GCC countries can enhance financial inclusion and boost the efficiency of cross-border payment services by adopting central bank digital currencies (CBDCs), according to the International Monetary Fund (IMF).
The Washington-based fund said the adoption of CBDCs appears to be an important priority for the GCC countries, including the UAE, Saudi Arabia, Bahrain, Kuwait, Oman and Qatar, an IMF blog said, quoting a recent departmental paper ‘Central Bank Digital Currencies in the Middle East and Central Asia.’
At least 19 countries in the Middle East region, as well as Central Asia, are on track to issue CBDCs. While the UAE, Saudi Arabia, Bahrain, and Georgia have moved to the more advanced proof-of-concept stage, most other states are currently exploring the option at the research stage.
In January 2024, the UAE sent the first cross border payment using the UAE’s central bank digital currency, the Digital Dirham. A payment of Dh50 million was made to China using the mBridge cross border CBDC platform, where both countries are participants alongside Hong Kong. Another 23 central banks are observers.
Last year the UAE and China agreed to promote digital currency payments between the countries.
The Central Bank of the UAE executed the mBridge transaction during the bank’s fiftieth anniversary celebrations, which was also the eve of the first Brics meeting following its expansion from five to 10 member countries, including the UAE.
The CBUAE is encouraging all commercial banks and payments processors in the country to participate in a pilot integration with the CBUAE node for issuing Digital Dirham. The regulator has also decreed Digital Dirham adoption by all UAE licensed financial institutions by 2026.
The IMF blog said cross-border payments tend to have frictions like varying data formats and operating rules across regions and complex compliance checks. CBDCs that address these inefficiencies could significantly cut transaction costs.”
The IMF noted that central bank digital currencies can promote financial inclusion by fostering competition in the payments market and allowing for transactions to be settled more directly and with less intermediation. This, in turn, will lower the cost of financial services and make them more accessible. Central banks can also keep the costs lower, unlike commercial lenders, as they are not profit-oriented.
“Within the remittance space, the cost of transfers could be lowered, and the transfer times could be sped up. The impact, however, could vary from one country to another,” it said.
One of the risks is that CBDCs may compete with bank deposits, which make up a huge chunk of bank funding in the region. This could then put pressure on the profits of lenders and have implications for financial stability, although banks in the region generally enjoy adequate capital levels, profit margins and liquidity buffers. Within the GCC, large banks are especially dominant, the IMF noted.
“For monetary policy, CBDCs could strengthen the pass-through into deposit rates by increasing competition among banks,” the IMF said.
“A CBDC could also strengthen the bank lending channel of monetary policy. However, the impact would likely be country-specific and is difficult to estimate because CBDC uptake is limited so far,” said the blog.
The Qatar Central Bank recently said it has developed the infrastructure for the CBDC project, which will enter its first experimental phase extending to October 2024.