Zimbabwe: Is a central bank digital currency feasible?

By Farai Shawn Matiashe
Posted on Monday, 4 April 2022 11:12

A street vendor poses as he displays bond notes, before the introduction of new currency in Harare
A street vendor poses as he displays bond notes, before the introduction of new currency in Harare, Zimbabwe, November 11,2019. REUTERS/Philimon Bulawayo

Zimbabwe has turned its attention to how it may adopt a central bank digital currency (CBDC). Even so, how feasible is a CBDC, a digital currency that exists purely in electronic form, for Zimbabwe's cash strapped economy, and how will this effect the existing mobile money landscape?

In 2018, Finance Minister Mthuli Ncube banned banking institutions and other financial firms from trading in cryptocurrencies, which was a huge blow to digital currencies fast gaining ground in the country at the time.

However, after visiting Dubai Multi Commodities Centre (a crypto centre in Dubai) last September, Ncube seems to have changed his stance.

He said on Twitter: “I visited the DMCC CRYPTO CENTRE in Dubai, which is a fascinating incubation hub for crypto currency and payment solutions. Came across solutions that could lower charges for diaspora remittances.”

Value

The digital currency phenomenon is not new to Zimbabweans as they have been using their own Real Time Gross Settlement (RTGS) and mobile money platforms, such as Ecocash and Netone’s OneMoney, for some time.

“All these existing platforms like Ecocash and RTGS are simply payment platforms. They do not actually move value, but simply send messages – a digital currency in tokenised form will actually move value across and make payments more efficient,” says Prosper Mwedzi, a financial technology lawyer based in the United Kingdom.

It will not be an alternative to Ecocash, but Ecocash will build a system around the CBDC and integrate itself with the new system.

“A CBDC will be a departure from existing technology and could bring better transparency. The design is what will tell us if the CBDC will [enhance] existing systems,” he says.

According to Confidence Nyirenda, a community developer at Xinfin.org (an organisation that uses blockchain technology to improve the overall deficit in the global infrastructure), the introduction of the CBDC is not a threat.

“It will not be an alternative to Ecocash, but Ecocash will build a system around the CBDC and integrate itself with the new system. Remember a CBDC is only a currency that is tied to a country’s currency. Its introduction will not replace existing institutions like banks,” he tells The Africa Report.

Monopoly

Between 2020 and 2021, the central bank cracked down on mobile money platforms across the country and cut limits on cash transfers as well as the use of agent lines across its network. At the time, the Reserve Bank of Zimbabwe accused Econet of running a Ponzi scheme, using its platform as a foreign currency exchange, which was fuelling inflation.

As such, some analysts believe that a CBDC could be a move to reduce – even further – the monopoly that Strive Masiyiwa’s Ecocash has in the Zimbabwean economy. “What [the government is] trying to do is control of all the modes of transacting by – to some extent – mimicking the features of cryptocurrencies as they are considering a CBDC,” says political analyst Kudakwashe Munemo.

Blockchain brings transparency into account since it is immutable.

Victor Bhoroma, an independent economic analyst, says any digital currency implemented by the RBZ can only hold value provided there is free-market price discovery, economic policy stability and proper management of electronic money supply growth.

Feasibility 

Mwedzi says a CBDC is feasible in Zimbabwe ,but there are several issues for consideration, such as its implications on privacy, technical expertise and resistance from banking institutions.

“In this regard, the design needs to ensure that it does not undermine the privacy of citizens. There is also the issue of ensuring that those who want to use cash can still use it otherwise those who are not connected online or without the hardware could end up being excluded,” he says.

Mwedzi says the existing technology in payments will not be able to support a CBDC and adapting current payments infrastructure could be expensive.

Moreover, the banking sector could push back because a retail CBDC, which is distributed directly to citizens, could result in the disintermediation of commercial banks, given that they are the only ones who hold accounts with the central bank. “It means they could lose their bread and butter [deposit-taking],” he says.

Nyirenda says the CBDC could bring a change in the structure of Zimbabwe’s financial system, which could alter the roles and responsibilities of the private sector and the central bank, consequently affecting monetary policy implementation.

If there is no discipline within those that are entrusted with the state coffers, the CBDC will still be a failure.

Nevertheless, a CBDC is feasible in Zimbabwe and it will bring financial inclusion to the masses, he says. “Blockchain brings transparency into account since it is immutable,” says Nyirenda. He however notes that the authorities in Harare might find it hard to adopt and given that Zimbabwe has a history of policy missteps that have caused currency failure, the CBDC could also fail.

“If there is no discipline within those that are entrusted with the state coffers, the CBDC will still be a failure. There is a need for sound monetary policies that will guarantee that the currency does not plummet. The technology is great, but using [it] the wrong way will just yield a disaster,” says Nyirenda.

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