IMF On Kenya CBDC Paper, Commends Caution

IMF returned its comments on the Kenyan Central Bank Digital Currency (CBDC) discussion paper published in February 2022. In the Annex to its biannual country report, IMF staff economist warned the authorities of consequences, and criticized the paper for a lack of depth.

The Central Bank of Kenya (CBK) issued its CBDC discussion paper in February 2022, one month after US Fed’s discussion paper on the digital dollar. The overall impression from the paper with multiple redundant paragraphs is that its preparation was outsourced to an external party with a limited budget.

IMF responded to the request for comments in its July biannual country report, in Appendix II. Prepared by Majid Bazarbash, a young economist at IMF Monetary and Capital Markets Departments in Washington, the “high-level review” points CBK’s attention to the implications for banks and financial service providers, liquidity and monetary policy consideration, technical and other costs to the Central Bank. M-Pesa, a popular telecom operated money transfer system is mentioned as “systemic player in the payment system” and CBK is advised to “clarify” the measures for protecting it.

Launched in 2007 by Vodafone and Safaricom (Kenya largest mobile network operator), M-Pesa indeed provides a solution to the financial inclusion problem of Kenyans, it helps to connect workers in urban areas with their families in rural areas of the country. Some problems of social character remain, as mentioned by the Governor of the CBK in a recent talks with IMF representative, but clearly the financial inclusion problem is not the priority in the Kenya CBDC task list. Existing system seems also to be satisfactory for the authorities in terms of its transparency and provided accountability. So, IMF’s comments in “do no harm” tone are understandable.

IMF’s commentary on liquidity management is that introduction of CBDC will possibly shift much of the private bank’s short-term liabilities to the Central Bank’s balance sheet. According to Majid Bazarbash, that would add extra challenges of maintaining CBDC balances with the private banks or will result in total disintermediation. Private sector money including M-Pesa, in IMF’s view, is safe in this regard because there are mandatory reserve policies implemented for them.

The commentary touches also on the possible technical and financial costs for CBK connected with operations of CDBC. Given the high risks of technological attacks on digital money, CBK will also bear all of the reputational damage. The paper is missing in depth analysis of all associated costs, the author concludes.

Finally, IMF’s reviewer points out that the paper does not provide a holistic view of all CBDC research and development by other countries and institutions, citing IMF’s respective research, in particular.

Nevertheless, the Kenyan Central Bank have effectively put their country on the CBDC development map and IMF’s response showed that these developments will not pass unnoticed. We will continue to observe as well.