How can the new Pan-African Payment and Settlement System boost trade?

By Xolisa Phillip, in Johannesburg
Posted on Tuesday, 1 February 2022 09:31

Trader holds Nigerian naira note at street-side market in Lagos
A trader holds a Nigerian naira note at a street-side market in Lagos. REUTERS/Akintunde Akinleye

The Pan-African Payment and Settlement System (PAPSS), which is expected to save the region $5bn in transaction fees and deepen trade under the African Continental Free Trade Area (AfCFTA) agreement, has gone live. But how does it work?

The system will enable the continent to retain on home soil the $5bn paid in annual fees to foreign banks in clearing charges for third-party currencies – such as the US dollar, the British pound and the euro – used to settle trade transactions.

The PAPSS will also address some of the key structural deficiencies within Africa’s payment infrastructure, which are impediments to achieving greater levels of trading on the continent.

“Why should we require hard currencies for trade between Kenya and Uganda or between Senegal and Guinea?” asked Afreximbank president and chairperson Benedict Oramah.

“Why can’t we operate as if every African currency is convertible within Africa? … Why should we pay $5bn annually – more than the nominal GDP of more than 25% of the countries in Africa – in clearing charges to non-African banks for Africa-to-Africa transactions? With the PAPSS, we will begin to address these absurdities.”

Oramah was among the officials, including AfCFTA Secretariat general secretary Wamkele Mene, PAPSS CEO Mike Ogbalu, African Development Bank (AfDB) vice-president Solomon Quaynor and Central Bank of Nigeria (CBN) governor Godwin Emefiele, who congregated in the Ghanaian capital Accra in mid-January to mark the commercial launch of the system.

Goal of original project

An African Union (AU) project, the PAPSS was officially commissioned at the continental body’s 12th Extraordinary Summit on 7 July 2019 in Niger.

The goal was to use the system as one of the operating instruments of the AfCFTA to boost intra-continental trade, stimulate industrialisation and promote sustainable and inclusive economic growth.

  • Work on the project began in 2016, which involved an assessment of existing regional payment systems, as well as engagements with regional economic communities and all major payment systems operators in Africa.
  • In 2017, discussions began with the West African Monetary Zone. The talks culminated in central bank governors of the zone agreeing to implement a pilot scheme of the PAPSS as a proof of concept.
  • That endeavour paved the way for the development of, among others, systems, a regulatory framework including the PAPSS Bye Law, scheme rules and membership agreements.

The six central banks in the zone have tested and gone through trial operations. In the last week of August 2021, the central banks went live with the system, which has meant the central banks in the zone have been doing real-time transactions. The PAPSS has also signed up 12 commercial banks and four payment switches.

The successful pilot in West Africa resulted in the commercial launch in Accra. Now, focus is moving to discussions with other central banks on the continent and regional payment systems to ensure bulk connections.

Payment infrastructure is a key instrument in intra-regional trade toolkit

“Globally, a functioning payment infrastructure underpins trade. As trading under the AfCFTA agreement gains momentum, functioning payment infrastructure that can integrate the disparate payment systems across the 55 countries on the continent, improve payment flows and reduce transaction costs will become central to the growth of intra-African trade,” said Oramah in explaining the significance of the PAPSS.

There are 42 national currencies across the continent. But access to hard currency, which is needed to transact across borders, is limited.

Access is limited because more than 80% of cross-border payment transactions coming from African banks have to be routed for clearing and settlement using international banking relationships. Moreover, these payments take between two to 14 days to complete.

“With these kinds of problems, it is no wonder that intra-African trade levels are so low. While Afreximbank’s partners are working hard under the AfCFTA arrangement to reduce the various impediments to intra-African trade, dealing with the problem of payments remains a key priority,” according to Oramah.

Crucially, “[the] … PAPSS presents another step towards restoring the dignity of Africans,” said Oramah, adding, “beyond making payments more efficient, the PAPSS will begin to strengthen African currencies and enhance their regional compatibility. PAPSS will also serve as an added tool for monetary policy management for most African countries.”

Working together

Although developed by Afreximbank, the PAPSS is a joint initiative of the bank, the AU and the AfCFTA Secretariat. Afreximbank is the main settlement agent for the PAPSS.

That function will entail Afreximbank providing settlement guarantees on the payment system and overdraft facilities to all settlement agents in partnership with participating central banks. Afreximbank will back the system with a $3bn overdraft facility.

“This facility will avail resources to central banks and other banks for settlements and clearing while bringing stability and predictability to external payment flows and current account management,” Oramah said.

“We are making it possible for a South African chocolate manufacture to buy Ghanaian cocoa products by simply using rand to buy cedis. We have created a platform for a Zambian farmer in a rural village to download his or her favourite Nollywood movie by simply paying in Zambian kwacha but the moviemaker in Nigeria receives the naira. We have opened an opportunity for Senegalese to buy critical pharmaceuticals from Egypt by simply using the CFA franc to buy the Egyptian pound,” added the Afreximbank president.

Furthermore, the PAPSS will make it possible for big engineering, procurement and construction contractors in Africa, particularly in major regional economies such as Egypt and South Africa, to price infrastructure projects in the currency of projects owners, making the process more competitive.

“African airlines will have the opportunity to … [recoup and convert] their money stuck in various African countries into their national currencies,” concluded Oramah.

PAPSS support from partners

The AfDB has also thrown its support behind the PAPSS by partnering with Afreximbank and the AfCFTA Secretariat in implementing the system.

Most importantly, the PAPSS will fill the real gap by adapting the necessary know-your-customer and anti-money laundering requirements to the African context.

“In the West African Monetary Zone, where the pilot stage of the PAPSS is being implemented, the AfDB invested $23m in improving national payment systems in Gambia, Guinea and Sierra Leone to bring them in line with those of Ghana and Nigeria,” said AfDB vice-president Quaynor.

According to Quaynor, the PAPSS, as a centralised payment and settlement market infrastructure, will help formalise large informal cross-border trading activities.

“Most importantly, the PAPSS will fill the real gap by adapting the necessary know-your-customer and anti-money laundering requirements to the African context. The infrastructure offered by the PAPSS will significantly boost intra-regional integration and intra-African trade by reducing exchange risk and unlocking the capacity of economic agents to trade among themselves,” noted Quaynor.

But there would be no PAPSS without the support of central banks, particularly those in the monetary zone where the pilot began.

Emefiele, who also chairs the PAPSS Governing Council, said the CBN will facilitate the widespread adoption, acceptance and implementation of the PAPSS.

“The CBN will ensure that financial institutions under its jurisdiction embrace the PAPSS as we confidently recommend it to businesses across Nigeria,” said Emefiele.

Emefiele also foresees many possibilities for the system. “The PAPSS can serve as a verifiable platform for supporting e-commerce within Africa. In addition, as a robust continental payment and settlement platform, the PAPSS strengthens the foundation for a potential monetary union within the region.”

A timely intervention

Simply, the PAPSS is designed to ensure instant payments for goods and services between African jurisdictions. Payments are initiated and settled in the local currencies of initiators and beneficiaries, effectively eliminating the need for third-party currencies to conduct trade within the region, explained PAPSS CEO Ogbalu.

“Allow me to emphasise that the PAPSS is not designed to compete with, or replace, existing payment systems. The PAPSS […] operates to facilitate the connectivity at a continental level that brings all payment systems together into one network. The PAPSS is designed to make our currencies regain value and to domesticate intra-Africa payments,” said Ogbalu.

When the AU’s Assembly of Heads of States and Government meets on 5 and 6 February, Mene and Oramah will provide a progress report on the PAPSS to the continent’s leaders.

“This should provide political impetus to ensure all members of the AU switch onto the PAPSS,” Mene said. “As we start 2022, we expect to see robust trading under the AfCFTA. The commercial roll-out of the PAPSS is, therefore, timely,” Mene concluded.

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