J Peter Pham & Erik Bethel

The volatility of cryptocurrencies like Bitcoin, Etherium, and Dogecoin continues to spark heated discussions in capital cities around the world.

Central banks, concerned about a possible loss of control over their own money supply, are actively engaged in the study of digitally issued currency, also known as central bank digital currencies (CBDCs).

Some governments are well beyond the discussion stage.

China, for example, has already tested a digital yuan and is set to launch its CBDC nationally within the next 12 months. According to the Atlantic Council CBDC Tracker, managed by the council’s GeoEconomics program and the Belfer Center for Science and International Affairs at Harvard University, more than 70 countries are currently leading CBDC initiatives.

In Africa, however, only nine of the continent’s 54 countries have some sort of CBDC program on the drawing board. The lack of meaningful political discussion on digital currency in Africa is disappointing as African countries can benefit tremendously from the adoption of digital currencies.

Failure to modernize African payment systems through CBDCs could be extremely debilitating for the continent.

Before exploring this question, it is important to define what a CBDC really is. Quite simply, it is sovereign legal tender – just like banknotes or paper coins – issued and backed by a country’s central bank.

A CBDC is therefore equivalent to cash represented in a digital form rather than a physical one. It is not a government version of a cryptocurrency like Bitcoin. It is also not a mobile payment platform operated by a mobile phone company like Safaricom’s M-Pesa, which allows the transfer of funds between cellphones.

Benefits of CBDCs

Africans were the first and most enthusiastic to adopt mobile phone payment systems, not only because many people do not have access to formal banking services, but also because even those with bank accounts prefer not to. not carry large amounts of paper invoices, not just for convenience, but also, of course, for security reasons.

African mobile payment platforms are so ubiquitous that of the 1.04 billion registered accounts worldwide, almost half are in sub-Saharan Africa.

However, there is a problem.

The various mobile payment solutions available to African consumers are not interoperable – or, at least, not without cumbersome payment settlement steps. The lack of interoperability will therefore slow growth.

In the DRC, despite some 30 million mobile money subscribers, the active usage rate remains low because Airtel Money users cannot easily make payments to users of competitor Orange Money without undergoing a reconciliation and reconciliation process. complicated (and expensive) settlement. A digital Congolese franc, legally issued by the government, would solve these problems.

Revenue collection

Although tax regimes vary widely across Africa, tax revenues as a proportion of GDP are considerably lower than in other regions of the world.

Data from the Organization for Economic Co-operation and Development (OECD) for 2019 indicated that governments on the continent have, on average, a tax-to-GDP ratio of 16.5%, compared to the OECD average of 34.3% and the average for Latin America and the Caribbean. by 23.1 percent.

Because it is difficult for African governments to collect taxes at the national level, they are highly dependent on import tariffs. A United Nations study estimated that import tariffs accounted for 25% of African government revenues, compared to a global average of 1% in highly developed countries, 5% in middle-income countries and 6% in high-income countries. low income countries.

Import tariffs hurt the poor by making products much more expensive. Rather than relying on punitive tariffs as the government’s main source of revenue, we believe that creating legal digital currency would help Africa significantly.

A digital currency could, in theory, be “programmed” to charge a very small sales tax on all transactions. Instead of tariffs, a modest sales tax that is effectively collected digitally could fund government spending such as teachers’ salaries, police, health care, and infrastructure.

Social insurance and personal income taxes are also easier to control with digitization.

Protect sovereignty

Africans fought hard for independence; and lately some countries have fought even harder for monetary sovereignty.

It has been less than a year since the French cabinet agreed to stop forcing the centralization of the foreign exchange reserves of eight of the former West African colonies in order to allow these countries to launch a regional currency with the rest of the Economic Community of West African States. (ECOWAS).

But even with this victory in hand, could a new hegemony take over from the French?

Enter China: With an impressive digital currency initiative, powerful financial payment companies such as Alipay and a dominant position in the smartphone market in Africa.

Will China harness these advantages and push the development of African digital currencies using Chinese technological standards? Judging by China’s track record on the mainland, it’s hard to imagine a scenario where China doesn’t showcase its advantages.

Illicit flows

A CBDC would certainly improve the ability to track money flows and help African countries recover some of the estimated US $ 88.6 billion that leaves the continent on illicit capital flight each year, an amount that almost equates to the total. total annual inflows of official development assistance. and foreign direct investment.

Digital currencies can also help track financial flows in conflict minerals, weapons and drugs.

Africa still needs to tackle several issues before launching a successful CBDC, including the continued development of telecommunications and other infrastructure, as well as improving access to national identity documents (and the creation of ‘secure digital identities).

But just as Africans have quickly and eagerly adopted mobile payment systems, so can they lead with digital currencies.

The recent Paris summit on reviving African economies – which included more than 20 African heads of state, senior European officials and heads of international financial institutions – underscored that the focus has shifted from a health crisis to economic revitalization.

As the continent emerges from the COVID-19 pandemic, we approach a critical time for African governments and other stakeholders to focus on this next challenge. – News week

Erik Bethel is a distinguished member of the Digital Chamber of Commerce. J Peter Pham, served as United States Special Envoy for the Great Lakes Region of Africa from 2018 to 2020

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