Despite Africa’s vast market of over 1.3 billion people and abundant resources, intra-African trade remains critically low.

According to the African Export-Import Bank (Afreximbank), one of the primary barriers is the existence of over 40 distinct currencies on the continent. This multiplicity creates high transaction costs, inefficiencies, and complexities that hinder the free flow of goods and services across borders.

The latest report by Afreximbank and the University of Ghana Business School reveals critical insights into how improved exchange rate mechanisms and efficient payment systems can revolutionize intra-African trade.

The African Continental Free Trade Area (AfCFTA) was launched to create a single African market, boost intra-African trade, and foster regional economic integration. However, intra-African trade still accounts for only 17 percent of total trade compared to 68 percent in Europe and 59 percent in Asia. The low figure underscores the challenges of achieving seamless cross-border transactions due to fragmented payment and settlement systems and the high cost of currency conversions, the survey report noted.

Currency unions globally have shown potential to stimulate trade by reducing transaction costs and fostering economic integration.

“As of 2024, approximately 90 countries participate in some form of a currency union, with notable success in trade among member nations. For Africa, Afreximbank highlights the need for an effective exchange rate structure to streamline cross-border payments, reduce costs, and simplify trade.

“One promising initiative is the Pan-African Payment and Settlement System (PAPSS), a framework designed to enable transactions in local currencies. By eliminating reliance on foreign exchange markets, PAPSS aims to reduce transaction costs and enhance trade flows within Africa,” the report read in part.

The latest joint report provides valuable insights into how improved exchange rate mechanisms and efficient payment systems can revolutionize Africa’s trade landscape.

The findings include: Exchange Rate Stability Boosts Trade Stable exchange rate mechanisms significantly enhance cross-border payments and trade efficiency. Conversely, fluctuating exchange rates and fragmented currency systems impede Africa’s trade potential.

Despite the AfCFTA’s ambitious goals, intra-African trade remains disproportionately low due to the lack of a unified payment system and inefficient currency management; PAPSS enables local currency transactions, reducing the need for foreign exchange and associated costs.

It noted that scaling this system could cut payment delays, enhance regional economic integration, and unlock trade potential; Adopting a common currency could create a predictable trading environment, reduce transaction costs, and foster trust among businesses and investors.

Such a system could pave the way for Africa’s long-term goal of a single continental currency.

Also, emerging technologies, such as blockchain and digital payment platforms, can improve the speed, security, and reliability of cross-border transactions. Fintech solutions are particularly critical for integrating informal traders into formal trade networks.

“While the prospects for a single currency and streamlined payment systems are promising, significant challenges remain. African economies face substantial obstacles, including exchange rate volatility, insufficient infrastructure, and weak regulatory frameworks. Studies show that exchange rate fluctuations reduce international trade, particularly in developing regions like Africa.

“Without addressing these issues, the AfCFTA’s potential to transform the continent’s trade landscape remains underutilized.The high transaction costs associated with fragmented currency systems also deter trade. Policymakers and financial institutions must develop comprehensive strategies to address currency misalignments, exogenous shocks, and other trade barriers,” it noted.

According to the joint report, to unlock Africa’s trade potential, Afreximbank and industry experts recommend the following strategies: African nations should adopt coordinated exchange rate policies and harmonized regulations to enhance trade efficiency and financial integration; expanding digital and physical infrastructure for cross-border payments is essential to support fast, secure, and cost-effective transactions; promoting the use of local currencies and regional payment systems like PAPSS can lower costs associated with currency conversions; enhanced collaboration among African central banks, policymakers, and the private sector is vital for efficient implementation of exchange rate mechanisms and payment systems; ongoing research and data collection on payment systems and exchange rate mechanisms can inform evidence-based policies and trade strategies.

According to the report, Africa’s journey toward economic integration and trade prosperity hinges on the modernization of its exchange rate mechanisms and payment systems. PAPSS, as a flagship initiative, offers a scalable solution to address some of the continent’s most pressing trade challenges.

However, for these systems to succeed, governments, financial institutions, and private sector actors must commit to coordinated action and substantial investment.

“Ultimately, Africa’s economic future lies in fostering a seamless trading environment. By reducing transaction costs, stabilizing exchange rates, and embracing technological innovations, the continent can unlock unprecedented growth, job creation, and economic resilience,” it stated.

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