“Let’s make the African market, the market of Africans. Produce in Africa, transform in Africa and consume in Africa. Let’s produce what we need and let’s consume what we produce instead of importing”- H.E. Thomas Sankara, President of Burkina Faso.
In 2020, the World Bank stated that the implementation of the African Continental Free Trade Area (AfCFTA) has the potential of growing African exports by $560 billion while increasing Africa’s income by $450 billion by 2035. The AfCFTA is a treaty that is going to connect approximately 1.3 billion people across 55 African countries with a combined GDP of $3.4 trillion. The possibilities that abound with the implementation of this treaty are not without their own intendent challenges. Chief amongst these challenges is creating a common system of payments given the numerous currencies and payment systems in use in the various economic sectors of the continent. To address this challenge the Pan-African Payment and Settlement System (PAPSS) was created.
The implementation of the PAPSS by Central Banks is a significant step towards the successful enactment of the African Continental Free Trade Area (AfCFTA).
The PAPSS is an African Union infrastructure developed in collaboration with the African Export-Import Bank (Afreximbank) to support trading under the AfCFTA. The PAPSS works in partnership with Central Banks on the African continent to offer a payment and settlement service to which commercial banks, payment service providers and fintech organizations across the continent can connect as participants. As at March 2023, the PAPSS network consisted of nine (9) Central Banks, sixty (60) commercial banks and four (4) six switches. It will expand further into the five (5) regions of Africa before the end of 2023. All Central Banks in Africa under the AfCFTA are to sign up by the end of 2024 and all commercial banks by the end of 2025.
However, there are other important challenges that must be tackled for the successful implementation of the PAPSS under the AfCFTA. These include fragmented financial infrastructure, differences in payment systems, regulatory frameworks, technological capabilities, limited digital penetration and financial inclusion, complex currency conversion and exchange rate risks, regulatory and compliance hurdles, cybersecurity concerns, and integration with existing payment systems. Additionally, there are concerns about the lack of competitiveness of some African economies, which could limit their ability to benefit from increased trade opportunities under AfCFTA.
What is the Pan-African Payment and Settlement System (PAPPS)?
The Pan African Payment and Settlement System (PAPSS) is a payment and settlement platform designed to enable intra-African trade and payments by enabling African countries to settle transactions in their local currencies, rather than in foreign currencies like the US dollar (USD), the British Pound Sterling (GBP), or the Euro. This is anticipated to lessen the transaction costs and currency risks related with cross-border trade and promote the use of African currencies in trade settlements. The platform minimizes risk and contributes to financial integration across the regions.
Benefits of Pan-African Payment and Settlement System (PAPSS)
- Reduction in demand for foreign currency and its intendent benefits.
Conceivably, the biggest benefit of AfCFTA on the African banking sector is the PAPSS. The PAPSS can streamline and facilitate trade transactions within the free trade area by providing a secure and efficient payment and settlement system. It enables businesses across Africa to transact seamlessly, reducing barriers and delays associated with cross-border payments.
As a continent-wide platform for processing, clearing, and settling intra-African payments. The system is designed to enable individuals, businesses, and governments to make instant cross-border payments in the more than 40 different African currencies, thus reducing the need for US dollars (USD), and other hard currencies. This in the long term will simplify cross-border trade in Africa.
Acquiring hard currency is a particular challenge for small and medium-sized enterprises (SMEs). There are fewer than 55 African currencies because of the two CFA Franc zones in Central and Western Africa, which themselves demonstrate that while common currencies are useful, barriers to trade also need to be eroded if trade volumes are to grow. The hunger for non-African hard currency is destroying African currencies, causing depreciation and inflation within the African continent. The implementation of this system will thus help to reduce the rate of currency depreciation and inflation in African countries.
- Provision of greater transparency and control
All payment channels, whether banks or fintech operators, will be able to utilize the PAPSS on behalf of their customers. Instant transactions would increase trust and confidence between trade partners, reducing liquidity requirements for settlements and freeing up more money for other uses.
The creation of a single window for all cross-border transactions made across the continent would provide Central Banks with greater transparency and control. With the implementation of the PAPSS, Africa can expect to begin to reap the fruits of the AfCFTA.
PAPSS is not positioned to replace existing regional and national payment systems but to collaborate and work with them to better integrate African economies for the benefit of all.
iii. Ease of payments across the continent
The PAPSS establishes a standardized payment infrastructure across African countries participating in AfCFTA. This harmonization of payment systems promotes interoperability, making it easier for businesses to conduct transactions, regardless of the country or currency involved.
- Lower Transaction costs
The Pan-African Payment and Settlement System can contribute to cost reduction in trade activities by offering a single platform for payment and settlement, businesses can avoid multiple currency conversions and associated fees. This can result in lower transaction costs, making trade more affordable and attractive for businesses within the AfCFTA.
- Increased efficiency
With the PAPSS, trade processes become more efficient. The system enables real-time or near-real-time payment settlements, eliminating the need for lengthy delays and paperwork. This improved efficiency contributes to smoother trade operations and enhances business productivity within the AfCFTA.
- Enhance financial inclusion
The PAPSS has the potential to enhance financial inclusion within the AfCFTA region. By providing a digital platform, it can reach remote and underserved areas, enabling individuals and businesses to participate more actively in regional trade.
This inclusion would foster economic growth and opportunities for a broader segment of the population.
The PAPSS would play a vital role in strengthening economic integration among African countries. By promoting seamless cross-border transactions, it would encourage trade and investment within the AfCFTA region, and the improved economic integration could lead to increased intra-African trade, job creation, and overall economic development.
vii. Risk mitigation
The PAPSS could help to mitigate risks associated with cross-border trade. The platform provides a secure channel for payment and settlement, reducing the risk of fraud and transactional disputes. This enhanced security and transparency can build trust among businesses and boost trade activities within the AfCFTA.
viii. Data insights
The PAPSS generates valuable transactional data that can be leveraged for data insights and analysis. The data can provide useful information on trade patterns, market trends, and consumer behavior within the AfCFTA. Such insights can assist policymakers and businesses to make informed decisions and promote trade growth and economic development.
Potential Hurdles to the Smooth Implementation of PAPSS.
- Implementation challenges
The implementation of the PAPSS across multiple African countries could be complex and challenging. It requires coordination, cooperation, and investment from participating nations. The PAPPSS must navigate through various regulatory frameworks and compliance requirements across African countries. Each country may have its own financial regulations, data privacy laws, and security standards. Ensuring compliance with these diverse regulations could be complex, and requires ongoing coordination and cooperation among participating countries.
Varying levels of technological infrastructure, regulatory frameworks, and financial systems in different countries could pose obstacles to the seamless integration and adoption of the PAPSS.
- Limited access and adoption
The PAPSS might face issues related to limited access and adoption, particularly in regions with low digital penetration and inadequate financial infrastructure. In areas where internet connectivity and technological literacy are low, businesses and individuals may struggle to utilize the system effectively. This could create a digital divide and hinder the full potential of PAPSS within AfCFTA.
iii. Currency conversion challenges
While the PAPSS aims to streamline cross-border transactions, it may still face challenges related to currency conversions. African countries use different currencies, and fluctuations in exchange rates could impact the cost and efficiency of transactions. PAPSS thus needs to address these challenges to ensure smooth and cost-effective currency conversions.
- Operational and technical risks
The PAPSS, like any other digital payment system, is susceptible to operational and technical risks. System outages, cybersecurity threats, and technical glitches can disrupt payment and settlement processes, leading to delays and potential financial losses. Robust risk management and mitigation measures need to be in place to address these risks effectively.
- Dependency on a single system
As the PAPSS becomes a central payment and settlement system within the AfCFTA, there is the risk of over-reliance on a single system. Any disruptions or failures in the PAPSS infrastructure could have a significant impact on cross-border trade and financial activities. Diversification and contingency plans should be considered to mitigate such risks.
- Limited integration with existing systems
The PAPSS may face challenges in integrating with existing payment systems and financial institutions within African countries. Legacy systems, different technical protocols, and varying levels of readiness for integration can impede the seamless adoption of PAPSS. Collaborative efforts and investment would therefore be needed to bridge the gaps and thereby ensure effective integration.
Overall, PAPSS contributes to the goals of the AfCFTA by facilitating trade, reducing costs, promoting financial inclusion, and fostering economic integration among African countries. It is important to note that while potential hurdles exist, they are not insurmountable. With proper planning, investment, and collaboration, the challenges could be addressed effectively to maximize the benefits of the system.
To overcome implementation challenges, there should be focus on capacity building and infrastructure development. Initiatives should be undertaken to promote financial inclusion for quick adoption.
For a smooth implementation, there is the need to create transparent and competitive exchange rates and offer currency hedging solutions that can facilitate smooth cross-border transactions.
Regular monitoring, maintenance, and upgrading of the PAPSS infrastructure are necessary to minimize disruptions. Collaboration with cybersecurity experts and adherence to international best practices would enhance the security of the system.
By adopting these solutions, the drawbacks associated with the implementation of the PAPSS within the AfCFTA could be effectively addressed to ensure a smoother and more efficient cross-border payment and settlement system.
Therefore, while the implementation of the PAPSS is an important step towards the success of AfCFTA, there is still a long way to go to overcome the significant challenges that exist. It would require sustained efforts from governments, businesses, and other stakeholders to address these challenges for the full realization of the potential of AfCFTA.
By: Bright Kweku Azumah (BA, MBA), Ecobank Ghana PLC