Central Bank: With 18 percent unbanked, push to improve CBDC adoption

Researchers at The Central Bank of The Bahamas estimate that 18 percent of people in The Bahamas are unbanked, and if that number is cut in half, The Bahamas could see a reduction in economic volatility.

The bank recently published a working paper on its first digital currency the Sand Dollar, showing that the adoption rate remains low at 7.9 percent.

The Sand Dollar was launched in the fourth quarter of 2019. Since then, researchers said circulation has increased by a factor of three, with $303,785 in circulation as of July 2022.

While the pandemic caused a reduction in transactions and their value, wallets in use grew to more than 32,000.

“We use a two-agent New Keynesian (TANK) model to assess the introduction of CBDC in The Bahamas. We assume that CBDC will lead to a decrease in the number of unbanked in The Bahamas. As these individuals acquire access to financial institutions, the fraction of hand-to-mouth agents in the economy falls. The current number of unbanked individuals is estimated to be roughly 18 percent,” researchers said.

“If this number is cut in half, the economic benefits include a reduction in the volatility of all shocks; monetary policy is more effective at controlling inflation and contributes less to the volatility of the overall economy; and fiscal policy becomes more Ricardian, mitigating the size of fiscal shocks.

“If adoption rates cut the number of unbanked in half, the volatility attributable to policy shocks (government spending and monetary policy) would be reduced substantially. However, with a significant fraction of non-savers (low adoption rate), government spending and monetary policy have significant impacts on macro aggregates. For inflation, the wage rate and consumption, monetary policy shocks are the dominant shock responsible for the most volatility. The intuition for this result is that if households cannot save, they rely more heavily on policy to make ‘correct’ economic decisions. If policy makers introduce significant shocks into the economy, the volatility pass-through is substantial. More so than if adoption rates are low,” researchers said.

“Intemporal substitution is critical for households to make optimal consumption/savings decisions. As more people are introduced to financial services, they can save optimally and will not react adversely to a shock. For example, suppose non-savers are hit with a monetary policy shock (increase in the interest rate). Normally, one would allocate consumption into the future as rates rise. This puts downward pressure on aggregate demand and prices – a positive monetary policy shock reduces inflation. However, non-savers are not able to reduce consumption, so the central bank’s control of inflation is mitigated. If the number of non-savers is substantial – as in The Bahamas – the control of inflation is reduced significantly. Therefore, CBDC could foster an environment conducive to improved monetary policy outcomes.”

To improve the Sand Dollar’s adoption rate, researchers said it’s imperative commercial banks and electronic money service providers conduct educational campaigns.

“Also, town hall meetings and virtual seminars and workshops should be pursued as a means of reaching the public. Through multilateral partnerships, consumers and merchants should be engaged in a manner to ensure financial instruments are easily accessible, reliable and available for use,” they said.

“As it relates to further areas of study, the authors expect the current initiatives being employed, coupled with these recommendations, to result in a significant increase in adoption. As The Bahamas prepares for the elimination of domestic check cashing by December 2022 and the full elimination of checks by December 2024, it is also expected that merchants and consumers will pursue more digital payment options. As the adoption rate of CBDC increases, it may be worthwhile to measure the impact of macro aggregates to note any improvements.”

The researchers include Allan Wright, Shavonne C. McKenzie, Lance R. Bodie and Carlisa L. Belle.

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Paige McCartney

Paige joined The Nassau Guardian in 2010 as a television news reporter and anchor. She has covered countless political and social events that have impacted the lives of Bahamians and changed the trajectory of The Bahamas. Paige started working as a business reporter in August 2016. Education: Palm Beach Atlantic University in 2006 with a BA in Radio and Television News

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