Can e-cedi impact BoG’s monetary policy implementation?

Can e-cedi impact BoG’s monetary policy implementation?

In 2019, the Bank of Ghana announced its plans to launch a central bank digital currency (CBDC), the e-cedi, as the pinnacle of government’s ‘Digital Ghana Agenda’ which focuses on promoting digitisation in the financial sector.

In September 2021, Ghana became the first country on the continent to pilot a general-purpose central bank digital currency (CBDC), the e-cedi. However, the central bank of Nigeria in the same month went live with its e-naira website ahead of schedule. The e-naira will serve as both a medium of exchange and store of value, offering better payment prospects in retail transactions when compared to cash payments.

The e-cedi is currently being tested in a trial phase with banks, payment service providers, merchants, consumers and other relevant stakeholders.

What exactly is a ‘digital currency’ and what makes it so distinctive? Why are most central banks in other parts of the world – including the UK, France and China – testing these currencies? How will CBDC affect the basic process of monetary policy implementation?

Digital Currency

The digital currency, also known as CBDC, is potentially a new form of central bank money that is an electronic record or digital token of an official currency issued and regulated by the monetary authority of a country, and may serve both as a medium of exchange and a store of value.

Interest in central bank digital currencies has risen in recent years. The Committee on Payments and Market Infrastructures and the Markets Committee of the Bank for International Settlement (BIS) recently completed work on CBDCs, analysing their potential implications for payment systems, monetary policy implementation and transmission as well as for the structure and stability of financial systems. The Committee is an international standard-setter that promotes, monitors and makes recommendations about the safety and efficiency of payment, clearing, settlement and related arrangements, thereby supporting financial stability and the wider economy.

In a recent study, the Committee identified the many forms of CBDCs and how they impact payment systems, monetary policy transmission as well as the financial system’s structure and stability. Primarily, there are two main CBDC variants – which are wholesale and general-purpose. The wholesale variant limits access to a predefined group of users, such as banks; while the general-purpose one will be widely accessible to the public when finally rolled-out.

According to the BoG, Ghana’s version of digital currency will take the form of a general purpose e-currency that is intended to complement and serve as a digital alternative to physical cash – thus driving the national cash-lite agenda through promotion of diverse digital payments, while ensuring a secure and robust payment infrastructure in Ghana.

Expectations are that the e-cedi will facilitate payments without a bank account or smartphone, and by so doing boost financial inclusion and the use of digital services among all demographic groups. For example, as part of the piloting people without smartphones can gain access to their savings through the use of a USSD code, which will feature savings, payments and transfer options.

Although a general-purpose CBDC might be an alternative to cash in some situations, the BoG in introducing such a currency will have to ensure the fulfillment of anti-money laundering and counter-terrorism financing (AML/CFT) requirements, as well as satisfy the public policy requirements of other supervisory and tax regimes.  

Monetary Policy Implementation

Issuing a CBDC would probably not alter the basic process of monetary policy implementation, wherein central banks use specific instruments and procedures to stabilise money market interest rates at the level they deem appropriate. Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation, and is generally carried out by central banks. To this end, central banks manage the amount of available central bank money, signalling the targetted interest rate level. CBDCs introduce a new type of central bank money; its demand – like cash – will need to be accommodated by the public.

The introduction of a digital currency would most probably have an impact on monetary policy implementation, transmission mechanism; and in extreme cases, even the monetary policy strategy. However, the scale of these effects would depend on demand for this new form of money, as well as the design.

Available research suggests that the introduction of digital currency might impact the monetary policy transmission mechanism only if the digital currency is interest-bearing that is, interest being earned on funds held in digital currency, similar to funds held in deposit accounts in commercial banks or mobile money accounts.

The e-cedi’s main impact on the wider economy would come through the interest rates channel, most notably the deposit rate. The interest-rates channel would be most affected, since the level of the CBDC rate would influence deposit rates in commercial banks more directly than what pertains currently. For instance, if households considered the e-cedi to be an alternative to commercial bank deposits, banks would have less scope for independently setting the interest rate on retail deposits – and as a result find it harder not to increase deposit rates in tandem when the central bank is raising the CBDC rate.

The impact on banks’ lending rates, and lending channels in general, is less obvious and would depend on the source of external funding chosen by banks in place of deposits declining due to outflow of funds to the central bank. If commercial banks resort to central bank funding other than deposits, the transmission of central bank policy rates to lending rates could be stronger – as banks’ lending rates would be more sensitive to policy rate changes.

However, if banks prefer interbank funding, the central bank might not be able to influence lending rates to the extent it does now. However, let’s keep in mind that the outflow of deposits from commercial banks and the associated need to provide external funding from different sources do imply financial stability challenges, with potential implications for the efficiency of monetary policy transmission as a whole.

The exchange rate channel of monetary policy transmission mechanism would be affected only if non-residents were allowed to use CBDC, and decided to do so for speculative purposes. This problem would not, however, be restricted only to a limited number of advanced economies during flight to safety periods. Equally, it could be an issue for emerging and frontier market central banks such as the Bank of Ghana, due to a probable large swing of funds into and out of CBDC, depending on risk appetite; as is the case currently for other emerging market assets.

The e-cedi could enrich options offered by the BoG’s monetary policy toolkit; for instance, by allowing for strengthening the pass-through of policy rate changes to other interest rates.

Implications are more pronounced for monetary policy transmission and financial markets, especially if a CBDC is to be designed as an attractive asset. A general-purpose variant could compete with guaranteed bank deposits, with implications for the pricing and composition of banks’ funding.

Per Bank of Ghana data on banks’ balance sheets, deposits continue to drive the funding of total assets in the banking sector – with a robust growth of 22.5 percent to GH¢110.3billion as at end-June 2021, relative to the 19.1 percent growth recorded a year earlier (Table 1). This emanated from liquidity flows within the domestic economy from the COVID-19 fiscal stimulus, payments to contractors, Special Deposit-Taking Institutions’ (SDI) depositors, and clients of the Securities and Exchange Commission (SEC)-licenced fund managers.

Increased savings by individuals and firms resulting from the pandemic-induced slowdown in consumer and investment spending in some sectors also contributed to the observed growth in total deposits.

The introduction of a CBDC could raise fundamental issues which go far beyond payment systems and monetary policy transmission and implementation. A general purpose CBDC variant being introduced by the Bank of Ghana could give rise to some level of instability in commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight toward the central bank may occur on a fast and large scale – challenging commercial banks and the central bank to manage such situations.

Introducing a CBDC could result in a wider presence of central banks in financial systems. This, in turn, could mean a greater role for central banks in allocating economic resources: which could entail overall economic losses should such entities be less efficient than the private sector in allocating resources. It could move central banks into uncharted territory with greater exposure to political interference.

Current steps being taken by the Bank of Ghana toward possibly launching a CBDC for the Ghanaian economy should be subject to careful and thorough consideration during and post the pilot phase. Further research on the possible effects on interest rates, the structure of intermediation, financial stability and financial supervision are warranted.


  • Bank of international settlements, CPMI. Central bank digital currencies. March 2018.
  • Bank of Ghana, release on partnership with Giesecke+Devrient
  • Bank of Ghana, Banking Sector report for July 2021.
  • Central bank digital currency and monetary policy; Munich Personal RePEc Archive (MPRA)
  • Sveriges Riksbank (2018): Riksbank e-krona project. Report 2, October.
  • Mancini-Griffoli, T., M.S. Martinez Peria, I. Agur, A. Ari, J. Kiff, A. Popescu and C.Rochon (2018): Casting Light on Central Bank Digital Currency, IMF Discussion Staff Note 18/08, November.
  • Norges Bank (2018): Central bank digital currencies, Norges Bank Paper No 1/2018.
  • Danmarks Nationalbank (2017): Central bank digital currency in Denmark, Analysis No. 28, 15 December.

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