Intra-African trade continues to be plagued by many challenges and the most worrisome of them is payment. In this piece, Temitayo Jaiyeola writes on how the Pan-African Payment and Settlement System might be the spark that will reverse the current trend of low intra-African trade
Africa is a continent of 54 countries acting like strangers among themselves. It is easier to travel outside the continent than within the continent. And nothing travels more outside the continent than trade.
Between 2019 and 2022, Nigeria, Africa’s largest economy, total trade with other countries on the continent totalled N2.8tn. Within that time frame, its total trade with countries in Latin and North America was N8.45tn and N76.09tn with Asian countries.
To improve trade on the continent, the African Continental Free Trade Area was established in 2018 to increase Africa’s income from trade by $450bn by 2035. By eliminating barriers to trade in Africa, the AfCFTA is poised to lift 30 million people from extreme poverty and another 68 million people from moderate poverty.
The agreement, which officially began in 2018, advocates for the dropping of 90 per cent of tariffs and pushing for policies aimed at eliminating non-tariff barriers, such as customs delays and others.
Nigeria signed the AfCFTA in 2019, and a 2021 Brookings report stated that the country stood to gain from increased access to cheaper goods and services on its continent as its intra-African trade is low.
It said, “Indeed, as of 2018, Nigeria’s imports from the African region relative to total imports were at 3.2 per cent while the share of Nigeria’s exports to the African region relative to total exports was 13.2 per cent. Moreover, in 2020, Nigeria’s main trading partner was actually China.”
On its part, the World Bank expected the implementation of AfCFTA to boost Africa’s income by $450bn in 2035 (a gain of seven per cent), adding $76bn to the income of the rest of the world.
It argued that the trade agreement could increase Africa’s exports by $560bn.
While the AfCFTA promises many mouth-watering possibilities, perhaps its biggest hindrance is the inability of African countries to settle trade contracts in local currencies (there are about 42 individual currencies on the continent).
Today, most intra-African trade is settled in US dollars or euros, which adds to the cost and complexity of transactions and exposes African businesses to exchange rate volatility despite engaging in local transactions.
To contextualise this, if a Nigerian farm wants to buy fertilisers from a South African firm, the two transacting parties and their local banks will need a correspondent bank — usually outside of Africa — to settle payments in an external currency (dollars or Euros). This exerted pressure on the external reserves of African Central Banks further degrading the FX liquidity problem in most African countries.
To solve this problem, the African Export-Import Bank launched the Pan-African Payment and Settlement System in 2022 to aid cross-border payments in local African currencies.
PAPSS, which is a digital platform that enables African businesses and individuals to send and receive payments in their local currencies, without the need for intermediaries or conversion fees, aims to not only reduce the transaction costs but also the time of intra-African trade by up to 60 per cent.
The solution is meant to serve as a payment infrastructure connecting all of Africa’s fragmented payment structure as one. It is expected to save businesses on the continent $5bn in transaction costs annually.
A report by Kora, a fintech, explained, “PAPSS aims to rival traditional swift networks, functioning as an automated clearing house for pan-African payments and as a crucial cross-border payment switch, facilitating transactions across the continent.”
At the launch of the solution, the AfCFTA Secretariat’s Chief Technical Advisor, Prudence Sebahizi, noted that it would allow a consumer or a buyer to pay in their currency while the vendor receives payment in their currency.
He highlighted that this would make trade easier and less expensive than converting the Kenyan shilling to the US dollar and then the US dollar to the Ghanaian cedi, as had previously obtained.
The Chief Executive Officer of PAPSS, Mike Ogbalu, commented, “The commercial launch marks a significant milestone in connecting African markets seamlessly. It will provide a fresh impetus for businesses to scale more easily across Africa and is likely to save the continent more than $5bn in transaction costs every year.”
Later in the year, Ogbalu would lament, “Intra-Africa trade is by far the lowest intra-continental trade globally standing at 15 -17 per cent.”
For the Executive Director of the International Trade Centre, Pamela Coke-Hamilton, PAPSS will assist businesses “in these uncertain times. African countries now have a commercially viable tool that can address a critical barrier for MSMEs to trade competitively”.
In a recent interview with The PUNCH, the Group Managing Director of United Bank for Africa, Oliver Alawuba, stressed the importance of intra-African trade to economic development and how PAPSS is crucial to it.
He said, “Today, you are aware that Afreximbank has a Pan-African Payment and Settlement System, a payment system for the settlement of business transactions across Africa and UBA is at the forefront of that partnership. Inter-African trade is important. Africa needs to trade more with each other and that will further improve economic development across the continent.”
It is not only traditional trade organisations that are raving about PAPPS, stockbrokers on the continent are also ruminating over how they might soon be able to transact on different exchanges in other African countries.
Recently, Nigeria’s Securities and Exchange Commission stated that the implementation of its agreement with PAPPS would aid diversification within the capital market.
The Head of the Office of the Chief Economist of SEC, Dr Okey Umeano, said, “PAPSS makes it easy to trade across Africa. It makes intra-African trade more efficient and we have always wanted it.
“It was created initially for just the usual everyday trade but we have always wanted it for the capital market because we think that if we can link the exchanges and the markets across the continent we will have a bigger opportunity set for everybody, so we have been working on that.”
However, PAPSS is not without its challenges. For it to succeed, it needs the cooperation and coordination of all stakeholders, including central banks, regulators, commercial banks, payment service providers, and traders.
So far, only the Central Bank of Nigeria, Bank of Ghana, Central Bank of Liberia, Central Bank of the Republic of Guinea, Central Bank of The Gambia, Bank of Sierra Leone, Reserve Bank of Zimbabwe, Bank of Zambia, Banque Centrale De Djibouti, and Central Bank of Kenya, and 50 commercial banks are connected.
This is a drop in the ocean when one considers that there are about 763 commercial banks and 54 central banks on the continent.
To successfully achieve its aim, these central banks need to come together to harmonise policies, standards, and regulations.
Recently, the Chair of the Association of African Central Banks Payment Systems Integration Working Group, told the World Bank, “The key challenges are that some countries are slow at migrating from their legacy systems or are finding it difficult to integrate with PAPSS.
“We have had various payment systems integration initiatives on the continent and some institutions are finding it challenging to seamlessly harmonise their other initiatives with what we have currently agreed on.
“Another challenge is that many African countries don’t have enough reserves to fund their settlement reserve accounts at Afreximbank for net settlement of transactions.”
Central banks, which are at the heart of the system, would have to reconcile differences in national regulations, infrastructure, and oversight systems, the International Monetary Fund recently noted.
Deciding on how to settle transactions among several volatile currencies could also prove difficult, it added.
Furthermore, the system requires the adoption of modern technologies and infrastructure to ensure the security, efficiency, and reliability of the system.
There are arguments that the individual digital capacity of Africa’s countries is not enough.
For instance, when Nigeria tried to push payments fully online, it failed.
The World Bank said of the attempt, “The lack of adequate digital and financial infrastructure and processes to support a swift transition to a cashless economy— coupled with the fact that only 40 per cent of adults have a bank account—further exacerbated the situation.”
Also, there is the problem of user adoption. The AfCFTA promises that SMEs from different African countries will be able to tap into a bigger market. This has been inhibited by payment issues, which PAPPS is hoping to solve, but not many businesses know this.
As a former Director General of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, Dr John Isemede, puts it, “What is PAPSS to an average Nigeria when we have no plans for SMEs.”
In a conversation with the Director of Africa Growth Initiative Senior Fellow, Global Economy and Development , The Brookings Institution, Aloysius Ordu, in 2022, the CEO of PAPSS, Ogbalu, noted that the initiative was aware of this limitation.
He expanded, “First of all, we are talking to different trade associations and medium businesses and trade groups in the different countries to begin to express to them the value that PAPSS will bring to that small shoemaker that is in Aba, who is developing shoes today and putting a brand that is not African on it because he thinks that that brand can’t sell.
“But let him understand that the infrastructure that PAPSS is providing will open up markets for him across the continent. So, he can focus on making his shoes and not worry about the buyer in Ethiopia who is paying birr and how that birr comes to naira for him in Aba.”
It is still too early to judge the performance of PAPSS considering that the AfCFTA that should serve as its launching pad is still wobbling. But there are high hopes that someday, payment across the African continent will become truly seamless and cheap.
