HSBC Research – Nigeria and the eNaira: Africa’s first digital currency

Nigeria launched the eNaira on 25 October, putting the country among the global first movers in establishing a Central Bank Digital Currency (CBDC). Only the Bahamas and Eastern Caribbean Central Bank had previously issued a widely available CBDC.

The eNaira issued by the Central Bank of Nigeria (CBN) will be a direct liability of the bank, legal tender at par with the physical NGN, and form part of the currency in circulation.

The CBN sees the eNaira as supporting financial inclusion through providing a less costly, more efficient and safe means of payment in a country where the World Bank estimates that c60% of the adult population was unbanked in 2017 (latest data). Beyond the economic gains from increasing financial inclusion, the CBN also sees the eNaira as enhancing the government’s capacity to deliver targeted social assistance, and boosting diaspora remittances through formal channels. These remittances are a critical source of foreign exchange in Nigeria, equalling c6% of GDP (USD24bn) ahead of the pandemic.

The CBN also argues that the eNaira can help improve the effectiveness of monetary policy. While this may prove to be the case for some of the bank’s targeted lending programmes, we see less immediate relevance to policy settings that have responded more to the soft growth recovery than inflation that has averaged about 17% this year (see CEEMEA Economics Quarterly: Getting it right, playing it wrong, 29 September 2021).

In terms of design, the eNaira has three key features: It is exchanged peer to peer, it is universal – anybody can hold it – and, maybe most interestingly of all, it does not yield any interest. The design considerations are something that central banks all over the world are grappling with – as we outlined in Central Bank Digital Currencies: 10 questions: A digital display, 6 July 2021. This has held up progress for CBDCs in many parts of the world, particularly developed markets.

The speed of the release of the eNaira, having only started assessments in June this year, may therefore signal that in the near term CBDCs may be a more relevant topic for emerging markets, rather than developed markets. With the incentives to benefit from greater levels of financial inclusion, we expect more EM central banks to make strides in the space in the coming years.