In a bid to alleviate the high costs associated with cross-border payments in Africa, governments on the continent have spearheaded the development of the Pan-African Payment and Settlement System. This groundbreaking initiative is scheduled to go live in 2024 under the leadership of Kenya, marking a significant stride towards fostering economic independence and reducing reliance on major global currencies.
Why African countries face exposure in the International Currency Market
African economies find themselves vulnerable in the international currency market due to three primary reasons.
Firstly, their small scale renders them heavily dependent on global trade, with exports primarily comprising primary commodities such as oil, gas, minerals, and cash crops.
Secondly, “intra-African” trade remains a small fraction of total trade. Lastly, the inability of African currencies to be directly exchanged in international transactions perpetuates the dominance of the US dollar in trade, even among African nations.
The vision behind the Pan-African Payment and Settlement System
The core objective of the Pan-African Payment and Settlement System is to facilitate trade settlement between African countries without the obligatory use of the US dollar. However, two major challenges loom over this ambitious endeavor.
Firstly, intra-African trade currently constitutes less than 15% of Africa’s exports, necessitating a gradual reduction in the reliance on foreign currencies. Secondly, the imbalance in trade between African nations calls for a universally accepted settlement currency, likely to be the US dollar.
Challenges and potential risks
Implementing this revolutionary system comes with its own set of challenges and risks. The fluctuating nature of exchange rates introduces risk in the trade financing chain, leaving the question of who bears the exchange rate risk unanswered.
Additionally, achieving the necessary scale for the system to be effective remains crucial, as large currency imbalances could persist until widespread adoption occurs.
The best-case scenario
The success of the Pan-African Payment and Settlement System hinges on its ability to address trade imbalances, clarify risk management procedures, and achieve significant scale. If these milestones are met, the system could revolutionize cross-border trade on the continent. However, its success ultimately depends on the economic performance of African nations, emphasizing the need for development in intra-African trade, trade policies, and fiscal measures.
As the system prepares to go live in 2024, stakeholders eagerly anticipate the positive impact it could have on the economic landscape of Africa, fostering increased trade independence and paving the way for a more sustainable and interconnected continental economy.