Under the leadership of the African Export-Import Bank, the African Continental Free Trade Area (AfCFTA) has moved towards financial integration with the launch of a cross-border payments platform.
The AfCFTA, which includes 54 of Africa’s 55 countries (excluding Eritrea) and encompasses a population of 1.2 billion people with a combined GDP of $2.5 trillion—comparable to that of France—has taken a significant step forward. It represents the largest common market globally in terms of population.
The AfCFTA was officially inaugurated at the African Union summit in Niamey in 2019, with the ambitious goal of boosting intra-African trade to stimulate the economic growth of a continent that remains the least developed. Currently, intra-African trade makes up only 15% of total trade on the continent, a stark contrast to the European Union’s 70%. However, the progress of the AfCFTA was delayed by almost two years due to the COVID-19 pandemic.
The recent launch of the Pan-African Payment and Settlement System (Papss) marks an essential development. This system is a key tool designed to facilitate payments and settlements in local African currencies, advancing the financial integration that AfCFTA seeks to establish. The Papss has already undergone testing in six West African Monetary Zone countries: Ghana, Nigeria, Gambia, Liberia, Guinea, and Sierra Leone. Although this area is relatively small, it reflects the broader challenges faced across the continent. Successful implementation could save Africa more than $5 billion annually in payment transaction costs. Additionally, it aims to reduce the average transaction time for intra-regional payments, which currently ranges from 2 to 14 days, contributing to the limited level of intra-African trade.
What is it all about?
The Pan-African Payment and Settlement System (Papss) represents a significant innovation aimed at simplifying and accelerating transactions within Africa. By enabling payments in local African currencies, Papss addresses the cost and time inefficiencies that have long hindered intra-African trade. The success of this system is expected to bring substantial economic benefits, fostering an environment where trade can develop more freely and efficiently across the continent.
Papss serves as a pan-African platform allowing businesses and governments to conduct transactions instantly, transparently, and in local currencies across various African markets. This platform is being developed by prominent continental institutions, including the African Export-Import Bank (Afreximbank), the African Union, and central banks involved in the project, in collaboration with the AfCFTA General Secretariat. Its primary objective is to eliminate the high costs associated with cross-border commercial transactions, which are often subject to excessively long processing times.
Currently, cross-border payments within Africa typically require the use of a third currency, such as the US dollar or the euro, leading to high transaction costs that AfCFTA aims to eliminate. This dependency on non-African currencies adds an unnecessary layer of expense to trade, reducing competitiveness and creating barriers for businesses. For example, a money transfer from Egypt to Nigeria must pass through a correspondent bank outside the continent, incurring fees before funds become accessible.
Benedict Oramah, President of Afreximbank and chairman of the Papss board, emphasized, "Papss is not designed to replace existing regional and national payment systems, but to collaborate and work with them to better integrate African economies for the benefit of all." Highlighting the broader economic implications, Wamkele Mene, Secretary General of the AfCFTA Secretariat, stated in an interview with Afrique Renouveau, "We have more than 42 currencies in Africa. We want to reduce and eventually eliminate this cost [$5 billion, Editor's note], because it limits the competitiveness of our SMEs and makes trade expensive and inaccessible for many SMEs and young entrepreneurs." Papss is considered a homegrown solution to address Africa’s specific financial challenges. Ghanaian Vice President Mahamudu Bawumia expressed optimism at the system's launch, remarking, "It is the most practical and important achievement in the integration of the payment system on the continent since independence from colonial rule. We have never been closer, as a continent, to the vision of issuing a common currency."
Towards an Integrated Financial Market
Intra-African trade currently faces numerous challenges, including a significant lack of liquidity, difficulties accessing foreign currencies, and stringent regulatory controls. A contributing factor to these challenges is the withdrawal of many international banks from the African continent over the past decade. "Payment infrastructures have existed for some time at national and sub-regional levels. However, these systems lack interoperability. Fragmented national and regional payment systems cannot stimulate pan-African economic development and intra-African trade. While these have made a good start, it is vital that we now integrate the whole of Africa financially," explained Mike Ogbalu.
Progress is on the horizon as Afreximbank plans to extend an $8 billion credit line to 500 African banks to facilitate trade transactions with Papss. "This will represent the largest banking relationship ever forged by a financial institution on the continent. Currently, the bank has integrated more than 480 banks," noted the bank’s chief executive. Godwin Emefiele, Governor of the Central Bank of Nigeria, emphasized, "The introduction of Papss offers central banks greater transparency and control, as we now have a one-stop shop for all cross-border transactions emanating from our various jurisdictions and across the continent."
This funding is essential for banks, as Papss will protect them against the risks associated with payment, clearing, and settlement. "Papss will provide a new impetus for businesses to expand more easily across Africa, essentially eliminating the borders that have balkanized us and deprived us of our economic prosperity for so long," pointed out Mike Ogbalu III, CEO of Papss. He also highlighted that Papss has demonstrated its credibility through the success of its pilot phase and the proof of concept in the West African Monetary Zone (WAMZ), showcasing the system's ability to manage the diversity and complexity of the broader African landscape, including multiple languages, currencies, and regulatory frameworks.
Looking ahead, Ogbalu III added, "Papss will now focus on integrating the rest of the continent into this critical infrastructure, including national payment systems, regional payment systems, and other financial service providers."
The year 2022 is poised to be a significant one for the AfCFTA. Member states are expected to finalize negotiations on rules of origin, accelerate work on financing mechanisms for SMEs, and launch the African Trade Gateway digital platform, further solidifying the progress towards an integrated financial market.
Le Point Afrique
https://www.lepoint.fr/afrique/zone-de-libre-echange-africaine-cap-sur-l-integration-financiere-22-01-2022-2461568_3826.php