The average rate of annual global inflation from 1981 to 2020 was 5.4%. In 2020, the global inflation rate was 1.94%. However, the rate varied significantly across countries, ranging from −2.7% in Qatar to 2360% in Venezuela. Cryptocurrency, particularly Bitcoin, has been touted as a potential solution for citizens of countries battling it.
The argument is that the decentralization of cryptocurrency offers an alternative to central bank policies, which often struggle to manage the rates. Cryptocurrencies operate independently of significant banks, meaning their value isn’t directly affected by considerable bank policies or national economic performance. This independence can make cryptocurrencies an attractive option for citizens of countries experiencing it where the value of the national currency is rapidly declining.
For instance, during Zimbabwe’s hyperinflation crisis in 2015, some Zimbabweans turned to Bitcoin as a more stable store of value. Similarly, in countries like South Sudan, Egypt, Ghana, Malawi, Mozambique, Nigeria, Zambia, and Zimbabwe, where inflation rates have reached double digits, Bitcoin economies are emerging.
According to the World Bank, South Sudan’s inflation rate was 102 percent between September 2016 and September 2017. Unsurprisingly, some of these countries are among Africa’s most important Bitcoin economies. According to gobitcoin.io, a website dedicated to Bitcoin news in Africa, the main Bitcoin countries are Botswana, Ghana, Kenya, Nigeria, South Africa, and Zimbabwe.
Recently, Bitcoin has been called ‘digital gold’ and investigated as an alternative inflation-hedging instrument in several studies. The evidence that supports Bitcoin as a robust inflation-hedging mechanism is limited. Smales examined Bitcoin and other cryptocurrencies’ abilities to hedge against inflation in the United States compared with gold.
After controlling for uncertainty in the financial markets and economic policies, they found that both cryptocurrencies and gold returns had a positive relationship with inflation and could hedge against inflation in the short run. However, unlike gold, there was no evidence that cryptocurrencies could be used to hedge against inflation in the long run.
While cryptocurrencies can offer an alternative to traditional currencies in countries experiencing it, they are not a panacea. They come with risks and challenges, and their use should be considered part of a broader economic strategy. Furthermore, improving public trust and understanding of central banks could also play a role in managing inflation and promoting financial stability.
Central banks are crucial in managing a country’s economy, including controlling inflation. However, their policies can sometimes lead to inflation. For example, if a central bank prints too much money in response to a crisis, it can lead to inflation. In such scenarios, cryptocurrencies can offer an alternative financial system that isn’t directly subject to these policies.
But also central bank interventions can be beneficial. For instance, central banks can absorb depreciation shocks through foreign exchange interventions, thereby preventing sudden exchange rate depreciation, which would require a minor reaction by the interest rate. This shows that central banks can positively manage inflation, suggesting that cryptocurrencies are not the only solution.
Trust in central banks is another essential factor to consider. A study by the Reserve Bank of New Zealand found that respondents who put more trust in the central bank are financially satisfied, have more knowledge about the bank, and have higher trust in government institutions. This suggests that improving public trust and understanding of central banks could be another way to manage inflation and economic stability.
In Tanzania, the Central Bank has shown a cautious approach toward adopting cryptocurrencies, with ongoing research into the risks and benefits of Central Bank Digital Currencies (CBDCs). Despite the current ban on cryptocurrencies, the Tanzanian government under President Samia Suluhu has shown a pro-crypto stance, indicating a potential future policy shift.
In the broader East African context, the adoption of cryptocurrencies is a mixed bag. While some countries like Sierra Leone and the Republic of Congo have outright banned crypto, others like Kenya are leading amongst 10 countries globally regarding cryptocurrency holdings and blockchain-related transactions.
As of January 2018, Kenya’s Bitcoin holding represented over 2% of the country’s Gross Domestic Product (GDP), a substantial percentage given that ten countries have a comparable GDP invested in cryptocurrencies. The potential benefits of cryptocurrency adoption in these regions are manifold. For one, cryptocurrencies can offer a hedge against inflation, providing a more stable store of value than local currencies. This is particularly relevant in countries like Tanzania, where inflation has been a persistent issue.
To sum up, while the adoption of cryptocurrencies in Tanzania and East Africa at large presents both opportunities and challenges, it is clear that the potential benefits cannot be ignored. As these countries continue to grapple, cryptocurrencies’ decentralized and inflation-resistant nature could offer a viable alternative to traditional monetary policies.
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