The successful conclusion of the Guided Trade Initiative should help spur business in the African Continental Free Trade Area (AfCFTA). It gives a nod to the continent’s readiness despite the slow start of commercially meaningful trade since AfCFTA’s inauguration in January 2021.
Eight countries representing five African regions were involved in the pilot. Attention now turns to the participation of more countries to realise borderless trade across the continent. Among the instruments to underwrite this is the US$10 million AfCFTA Adjustment Fund to be hosted in Kigali.
The fund will support countries to adjust smoothly to the integrated trading environment and address anticipated short-term revenue losses.
Another key instrument already in place is the Pan African Payment Settlement System (PAPSS) which will not only facilitate seamless cross-border financial transactions but will accrue savings in terms of time and cost.
More significantly perhaps is that PAPSS will be more inclusive, linking financial services to businesses big and small through local banks enrolled on the platform across the continent.
To appreciate this, recall that to transfer funds from one bank to another between African countries it still has to be through a correspondent bank in America or Europe.
This has two main disadvantages: It not only occasions delays that can run into days to conclude a transaction but entails costs in fees paid to correspondent banks.
PAPSS will eliminate these inconveniences. A pilot implementation of the platform in the West African Monetary Zone that brings together eight francophone countries affirmed prediction it will take less than two minutes to conclude a cross-border transaction.
In processing, clearing and settling intra-African payments, the platform is designed to enable individuals, businesses and governments to make instant cross-border payments. Thus one of its most significant utilities is that it will allow countries to pay each other with their own national currencies. This will be a major achievement, essentially because of the 44 currencies in
Africa, only one, the South African Rand, is freely convertible.
That the none other African currency is transferable is a hindrance the PAPSS will eliminate. It will also remove the need for hard currencies such as the US dollar or the euro to conduct business, eliminating also the foreign currency exchange rate costs.
One of the key observations from the Guiding Trade Initiative was that private sector participation was largely by Small and Medium Enterprises (SMEs), most of which we don’t usually see exploiting business opportunities between neighbouring countries let alone countries thousands of kilometres apart.
SMEs involved in the initiative such as Igire Coffee, the Rwandan women-led coffee processing firm that shipped its product to Ghana, were the proof of concept that gave the initiative the continental nod.
But it is through the SMEs that the PAPSS will prove its mettle, more so through the network of local banks it shall enrol on the platform across the continent.
The only issue at the moment is that not enough banks are enrolled yet. To take the example of the
East African Community, none of the region’s banks, including the major ones – KCB, Equity, Bank of
Kigali – have enrolled on the Pan African Payment Settlement System yet.
There are well over 500 banks in Africa. But a peek at the PAPSS website reveals that commercial banks enrolled under the platform are mostly from West Africa.
We can be certain that the banks in the continent will come on board because it is in the interest of the banks and governments, not least because AfCFTA is a rich and continent-wide catchment area that can’t ignore the small enterprises.
The African Business Magazine observes that PAPSS could help regulate trade by assisting in tracing informal small-scale cross-border trade, which is often overlooked by banks, governments and regulators.
This means that the full scale of existing cross-border trade is unknown, though reducing the cost of cross-border bank transactions could move more traders from the informal into the formal sectors.
The banking sector, as one expert observes, has to be at the heart of the AfCFTA’s attempt to create a single continental market for goods and services that will hopefully optimise the use and allocation of resources.
This means that the continental free trade area could generate a great deal of work for African banks in terms of transaction volumes and trade finance.
But it is the economy that will be the winner, in which the banks will play a critical role. The World Bank finds that the implementation of the free trade area could boost African exports by $560bn and generate $450bn more in income by 2035.
However, challenges such as poor infrastructure, border bureaucracy, corruption, violent conflict and other developmental ills that continue to dog the continent have to be addressed.