While tensions are growing on the European continent due to the war between Russia and Ukraine, people on the African continent are wondering to what extent financial market stability is currently at risk. Because the IMF published its report on Nigeria and its newly launched digital central bank currency, the e-Naira. The IMF recognizes the opportunities, but also warns of possible risks.
On October 25, 2021, the world’s first publicly available central bank digital currency was launched, not in China or Sweden, but in Nigeria. The state-backed payment method e-Naira, which was developed in cooperation with fintech Bitt Inc., has now been part of the Nigerian central bank (CBN) money supply for four months. In order to meet the needs of the population, the CBN uses a tiered identification model . The more information about the identity of the users is entered, the higher the available transaction amounts per day. There are four levels in total, for companies the transaction amounts are unlimited.
In the classic manner, the International Monetary Fund (IMF) now examined the implications and effects of the new currency and came to interesting conclusions in its current country report 22/33 .
“The e-Naira poses risks for monetary and operational areas”
The IMF warns of a more difficult implementation of monetary policy, the threat to both bank financing and cyber security. In addition, the International Monetary Fund sees the e-Naira as a threat to operational resilience and financial integrity and stability. That is why they are demanding regular risk assessments and the development of an emergency plan from the Nigerian government. In particular, the IMF calls for the current regulations on money laundering and terrorist financing to be tightened. That would pose considerable difficulties for the identification model already mentioned, because so far only verification with the telephone number is necessary at the lowest level.
The events of early February already show that the Nigerian authorities should take this statement seriously. At that time, the international law enforcement authorities, in cooperation with Binance , froze several Nigerian Binance accounts. The accusation was: non-compliance with international money laundering standards.
opportunities for the population
Likewise, the IMF sees the e-Naira as an opportunity to promote financial inclusion, achieve a higher remittance inflow and reduce informality and corruption within the country – so the assessment is not very clear.
Ita Mary Mannathoko, IMF Executive Director for Africa (Group 1) and Patterson Chukwuemeka Ekeocha, her adviser, emphasize the benefits of e-Naira in their closing statements. The central bank digital currency would help their country in many ways. This is how the e-Naira can:
- to improve the Nigerian payment system,
- to create financial inclusion, especially for people without bank access,
- collect taxes and thus generate income,
- to support targeted social measures,
- to improve remittance flows with foreign countries,
- prevent corruption.
They point out that the risks of the IMF mentioned would be reduced by digital currency management. Because the e-Naira relies on distributed ledger technology. Nevertheless, a ban on illegal money flows and the use of money for illegal activities on this blockchain would be possible. This is because the money transfer requires that the transaction partners identify themselves and the details of the transaction are recorded. Nonetheless, Mannathoko and Ekeocha emphasize taking technical assistance and guidance from the IMF.
e-Naira as a transparent means against the abuses
With a GDP of 432.3 billion US dollars , Nigeria is the largest economy on the African continent (for comparison: Austria’s GDP is 433.3 billion US dollars). Despite this, more than 42 million rural adults do not have access to banking services. In rural areas, only 40 percent have a formal bank account, which excludes them from traditional finance. With the e-Naira one wants to overcome these difficulties, therefore no bank account is necessary for level 1 of the transaction amounts. These people can still send or receive money up to $50 a day.
At the same time, the country has suffered greatly from the Covid 19 pandemic. The country is currently registering falling inflation of 15.6 percent. The IMF also expects that the food supply has deteriorated as a result of the pandemic and the rate of people in poverty has increased sharply. Here, the Nigerian government and central bank hope that the e-Naira can help to transfer social assistance faster and more completely to the needy places and people. Because according to the Corruption Perceptions Index (CPI), Nigeria only ranks 149th out of 180 countries considered.
It will therefore remain interesting to see how the Nigerian government balances these benefits against the risks identified by the IMF. At the same time, the question arises to what extent the identification model can be retained if stricter money laundering and financing regulations are introduced. Then just those people could be excluded from the financial system again, for which the connection would be life-changing.