The crystal ball that foretold an eventual conglomeration of currencies in Africa into a single medium of exchange and store of value looks to now been accorded some attention. This is because some countries in the West African Monetary Zone (WAMS) – Gambia, Gambia, Ghana, Guinea, Liberia, Nigeria, and Sierra Leone have concluded a successful pilot scheme on the Pan-African Payment and Settlement System (PAPSS).
Launched by the Afreximbank – the PAPSS has been around since July 2019 but was only recently commercially launched in Accra, Ghana on the 13th of January 2022.
The interoperability of the PAPSS Platform is mainly focused on the promotion of trade within the continent especially with the existence of the African Continental Free Trade Area (AFCFTA) which has a market value of $3 trillion, there is a prospect for African countries to leverage the system to increase the demand for their local goods and services. This in turn will strengthen their respective currencies.
The scheme will also bridge the gap in the erstwhile fragmented payments system that long existed on the continent with a renewed opportunity for deepened trade
The decreased dependence on a foreign currency like the US Dollars or the Pounds Sterling during the settlement system for continental transactions helps in raising the quality of the African nations’ currency especially as the presence of the ‘third force’ correspondent banks during settlement in the value chain would have been removed.
Until now, it was estimated that over 80 percent of African cross-border payments were re-routed offshore for settlement and clearing, thus increasing the turnaround time to conclude intra-African transactions and drastically reducing customer satisfaction.
This was a key challenge that Small, Medium Enterprises (SMEs) on the continent were forced to deal with. The challenge was such, if one wanted to trade between South Africa and Kenya, then one has to convert the South African Rand into the dollar, transact with somebody with a business in Kenya and receive that United States dollar, convert it into the Kenyan Shillings and then you can conclude the transaction. The immediate foregoing is clearly a merry-go-round and totally unnecessary.
That singular reliance on a currency foreign to Africa costs the continent over $5 billion in transactions per year.
Therefore, the commercial launch marks a significant milestone in connecting African markets seamlessly. It will also provide a fresh impetus for businesses to scale more easily across Africa and is likely to save the continent more than $5 billion in transactions costs every year.
The scheme will also bridge the gap in the erstwhile fragmented payments system that long existed on the continent with a renewed opportunity for deepened trade. There is an opportunity for African nations to see the percentage of their trade soar from the current 15 percent to 35 percent within the next five years.
Nevertheless, the requirement for financial institutions in Africa to onboard on the PAPSS platform through their various central banks defeats the purpose of the scheme to increase efficiencies and promote seamless transactions. It would have been preferable to onboard the switching companies in each African nation.
A case in point for Nigeria is The Nigerian Inter-bank Settlement System (NIBSS) which is the regulator for the payment industry and has provided a secured and reliable platform for the interconnectedness of financial institutions within the country.
On the NIBSS platform today are all 22 commercial banks, over 15 microfinance banks, all switching companies, and even more financial institutions. Thus, switching companies and regulators should be well carried along and embedded on the platform as this would reduce the need for every financial institution to do so singularly.
Also, in Nigeria, with Sterling and Ecobank having been successfully on boarded on PAPSS, there are no guarantees for the period other financial institutions would do the same with the current arrangement in force which extensively relies on the Central Bank of Nigeria (CBN).
Nonetheless, central banks are indispensable should an intra-African trading platform be successful as they remain the watchdogs and custodians for the legal framework, guides, and checks including money laundering within the industry.
Meanwhile, the CEO of PAPSS, Mike Ogbalu also says that transactions are going to be domiciled in the currency of the beneficiary. According to him, “We want transactions to be made in the local currency of the beneficiary and not that of the sender.”
If this modus operandi is maintained, what it means is that beyond currency appreciation, the extent of benefit on the Gross Domestic Product (GDP) to be actualized by trading nations would be dependent on their volume of trade and by extension, the prowess of their domestic economies. This in turn will boost the production of viable export commodities and the employment of local natural and human resources. Thus, opening up employment for more able-bodied youths.
Even as PAPSS aids the strength of currencies in Africa, it is not the missing link to actualizing the long-touted ‘single currency’ within the region. While francophone nations in Africa have since 1945 adopted the CFA Franc as a common currency, they still grapple with just about 16% of trade within the union. For the Economic Community of West Africa States (ECOWAS), there has been a long call for a single currency – the ECO – which is believed will promote trade in the region.
The PAPSS helps to drive the aspiration of ECOWAS as one of the requirements for the single currency coming on stream is a strong and stable currency across the various countries. Howbeit, PAPSS contributes minimally to this quest as there are other factors unique to each country that are responsible for the appreciation/depreciation of the various currencies.
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Another requirement is that there must be single-digit inflation of 5% or less. There is still a long way coming in achieving this as Nigeria – Africa’s biggest economy had inflation of 15.40 percent as of December 2021.
In addition, ECOWAS requires all member countries to achieve a budget deficit to GDP ratio of 4 percent or lower before the single currency can be launched. Unfortunately, the continent is not anywhere close to this mark. Ghana has a total debt to GDP of 73.3 percent in 2016. For the Gambia, it was 108 percent in 2015. In Africa – Nigeria, still has one of the lowest debt to GDP. As of 2020, it was 36.88 percent –which is still far from the mark.
Thus, while PAPSS is welcome at this time to facilitate trade and the domestication of the currency of African nations, it is just a drop in the mighty ocean in a quest to achieve a single currency within the region. Certainly, however, this laudable journey has started if only at a minimal level. Consequently, African nations must move quickly to consummate the gains and possibilities of this historic enterprise.
