African countries lose $5bn annually to dollar convertibility
… as AfCFTA, Afreximbank plan $10bn adjustment fund for countries that eliminate tariff
African countries with 42 different currencies are losing $5 billion annually, as the cost of currency convertibility, Wamkele Mene, Secretary-General of the African Continental Free Trade Area (AfCFTA) Secretariat, said on Friday in Durban, South Africa.
This, he said, was one of the reasons why intra-African trade is constrained and the Small Medium Enterprises (SMEs), are the most affected.
Apart from that, he said inefficiency, the lack of expeditious conclusion of transactions, are the very challenges Africans, particularly, SMEs, encounter as a result of 42 currencies in the continent.
“Today if you want to trade between South Africa and Kenya, you have to first convert the South African Rand into dollars, before transacting with somebody with a business in Kenya. You then receive the United States dollar, convert it into Kenyan Shillings and then you can conclude the transaction,’’ he said while addressing journalists on the sideline of the 2021 Intra-African Trade Fair (IATF) in Durban.
As part of efforts towards addressing this challenge, Mene said AfCFTA is working with Afreximbank to establish a Pan-African Payment and Settlement System (PAPSS), which will enable Africans to transact in real-time on a digital platform with somebody or entity in other parts of the continent using their local currency, “so you will not have to worry about converting to a dollar, or Euro or any other currency”.
He explained that Afreximbank is providing liquidity worth over a billion dollars for the settlement as well as establishing the technology, while AfCFTA is providing the legal framework.
“This is the very first time we have had a single set of rules for trade and investment. So we need to leverage on this single instrument to make sure that we maximize the benefit,” Mene said.
“As we are now in a free trade area, it is our desire and objective that one day, as we move along the integration in Africa, the next step will be custom union and so on. One day we will be a single currency in the monetary union that was the Abuja treaty, and that is one of the objectives – highest level of integration,” he said further.
On the issue of currency adjustment for countries that are losing revenue as a result of reducing tariffs on goods produced on the continent or eliminating such, he said AfCFTA and Afreximbank are in the final stages of negotiating an AfCFTA adjustment fund worth $10 billion.
“They will work with us to mobilize up to $10 billion of a trade finance facility for those countries that would suffer short-term revenue losses as a result of reducing tariffs or eliminating them,” he said.
“We know that there will be countries that as a result of elimination of tariffs, they will suffer short term revenue losses. For many countries on the continent, tariffs or duties are a source of revenue. Ultimately what we should aim for is that tariffs or duties should not be a tool for revenue generation but should be an industrial development tool. That is why the AfCFTA exists to make sure that we move away from that reliance,” Mene said further.
AfCFTA commenced into effect on January 1, 2021 eliminating tariffs on goods produced on the continent.
He said for the continent to create an internal market for African products, it must begin to manufacture value-added goods and deepen their regional value chains.
He also stated that African markets must discover their areas of specialisation and value addition in their local market before the continent would witness any real inter-African trade.