By Henri Kouam, Research Fellow (PDF Version)
Facebook, a global social media giant has decided to create a digital currency to add to the likes of bitcoin, ripple and lytcoin. Africa has 139 million users, with 98% connected via phone. The currency will be based on a basket of currencies, which do little to prevent financing for terrorism, cyber security threats and market capture.
Facebook’s Libra is bad and Central banks in emerging markets will bear the cost
Facebooks’ Digital current is bad. It is inherently unequal as transactions costs accrue solely to shareholders and a shift from traditional currencies will affect the remittance industry by reducing employment, stymie competition and innovation as well as exacerbate risks to financial stability. As fin-tech and financialization become the norm in most advanced economies, a destabilising virtual currency can make the Job of Central Banks harder. The story is much more nuanced for emerging market economies.
First of all, most currencies in advanced economies have been stable over the last ten years, and the pass-through to inflation further underscores this point. Secondly, several alternatives to traditional banking have emerged in recent years, facilitating cross border payments and transactions. From Monzo, resolute to Transferwise, the list goes on. As such, there is little need for Facebook to facilitate cross border payments as it will prevent a significant portion of the unbanked individuals or those who lack access to electricity and the internet. This will create the perfect conditions for inequality to flourish.
Libra would not create new jobs; it will destroy them!
Secondly, a significant portion of the population in emerging markets are employed in the remittance industry. Although creative destruction is the rationale for Facebooks’ otherwise detrimental and destabilising currency, its technology-centric programs have done little to shift the labor force from these sectors. Higher unemployment will not be far behind, if emerging markets accept Libra or fail to impose a proportional digital tax for each transaction in their country. Rather than further innovation, Libra will likely stymie already faltering innovation in most EMs. Is Facebooks’ graft worth rising unemployment in economically unequal countries, I think not.
Facebooks’ Libra will cause financial instability
Facebook will argue that businesses in these economies – especially those whose business model centre around Facebook will access new markets via its electronic currency. Nevertheless, this will be cleared in bank accounts, which provides little justification for a digital currency that will cause large swings in capital flows. This is particularly salient for Emerging Markets who continue to see FX-related debt rise. So, the arguments for a more global access for businesses is misguided at best if monetary policy already has to account for uncertain financial flows. In a world plagued by global trade and policy uncertainty the last thing emerging markets need is another destabilising trigger described as innovation. Furthermore, with economies trying to stem inflation, Facebooks’ Libra will interfere with imported inflation and the transmissions from Central bank policy, which is paramount to financial stability in these economies with capital markets in their infancy stages.
Policy makers should use fintech and digital payments systems to bring the unbanked population into the financial system.
Rather, governments should follow the example of China and South Korea who have used fintech to bring significant amounts of their unbanked population rather than cut off individuals from the financial system entirely. This is most likely to be the case for individuals in rural areas; this is especially salient in Africa, where electricity generation remains and issue despite a rise in the number of individuals with access to the internet.
Rather than focus on how to implement Libra, with elusive global regulation providing cover for illicit capital and financial flows; it should be blocked from EMs to allow innovation and mobile payments to ensure individuals gain access to financial services and move businesses from the informal economy. The latter, unfortunately, accounts for a significant number of individuals employed in the labor market.
Government revenues will suffer
Facebooks’ Libra will make taxing domestic companies even more challenging for emerging markets with undeveloped tax regimes and global tax rules, which continue to elude policy makers. According to the IMF, emerging markets loose over 2billion in taxes yearly, Libra is unlikely to improve this picture. It is almost certain that allowing Libra free reign in South Africa, Tanzania, Egypt is unlikely to do the financial system any good, let alone the government’s fiscal balances that remain plagued by falling commodity prices and worryingly high levels of external debt.
Whilst debt sustainability concerns plague some emerging market economies, they should focus on improving the tax base rather than supporting the current approach, which continues to see a significant number of people in the informal sector. Affording their debt, therefore, hinges on the ability to improve their tax base, not shrink it and possibly loose significant amounts of tax income.
The U.S government might view this as an opportunity to slow changes to Central Banks reserve holdings. Rising trade amongst emerging market economies and China underscore this point. Whilst lax regulation in the U.S and Facebook’s lobbying and influence on politicians tilt the balance in favour of Libra; policymakers Emerging Markets must block it! This will reduce the cost to central banks who have to deal with idiosyncratic capital flows, currency depreciation and high food prices. Couples with lost tax revenue, this could interrupt an economic or financial cycle.
I am sure the business case for innovation and greater market access will drive most of the discourse around Libra. But policymakers must think beyond social media, to fully grasp the distortive impacts of Libra. If nothing stops Facebooks’ continues push for market dominance, the economic impact for Central Banks, governments and households in emerging markets.
What will a Libra-world look like?
Multipolarity is what several people ascribe to Libra. One could argue that Central Banks will be more inclined to issue digital currencies to prevent financial stability risk emanating from these digital currencies such as bitcoin, Ripple and Libra amongst others.
This might appear justified at first, but monetary and payment systems must insulate themselves from cyber security risk at a time when cyber warfare appears to be more salient form of state aggression than direct conflict. In the absence of a global rule book, to govern and enforce cyber securities issues, payment systems and financial systems constitute critical infrastructure that must be guarded against external agents.
Following Cambridge Analytica’s role and possible Russian interference in the U.S election, can we understate the importance of online safety. It is commonly understated, but Facebook was the main conduit behind foreign interference in Western elections. If Facebook was unable to identify rogue companies, which used psychological profiling to influence voter behaviour via imagine what could happen should they have access to the financial system!