targeted social interventions, enhanced revenue and tax collection, and diaspora payment as articulated by the CBN.
However, many have opined that there are potentials for the e-Naira to help reduce the financial exclusion rate from 36 percent in 2020 with continued product development and research.
For the International Monetary Fund, there are five observations on the eNaira as Nigeria’s central bank-backed digital currency.
One of the observations is the risks for monetary policy implementation, cyber security, operational resilience, and financial integrity and stability. The IMF said there is a need to manage cybersecurity and operational risks associated with the eNaira as the digital currency, though backed by the CBN, may be perceived, or even effectively function, as a deposit at the central bank, which may reduce demand for deposits in commercial banks.
It acknowledged that the monetary authorities in Nigeria have taken measures to manage the associated risks as the transfer of funds from bank deposits to eNaira wallets is subject to daily transactions and balance limits to mitigate risks of diminishing the roles of banks and other financial institutions.
The IMF further noted that financial integrity risks, such as those arising from the potential use of the eNaira for money laundering are mitigated by using a tiered identity verification system and applying more stringent controls to relatively less verified users.
The Bretton Woods institutions advised that to address and combat cybersecurity risk, regular IT security assessments are expected to be conducted.
On the IMF’s third observation, the eNaira is expected to lower remittance transfer costs, making it easier for the Nigerian diaspora to remit funds to Nigeria by obtaining eNaira from international money transfer operators and transferring them to recipients in Nigeria by wallet-to-wallet transfers free of charge.
Exchange rate reforms, including a unified market-clearing rate, that reduces the gap between official and parallel market exchange rates, would enhance the incentives for using eNaira wallets to send remittances, the IMF advised.
The IMF also observed the need to reduce informality as Nigeria has a large informal economy, with transactions and employment equivalent, respectively, to over half of GDP and 80 percent of employment, and as such, the eNaira is account-based and transactions are in principle, fully traceable, unlike token-based crypto-asset transactions.
It added that once the eNaira becomes more widespread and embedded into the economy, it may bring greater transparency to informal payments and strengthen the tax base. Informal and formal businesses may also benefit if eNaira adoption enhances consumption through greater financial inclusion.
In its final observation, the IMF stated that the eNaira wallet is provided only to people with bank accounts, but its coverage is expected to eventually expand to anyone with a mobile phone even if they do not have a bank account, adding that those with mobile phones will be allowed to have access to the eNaira which will increase financial inclusion and facilitate more direct and effective implementation of social transfer programmes, a move that is envisaged would enable up to 90 percent of the population to use the eNaira.
Meanwhile, unlike crypto-assets like Bitcoin or Ethereum, the eNaira is not a financial asset in itself but a digital form of a national currency and draws its value from the physical naira, to which it is pegged at parity.
But it uses the same blockchain technology as Bitcoin or Ethereum, it is stored in digital wallets and can be used for payment transactions, and can be transferred digitally at virtually no cost to anyone in the world with an eNaira wallet.