Africa's Currency Conversion Costs Impact Trade

The continent is reportedly losing approximately $5 billion annually due to expenses associated with currency conversion, highlighting a significant challenge in its pursuit of a unified single market. A recent evaluation of cross-border trade barriers indicates that limited currency convertibility is a major hindrance for businesses, traders, and consumers throughout Africa. Payments between African nations frequently require conversion through foreign currencies, predominantly the dollar or euro, leading to additional fees, exchange-rate losses, and delays that diminish the already constrained trade value. To address this issue, the Pan-African Payment and Settlement System (PAPSS) has been introduced as a key solution. Officially launched in 2022 by the African Union and the African Export-Import Bank, PAPSS enables transactions where a buyer in one African country can pay in their local currency, while the seller in another country receives funds in their own currency. This system facilitates settlements through participating central banks, thereby reducing reliance on correspondent banks located outside the continent. PAPSS is closely associated with the African Continental Free Trade Area, which aspires to establish the largest single market globally in terms of participating nations. The full realization of this trade agreement is anticipated to significantly enhance intra-African trade, boost manufacturing output, increase incomes, and create millions of jobs by the year 2035. However, these potential benefits hinge on the ability of traders to transfer funds as efficiently as they move goods and services. The burden of currency conversion costs is particularly pronounced for smaller enterprises, informal traders, and businesses operating in countries with currencies that lack broader acceptance. For instance, a trader transporting goods from West Africa to East Africa may encounter multiple conversion layers before completing a payment. This challenge is exacerbated by banks offering wide spreads, prolonged settlement times, and the necessity for businesses to maintain limited foreign exchange for routine transactions. PAPSS aims to transform this landscape by netting transactions among participating countries and settling only the final balances. This approach reduces the demand for hard currency, accelerates payment processes, and enhances the role of local currencies in regional trade. Additionally, it provides central banks with improved visibility over cross-border financial flows, potentially strengthening regulatory oversight and alleviating pressure on foreign reserves. While the adoption of PAPSS is growing, it remains uneven. Over 150 banks are now linked to the network, which has expanded its offerings beyond instant payments to include an African Currency Marketplace and PAPSSCARD. These initiatives are designed to promote local-currency settlements, broaden access for payment service providers, and support retail transactions beyond large corporate dealings. Nonetheless, the payments infrastructure alone cannot eliminate Africa's trade challenges. Businesses continue to encounter non-tariff barriers such as customs delays, inconsistent product standards, border management issues, inadequate transport routes, and high logistics costs. Although a payment system can expedite settlements, the physical movement of goods still relies on road, port, and rail networks that are often inconsistent and, in some cases, costly or unreliable. Trust remains a critical factor for the successful scaling of PAPSS. For the system to gain traction, banks, fintech companies, regulators, and traders must have confidence in the fairness of exchange rates, the adequacy of liquidity, and the management of settlement risks. Countries with unstable currencies may hesitate to embrace deeper local-currency involvement, while businesses accustomed to invoicing in dollars may require time to adjust their established practices. Political commitment at the national level will be crucial, especially in instances where central banks are protective of their foreign-exchange systems. In addition to PAPSS, various competing and complementary initiatives are emerging. Regional blocs are developing local-currency payment platforms aimed at reducing trade costs for micro, small, and medium-sized enterprises. These efforts reflect a broader movement to retain more value within African financial systems, minimizing the outflow of conversion fees and settlement income to offshore banking channels.

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