Central Bank Digital Currencies (CBDCs) and the Future of Monetary Policy: A Comparative Study of Pakistan and Iraq

Abstract

Central Bank Digital Currencies (CBDCs) have progressed from theoretical concepts to empirical implementation in over 130 jurisdictions; however, limited empirical work has examined their potential monetary policy impact on fragile, cash-intensive, and dollarized economies. This paper presents a quantitative and comparative analysis of CBDC readiness levels and potential monetary policy implications for Pakistan and Iraq, both of which are at early stages of CBDC development with distinct monetary policy frameworks. The study develops a composite CBDC Readiness Index (CRI) for 2024–2026 based on secondary macroeconomic and financial inclusion data, and employs transmission elasticities from recent cross-country empirical studies to simulate potential monetary policy implications of CBDC implementation in each country. The analysis covers five dimensions: financial inclusion (FI), digital payment infrastructure (DPI), price and exchange-rate stability (PRICE), institutional/legal preparedness (INSTIN), and payment-system modernization (PSM). The results reveal that Pakistan's institutional preparedness (dedicated legislation, PRISM+ integration, pilot stage) is moderate, while structural constraints in Iraq are substantial (123% dollarization ratio and a significant exchange-rate gap between official and parallel markets). The simulated results indicate that a retail CBDC could reduce the lag in monetary policy transmission by increasing pass-through from the policy rate to broad money and output, particularly in Pakistan, whereas de-dollarization and expenditure traceability are the primary benefits of a CBDC in Iraq. The paper concludes with differentiated policy recommendations for the State Bank of Pakistan and the Central Bank of Iraq.

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