•Tasks CBN on risk management
Ndubuisi Francis in Abuja and Nume Ekeghe in Lagos
The International Monetary Fund (IMF) has revealed that Nigeria’s digital currency, the eNaira has been “drawing substantial interest from the outside world,” since it was unveiled on October 25, 2021.
In its ‘Country Focus’ article on Nigeria authored by Jack Ree of the African Department and published in its website, the IMF noted that like digital currencies elsewhere, the eNaira carries risks for monetary policy implementation, cyber security, operational resilience, and financial integrity and stability.
The fund noted that although the digital currency was expected to increase financial inclusion and facilitate remittances, the CBN should be prepared to manage the potential risk associated with managing a digital currency.
Noting that Nigeria’s eNaira was the second central bank-backed digital currency (CBDC) fully open to the public after the Bahamas, the IMF stated that countries and regions, such as China and the Eastern Caribbean Currency Union had been conducting CBDC pilots with a subset of their citizens.
It stated: “For example, eNaira wallets may be perceived, or even effectively function, as a deposit at the central bank, which may reduce demand for deposits in commercial banks. Relying as it does on digital technology, there is a need to manage cybersecurity and operational risks associated with the eNaira.”
The multilateral institution stated that in introducing the eNaira, the CBN envisaged that it would bring multiple benefits, which were expected to materialise gradually as it becomes more widespread and is supported by a robust regulatory system.
It listed some of the key benefits to include increase in financial inclusion; facilitation of remittances; exchange rate reforms, including a unified market-clearing rate that reduces the gap between official and parallel market exchange rates, and greater transparency to informal payments, among others.
The IMF noted: “For now, 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. A large number of people do not have bank accounts (38 million people; 36 per cent of the adult population), and allowing those of them with a mobile phone to have access to the eNaira would increase financial inclusion and facilitate more direct and effective implementation of social transfers programmes.”
On facilitation of remittances, the IMF stated that Nigeria was among the key remittance destinations in sub-Saharan Africa, with remittance receipts amounting to $24 billion in 2019, adding that remittances are typically made through international money transfer operators such as Western Union with fees ranging from one per cent to 5 per cent of the value of the transaction.
“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,” it stated.
“Exchange rate reforms, including a unified market-clearing rate, that reduce the gap between official and parallel market exchange rates would enhance the incentives for using eNaira wallets to send remittances.
“Nigeria has a large informal economy, with transactions and employment equivalent, respectively, to over half of GDP and 80 percent of employment. The eNaira is account-based, and transactions are in principle fully traceable, unlike token-based crypto asset transactions.
“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,” the IMF stressed.
The IMF pointed out that the Nigerian authorities have so far taken measures to manage the risks, adding that the transfer of funds from bank deposits to eNaira wallets was subject to daily transactions and balance limits to mitigate risks of diminishing the roles of banks and other financial institutions.
It stressed that financial integrity risks, such as those arising from the potential use of the eNaira for monetary laundering, are mitigated by using a tiered identity verification system and applying more stringent controls to relatively less verified users.
“For example, for now only people with a bank verification number can open a wallet, but over time coverage will be expanded to people with registered SIM cards and to those with mobile phones but no ID numbers. The latter categories of holders would be subject to tighter transactions and balance limits.
“Even so, wallet holders who meet the highest identity verification standards cannot hold more than 5 million naira (about $12,200) each in their eNaira wallets. To address cybersecurity risk, regular IT security assessments are expected to be conducted,” the IMF stated.
The multilateral agency noted that it remains available to help with technical assistance and policy advice, noting that the IMF’s Monetary and Capital Markets Department has been involved in the eNaira rollout process, including by providing reviews of the product design.
It further explained: “The 2021 IMF Article IV mission emphasized the need for monitoring risks and macro-financial impacts associated with a central bank digital currency.
“The IMF 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.”