Christopher Adam, a development economist specializing in African exchange rate policies, sheds light on the upcoming Pan African Payment and Settlement System, set to be operational in 2024 under Kenya’s leadership. The initiative aims to alleviate the high costs associated with cross-border payments on the continent, facilitating transactions in local currencies.
Why African Countries Face Currency Challenges
African economies, being relatively small, heavily rely on global trade. Their exports, dominated by primary commodities, and imports, ranging from essential goods to capital items, expose them to world market prices set in major reserve currencies (USD, Euro, Yen, and Renminbi). Additionally, “intra-African” trade remains limited, and African currencies lack direct exchangeability in international transactions.
Requirements for the System to Succeed
The primary objective of the Pan-African Payment System is to settle trade between African countries without relying on the US dollar. However, challenges arise due to the small percentage of intra-African trade and imbalances in trade between nations. A settlement currency acceptable to all parties, likely the US dollar, becomes necessary.
Challenges and Potential Risks
Trade financing involves an exchange rate risk, especially considering the time gap between ordering and receiving imports. In the current system, this risk falls on the trader due to pricing in dollars. The new system maintains this risk in “external trade” and intra-African trade. Key questions emerge regarding the allocation of exchange risk and the new system’s ability to handle currency fluctuations.
Best-Case Scenario for the Pan African Payment System
Success hinges on addressing trade imbalances, providing clear risk management, and achieving scale. The system’s effectiveness relies on economic performance, emphasizing the need for intra-African trade development and reduced dependence on extra-African trade. The system’s success also depends on its ability to handle risks, build a strong balance sheet, and gain the confidence of traders and participants.
