Financial Inclusion and Central Bank Digital
Currency in The Bahamas
Allan Wright, Shavonne C. McKenzie, Lance R. Bodie, Carlisa L. Belle∗
Research Department
Central Bank of The Bahamas
July 26, 2022

1 Introduction
The global payments landscape continues to evolve as advancements in thefield are being made through globalization and digitization. These developments have resulted in increased interest in the implementation of central
bank digital currencies, hereafter CBDC, among policy makers and otherinterest groups. The Bahamas is considered a global leader in CBDC development following the launch of its CBDC, Sand Dollar, in October 2020.
It is the first country in the region and among the few globally, to launch acentral bank digital currency.
The use of a CBDC would offer another method of payment as not all
consumers have credit or debit cards. Providing a safe and liquid governmentbacked means of completing payments without the necessity of getting or∗

The views expressed in this paper do not represent those of the Central Bank of The
Bahamas. For internal circulation only.

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Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC
maintaining a bank account. The goal of Sand Dollar is to advance more
inclusive access to regulated payments and other financial services for underserviced communities and socio-economic groups, as well as reduce service delivery costs and increase transactional efficiency for financial services
across The Bahamas (Central Bank of The Bahamas, 2020). The purposeof this research memo is to assess the extent to which the Sand Dollar iscapable of achieving these goals.
The purpose of this paper is to develop a dynamic, stochastic generalequilibrium (DSGE) model of CBDC adoption in The Bahamas. The modelallows us to assess how CBDC adoption will impact monetary and fiscal
policy and is a Two-Agent, New Keynesian (TANK) Model first developed
by Bilbiie (2008) with open-economy features, critical for the assessment incountries like The Bahamas. The TANK framework has become a standard
model for assessing monetary policy when households are unbanked. Weinterpret Non-Savers as those who gain access to financial services through
CBDC. Thus, our analysis focuses on a careful calibration of this important parameter. We discuss the model in detail below. To highlight a few
important results: If the adoption rate of CBDC is sufficiently high, then1. the volatility pass-through of monetary policy shocks falls substantially.
2. variance decompositions show that technology shocks account for thelion’s share of volatility in the model.
3. negative monetary policy feedback effects are mitigated.
4. recessionary shocks are less likely.
5. Welfare of households, especially the constrained households, improves.
Our analysis depends critically on the fraction of households who do nothave access to financial services that would gain access over the course of
the next several years. Our estimate of 70k persons or 17.9% of population (IMF, 2019) that remains unbanked is discussed in detail below. The
primary goal of the Sand Dollar project is to provide financial services to2

Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC
those not currently integrated in the Bahamian banking system. If the Sand
Dollar cuts the number of unbanked in half, the economic benefits discussed
above come to fruition. The intuition of these results comes from the interest rate channel of monetary policy. If the population is 100% banked,
then monetary policy can fully control inflation. The volatility of monetary
policy pass-through is tied specifically to the number of unbanked. As thisnumber increases, monetary policy loses control of inflation dynamics. This
main mechanism spills over into the impact of monetary policy on the real
economy. If there is a substantial number of unbanked, variance decompositions show that monetary policy has a much more significant impact on
the volatility of GDP. As the number of unbanked falls, technology shocks
account for the lion’s share of volatility in the model. Thus, policy mistakes
are amplified as the number of unbanked increases.
1.1 Stylized Facts on CBDC Adoption

The success of any CBDC

and its potential impact on economic growth are dependent upon the rateof adoption by consumers and businesses. Therefore, the Bank conducteda survey on business and consumer payment practices in 2020 to assess thecurrent environment and the potential for the future (Central Bank of The
Bahamas, 2021). Two-thirds of consumers signaled that they have heard
about or are aware of Sand Dollar. Moreover, most respondents indicatedthat they were most comfortable using cash and debit/credit cards, andin a positive sign of the CBDC’s prospective usage, 31.5% of respondents
said they were likely to use less cash in the future. For businesses, 76.6%
of respondents confirmed business chequing accounts as their most utilized
form of payment. In order to see a shift in the growth of CBDC adoption,
both businesses and consumers will have to shift payment habits.
Tables 1-2 and Figures 1-5 provide stylized facts on the rollout of CBDC
in The Bahamas. Highlights include• Sand Dollar in Circulation now stands at $303,785.
• The current adoption rate is roughly 7.9%.
• 32,736 wallets in use with sovereign wallets equal to 1,340
3

Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC
• The pandemic reduced transactions but not substantially (Figure 5).
• Circulation has increased by a factor of three since inception in Q42019.
• Transaction values have fallen primarily due to the pandemic (Figure4) while transaction volume has remained roughly constant (Figure 5).

2 ModelWe employ a dynamic, stochastic general equilibrium model that contains
the following crucial features—two agent types (savers and non-savers); asmall open-economy; a non-competitive banking sector; and sticky prices
and wages (New Keynesian); fiscal policy with debt accumulation. The nonsavers work and consume all income contemporaneously. They do not haveaccess to financial institutions. The small open-economy allows for trade
shocks and external interest rate pressures. The banking sector controls
capital flows within the economy and maximizes a non-zero profit functionthat introduces dead-weight loss. All of these features are important whenassessing the impact of CBDC on a smaller economy like the Bahamas.
Parameters are calibrated to The Bahamian economy. We focus on monetary policy impacts but also note the importance of rising public debt.
The key parameters of our model are the fraction of unbanked (η) and thedebt-to-gdp ratio in steady state (initially set at 0.75). Results will bepresented assuming low CBDC adoption (low, η = 17.6) and high adoption (high, η = 16). The model features four exogenous shocks: monetary
policy, terms-of-trade, government spending and technology. The model issolved using Dynare Version 5.0, see Landi (2020) for a complete derivationof equilibrium dynamics and Dynare code.
The model is calibrated to standard values with the exception of theshare of rule-of-thumbers. We set this value equal to 17.9% to represent
the number of unbanked in The Bahamas. This is the standard calibration.
Results presented will assume this value is cut in half to 8.9% (high adoption)and reduces less dramatically to 15% (low adoption).
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Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC

2.1 Results

Figures 6-10 present the results of our analysis. Figure 6

is a variance decomposition of all shocks (technology, government spending, monetary policy) under a low adoption rate and Figure 7 is the same
decomposition under a high adoption rate. Recall that variance decompositions show what percentage of the variance of endogenous variables is
attributable to the three shocks in the model (government spending, technology and monetary policy). The standard result in the NK model is forthe technology shock to account for the overwhelming majority of the variation in macro aggregates. Thus, policy mistakes are not detrimental. Thisis true for Figure 7; that is, if adoption rates cut the number of unbanked inhalf, the volatility attributable to policy shocks (government spending andmonetary policy) would be reduced substantially. However, with a significant fraction of non-savers (low adoption rate), government spending andmonetary policy have significant impacts on macro aggregates. For inflation,
the wage rate and consumption, monetary policy shocks are the dominant
shock responsible for the most volatility.
The intuition for this result is that if households cannot save, they
rely more heavily on policy to make “correct” economic decisions. If policy makers introduce significant shocks into the economy, the Volatility
Pass-Through is substantial. More so than if adoption rates are low. Intertemporal substitution is critical for households to make optimal consumption/savings decisions. As more people are introduced to financial services,
they can save optimally and will not react adversely to a shock. For example, suppose non-savers are hit with a monetary policy shock (increasein the interest rate). Normally, one would allocate consumption into the
future as rates rise. This puts downward pressure on aggregate demandand prices—a positive monetary policy shock reduces inflation. However,non-savers are not able to reduce consumption so the central bank’s control
of inflation is mitigated. If the number of non-savers is substantial—-as in
The Bahamas—the control of inflation is reduced significantly. Therefore,
CBDC could foster an environment conducive to improved monetary policy
outcomes.
The intuition for fiscal policy is similar. A shock to government spend5

Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC
ing has a much more powerful effect when non-savers are influential because
they act as non-Ricardian households. They cannot offset changes in government spending with an increase in savings or an anticipated increase intax rates. Thus, a positive government spending shock causes an increasein consumption, and the volatilities of g and c are strongly correlated.
Figures 8-10 plot impulse responses under three scenarios—low adoptionof CBDC, high adoption, and low adoption with high debt-to-GDP ratio.
The debt-GDP ratio is calibrated to 175% and increased to over 200% in thehigh scenario. As in the volatility results, the ”High Adoption” case represents the standard impulse response to a monetary policy shock—inflationand output fall in response to a positive monetary policy shock and return tosteady state within two years. This is our baseline case. With a higher number of non-savers (Figure 9), there are negative feedback effects—all macroaggregates overshoot targets. This overshooting is made substantially worsewith high levels of debt (Figure 10). The intuition for this result is as follows: As the fraction of non-savers increases, the initial impact of monetary
policy is muted (i.e., non-savers do not respond to changes in the interestrate). The impact on firms is muted as well. Wages begin to increase after
two quarters leading non-savers to have more disposable income, causing
the overshooting.
2.2 Welfare analysis

Compared with baseline TANK model, a monop-

olistic banking sector decreases the deposit rate and discourages saving, thesteady state capital stock is lower and the social welfare is lower for bothconstrained and unconstrained household. Dollarization benefits directly
constrained household since it provides an additional way of transaction
and saving, but it generates negative externality to unconstrained household mainly by lowering the terms of trade. Both results are apparent in
the welfare calculations in the table below.
CBDC does not affect baseline model, since all the agents are unconstrained and they will always choose to hold deposit as long as the deposit
rate is higher than CBDC return. CBDC benefits manly the constrainedhousehold, the welfare of the constrained household will be lowered because
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Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC

Table 1: Welfare change by adding different frictions
Welfare change Unconstrained Constrained Social
Bank-0.0058-0.0143-0.0082
Dollarization-0.0577
0.94380.0986of central bank’s cost to run CBDC (interest rate payment) and lower labor
supply of constrained household.
Table 2: Welfare change by introducing CBDC
Welfare change
Unconstrained Constrained
Baseline
00
TANK-0.04191.0064TANK with bank-0.04211.0081TANK with dollarization
0.00640.0123Social00.11960.12070.0073The upshot of our analysis is that if the CBDC leads to improved financial inclusion, the volatility of all macro aggregates can be dampened
substantially and the efficacy of monetary policy enhanced with an increasein CBDC adoption rates.

3 Conclusion
The results of this paper determined that there is a positive correlation between CBDC and financial inclusion. To this end, several initiatives havebeen implemented as a means of increasing financial inclusion. The Central
Bank of The Bahamas relaunched its financial literacy program in April
2019. Subsequently, the Bank hosted its financial literacy video essay competition for students in 2020 and 2021. In addition, the Bank also launched
its Sand Dollar website on 4 January, 2021. This website allows the public to
not only get a better understanding of Sand Dollar but connects consumers
with all Authorized Financial Institutions (AFIs). Further, the Bank hascommenced efforts to require all AFIs to offer interoperable Sand Dollar
services. This would allow enrolled merchants and individuals to send andreceive funds from any other digital wallet holders, once transacting in Sand
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Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC
Dollars.
Moreover, commercial banks and electronic money service providers areencouraged to conduct educational campaigns to increase adoption efforts.
Also, town hall meetings and virtual seminars and workshops should be pursued as a means of reaching the public. Through multilateral partnerships,
consumers and merchants should be engaged in a manner to ensure financial
instruments are easily accessible, reliable and available for use.
As it relates to further areas of study, the authors expect the current
initiatives being employed, coupled with these recommendations, to resultin a significant increase in adoption. As The Bahamas prepares for theelimination of domestic cheque cashing by December 2022 and the full elimination of cheques by December 2024, it is also expected that merchants andconsumers will pursue more digital payment options. As the adoption rateof CBDC increases, it may be worthwhile to measure the impact of macroaggregates to note any improvements.

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Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC

4 References
Aiyagari, S. R. (1994). Uninsured Idiosyncratic Risk and Aggregate Saving.
The Quarterly Journal of Economics, 109(3):659–684.
Atlantic Council (2021). https://www.atlanticcouncil.org/cbdctracker/

Auer, R, G Cornelli and J Frost (2020), ”Rise of the central bank digital currencies: drivers, approaches and technologies”, BIS Working Papers,
August, No. 880.
Bilbiie, F. O. (2008). Limited Asset Markets Participation, Monetary Policy and (Inverted) Aggregate Demand Logic. Journal of Economic Theory,
140(1):162–196.
Boar, C., Holden, H., Wadsworth, A., (2020), “Impending arrival – a sequelto the survey on central bank digital currency” BIS Papers No 107, Monetaryand Economic Department. (May 2021)
Central Bank of The Bahamas (2021). The Bahamas Business Digital Payments Survey (2020). https://www.centralbankbahamas.com/
Central Bank of The Bahamas (n.d.) Sand Dollar https://www.sanddollar.
bs/faqs/why-does-the-central-bank-of-the-bahamas-think-we-need-thisCentral Bank of The Bahamas (2021) Results of the 2020 Surveys on Business and Consumer Payments Practices https://www.centralbankbahamas.

com/news/press-releases/results-of-the-2020-surveys-on-business-and-consumer-payments
Debortoli, D. and Gali, J. (2017). Monetary Policy with Heterogeneous
Agents: Insights from TANK Models. Mimeo.
Gali, J., Lopez-Salido, J. D., and Valles, J. (2007). Understanding theEffects of Government Spending on Consumption. Journal of the European
Economic Association, 5(1):227–270.
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Honohan, P., (2021), “Central bank’s uneasy embrace of digital currencies”(June 2021)
Jinze, Etienne., (2019), “First Look: China’s Central Bank Digital Currency” Overview of the expected characteristics from China’s CBDC https://research.binance.com/en/analysis/china-cbdc#fnref-20 (July 2021)

Kaplan, G., Moll, B., and Violante, G. L. (2018). Monetary Policy According to HANK. American Economic Review, 108(3):697–743.
Krusell, P. and Smith, Jr, A. A. (1998). Income and Wealth Heterogeneity
in the Macroeconomy. Journal of Political Economy, 106(5):867–896.
Landi, Valerio. (2021). The TANK Model. Mimeo
Middleton, P., Sinha, S., (2019), “Retail CBDCs The next payments frontier” OMFIF-IBM. June
PwC CBDC global index 1st Edition. https://www.pwc.com/gx/en/industries/financialservices.pdf (April 2021).
Rotemberg, J. J. (1982). Monopolistic Price Adjustment and Aggregate
Output. The Review of Economic Studies, 49(4):517–531.
Segal, S., Risberg, P., “Central Bank Digital Currency, Design Choices, andImpacts on Currency Internationalization” 2021 https://www.csis.org/
analysis (June 2021)
Sheffield, C., “Central Bank Digital Currency and the future: Visa publishes
new research” (2020) https://usa.visa.com/visa-everywhere/blog.html(June 2020)“Small Business Statistics” https://smallbiztrends.com/small-business-statistics(August 2021)
Ward, O., Rochemont. S., “Understanding Central Bank Digital Currencies(CBDC)” (2019) (June 2021)
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Wojtuszko, P., Bujnowski, A., “Central Bank Digital Currency and its impact on the banking system, a need for a new payment system” 2018 https://www.bankinghub.eu/innovation-digital/central-bank-digital-currency(June 2021)

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Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC

5 Figures & Tables
TREASURY
As At 31-Oct-2021
AFI Sand Dollar Treasury Activity

KanooPays
TSWCCUL
Omni Financial
Sun CashCash N Go
Island Pay
Moneymaxx
Mobile Assist
BOB
$0.00

$10,000.00$20,000.00$30,000.00$40,000.00

Vault$50,000.00$60,000.00$70,000.00

Distributed

Figure 1: Treasury Activity

Figure 2: Wallets
12$80,000.00$90,000.00$100,000.00

Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC

Figure 3: Circulation

Figure 4: Transaction Value
TRANSACTION VOLUMEAs At 31-Oct-2021
8000
6723

7000
6000

4512

5000
4000

4032

3430
2798

3000

1829

2000

1033

1000

475

262

0
Q4-2019

Q1-2020

Q2-2020

Q3-2020

Q4-2020

Q1-2021

Q2-2021

Q3-2021

Q4-2021

3268

3500
3000
2500

1866

2000

1829

1589

1500
1000
500

739
448

262
5

907

1196

1101
790

827

Dec

Jan

1407

1497

Mar

Apr

1550

1465

1551
1189

1298

287
22

7

Jun

Jul

0
Dec

Jan

Feb

Mar

Apr

May

Aug

Sep

Oct

Nov

Feb

-500

Figure 5: Transaction Volume
13

May

Jun

Jul

Aug

Sep

Oct

Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC

90
Technology Shock
Gov. Spending ShockMonetary Policy Shock

80
70
60
50
40
30
20
10
0
Output

Cons

Inv

Infl

Int Rate

Wage

Figure 6: Variance Decomposition (Low Adoption Rate)

Technology Shock
Gov. Spending ShockMonetary Policy Shock

90
80
70
60
50
40
30
20
10
0
Output

Cons

Inv

Infl

Int Rate

Wage

Figure 7: Variance Decomposition (High Adoption Rate)

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Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC

y

0

c

0

-0.02

-0.02

-0.04
5
10 -3

10

15

-0.04

5

i

10

15

10

15

10

15

pi

0

0

-5

-0.01

-0.02

-10

5
10 -3

10

15

5

r

w

0

6
4

-0.05

2
-0.1

0

5

10

15

5

Figure 8: IRF: Monetary Policy Shock (High Adoption of CBDC)

c

y
0

0

-0.02

-0.02

-0.04

-0.04
5

4

10 -3

10

15

5

i

10

15

10

15

10

15

pi
0

2

-0.01

0
-0.02
-2
5
10 -3

10

15

5

r

w
0

4
-0.05

2
0

-0.1
5

10

15

5

Figure 9: MP Shock (Low Adoption of CBDC)

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Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC

National adoption rate
Personal sovereign wallets (less CBOB staff)
Personal custodial wallets
Total personal wallets* Estimated adult population (2020 aged 15+)
Estimated adoption rate -All Bahamas (%)

No. wallets(% of pop)
1340
31396
32736
30830010.61820% of adult pop.
1340
31396
32736
61660
53.091

Table 3:Adoption Rates.
Source https://www.statista.com/
statistics/795139/population-total-age-bahamas/ Notes: Sovereign
wallets represent those that are client owned and are visable in the Sand
Dollar environment.

Currency in circulation
Sand Dollar in circulation
Estimated adoption rate - All Bahamas (%)

386,000,000
303,785.04
0.079

Table 4: Using the AFI methodology—cbdc in circulation vs fiat currency.
Source: https://www.worldbank.org/en/topic/financialinclusion/
brief/how-to-measure-financial-inclusion

beta=0.975;
alpha=1/3;
delta=0.025;
sigma=1;
phi=0.2;
eta=0.179;
g=0.2;
D=1.75;pi=1;
y=1;
h=1/3;

discount factor
capital sharedepreciation rate
relative risk aversion
inverse of Frisch elasticity
fraction of rule-of thumbpublic spending over GDP ratio
public debt over GDP ratio
inflation targeting
gdp
hours of work

Table 5: Structural Parameters (quarterly calibration)

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Wright, Belle, McKenzie, Bodie: Financial Inclusion & CBDC

c

y
0.02

0.02

0

0

-0.02

-0.02

-0.04

-0.04

-0.06
5
10

-3

10

15

5

i

10

15

10

15

10

15

pi

0.02

10
0
5

-0.02

0
5
5

10 -3

10

15

-0.04

r

5

w

0.1
0

0
-0.1
-5
5

10

-0.2

15

5

Figure 10: MP Shock (Low Adoption of CBDC & High Debt-GDP)17