## FREEING FOREIGN EXCHANGE IN AFRICA ## Source details **Canonical URL:** [FREEING FOREIGN EXCHANGE IN AFRICA](https://www.imf.org/-/media/files/publications/fandd/article/2022/september/digital-journey-africa.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2022/september/digital-journey-africa.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2022/september/digital-journey-africa.pdf.json) --- ### Overview: the payments problem and trade costs - Cross-border payments across African countries are expensive, slow, and often routed through overseas banks, impeding intra-African trade. - Trade among Africa’s 55 countries amounts to only about 15 percent of their total imports and exports, versus an estimated 60 percent of Asian trade and roughly 70 percent in the European Union. - Example anecdote: a Ghana resident sent a $100 payment to a lawyer in Nigeria that took two weeks to arrive and cost almost $40. ### AfCFTA and expected economic impact - The African Continental Free Trade Area (AfCFTA), effective in 2021, aims to: - Gradually eliminate tariffs on 90 percent of goods in its first phase. - Reduce barriers to trade in services. - In later stages, harmonize policies on investment, competition, e-commerce, and intellectual property rights. - Projected benefits cited: - The World Bank study estimates real income would rise by 9 percent and 50 million people would be lifted out of extreme poverty by 2035 if the deal is fully carried out. - The AfCFTA and improvements in payment systems are seen as complementary: “When the payments are unlocked, invariably you are unlocking trade between African countries.” ### PAPSS: Pan African Payment and Settlement System - Purpose: - Link African central banks, commercial banks, and fintechs into a network enabling quick and inexpensive transactions among any of the continent’s 42 currencies. - Settle transactions in local African currencies to avoid conversion to dollars, pounds, or euros and eliminate costly overseas intermediaries. - Expected performance: - Aim to complete transactions in less than two minutes at a low (though unspecified) cost. - AfCFTA secretary general: “This will be a game changer for trade on the African continent.” - Status as of midsummer (2022): - Formally launched in January 2022. - Had integrated six central banks and 16 commercial banks. - Had yet to complete a single commercial transaction as of midsummer. - Joint marketing campaign under way by Afreximbank and PAPSS, though awareness in the business community remained low. ### Current frictions and costs in cross-border payments - Routing and intermediation: - As of 2017, only about 12 percent of intra-African payments were cleared within the continent (SWIFT); the remainder are routed through overseas banks, mostly in Europe and North America. - Routing through overseas banks forces double conversion (African currency → dollars/pounds/euros → another African currency) and is estimated to add $5 billion a year to intra-African currency transaction costs. - Fees and relative costs: - Typical SWIFT standard fee of $35 accounted for most of the nearly $40 cost in the $100 example. - As a proportion of transaction amount, costs are typically much lower than that example but can amount to as much as 4 to 5 percent. - Small-value transactions face disproportionately high costs, creating barriers for small cross-border traders, many of whom lack bank accounts and may use black-market exchanges. - Exchange rate volatility and foreign exchange rationing: - Example: Ghana exchange rate moved from about ¢6 per dollar in mid-July 2021 to ¢8 a year later—a depreciation of 25 percent. - Volatility increases risk and cost of foreign currency transactions. - Some central banks ration dollars and other hard currencies via regular auctions, causing delays and shortages that disrupt trade (example: exporters waiting for payments because a counterpart central bank “didn’t have enough dollars”). - Real-world business impacts: - Delays in receiving foreign currency can prevent timely procurement of inputs (fertilizers, seedlings), leading to empty shelves, lost sales, and difficulty in production planning (e.g., timing of planting avocados). ### Implementation challenges for PAPSS and related reforms - Integration hurdles: - Central banks must reconcile differences in national regulations, infrastructure, and oversight systems. - Deciding how to settle transactions among multiple volatile currencies could be difficult. - Awareness among businesses is low, requiring outreach and marketing to promote adoption. - Operational readiness: - Project magnitude implies “glitches” during implementation; commercial bank transactions expected “very soon” but exact timing was not specified by PAPSS leadership. ### Key statistics and exact figures from the source - 55 countries (African continent) - Intra-African trade share: about 15 percent - Asian intra-regional trade share: 60 percent - European Union intra-regional trade share: roughly 70 percent - AfCFTA trading area population: 1.3 billion people - Tariff elimination target in AfCFTA first phase: 90 percent of goods - World Bank projected real income rise: 9 percent - World Bank projected people lifted out of extreme poverty: 50 million by 2035 - PAPSS target currencies coverage: 42 currencies - Intra-African payments cleared within continent (2017): about 12 percent (SWIFT) - Estimated added cost from overseas routing: $5 billion a year - Example transaction: $100 payment costing almost $40; standard SWIFT fee: $35 - Transaction cost range commonly cited: 4 to 5 percent - Ghana exchange rate example: ¢6 per dollar (mid-July 2021) to ¢8 per dollar (one year later) — depreciation of 25 percent - PAPSS launch: January 2022 - PAPSS integration as of midsummer 2022: six central banks and 16 commercial banks *Source: FINANCE & DEVELOPMENT, September 2022 (digital-journey-africa)* --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/september/digital-journey-africa.pdf_