IMF Staff Country Reports

This Selected Issues paper on the Kingdom of Bahrain presents a counterfactual analysis on financial system effects of introducing a Central Bank Digital Currency (CBDC) in Bahrain. Bahrain has made significant strides in the areas of fintech and the adoption of digital payments. The analysis presented in this paper aims to assess some of these benefits and risks for Bahrain. It will quantify the potential impact of introducing a CBDC on the financial system and monetary policy transmission using a model specifically calibrated and estimated for Bahrain. It finds that a CBDC's perceived utility by the population is key for wide adoption. While high adoption and remuneration can help enhance monetary policy transmission, they may imply a drag on banking system profitability. A careful and analytically informed design could enhance adoption while limiting risks to financial stability. CBDC introduction strengthens monetary policy pass-through and more so if it were remunerated.