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The move was likely spurred by the CAR's deepening security
relations with Russia. It thus appears both as a potential step
towards circumventing current international sanctions against
Russia and further reducing French influence by moving the CAR away
from the CFA franc zone.
The adoption of a volatile cryptocurrency will have
far-reaching consequences, threatening the CAR's position in the
Economic and Monetary Community of Central Africa (CEMAC)
block.
The experience of El Salvador, where Bitcoin adoption has been
slow, indicates limited everyday use and rising default risk.
The CAR's adoption of bitcoin threatens its position
within the CEMAC
The CAR is a member of the CEMAC region (Cameroon, Chad, CAR,
Equatorial Guinea, Gabon, Congo-Brazzaville) and the CFA franc
zone, with its official currency, the CFA franc, pegged to the euro
and backed by the French Treasury. During a special meeting held on
6 May, the Bank of Central African States (Banque des États de
l'Afrique Centrale: BEAC), the regional central bank, banned the
use of cryptocurrencies in any financial transactions in the CEMAC
region. This decision was designed to safeguard financial stability
and preserve customer deposits, the BEAC stated. The CAR's decision
to adopt the bitcoin as legal tender could thus trigger sanctions
by the CEMAC, which would both limit the CAR's access to deposits
held in CEMAC accounts and increase the risk of domestic debt
defaults. The CAR will also face challenging bitcoin implementation
issues. The CAR is a very small economy, accounting for roughly
2.6% of overall CEMAC GDP, and years of civil war has left most of
the population displaced and poor. The country also lacks
sufficient infrastructure (such as access to electricity, internet,
and mobile coverage, combined with a large digital divide) to be
able to attempt to implement a volatile cryptocurrency as a
generalised form of legal tender.
Bitcoin's adoption has implications for the CAR's
relationship with the International Monetary Fund
(IMF)
The CAR is on an IMF staff-monitored programme (SMP) to unlock
future concessional assistance under an Extended Credit Facility.
Concessional funding will be required to meet pressing
socio-economic and reconstruction needs. The IMF has previously
stated its concerns about the adoption of bitcoin as legal tender,
which could jeopardise the CAR's standing under the SMP and future
disbursements, significantly exacerbating the country's problems in
meeting its fiscal financing needs. Non-payment risk in the CAR for
local and foreign currency debt has thus increased as a result of
the bitcoin initiative, while fiscal programme implementation will
become increasingly difficult.
El Salvador's pioneering use of Bitcoin indicates limited
everyday use alongside increased default risk, suggesting a similar
path for the CAR
El Salvador on 7 September 2021 became the first country
globally to make a cryptocurrency, bitcoin, its legal tender,
alongside the US dollar. Salvadoran President Nayib Bukele's
initial arguments in favour of bitcoin were to increase financial
inclusion, allow cheaper and faster transfer of remittances, and
attract investment and income from bitcoin mining and tourism.
However, all available evidence to date suggests limited adoption
and use of bitcoin in El Salvador. A National Bureau of Economic
Research survey, conducted in February, recorded little use of
bitcoin in day-to-day transactions: only 20% of respondents added
any additional funds to the government-sponsored Chivo Wallet app
after spending a USD30 incentive bonus. Only 1.6 % of remittance
inflows during January-April 2022 were sent via digital wallets,
according to the Central Reserve Bank of El Salvador, while just 5%
of Chivo users have made tax payments with the app.
The bitcoin initiative has further increased an already
elevated risk of sovereign default for El Salvador
Much of the adverse fallout has been caused indirectly, through
reputational damage among investors and creditors given strong IMF
opposition to the move, complicating the government's financing
plans. Average risk spreads over US treasuries measured 2,434 basis
points on 16 May, four times wider than a year ago, clearly
precluding new bond issuance for the foreseeable future and instead
flagging strong expectations of debt restructuring and capital
write-offs. Negotiations with the IMF regarding a three-year
USD1.3-billion Extended Fund Facility have been stalled for over a
year, with the legal tender status of bitcoin being a major
roadblock given the risks it poses to financial stability and
public finances from the lack of regulation, price volatility, and
the contingent liability of free, government-backed convertibility
between bitcoin and US dollars. Moreover, the government has
postponed its planned USD1-billion sale of "bitcoin bonds"
targeting cryptocurrency investors, to be invested in purchases of
bitcoin and development of a bitcoin mining-oriented city to
harness thermal energy, originally scheduled to take place in
March. Even if successful, however, it would not have helped to
fund the conventional budget given the planned issue's specific use
of proceeds.
Posted 07 June 2022 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence and
Jeremy Smith, Sr. Economist, Economics and Country Risk, S&P Global Market Intelligence and
Thea Fourie, Associate Director, Sub-Saharan Africa Economics, S&P Global Market Intelligence and
Veronica Retamales Burford, Senior Research Analyst, Latin America Country Risk, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
