PAPSS Launches in 2024: Ushering in a New Era of African Trade

African countries are highly exposed to fluctuations in international currency markets due to their dependence on trade with more powerful economies. The reliance on the U.S. dollar as the primary currency for trade settlement adds significant financial burdens and hinders the growth of intra-African trade. To address this issue, the Pan-African Payment and Settlement System (PAPSS) is set to launch in 2024 under Kenya’s leadership, aiming to facilitate trade settlement in local currencies.

Addressing key questions from The East African Magazine, the development economist Christopher Adam, who has studied exchange rate policies of African countries, highlights the main drives and potential hurdles for this ambitious project. 

Why are African countries exposed in the international currency market?

·Small economies: African economies are highly reliant on trade with larger economies, often exporting primary commodities and importing a wide range of goods – from essential commodities to capital goods and energy, often at prices determined by larger economies.

·Limited intra-African trade: Intra-African trade represents less than 15% of Africa's total exports, limiting opportunities for local currency settlements.

·Inconvenient currency exchange: Most African currencies cannot be directly exchanged internationally, making the dollar the default choice for trade, even within the continent.

What’s required for the system to get off the ground?

The goal of PAPSS is to enable trade settlement between African countries without relying on the US dollar. However, two major challenges exist:

·Trade imbalances: Trade volumes between African countries are often uneven. For example, Kenya might export more to Ethiopia than it imports, leaving Kenya with excess Ethiopian currency.

·Exchange rate risk: As trade rarely occurs instantaneously, there's a risk of currency fluctuations between the time an order is placed and the product is delivered.

What are the challenges and potential risks?

·Risk allocation: It needs to be determined who bears the exchange rate risk during trade. This risk is currently borne by traders in the "old" system, but it needs to be clarified under PAPSS.

·System scale: The success of PAPSS hinges on its adoption by a large number of traders. This will require a strong balance sheet to ensure swift and risk-free settlements.

·Underlying economic performance: While PAPSS can facilitate trade settlement, the long-term success depends on broader economic factors like trade policy, fiscal policy, and production capacity.

What is the best case scenario?

If PAPSS effectively addresses the trade imbalance issue, provides clear risk management guidelines, and achieves scale, it has the potential to revolutionize trade within Africa. However, its success ultimately depends on the continent's overall economic development and its ability to reduce reliance on external trade.