IMF vs. e-Naira: Nigeria facing withdrawal of funds?

The started on October 25, 2021 first publicly available central bank digital currency in the world, not in China or Sweden, but in Nigeria. The state-secured payment method e-Naira, which cooperation which was developed with fintech Bitt Inc. has now been part of the money supply of the Nigerian Central Bank (CBN) for four months. In order to meet the needs of the population, the CBN uses a tiered identification model. The more information about the identity of the users is entered, the higher the available transaction amounts per day. There are four levels in total, for companies the transaction amounts are unlimited.

In a classic manner, the International Monetary Fund (IMF) has now examined the implications and effects of the new currency and comes up with its current Country Report 22/33 to interesting results.

“The e-Naira poses risks for monetary and operational areas”

The IMF warns of a more difficult implementation of monetary policy, the threat to both bank financing and cyber security. In addition, the International Monetary Fund sees the e-Naira as a threat to operational resilience and financial integrity and stability. That is why they are demanding regular risk assessments and the development of an emergency plan from the Nigerian government. In particular, the IMF calls for the current regulations on money laundering and terrorist financing to be tightened. That would pose considerable difficulties for the identification model already mentioned, because so far only verification with the telephone number is necessary at the lowest level.

The events of early February already show that the Nigerian authorities should take this statement seriously. At that time, the international law enforcement agencies froze in cooperation with binance several Nigerian binance-Accounts a. The accusation was: non-compliance with international money laundering standards.

Opportunities for the population

Likewise, the IMF sees the e-Naira as an opportunity to promote financial inclusion, achieve a higher remittance inflow and reduce informality and corruption within the country – so the assessment is not very clear.

Ita Mary Mannathoko, IMF Executive Director for Africa (Group 1) and Patterson Chukwuemeka Ekeocha, her adviser, emphasize the benefits of e-Naira in their closing statements. The central bank digital currency would help their country in many ways. This is how the e-Naira can:

• to improve the Nigerian payment system,
• to create financial inclusion, especially for people without bank access,
• collect taxes and thus generate income,
• to support targeted social measures,
• to improve remittance flows with foreign countries,
• prevent corruption.

They point out that the risks of the IMF mentioned would be reduced by digital currency management. Because the e-Naira relies on distributed ledger technology. Nevertheless, a ban on illegal money flows and the use of money for illegal activities on this blockchain would be possible. This is because the money transfer requires that the transaction partners identify themselves and the details of the transaction are recorded. Nonetheless, Mannathoko and Ekeocha emphasize taking technical assistance and guidance from the IMF.

e-Naira as a transparent means against the abuses

Nigeria is with $432.3 billion GDP the largest economy on the African continent (for comparison: Austria’s GDP is 433.3 billion US dollars). Still have more than 42 million adults living in rural areas do not have access to banking services. In rural areas, only 40 percent have a formal bank account, which excludes them from the traditional financial system. With the e-Naira one wants to overcome these difficulties, therefore no bank account is necessary for level 1 of the transaction amounts. These people can still receive amounts of up to $50 send or receive a day.

At the same time, the country has suffered greatly from the Covid 19 pandemic. The country is currently registering falling inflation of 15.6 percent. The IMF also expects that the food supply has deteriorated as a result of the pandemic and that the rate of people in poverty has increased sharply. Here, the Nigerian government and central bank hope that the e-Naira can help to transfer social assistance faster and more completely to the needy places and people. Because according to the Corruption Perceptions Index (CPI), Nigeria only ranks 149th out of 180 countries considered.

So it will be interesting to see how the Nigerian government weighs these benefits against the risks identified by the IMF. At the same time, the question arises to what extent the identification model can be retained if stricter money laundering and financing regulations are introduced. Then just those people could be excluded from the financial system again, for which the connection would be life-changing.