Nigeria’s eNaira, one year after (1)
Nigeria’s eNaira was the first Central Bank Digital Currency in Africa and only the second in the world when it launched in October 2021, but a growing number of countries across the globe are now planning to follow suit with their own CBDCs.
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What can they learn from Nigeria’s experience? Jookyung Ree is an economist in the IMF African Department and assigned to Nigeria when the CBDC was introduced.
Ree has since studied its impact on the economy and found that existing mobile money networks are proving a challenge to the eNaira’s adoptability. In this podcast with Bruce Edwards (BE), Jack Ree (JR) says the eNaira will need to complement mobile money systems to convince more Nigerians to use it.
(BE):Nigeria's eNaira was one of the first of a growing number of central banks wanting to launch their own, but what do Central Bank Digital Currencies or CBDCs actually bring to the table?
(JR):From the customer's point of view, the utility that the existing mobile money provides is very similar to the utility that CBDCs can potentially provide, and there are already like 25 mobile money operators... So somehow the CBDC might not mean a game-changing value edition.
(BE):In today's program, what we can learn from Nigeria's CBDC experience and how its Central Bank might convince more Nigerians to use it.
(JR):The next two, three years will be very important. They will need to make the right strategy in terms of setting relationships with mobile money, so that either compliment or substitute. Probably in Nigeria's case it's going to be a complimentary model that makes sense.
(JR). I'm an Economist working for the African department. Currently working on Zambia, but my previous assignment was in Nigeria.
(BE):Jack Ree is also the author of a research paper called, Nigeria's eNaira, One Year After. Check it out at imf.org.
So Nigeria was the first on the continent or the African continent and only the second in the world to launch a CBDC or Central Bank Digital Currency.
Why would it choose to do that? I mean with all the other challenges the country faces, why did the government make this a priority?
(JR):That's a very interesting question. I think that certainly there has been some political backing because the former president, Mr. Buhari, himself was quite interested in doing something digital, and Nigeria being seen as the champion of some sort of innovative digital revolution in Africa.
So probably that's one of the political drives that is coming from that front, but that's speculative. So based on the central bank's own account of their motivation, essentially three big reasons.
The first motivation is financial inclusion, which is not really much of a problem for many of the advanced central banks. For example, Bank of England recently did quite deep research on whether or not to do a CBDC on its own.
And for Bank of England financial inclusion is not much of a problem.
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% of total of their population.
(BE):38 million adults don't have bank accounts?
(JR):Right. So that's quite large. 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. And the other reason is remittances.
Nigeria is one of the largest remittance recipient countries in Sub-Saharan Africa. Before pandemic, the size of the annual remittance that Nigeria alone has received was close to 25 billion dollars per year.
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That's a lot of money, but since the pandemic, for a lot of reasons, the remittances really fell down quite dramatically and it never recovered to the pre-pandemic level.
And then along with many other developing countries, they thought that making remittances cheaper may be the way to go.
Currently, for remittance through the, what's called, International Money Transfer Operators, IMTOs like Western Union, typically costs like seven to 8% margin in every dollar you send.
And with the CBDC you can, in theory, bring down that close to zero. So that was another big reason.
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Third reason is the presence of large underground or informal economy in Nigeria. So the size of the informal economy in terms of employment is almost 80% in Nigeria because all our people in non-urban areas, they're all sort of informal.
So informal economy means that a lot of money are 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 use, 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.
(BE):So your research is a bit of a stock-taking on this CBDC that was launched now in, what year was it launched?
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(JR):That was 2021. October, I think. Yes.
(BE):And you started doing your research about a year after it was launched?
(JR):Yes.
(BE):Looking at how effective it was. So how have Nigerians accepted the CBDC? Are they using it to the extent that they were hoping or at least that the government was hoping that they would or the central bank was hoping that they would use it?
(JR):That's a mixed bag because first of all, it's very difficult to get any statistics or data on CBDC usage.
So I was very privileged to have the courtesy of the central bank to share the data, very granular data with me.
But the data essentially says that after one year the number of wallets... CBDC has to be downloaded as a wallet in your phone, like an app. And the number of downloads was less than 1 million, something like 860,000 as of end of November.
That's the last data point that you got. That- compared to Nigeria's huge population, it's like less than 1% of the total number of bank accounts. So that's fairly small, fairly modest, if I may say.
And what is a little bit more somewhat disappointing was a slowness in terms of the usage because a lot of wallets that has been downloaded, well, not actually used, they were remain in the state of dormancy.
My paper found that about 98.5% of the total wallets that has been downloaded was not