Chart of the WeekMore African Central Banks Are Exploring Digital Currencies

By Habtamu Fuje, Saad Quayyum and Franck Ouattara

Several sub-Saharan African central banks are exploring or in the pilot phase of a digital currency, following Nigeria’s October introduction of e-Naira. Nigeria was the second country after the Bahamas to roll out a CBDC.

CBDCs are digital versions of cash that are more secure and less volatile than crypto assets because they are issued and regulated by central banks. As the Chart of the Week shows, South Africa and Ghana are running pilots while other countries are in the research phase.The South African Reserve Bank is experimenting with a wholesale CBDC, which can only be used by financial institutions for interbank transfers, as part of the second phase of its Project Khokha. The country is also participating in a cross-border pilot with the central banks of Australia, Malaysia and Singapore.

The Bank of Ghana, by contrast, is testing a general purpose or retail CBDC, the e-Cedi, which can be used by anyone with either a digital wallet app or a contactless smart card that can be used offline.

Countries have different motives for issuing CBDCs but for the region there are some potentially important benefits.

The first is promoting financial inclusion. CBDCs could bring financial services to people who previously didn’t have bank accounts, especially if designed for offline use. In remote areas without internet access, digital transactions can be made at little or no cost using simple feature phones.

CBDCs can be used to distribute targeted welfare payments, especially during sudden crises such as a pandemic or natural disaster.

They can also facilitate cross-border transfers and payments. Sub-Saharan Africa is the most expensive region to send and receive money, with an average cost of just under 8 percent of the transfer amount. CBDCs could make sending remittances easier, faster, and cheaper by shortening payment chains and creating more competition among service providers. Faster clearance of cross-border payments would help boost trade within the region and with the rest of the world.

There are risks and challenges that need to be considered before issuing a CBDC, however. Governments will need to improve access to digital infrastructure such as a phone or internet connectivity. While the region has made significant strides, more investment is needed.

More broadly, central banks will need to develop the expertise and technical capacity to manage the risks to data privacy, including from potential cyber-attacks, and to financial integrity, which will require countries to strengthen their national identification systems so know-your-customer requirements are more easily enforced. There is also a risk that citizens pull too much money out of banks to purchase CBDCs, affecting banks’ ability to lend. This is especially a problem for countries with unstable financial systems.

Central banks will also need to consider how CBDCs affect the private industry for digital payment services, which has made important strides in promoting financial inclusion through mobile money.

—See our latest Regional Economic Outlook for more on CBDC developments

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From 1980s Debt Crisis to Crypto Era, Financial Stability Monitoring is Always Evolving

By Tobias Adrian, Fabio Natalucci and Mahvash S. Qureshi

The IMF’s Global Financial Stability Report, introduced in 2002, was a step toward a more comprehensive assessment of risks in financial markets and cross-border capital flows.

Twenty years ago, the IMF released its inaugural Global Financial Stability Report to strengthen surveillance of financial markets after a series of crises in emerging market economies and the dot-com bust.

This semiannual publication by the Monetary and Capital Markets Department has since evolved through years of seismic shifts in the global economic and financial landscape into one of our key multilateral surveillance tools. Along with the World Economic Outlook and the Fiscal Monitor, this flagship report aims to foster international monetary and financial stability.

The beginning

Monitoring the health and outlook of the global economy and member countries is the bedrock of the Fund’s work. This surveillance role, outlined in amendments to our Articles of Agreement first adopted at the 1944 Bretton Woods Conference, charges us with overseeing and safeguarding the international monetary system.

In the early years, surveillance focused on the macroeconomic and exchange-rate policies of member nations, but growth in international banking in the early 1970s highlighted a need to better track global capital markets and assess financial-stability implications. Consequently, the Fund started discussions with monetary authorities in major financial centers and in 1974 initiated internal reports on market developments and prospects.

Starting in 1980, the report known as International Capital Markets became our main vehicle to monitor conditions in financial markets, warn of risks, and analyze disruptions like Latin America’s debt crisis of the 1980s or Europe’s exchange-rate mechanism crisis in the early 1990s. But that era’s rapid expansion and integration of global capital markets, and the ensuing financial crises in Asia and several other emerging markets, highlighted the need to better assess systemic risks.

The introduction of the Global Financial Stability Report marked an important step toward a more comprehensive and frequent assessment of cross-border capital flows and financial market risks. In his forward to the first GFSR, the then-Managing Director Horst Köhler noted how the report had its roots in crisis.

“The rapid expansion of financial markets has underlined the importance of a constant evaluation of the private sector capital flows that are the engine of world economic growth, but sometimes at the core of crisis developments as well,” he wrote. “Opportunities offered by the international capital markets for enhancing global prosperity must be balanced by a commitment to prevent debilitating financial crises.”

Turning point

The GFSR has since focused on identifying cyclical and structural vulnerabilities in the bank and nonbank sectors of advanced and emerging market economies, the risks they pose, and the policy options to mitigate these risks.

Vulnerabilities such as leverage tend to build up when financial conditions are easy and investor risk appetite is strong. And in times like that, our stability reports place more emphasis on potential threats we see building.

One of the most pivotal moments for the GFSR arrived in 2007, when contagion from the US housing slump shook the world’s economies and markets. In a tightly integrated world, the global financial crisis underscored just how critical it is to better connect the dots between institutions, sectors, and countries.

Since then, the Fund has increased its efforts to analyze and understand interlinkages and systemic risks, cross-border interconnectedness and spillovers, and the role of macroprudential policies in strengthening financial system resilience.

In recent years, we have adopted a conceptual framework for more systematic assessment and monitoring of financial stability risks. It centers around vulnerabilities that amplify negative shocks, creating an adverse feedback loop between falling asset prices and tightening financial conditions, deleveraging by financial firms, and weakening economic activity.

The empirical implementation of the framework relies on two tools: a broad set of key vulnerability indicators for the financial and real sectors (such as debt-servicing capacity and the ratio of liquid assets to short-term liabilities) that can serve as intermediate targets for macroprudential policies (such as capital buffers and liquidity coverage ratios); and an aggregate measure of how financial stability risks could affect expected global economic activity, which we call “growth at risk.”

These tools are complementary for monitoring and policymaking purposes, as a granular analysis of specific exposures provides the necessary nuance and depth to the summary measure of threats to economic growth.

The GFSR has also actively called for an overhaul of the international regulatory landscape to address the gaps revealed by the global financial crisis. In addition, it has backed strengthening oversight of nonbank financial institutions, which have taken on a bigger role in intermediation since the crisis and could make the system more vulnerable.

Constant vigilance

Though we have made progress, the continuous evolution in global financial markets—not least because of the dizzying pace of technological innovation—is always introducing new vulnerabilities and risks that demand constant vigilance. For instance, the advent of fast and highly sophisticated computer technology has facilitated the growth of high-frequency trading, which can improve market efficiency but can also be a source of market instability.

Other emerging technologies such as artificial intelligence and distributed ledger are revolutionizing financial markets through fintech and crypto assets that carry opportunities but also fundamental risks that the GFSR is bringing to the fore. Climate change poses another stability threat that we are increasingly analyzing, along with the role that sustainable finance and the private sector can play in fostering a green transition.

And now, as our recent reports have highlighted, the enduring pandemic and war in Ukraine have further compounded financial risks by exacerbating pre-existing fragilities, contributing to the greatest inflationary pressures in decades, and confronting international capital markets with greater risk of fragmentation.

More than ever, rapid technological change as well as frequent and varied shocks make our surveillance crucial for safeguarding international monetary and financial stability in order to promote growth and inclusion. And it’s increasingly clear that, to do so, we must constantly adapt and sharpen our tools for assessing risk to better scan the global financial landscape and strengthen its resilience.

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