Cross-border retail CBDCs can help financial inclusion for migrants

Digital currencies adding value to African monetary unions

Global remittances to low- and middle-income countries amounted to $540bn in 2020, according to OMFIF’s ‘Future of payments’ 2021 report. Over 200m migrants working across 40 countries send money to a further 800m people in 125 countries. On the ground, these inbound remittances can account for 60% of household incomes at the receiving end; at the macro level, these remittances are the single-largest source of foreign currency for many low-income nations. In countries as diverse as Lebanon, Kyrgyzstan and Tajikistan, inbound remittances account for between 25%-32% of gross domestic product. The numbers are staggering.

Unfortunately, it is challenging for migrant workers to keep this extremely important river of money flowing. Many, if not most, are under- or unbanked. Transferring money through formal channels is costly, time-consuming and intimidating; for those working illegally, it is often unavailable. This can force migrant workers to use the parallel economy, which is unregulated and under-reported.

Many of these issues are to be found in Africa. A recent study found that the cost for sending $200 from Tanzania to neighbouring Uganda could cost the sender almost 30% of the total. Clearly the senders can’t stop remitting; their families need the money. But just as clearly, they need better alternatives to feel more included in the global financial system.

As people continue to migrate from their homes for work, remittances will grow. Sub-Saharan Africa reflects this global trend. Cross-border retail central bank digital currencies have enormous potential in this situation. A properly designed CBDC doesn’t require a bank account, is intuitive to use and could be much cheaper and quicker than existing alternatives.

Many governments, central banks and other stakeholders on the African continent are pursuing this issue. They are moving quickly to address the pain points in order to maximise financial inclusion for their citizens.

One interesting direction of travel in the region is the move towards monetary unions sharing a common currency. Currently, two sets of nations in west and central Africa use two versions of the CFA franc. A further four countries in the south of the continent use, or link their own currencies to, the South African rand. The Economic Union of West African States has discussed replacing the CFA franc with the eco, while the larger African Union’s plans for further integration of its member nations include a euro-like common currency, administered by the African Central Bank. Called the afro or afriq, it will be used across the proposed African Monetary Union.

Such monetary unions open up significant potential for cross-border payments and digital currencies. The Bank of Central African States serves as the central bank for the Economic and Monetary Community of Central Africa (CEMAC). The bank’s board has been vocal in its demand that it rolls out a digital currency that can be used across the six member states of CEMAC.

That CBDCs are being put at the centre of future plans is heartening. Nigeria and Ghana are driving retail CBDC development in the region, and many of their neighbours are actively considering, or are already planning, their own.

It is clear that the financial inclusion of under-served populations is critical to sustainable development. The potential of CBDCs in this area cannot be over-estimated. It would be beneficial for central banks to consider cross-border functionalities when designing their national CBDCs.

A case in point is Filia, G+D’s award-winning CBDC solution. Its association with the Bank of Ghana’s eCedi rollout showed its real-world applicability. Financial inclusion is fundamental to both G+D Filia and the eCedi. G+D Filia can thus be a sound basis for greater inclusion into the digital economy in the region, with all its attendant benefits.

Roman Hartinger is Senior Business Analyst, CBDC, and Daniel Nagy is Business Analyst, CBDC, at G+D.

This is an edited version of a report published by G+D. Read the full paper to learn more.

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