Ethiopia Embarks on CBDC Journey as Part of Economic Reform

Ethiopia is embarking on establishing a central bank digital currency (CBDC) in a move to modernise its financial system.

Ethiopia’s privately owned newspaper, The Reporter, revealed the government’s interest in a CBDC in April and suggested launching a study in June. The National Bank of Ethiopia (NBE) indicated that it plans to join “the Cross Border Payment System by December.” The report did not provide any specifics regarding the system. The policy changes anticipated by the NBE proclamation involve establishing a legal framework for a CBDC as needed, increasing the NBE’s capital, and creating a legal foundation for consumer protection. 

The accompanying Naming Businesses Proclamation covers liberalising foreign investment in the banking sector, corrective measures for addressing “problems” banks and establishing a regulatory sandbox for innovative financial solutions. This initiative aligns with broader economic reforms aimed at boosting financial inclusion, enhancing monetary policy efficiency, and fostering economic growth. The country’s interest in digital currency reflects a global trend where central banks are exploring or implementing CBDCs to adapt to the rapidly evolving digital economy. The Council of Ministers has approved the proclamation, which will soon be presented to the House of Representatives.

The Rationale Behind Ethiopia’s CBDC Initiative

Ethiopia’s decision to explore the issuance of a CBDC stems from multiple economic and financial motivations. One of the primary drivers is the need to improve financial inclusion. Despite significant progress in recent years, a substantial portion of the Ethiopian population remains unbanked or underbanked, particularly in rural areas. A digital currency could facilitate more accessible access to financial services for these underserved populations, enabling them to participate more fully in the economy. Furthermore, a CBDC can enhance the efficiency of the country’s payment systems. Traditional banking and cash-based transactions are often slow, costly, and fraud-prone. 

A well-designed CBDC could streamline transactions, reduce costs, and enhance security. This would be particularly beneficial in Ethiopia, where the financial infrastructure is still developing and could greatly benefit from digital technologies’ leapfrogging potential. Another crucial aspect is the potential for improved monetary policy implementation. A CBDC could provide the NBE with better tools to monitor and control the money supply, respond to real-time economic changes, and implement financial policies more effectively. This is especially relevant in Ethiopia, where economic volatility and inflation pose significant challenges. 

Steps Toward Implementation

The journey towards a CBDC in Ethiopia will be multifaceted and requires careful planning and execution. The initial step involves conducting comprehensive research and feasibility studies. The NBE has already initiated this phase, collaborating with international experts and financial institutions to assess the potential benefits, risks, and technical requirements of a CBDC. On May 11 2023, Ethiopia initiated economic liberalisation measures, such as ending the state monopoly on mobile money services. The country already uses blockchain-based digital infrastructure for significant government payments. Public consultation is another critical step in the process. Engaging with various stakeholders, including commercial banks, fintech companies, and the general public, is essential to ensure that the CBDC is designed to meet the needs of all users. Transparency and inclusivity in this phase will help build trust and acceptance among the population.

Ethiopia must invest in advanced digital technologies to develop a reliable CBDC platform. This includes building secure systems to prevent cyber threats, ensuring interoperability with existing payment systems, and creating a user-friendly interface to facilitate widespread adoption. The regulatory framework must also be updated to accommodate the new digital currency. This involves creating new regulations and possibly amending existing ones to address data privacy, cybersecurity, and anti-money laundering (AML) measures. Ensuring that the legal framework is robust and flexible enough to adapt to future developments is crucial for the success of the CBDC.

Potential Challenges and Future Outlook

While the potential benefits of a CBDC in Ethiopia are significant, the journey is fraught with challenges. One of the major hurdles is the digital divide. Ensuring that the infrastructure reaches remote and rural areas, where internet and smartphone penetration might be low, is essential for achieving financial inclusion goals. Addressing this gap will require substantial investment in digital infrastructure and literacy programs. Another challenge is ensuring cybersecurity. As digital currencies become more prevalent, they also become attractive cyberattack targets. Ethiopia must implement stringent security measures to protect the CBDC system from threats. 

This includes regular security audits, advanced encryption techniques, and continuous system monitoring. The transition from a predominantly cash-based economy to a digital one may need more support from the public, especially among those less familiar with digital technologies. Effective public awareness campaigns and education programs will be necessary to build confidence and encourage the adoption of the CBDC. Despite these challenges, the future outlook for Ethiopia’s CBDC initiative is promising. If successfully implemented, a CBDC could transform Ethiopia’s financial landscape, making it more inclusive, efficient, and resilient. It could also position Ethiopia as a leader in digital finance in Africa, setting an example for other countries on the continent.