As trade wars intensify globally, an African payment system is stepping up its efforts to facilitate cross-border transactions in local currencies among businesses across the continent.

The Pan-African Payments and Settlements System (PAPSS) enables companies in various African nations to conduct trades independently of the dollar. During ongoing tariff disputes involving major economies like the U.S., China, and others, PAPSS reports that many African countries are increasingly utilizing alternative global currencies to cut trade expenses and mitigate exposure to dollar volatility.

Reduced Costs, Swift Transactions

Inward estimates from PAPSS suggest that a $200 million intra-African trade transaction might typically incur 10% to 30% in costs via dollar settlements. By switching to local currencies like the Nigerian naira, Ghanaian cedi, or South African rand, these fees could be slashed to merely 1% per transaction.

The financial benefits for Africa are considerable; PAPSS forecasts that the continent might save up to $5 billion annually by adopting regional currency settlements.

Transactions on PAPSS are completed nearly in real-time, with typical processing under 120 seconds. To achieve these swift settlement times, participants must ensure funds are readily available for transactions before transferring them between buyers and sellers’ accounts. This necessitates a pre-funding agreement where banks maintain balances with PAPSS.

Striving for the World’s Largest Free Trade Zone

PAPSS commenced commercial operations in January 2022, as part of Afreximbank’s strategy to establish one of the key components of the African Continental Free Trade Area (AfCTF), an agreement reached among 54 African Union nations in 2018.

Expected to be operational by 2030, this continent-wide trade zone is projected to become the world’s largest free trade area by land mass, covering a potential market of 1.2 billion people and boasting a combined gross domestic product of $2.5 trillion. Currently, PAPSS operates in 15 African countries including Kenya, Malawi, Tunisia, and Zambia, with over 150 commercial banks participating.

The impact of tariff wars on Africa has been profound; according to the Carnegie Endowment for International Peace, 20 African nations face elevated tariffs from the U.S., ranging from 11% on imports from Cameroon and Congo up to 50% on goods from Lesotho. Another 29 countries are subject to a baseline tariff of 10%, including Egypt, Ethiopia, and Kenya.