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DIGITAL JOURNEYS
The continent seeks to facilitate cross-border payments in a bid to boost trade
Making payments from one African country to another is not easy. Just ask Nana Yaw Owusu Banahene, who lives in Ghana and recently paid a lawyer in neighboring Nigeria for his services.
“It took two weeks for the guy to receive the money,” explains Owusu Banahene. The transaction cost of $100? Almost $40. “Using the banking system is a very difficult process,” he says.
His experience is a small example of a much bigger problem for Africa’s economic development: the cost and difficulty of making cross-border payments. This is one of the reasons why trade between the 55 African countries represents only about 15% of their total imports and exports. In contrast, an estimated 60% of Asian trade takes place within the continent. In the European Union, the proportion is around 70%.
“When payments are released, you invariably unlock trade between African countries,” says Owusu Banahene, the Ghana country manager for AZA Finance, which handles foreign exchange transactions for companies doing business in Africa.
Cross-border payments are just one of many barriers to trade in Africa. Others range from high tariffs and cumbersome border procedures to divergent trade regulations and congested roads.
A trade deal that took effect in 2021 aims to reduce some of those barriers and create a vast trade zone from Casablanca to Cape Town, encompassing 1.3 billion people. In its first phase, the African Continental Free Trade Area (AfCFTA) agreement would phase out tariffs on 90% of goods and reduce barriers to trade in services. In later stages, it would harmonize policies on investment, competition, e-commerce and intellectual property rights.
AfCFTA supporters say lowering trade barriers will boost trade, attract foreign direct investment and boost economic growth. A recent World Bank study estimates that the deal, if fully realized, would raise real income by 9% and lift 50 million people out of extreme poverty by 2035.
The Pan-African Payments and Settlement System (PAPSS), a project of the AfCFTA Secretariat and Cairo-based Afreximbank, which specializes in trade finance, will work in tandem with the agreement. The system aims to link African central banks, commercial banks and fintechs in a network that would enable fast and inexpensive transactions between any of the continent’s 42 currencies.
In 2017, only around 12% of intra-African payments were cleared on the continent, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The rest is channeled through foreign banks, mainly in Europe and North America. Accordingly, an African currency must first be exchanged for dollars, pounds or euros, and then exchanged a second time for another African currency. This adds about $5 billion a year to the cost of intra-African currency transactions.
Owusu Banahene says his payment of $100 to his lawyer was relatively straightforward, as banks in Ghana and Nigeria have correspondent banking relationships with foreign counterparts who use dollars in foreign currency transactions. But in the case of Ghana and Côte d’Ivoire, the transactions involve two foreign banks, because the Ivorian institutions have links with banks that use the euro.
Most of the cost of Owusu Banahene’s transaction was a standard $35 fee charged by SWIFT. In proportion to the amount of the transaction, the costs are generally much lower, although still considerable, amounting to as much as 4-5%.
Yet the cost of low-value transactions can be a barrier for small cross-border traders who account for a significant portion of intra-African trade. Many of them don’t have a bank account to begin with, and even those who do often trade money on the black market, which can involve the risk of being robbed or receiving counterfeit currency, explains Richard Adu-Gyamfi, Senior Advisor at AfroChampions. Initiative, which aims to support African multinational companies.
There are other obstacles. One is the volatility of African exchange rates. In the case of Ghana, it took about 6¢ to buy a dollar in mid-July 2021; a year later the cost was 8¢, a 25% depreciation. Volatility increases the risk, and therefore the cost, of foreign currency transactions.
Another obstacle: some African central banks, seeking to support the value of their currency, ration dollars and other hard currencies by regularly organizing auctions. This has been a source of frustration for Sasha Naryshkine, the operations manager of Kuza Africa, which exports avocado seedlings from Tanzania.
“We sold seedlings in Angola and had to wait for payment simply because the central bank of Angola didn’t have enough dollars for people to pay,” he says. Delays and uncertainty make it difficult to plant lawyers, he says, and hold back business.
One of his clients is Lourenço Rebelo, commercial director of FertiAngola, a retailer of agricultural products ranging from seedlings to tools. Rebelo says delays in accessing foreign currency mean some shelves remain empty, resulting in lost sales.
“We are a one-stop shop,” he says. “So if I run out of fertilizer, for example, [customers] won’t come in, and the other things won’t sell.
The PAPSS aims to solve these problems by settling transactions in local African currencies, thus avoiding having to convert them into dollars or euros before exchanging them for another African currency. Essentially, the PAPSS would eliminate expensive overseas intermediaries. The system aims to complete transactions in less than two minutes at a low but unspecified cost.
“This will be a game-changer for trade on the African continent,” said Wamkele Mene, AfCFTA General Secretary.
Yet the PAPSS faces its own obstacles. Central banks at the heart of the system will have to reconcile differences in national regulations, infrastructure and oversight systems. Deciding how to settle trades between a number of volatile currencies could also prove difficult.
Officially launched in January 2022, the system had yet to complete a single business transaction as of mid-summer. It has integrated six central banks, with others on the way, and 16 commercial banks, explains John Bosco Sebabi, deputy director general of PAPSS.
Sebabi concedes that knowledge of the system is low in the business community. He says Afrexim and PAPSS have a joint marketing campaign underway, although he says he cannot provide details.
“When implementing a project of this magnitude, there are always glitches along the way,” he says. “However, we are set to have commercial banking transactions very soon. We cannot say today or tomorrow, but very soon.
Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.
