Ethiopia Initiates Introduction of CBDC as Part of Economic Reforms

Jimmy Aki
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Ethiopia’s Council of Ministers approved banking reforms that propose a legal framework for developing Ethiopia’s CBDC and opening the banking sector to foreign investment.

These proposed reforms, introduced under the banner of “The National Bank of Ethiopia (NBE) Proclamation and the Banking Business Proclamation,” aim to reshape the financial structure of Ethiopia.

Ethiopia’s CBDC and Proposed Reforms are Subject to Review & Comment

In a recent press release, the NBE announced that the approved draft proclamations will soon be referred to the House of Peoples’ Representatives for review, comments, and final ratification.

The NBE Proclamation aims to create a legal framework for Ethiopia’s CBDC, a central bank digital currency. This includes establishing necessary regulations and guidelines for the development and use of a CBDC within the country. Additionally, the proclamation seeks to increase the capital of the National Bank of Ethiopia, thereby strengthening its financial position and ability to manage the nation’s monetary policy effectively.

Ethiopia’s CBDC
Excerpt of the National Bank of Ethiopia press release

It also introduces legal measures to enhance consumer protection, ensuring that the interests of financial consumers are safeguarded in the evolving financial landscape.

The accompanying Banking Business Proclamation addresses several critical areas. Firstly, it aims to liberalize foreign investment in Ethiopia’s banking sector, opening the doors for foreign banks and investors to participate in the Ethiopian financial market. This move will increase competition, improve banking services, and bring much-needed capital and expertise.

Secondly, it outlines corrective measures for dealing with “problem” banks, those underperforming or facing financial difficulties, to ensure stability and protect depositors. Lastly, the proclamation introduces a regulatory sandbox, a controlled environment where financial innovations can be tested and developed under regulatory supervision, promoting innovation and the adoption of new financial technologies.

Both reforms take into account Ethiopia’s current and future development levels and policy directions. They also consider the rapid technological advancements in the financial sector, adhering to international principles and best practices observed by peer central banks. These comprehensive changes are aimed at modernizing Ethiopia’s financial system, making it more resilient, inclusive, and aligned with global standards.

Insights into Both Edges of Ethiopia’s CBDC

On May 24, 2024, the National Bank of Ethiopia published a Financial Inclusion Implementation Framework, which detailed that the country’s financial inclusion level stands at 46%, significantly lower than Kenya (83%), Rwanda (77%), and the Sub-Saharan average (55%).

Introducing a CBDC in Ethiopia could improve financial inclusion by providing access to digital financial services for the unbanked population, promoting economic participation. It would improve the efficiency and transparency of the payment system, reducing transaction costs and minimizing the risk of fraud.

Additionally, a CBDC could facilitate more effective monetary policy implementation, allowing the central bank to better control the money supply and manage economic stability. The idea of Ethiopia’s CBDC is similar to that of Israel as the Bank of Israel expects digital shekel to improve financial competition and bolster the digital economy of the country.

However, there are potential threats that raise high concerns. The implementation of a CBDC could pose cybersecurity risks, making the financial system vulnerable to hacking and other digital attacks. Furthermore, it may lead to privacy concerns, as the central bank would have increased access to individuals’ transaction data, potentially compromising personal financial information.

About Jimmy Aki PRO INVESTOR

Based in the UK, Jimmy is an economic researcher with outstanding hands-on and heads-on experience in Macroeconomic finance analysis, forecasting and planning. He has honed his skills having worked cross-continental as a finance analyst, which gives him inter-cultural experience. He currently has a strong passion for regulation and macroeconomic trends as it allows him peek under the global bonnet to see how the world works.