Thinkpad: Central Banking Coolth

Happy Sunday.

There are many ways you could describe central banks and central bankers. Our guess is that ‘cool’ may not be first word that comes to mind. Stuck between M0, M1, M2, M3 and money multipliers, they may not be everyone’s favorite conversation companions. This year, in particular, they’ve been hard at work trying to save a Covid-ravaged global economy.

But tucked away in a corner at these central banks is a body of interesting work on central bank digital currencies. The talk of such digital coins issued by central banks—in contrast to private virtual currencies like Bitcoin—has been around for some time. But work on these projects has picked up considerable pace against the backdrop of a Covid-driven surge in the adoption of digital transactions.

Last week, the Bank of International Settlements, together with seven large central banks, issued a primer of sorts on CBDCs. For those interested in a deeper read, the full BIS report is worth saving, as is this G30 Working Group report on digital currencies. Next week, U.S. Federal Reserve Chair Jerome Powell will join an IMF panel to discuss the benefits and risks of cross-border use of digital currencies and their macro-financial implications.

The core debate still boils down to three issues. First, its utility. What does a CBDC give us that we don’t already have? Second, its practicality. How does it interact with cash? Is it interest-bearing? Are there limits on its holdings to ensure it doesn’t hurt the stability of the financial system? Third, safety and data security. The answers to all three of those issues are still unclear.

Lest you think this is all still theoretical, China is already experimenting with a digital currency project.

Tens of thousands of Chinese this week spent digital yuan. “The experiment—unprecedented in scope and size—went off without a hitch, catapulting the world’s No. 2 economy to the forefront of a race to develop virtual money,” Bloomberg reported. Not every central bank sees utility in pursuing this. Australian central bank officials said this week that they see no public policy use case for a CBDC.

What’s happening on this front in India? A digital rupee has been suggested by a few committees but RBI Governor Shaktikanta Das, in comments last December, didn’t suggest it was a priority for the Reserve Bank of India. Who can blame him? He has his hands full with the many battles being fought in the real economy.

On the subject of the real economy, the IMF released its latest forecasts this week. They didn’t look pretty. Certainly not for India, which is expected to see a 10.3% contraction in real GDP this year. That contraction will mean that India’s per capita GDP will slip below $2,000 this year – a level often seen as an inflection point by economists. This year, India will also see its per capita GDP slip in ranking and fall below neighbouring Bangladesh – a fact that generated much angst. We would, however, like to suggest that the graver concern is that it will take India until FY23 to recoup the Covid losses and, over this time, the gap between India and others like Indonesia and China will only widen.

The IMF’s suggestion in the midst of the continuing economic pain is that governments should keep spending. As the Financial Times said: This was the week that austerity was officially buried. The fund’s chief economist Gita Gopinath recommended the same for India in this conversation with Quintillion Media’s Sanjay Pugalia.

For central banks and monetary policy, the IMF’s advice is to not withdraw support prematurely. Essentially – hold off on even thinking about rate hikes and keep the liquidity flowing.

So, yes, while in one small cool corner of central banks there is work going on around digital currencies, most central bankers are just busy fire-fighting. As they normally are.

Hope you’ve got no firefighting to do this weekend. Enjoy what’s left of it.