For Africa to grow, efficient and seamless intracontinental trade between its member nations is vital. Ensuring this would act as a panacea for several issues plaguing the continent. The Intra-African trade could experience a major boost, which currently stands at a dismal 16%. This, when compared to 68% in Europe (EU), shows there is huge untapped potential for it grow. Trade integration would have a direct impact on Africa’s GDP, and could add $500 billion (approx.) to Africa’s GDP by 2035. Expanding trade would also have a positive impact on job creation, lifting 30 million Africans out of poverty, according to estimates. Additionally, easier trade mechanics would lead to growth in industrialisation and diversification, as countries would make the shift from mere exporters of raw materials to higher-value manufacturing and industrial hubs. Lastly, enhanced intracontinental trade would reflect in increasing Africa’s global competitiveness, reducing its dependency on external markets, while enhancing its negotiating power at the table. With the next G20 taking place in Africa, a keen emphasis should be placed to ensure a widespread adoption of an African-led and African-made platform that can address the payment issues plaguing intra-continental trade in Africa.
Existing Payment Mechanisms
Taking a closer look, African nations have traditionally used a mixture of mechanisms to conduct payments during intra-continental trade. Over 80% of such payments relied on the SWIFT system for cross-border payments, where transactions were transferred through intermediary banks located in the West, leading to delays and transaction costs, running into billions each year. According to an Afreximbank report, local businesses lose $5 billion annually due to transaction costs related to external systems like the SWIFT, owing to currency conversion charges between 3 to 6% per transaction, and high fees.
Other methods included regional and ad-hoc payment mechanisms like SIRESS for Southern Africa and CFA Franc Zone for West Africa. While these mechanisms are relatively more cost effective and reduce delays, they are marred by their own set of issues. For instance, the currency dominance of one country over the smaller ones in these regional payment mechanisms. In the case of SIRESS, the mechanism turns over-reliant on the South African Rand, making it difficult for the smaller countries of the bloc to derive the same value out of it.
Additionally, more than 20 African countries saw the rise of Mobile Money Platforms like M-Pesa and Orange Money to settle small scale cross-border transactions, while others engaged in bilateral currency agreements, in an attempt to avoid high cost of dollar transactions and ensure geoeconomic autonomy. A case in point being Nigeria and China, who in 2018 signed a $2.5 million currency swap deal, enabling businesses in both countries to settle trade transactions in either Naira or Yuan. Likewise, in 2023, Tanzania and India inked the use of Indian rupee for trade with Tanzania, facilitating direct trade in local currencies.
Additionally, large Pan-African banks like United Bank of Africa and Ecobank, came up with their own continental payment solutions to utilise their extensive networks. However, limited geographical reach and interoperability issues have been major hindrances in the implementation of these. Lastly, in remote and underdeveloped regions of the continent, informal payment systems like barter and cash transactions have been the norm.
PAPSS: a Solution?
Thus, the AU, in collaboration with the Afreximbank, aimed to solve this hodge podge and overlapping systems of payment that were in existence by launching the Pan-African Payment and Settlement System or PAPSS in 2022, as part of the larger AfCFTA framework. PAPSS is a financial infrastructure that enables intra-continental transactions in local African currencies. It eliminates the need to depend upon third party foreign currencies and off-shore intermediaries, thus reducing transaction costs and delays while boosting financial integration and trade efficiency.
However, PAPSS faces certain hurdles. It requires a robust digital and financial infrastructure across countries to ensure uninterrupted operability, in a continent where 45% of adults do not have access to Banking, and another 40% lack access to internet. The sheer divergence in economic strengths of countries in a continent as diverse as Africa, only adds to the problem. For instance, while the GDP of Nigeria is around $400 Billion, Burundi’s GDP does not even touch $4 Billion, where around 80% of the population lives on subsistence farming. Thirdly, Central Banks of several countries like Algeria and Sudan have failed to fully adopt the PAPSS, and have persisted with the alternate mechanisms, mainly due to domestic instability, hyperinflation, and stringent currency control regulations. Finally, ensuring full transparency becomes key as trust deficit in moving to newer and largely untested mechanisms persist.
Efforts by Individual Countries to Address the Issue
Individual African countries have enacted and implemented local and regional policies and frameworks to ensure smoother intra-continental trade. South Africa enacted the Customs Modernization Program along with multiple trade agreements within the Southern African Customs Union and SADC to promote regional and continental trade. It seeks to streamline import/export procedures, enhance trade facilitation, and ensure compliance with AfCFTA provisions Similarly, Rwanda implemented the Single Customs Treaty (SCT), as part of the Eastern African Community (EAC) to simplify and expedite customs processes, reducing delays at borders. Morocco’s efforts to sign FTAs with several African countries and Kenya’s National Export Development Strategy, that looked to improve export diversification and value chain development, are similar initiatives that existed between countries before the implementation of a Pan-African agreement.
Conclusion
As G20 heads to Africa in 2025, with AU as a full member, a seamless intra-continental trade now becomes a major priority for Africa. The host, South Africa, would have a great opportunity to support and call for the better implementation of the newly established mechanisms like PAPSS and other DPI initiatives that are key pillars towards ensuring a more efficient and smoother African trade system.
