CBDC seen important priority for Gulf countries, says IMF blog

Close on the heels of Qatar laying the foundation for the central bank digital currency (CBDC) regime, an International Monetary Fund (IMF) blog has said CBDC appears to be an important priority for oil exporters and the Gulf countries."CBDCs can potentially help improve the efficiency of cross-border payment services. This appears to be an important priority for oil exporters and the Gulf Co-operation Council (GCC) countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE," an IMF blog said, quoting a recent departmental paper 'Central Bank Digital Currencies in the Middle East and Central Asia.'Reasoning for the priority, the report said it was because cross-border payments tend to have frictions like varying data formats and operating rules across regions and complex compliance checks. CBDCs that can address these inefficiencies could significantly cut transaction costs.Some countries have already introduced cross-border technology platforms to address these issues and promote digital currency payments between countries, it said, highlighting the Buna cross-border payment system, created by the Arab Monetary Fund in 2020.The IMF blog said almost two-thirds of countries in the Middle East and Central Asia are exploring adopting a CBDC as a way to promote financial inclusion and improve the efficiency of cross-border payments.Many of the 19 countries currently exploring a CBDC are at the research stage. Bahrain, Georgia, Saudi Arabia, and the UAE have moved to the more advanced "proof-of-concept” stage. Kazakhstan is the most advanced after two pilot programmes for the digital tinge.The Qatar Central Bank recently said it has developed the infrastructure for the CBDC project, which will enter its first experimental phase extending to October 2024.It aims to achieve a set of primary objectives, including leveraging artificial intelligence technologies, distributed ledger technology, and emerging technologies and establish a strong foundation to enhance liquidity by expanding participation in financial market facilities, considering the aspects related to information security during project implementation.The IMF blog said CBDCs can advance financial inclusion by fostering competition in the payments market and allowing for transactions to be settled more directly and with less intermediation, in turn lowering the cost of financial services and making them more accessible.Highlighting that deposits make up a large share of bank funding in the region, about 83%; it said because a CBDC may compete with bank deposits, it could weigh on bank profits and lending and have implications for financial stability.However, lenders in the region generally have adequate capital levels, profit margins, and liquidity buffers, and their relatively high concentration may limit strains on deposits, it said, adding large banks are especially dominant in the GCC countries.In the GCC, financial systems are large, having grown in recent years thanks to buoyant economic activity fuelled by large hydrocarbon proceeds and abundant liquidity.