We need to optimize Africa’s payment and settlement system
One of the factors that have hampered intra-African trade and kept it at its embarrassing level is the difficulties faced by the parties involved in such trade relations. Foremost among these are the challenges faced by business people when they want to make payments to companies located in other countries on the continent.
Part of the problem is often due to the lack of convertibility of African currencies, despite the existence of around 44 different currencies on the continent, and the demand of many traders to be paid in foreign currencies, especially the dollar. This preference for third currencies in African transactions has, to say the least, weakened the continent’s trading system and its currencies.
This was one of the reasons for the skepticism expressed by many towards the idea of a continent-wide trading bloc, which eventually morphed into the African Continental Free Trade Area ( AfCFTA).
Today, this hurdle is being resolved as a system to ameliorate the above challenges has been introduced in the African financial system. This is the Pan-African Payment and Settlement System (PAPSS). It is a creation of the African Export-Import Bank (Afreximbank) designed to simplify intra-African trade by settling transactions in local currencies in the wake of the take-off of the AfCFTA.
This is a welcome development. It is clear that without the establishment of such a system, the dream of increasing intra-African trade from its current low level between 13% and 18% will remain a mirage. While Africa records such a low level of intra-continental trade, Asia and Europe, for example, are said to have increased theirs up to 59% and 69%, respectively.
Obviously, without this project, African producers will always prefer to sell their products to buyers from countries that have smooth trading systems with their respective countries. Similarly, importers from Africa will continue to prefer dealing with sellers from countries from which they can easily earn hard currency.
This payment system will reverse all that. This will relieve Africa of importing goods that can easily be produced locally. Thanks to it, African traders will be able to carry out transactions in local currencies. The effectiveness of this system can be attested to by the fact that a pilot program that took off with $500 million in West Africa already has 28 banks joining the platform. Likewise, there are reports that another 24 banks are in the process of signing up to the platform.
The decision to start this process on a pilot project is also commendable and shows the professionalism its proponents bring to the project. As they explained, the choice of the West African sub-region for the pilot is to subject the process to the complexities that characterize the rest of the continent, which they believe are found in this part of the continent. These complexities include a multi-currency, multilingual zone, five English-speaking countries and a French-speaking zone, with more than 60 French regulators in this zone. It is logical to expect that once the pilot project was able to handle such complexities, it would have paved the way for full-scale project implementation.
Often, the success of a continental project such as this is vitiated by the evasive attitude of national governments. This must not be the case with this project. The overriding consideration here must be the pursuit of increasing the level of trade between African nations.
This objective has great multiplier effects which include promoting industrial growth, economic diversification and specialization, job creation and improving the well-being of the average African. Since trade unquestionably remains one of the means of increasing prosperity between nations and since in trade relations all parties are potential beneficiaries, this impetus to raise the level of trade between African nations must be encouraged. Therefore, let every government on the continent give PAPASS all the assistance it needs to succeed. Funding is essential and we expect leaders to find a way to contribute financially to this. Indeed, a big motivation for African nations to show their commitment to PAPASS must be the current events unfolding in Ukraine and Russia. The raging war between the two countries has caused major disruptions in the global supply chains of industrial and consumer goods. It has, for example, raised the specter of food insecurity which now threatens the lives of millions of people around the world, including in Africa.
Consequently, countries are reassessing their trade policies, partnerships and alignments. They are reconnecting with parts of the world in efforts to discover markets that best serve their interests in the context of new global realities.
Africa should do the same. For Nigeria, the stakes are even higher in evolving scenarios. The country has become, in one way or another, the hub of African trade. From the country’s abundant natural resources such as oil and gas to agricultural raw materials and industrial products, Nigeria has the potential to meet the needs of many countries in Africa. For this reason, Nigeria should be at the forefront of countries that want this payment system to succeed.