The Bank of Uganda (BoU) is actively exploring a significant shift from the familiar physical currency to a digital form, primarily driven by the substantial costs incurred in printing and replacing banknotes damaged through poor handling.
This move, as highlighted by the Deputy Governor of the BoU, Professor Augustus Nuwagaba, aims to alleviate the financial burden caused by the premature destruction of physical money.
Speaking to a gathering of accountants earlier this week at the 3rd Annual Public Finance Management Conference in Entebbe, Professor Nuwagaba minced no words about the financial strain. “You need to know the amount of money, the amount of currency we destroy every day, and every destruction we replace, and when replacing, you pay. You pay not in shillings. In case some of you think we pay shillings, you pay in dollars.”
Professor Nuwagaba elaborated on the extent of the problem, directly linking it to how the public handles money. “Our highest cost is printing money, the amount of money we spend on printing, why? Because most of you don’t even know how to handle money, because you are not good people. You want to give money. You have a lot of money in your pocket. When you are moving it you first squeeze the money, then you put it 10 times, and then we need to print it again. That currency has lost value.”
The Deputy Governor’s address painted a picture of millions of shillings worth of banknotes rendered unusable daily due to what he described as improper handling.
This constant cycle of destruction and replacement necessitates continuous printing, a costly exercise borne by the central bank in foreign currency.
Beyond the immediate cost savings, the BoU envisions a Central Bank Digital Currency (CBDC) offering a broader range of benefits for Uganda’s financial landscape.
These potential advantages include enhanced financial inclusion by reaching underserved populations, improved payment efficiency through streamlined transactions and reduced fees, and strengthened security against counterfeiting and theft.
A digital system could also provide the government with greater control over financial flows, enabling more targeted interventions and potentially aiding in the fight against financial crime.
However, the BoU acknowledges potential challenges associated with a digital transition. Concerns around privacy, cybersecurity risks, and the need for interoperability with existing payment systems are being carefully considered.
Moreover, the current state of Uganda’s digital infrastructure and the public’s preference for physical money present significant hurdles that need to be addressed.
Despite these challenges, the BoU is taking a proactive approach. The release of a Consultation Paper on CBDC in September last year shows a commitment to exploring this technological frontier.
The paper seeks input from the public and various stakeholders on crucial aspects such as financial inclusion, regulatory adjustments, and the overall future of Uganda’s financial system.
Professor Nuwagaba’s emphasis on cost reduction highlights a critical immediate driver for the potential shift to a CBDC. However, the broader vision encompasses a more efficient, inclusive, and secure financial ecosystem for Uganda in the long run.
Several nations have already taken concrete steps into this new financial frontier. The Bahamas, leading the charge, officially launched its “Sand Dollar” in 2020, becoming the first country with a nationwide CBDC.
Nigeria followed suit in the same year with the introduction of the “eNaira.” These early adopters have paved the way for other countries to explore the potential of digital forms of sovereign currency.
Beyond these initial launches, other significant economies are actively experimenting with their digital currencies. China stands out as the first major economy to pilot its CBDC, the “e-CNY” or Digital Yuan started in April 2020. India commenced piloting its “Digital Rupee” in December 2022, while Brazil announced DREX, a proof of concept for its CBDC, back in 2017.
Kazakhstan also joined the pilot phase with its “Digital Tenge” in 2020. In a unique move, El Salvador took a different route by legally recognizing Bitcoin as a currency in June 2021, highlighting the diverse approaches countries are taking in the realm of digital assets.
