New payment system set to transform trade in Africa

Dar es Salaam. Expectations are high as Africa pushes for the use of local currencies in settlement of trade transactions in their efforts to reduce expenses, reduce the dominance of the dollar in trade and streamline trade within the continent.

 The platform, Pan-African Payment and Settlement System (PAPSS), offers an alternative in which countries can conduct transactions in their currencies, eliminating the necessity for a third-party currency such as the US dollar.

Analysts say there is huge potential for intra-African trade to grow.

“This is one of the initial solutions, as there are challenges in using currencies that we do not control, such as the US Dollar. There are limitations,” said researcher and economist Professor Haji Semboja in a phone conversation with The Citizen.

PAPSS reduces expenses and streamlines trade within the continent as it enables traders to pay in local currencies, Prof Semboja argues.

Unlike the use of dollars, which African countries do not have control over, they agree on an exchange rate.

According to him, it can boost inter-African trade, fortify the continent’s currencies, and increase the country’s tax revenues through goods and services.

“Just as countries remove barriers to people’s movements from one country to another, where one can enter another country without a visa and the like, now this will become an equalisation of goods and services,” he added.

One of the biggest challenges of intra-African trade is the high costs of doing business, which are greatly caused by the high costs of financial transactions and time.

“Transfer of money is very expensive in Africa because we are using systems from outside Africa,” explains Director for Institutional Matters and Programmes Coordination at the African Continental Free Trade Area (AfCFTA) Secretariat, Prudence Sebahizi.

Adding, “Because we are using systems from Europe, from the U.S. And it can take sometimes more than three days for a transaction to be done, even if you are doing it within African banks.” He said

The continent’s trade bloc, the African Continental Free Trade Area (AfCFTA), estimates that PAPSS can save Africa $5 billion a year in fees and compliance costs alone.

Experience shows that if one wants to transfer money from Rwanda to Ethiopia, for example, one has to use the SWIFT code, which is owned by the US. So the money has to pass through a US bank for it to go to Ethiopia.

“But now PAPSS is going to address that challenge by having a continental system that can facilitate the instant transfer of money from one bank to another without using foreign currency,” said Mr Sebahizi.

Traders will be able to transact within the continent using local currencies. For example, a Tanzanian trader will be able to pay for a product in Rwanda with Tanzanian shillings, but the recipient in Rwanda will receive money in Rwandan francs.

“There are two major advantages that PAPSS is going to bring. First, it’s going to cut the cost of time because the transfer will be done quickly and instantly. And second, it’s going to reduce the cost because it’s going to allow direct transactions within African currencies,” further added Mr Sebahizi.

The payment platform will be adopted by the African Union’s Assembly of Heads of State and Government in February 2024.

The AfCFTA, which unites the 55 members of the African Union (AU) and eight Regional Economic Communities (RECs), is the largest free trade area in the world. It has the overarching goal of establishing a single continental market with a combined GDP of around US$3.4 trillion and a population of over 1.3 billion.

However, data shows that while the share of intra-continental trade in Europe, Asia, and North America stands at 67 percent, 56 percent, and 50 percent, respectively, the same stands at only 13 percent in Africa.

And over 80 percent of intra-African payments currently go through either Europe or the United States, with African countries spending as much as $5 billion in fees and compliance costs.

The PAPSS platform, designed by the African Export-Import Bank (Afreximbank) and supported by the AU, allows a trader to tell her or his local bank to pay a supplier in another country in the local currency.

The trader’s bank then sends instructions to Papss to settle the payment through the local bank of the supplier in the currency of their jurisdiction in real-time.

Papss is required to do validation checks before passing the instruction to the recipient bank.

With instant payment, compliance, legal, and sanctions checks are performed instantly within the system. Near-instant payments process within 120 seconds.

Although stakeholders and analysts term it a “huge step forward”, they also caution against counterfeiting and deception.

To trade under this mechanism, Prof Semboja suggests, “The African Union needs to ensure that there is a system in place to control these currencies. Governments should be in agreement that we can use our own currencies for trade so that we don’t incur additional expenses. But the currencies of each country should be credible and accepted by every nation on the continent.”

According to Afreximbank, the system will be regulated by central banks, and once countries accept it, all commercial banks will be able to use it.

In the same vein, Mr Sebahizi added that the commitment starts with the central banks; because they are the regulators, the commercial banks will have to switch to it, and then the users of the banks will be the beneficiaries.

“So those stakeholders have to be involved, and they have to understand how PAPS works and also embrace it,” he said.

Statistics display that the majority of beneficiaries of the new payment platform are small and medium enterprises and young entrepreneurs who cannot afford the costs of currency conversion.

The system, which was formally introduced in January of last year, has over eleven central banks from Nigeria, Guinea, Djibouti, Zambia, the Gambia, Sierra Leone, Liberia, Ghana, and Zimbabwe.

Africa has multicurrency cross-border payment systems, serving regional trading blocs.

They include the Regional Payment and Settlement System (REPSS) of the Common Market for Eastern and Southern Africa (COMESA) bloc, which settles deals either in dollars or euros, and the East African Payment System (EAPS), which settles in the local currencies of participating East African Community (EAC) countries. Tanzania’s main export destinations in Africa include Kenya, Rwanda, Uganda, Malawi, Burundi, the DRC Congo, and South Africa.

The push to reduce the dominance of the dollar in global trade is, however, not new.

Analysts predicted in the 1990s that the Japanese yen would challenge the dollar as the world’s reserve currency, and this prediction was revived in the 2000s with the introduction of the euro. There have recently been claims that the Chinese currency, the renminbi, will challenge the dollar’s dominance in global trade.

Stakeholders are eager for PAPSS to gain momentum soon.