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Revolutionizing Cross-Border Trade: Africa’s Pan-African Payment and Settlement System

In a bid to alleviate the high costs associated with cross-border payments in Africa, the continent is poised to introduce the Pan-African Payment and Settlement System by 2024, spearheaded by Kenya. Development economist Christopher Adam sheds light on the rationale behind this groundbreaking initiative.

1. African Vulnerability in International Currency Markets

African countries face exposure in the international currency market due to their small economies heavily reliant on global trade. According to Adam, three key factors contribute to this vulnerability: their dependence on exports of primary commodities, limited intra-African trade, and the inability to directly exchange their currencies in international transactions.

Adam emphasizes, African countries are ‘price takers’ in world markets, exposed to movements in major reserve currencies.

2. Challenges in Establishing the Payment System

The fundamental goal of the Pan-African Payment and Settlement System is to facilitate trade between African nations without the predominant use of the US dollar. However, challenges arise as intra-African trade currently accounts for less than 15% of Africa’s exports, and trade imbalances persist.

Christopher Adam underscores the challenges: “Intra-African” trade is limited, and trade imbalances necessitate a settlement currency acceptable to all, likely the US dollar.

3. Risks and Uncertainties

The new system introduces questions about exchange rate risk in intra-African trade. Adam points out that the allocation of risk remains a critical issue, questioning whether importers or exporters should bear the exchange risk. Moreover, the success of the system hinges on achieving scale and a robust balance sheet.

According to Adam, “Until the system achieves scale”, a strong balance sheet is essential for “swift and risk-free settlement.”

4. The Best Case Scenario

The success of the Pan-African Payment and Settlement System lies in addressing trade imbalances, ensuring clarity in risk management, and achieving scale. However, Adam underscores that its efficacy is intertwined with broader economic performance, emphasizing the importance of developing intra-African trade and reducing dependence on extra-African trade.

In Adam’s words, “Improved settlement” is pivotal, but the true driver is the “structure of trade” and economic development within Africa.

As Africa prepares to embrace this revolutionary system, the path to success requires addressing multifaceted challenges and fostering a robust economic foundation.

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