Earlier this month, cross-border trade and commerce within Africa were given a boost with the launch of the Pan-African Payment and Settlement System (PAPSS).
Developed by African Export-Import Bank (Afreximbank), the system is forecast to save the continent more than $5bn per year in transaction costs.
Importantly, PAPSS is considered to be a critical market infrastructure to support the African Continental Free Trade Area (AfCFTA), officially launched a year ago to foster greater economic integration and create a single market across Africa.
Speaking at the launch event in Accra on January 13, Benedict Oramah, president and chairman of the board of directors of Afreximbank, said: “PAPSS provides the state-of-the-art financial market infrastructure connecting African markets to each other, thereby enabling instant cross-border payments in respective local African currencies for cross-border trade.” Afreximbank acts as the main settlement agent for PAPSS.
The initiative is not meant to compete with or replace existing payment systems, according to PAPSS CEO Mike Ogbalu. He said: “PAPSS operates to facilitate connectivity at a continental level that brings all payment systems together into one network that is interoperable, efficient, and affordable. It is designed to help our currencies retain value and to domesticate intra-Africa payments.”
New Payment System To Supercharge Cross-Border Trade In Africa
Previously, over 80% of African cross-border payment transactions originating from African banks had to be routed offshore for clearing and settlement using international banking relationships, which is costly, inefficient (taking two to 14 days to complete) and act as a barrier to intra-regional trade.
The six central banks in the West African Monetary Zone (WAMZ) successfully piloted PAPSS during the last week of August 2021. Since then, 12 commercial banks – most with a pan-African reach – and four payment switches have signed up to the system. A precondition for participation in PAPSS is compliance with its set rules and standards, such as know your customer and anti-money laundering regulations.
“Engagement with other central banks has commenced in earnest,” said Mr Ogbalu. “Together, we will create the foundational support for the innovation of trade and payment solutions, which will help the continent solve uniquely African challenges. The network effect of central banks participating is key to our collective success.” He called on other central banks outside of the WAMZ to join and ensure PAPSS services are made available to all Africans to facilitate payment for goods and services across the continent.
Mr Oramah called the launch of PAPSS a “watershed moment” for the continent and that it represents another step towards “restoring the dignity of the Africans”. He added: “PAPSS will begin to strengthen African currencies and enhance their regional convertibility. It will also serve as an added tool for monetary policy management for most African countries.” Afreximbank plans to back the new system with a $3bn overdraft facility for central banks and other direct participants, among other initiatives.
According to Mahamudu Bawumia, vice-president of Ghana, the biggest beneficiaries will be small and medium-sized enterprises (SMEs). “Businesses and traders will no longer have to spend days waiting for the confirmation of receipts of funds to facilitate trade, as payments will be cleared and settled in real time. It provides a simplified process that reduces the costs and complexities of foreign exchange for cross-border transactions between African markets,” he said, adding, “PAPSS is an African solution to an African problem.”
While the benefits of AfCFTA have yet to be felt by both businesses and governments, as John Everington outlines in his recent article ‘AfCFTA: one year on’, pan-African market infrastructures like PAPSS are fundamental building blocks to removing the barriers to trade, stimulating industrialisation and promoting inclusive economic growth on the continent.