Should Africans adopt the use of Digital currencies?

 

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Digital currencies can take various forms but can be broadly classified into two, namely: Centralised digital currency and Decentralised digital currency. Centralised digital currencies are those digital currencies with legal backing from a centralised authority while decentralised digital currencies are the mere opposite.

Now let’s dive into the main purpose of our analysis, we have all witnessed the growing popularity of digital currencies in recent times, most especially decentralised digital currencies (Cryptocurrency) such as Bitcoins and Altcoins. 

According to an article published on Yahoo Finance, the cryptocurrency market was worth over 2.22 trillion dollars in 2021, this figure is just $500 million less than the worth of the entire African economy measured using nominal GDP. Surprisingly, Nigeria tops the list of countries with the most crypto users. Reports from a survey conducted show that 1 out of 3 respondents from Nigeria report having used or owned one type of crypto or another in 2020. 

The race to develop a more efficient, transparent and seamless medium of exchange has taken a momentous toll and Central banks have refused to be left behind. The introduction of central bank digital currencies CBDC by many central banks across the world especially in Africa shows how unrelenting and determined they are. 

The diagram above by IMF shows the stages of development or adoption of Central Bank Digital Currency (CBDC) by central banks in Africa. However, Nigeria seems to be the only African country on the chart to have fully launched its own digital currency. 

It is worth noting that despite the growing popularity and relevance of digital currency in today’s dynamic world, it is nowhere close to the conservative medium of Exchange ‘Physical or paper money’ when compared in terms of adoption and usage.

Threats to the successful adoption of Digital currency in Africa 

The Internet penetration rate in the continent is still below average, According to a report by Internet World Stats, internet penetration in Africa stands at 43.1% as of December 2021. This tells us that if digital currencies like Bitcoin are to be adopted in the continent, frantic efforts will have to be put in place to ensure that Africans have access to the internet. However, it is important to note that some Central bank Digital currencies like the e-naira can work without the Internet, but will require a cell phone. This brings us to another question, What percentage of Africans have access to Mobile services? 

By the end of 2020, 495 million people subscribed to mobile services in Sub-Saharan Africa, representing 46% of the region’s population, an increase of almost 20 million in 2019. 

Adopting digital currencies in Africa will put over 50% of the continent’s population at a disadvantage, most especially people in the Sub-Saharan region where the poverty rate is high and literacy rate is low.

In 2021, 67.4 per cent of people aged 15 years and above in Africa were able to read and write a simple statement and understand it and most of these people reside in urban areas. Making use of a digital currency requires basic knowledge of reading and writing which many rural dwellers are incapable of.

What impact would cryptocurrency trade have on the economy (my perspective)

Let’s take a slide into the potential economic impact of cryptocurrency in Africa; For this analysis, I will be very practical and would relate it to economic situations such as labour, productivity and inflation. I won’t be talking about financial inclusion, fraud or cross-border payments as there are already lots of articles written in that regard.

Cryptocurrencies can result in reduced productivity for African nations. In 2021, a report released by Binance shows that Nigeria tops the list of countries adopting Crypto. While this might seem like good news in a country with a young and tech-savvy population, let’s look at the dark side. 

Increasingly, young Africans (Especially Nigerians) who leverage the volatility of cryptocurrency to earn income have now ventured into crypto trading as a full-time profession. 

So how does this affect productivity in a nation? productivity refers to how much output can be produced with a given set of inputs. Those who understand basic economics will agree with me that labour is a very essential input for production. 

When the availability of labour decreases or the value created by labour decreases, then productivity or production automatically declines. When a sizeable number of a country’s youth population engages in unproductive trades or creates no value, then the overall productivity in that nation declines. 

What happens when there are more people trading value than creating value? Value becomes more expensive. If the young African population continues in the trend of taking advantage of crypto’s volatility then we might end up breeding an unproductive population. When viewed from an aggregate position, products and services are going to become more expensive thereby triggering inflation. This is because the amount of money in circulation (in people’s hands) is now more than the value that has been created.

There are many viewpoints from which these issues can be analysed. Some may argue that cryptocurrency creates employment or income, Yes it does, but at what expense? 

Will Central Bank Digital currencies be successful in Africa?

Let’s conclude this whole analysis by delving into CBDCs, Do you think CBDCs will be successful in Africa? To start my analysis, I visited the Google Play store to find out how many downloads the Nigerian E-naira app has. Surprisingly the app only has 100k downloads as of when this article was written, this is after almost one year of launch, when compared to the Kuda bank app which was launched in 2016, we would see that the adoption of eNaira is lagging significantly. Mathematically, if the e-naira app is to maintain its current growth rate on an annual basis, it is expected that the app will have 600k downloads in the next 5 years which is less than 0.5% of the entire Nigerian populace. 

Amongst the 10 principles of economics, there’s one principle that stands out in this context and that is ‘People respond to incentives’. The question is; What incentives has the Nigerian government put in place to facilitate the adoption of the E-naira? Why should I use an alien E-naira for my transactions instead of using My bank mobile App? 

The first answer to this question is ‘Trust‘. For CBDC to be successful in Africa, governments must ensure that their citizens are well informed and convinced of their motives and intentions, and the only way this can be achieved is by practising fair, good and transparent governance. We have witnessed how the Zimbabwean economy became dollarized due to citizens losing trust in the nation’s currency. If you reside in Nigeria, you will agree with me that the US Dollar is fast becoming a medium of exchange in the country. This is to say, it’s not just the digital currencies that can suffer a loss of relevance, even paper currencies can. 

What are your own thoughts about digital currencies? 

References 

1. https://finance.yahoo.com/news/countries-using-cryptocurrency-most-210011742.html
2. https://statisticstimes.com/economy/africa-gdp.php
3. https://blogs.imf.org/2022/06/23/more-african-central-banks-are-exploring-digital-currencies/
4. https://www.internetworldstats.com/africa.htm
5. https://www.gsma.com/mobileeconomy/sub-saharan-africa/
6. https://www.statista.com/statistics/1233204/adult-literacy-rate-in-africa-by-region/
7. https://www.rba.gov.au/education/resources/explainers/productivity.html