The Mo Ibrahim Foundation, in its report titled “Africa on the Move: Boosting Mobility and Connectivity”, has found that trade among the continent’s countries is undergoing difficulties related to the high cost of currency conversion, further delaying the full implementation of Africa’s free market roadmap.
The report, stating that currency conversions alone are costing Africa USD 5 billion every year, mentioned, “This increases the cost of intra-Africa trade, which is still grappling with other barriers such as customs procedures, regulatory divergences, border management issues and high cost of transport and operations. Africans pay a premium, especially those who live in countries whose currencies are not easily convertible into major international currencies such as the US dollar or the euro.”
“African citizens must often convert several times from their home currencies into intermediate currencies and then finally their desired currency, losing out on the exchange rate at each stage. Africa loses approximately USD 5 billion per year to currency conversion costs,” the Mo Ibrahim Foundation remarked.
Talking about Africa’s free market roadmap, the full implementation of the African continental free trade area (AfCFTA) agreement will boost intra-continental trade to 53%, from around 18% of Africa’s current trade, apart from growing the manufacturing sector by USD 1 trillion. The agenda also eyes generating income worth USD 470 billion, apart from creating 14 million jobs by 2035.
The AfCFTA, one of the main flagships of the African Union’s (AU) “Agenda 2063”, entered into force in May 2019, aiming to create the world’s largest single market by progressively eliminating tariffs on most goods, reducing non-tariff barriers (NTBs), harmonising trade regulations, and improving trade-related infrastructure.
The Mo Ibrahim report, however, presents limited currency convertibility as a main challenge for swift trade operations.
“Both the AfCFTA Secretariat and RECs (regional economic communities) are working on these challenges, which require strong political commitment at the country level, and could also benefit from the exchange of expertise and best practices from other economic unions,” it stated.
“The Pan-African Payment and Settlement System (PAPSS), which was launched in 2022 by the AU and the African Export-Import Bank (Afreximbank), is a key instrument to resolving the long-standing issue of African countries trading with one another using foreign currencies and has become a core part of Africa’s current financial architecture,” reported The East African, while citing the study’s observations.
Papss is a centralised payment and settlement platform that allows African businesses to pay and recipients to receive funds in their own local currencies through an African institution. This process also removes the need for full currency convertibility by handling conversion within a dedicated system, apart from using central banks as settlement anchors.
“Even if a currency is not internationally traded, if it is recognised within PAPSS, it can be traded with at a fairer rate. Overall, this system reduces US dollar dependence, improves monetary sovereignty as countries and boosts the continent’s financial integration by moving it closer to a single payments market without requiring an intermediary currency or even a single pan-African currency,” the Mo Ibrahim Foundation remarked.
“Soft mobility of goods and services around the continent, which is key to facilitating intra-continental trade, is strangled not only by customs fees but also by numerous NTBs, often behind the border, such as sanitary and phytosanitary barriers and labelling and packaging standards,” it added further.
Stating that free movement of people, goods and services is key to both economic integration and regular migration within Africa, the think tank said, “Enhanced mobility and connectivity are both key to accelerating continental integration and the swift implementation of the AfCFTA, as well as to facilitate and encourage regular migrations within the continent. The AfCFTA is making progress reducing tariff barriers across the continent, trade and mobility. However, they are often blocked by NTBs such as custom procedures, regulatory divergences and border management issues.”
The AfCFTA envisions creating a fully integrated African Economic Community through six sequential stages over roughly 34 years that, by 2028, will culminate in a single African market with free movement of people, goods and services; a central bank; and eventually a single currency-based continental monetary union. As per its roadmap, strong regional economic communities such as the Economic Community of West African States (Ecowas), Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (Comesa) will first integrate internally, then gradually merge to form continent-wide institutions.
The pan-African currency goal will be among the final pieces of the puzzle that will convert the dream of the integrated African Economic Community into a reality. However, the target year 2028 looks like an impossible one, as achieving a single currency by that deadline looks unrealistic, with the high currency conversion cost now presenting another steep challenge.