Digital Journeys: Freeing Foreign Exchange in Africa

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Cross-border payments in Africa are expensive and slow, constraining intra-African trade and economic development.
Trade among Africa’s 55 countries amounts to only about 15 percent of their total imports and exports, compared with an estimated 60 percent of Asian trade taking place within the continent and roughly 70 percent in the European Union.
Small-value transactions face disproportionately high costs and exclusion: many small cross-border traders lack bank accounts and often use black markets, exposing them to theft and counterfeit currency risks.

Individual case: a $100 payment from Ghana to Nigeria took two weeks and cost almost $40; most of the cost was the standard $35 fee charged by SWIFT.
Typical transaction cost proportions can be as much as 4 to 5 percent of the transaction value.
As of 2017, only about 12 percent of intra-African payments were cleared within the continent; the remainder are routed through overseas banks, mostly in Europe and North America.
Routing via overseas intermediaries forces double currency conversions and adds an estimated $5 billion a year to the cost of intra-African currency transactions.
Exchange rate volatility increases transaction risk and cost: example—Ghana: ¢6 per $1 in mid-July 2021; ¢8 per $1 a year later, a depreciation of 25 percent.
Currency rationing by some central banks (regular auctions) delays payments and constrains trade—example: exporters waiting for dollar allocations in Angola, affecting decisions like when to plant avocados.
Business impact example: delays in foreign-currency access can leave shelves empty and cause lost sales for dealers of agricultural inputs.

African Continental Free Trade Area (AfCFTA)
- Entered first phase in 2021 with objectives to gradually eliminate tariffs on 90 percent of goods and reduce barriers to trade in services.
- Later stages aim to harmonize policies on investment, competition, e-commerce, and intellectual property rights.
- A World Bank study cited estimates that full implementation would raise real income by 9 percent and lift 50 million people out of extreme poverty by 2035.
Pan African Payment and Settlement System (PAPSS)
- Joint project of the AfCFTA secretariat and Afreximbank to link African central banks, commercial banks, and fintechs for quick and inexpensive transactions among any of the continent’s 42 currencies.
- Goal: settle transactions in local African currencies, eliminating the need to convert via dollars, pounds, or euros and removing costly overseas intermediaries.
- Target performance: complete transactions in less than two minutes at a low (unspecified) cost.
- Formally launched in January 2022.
- As of midsummer, PAPSS had integrated six central banks and 16 commercial banks but had yet to complete a single commercial transaction.
- Awareness among the business community is low; Afreximbank and PAPSS have a joint marketing campaign underway (no further details provided).

PAPSS and AfCFTA together are positioned to “unlock” intra-African trade by removing payment frictions, potentially supercharging commerce, attracting foreign direct investment, and boosting economic growth.
Eliminating overseas routing could reduce the estimated $5 billion annual extra cost on intra-African currency transactions and lower barriers for small-value traders.

Reconciling differences in national regulations, infrastructure, and oversight systems among central banks is necessary for PAPSS to function.
Deciding how to settle transactions among multiple volatile currencies presents operational and risk-management difficulties.
Integration and uptake risks: initial lack of commercial transactions and low awareness in the business community.
Operational glitches are expected during large-scale implementation; PAPSS leadership anticipates commercial bank transactions “very soon” but could not provide firm timing.

Source: F&D Magazine — “Digital Journeys: Freeing Foreign Exchange in Africa,” Chris Wellisz, September 2022.

Freeing Foreign Exchange in Africa
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