By: Nghiinomenwa-vali Hangala
It has been found that a trader in one African country may find it difficult or expensive to pay a supplier in another African country directly in either party’s currency.
The transaction often has to be routed through a hard currency, introducing additional exchange costs, settlement risk and dependence on correspondent banks outside the continent.
This is according to a Trade Brief by TRALAC researchers titled ‘Facilitating Intra-African Trade Through a Digital African Settlement Instrument: A Monetary Economics Perspective.’
African countries struggle to trade with one another, with intra-African trade still below 18%, and one of the touted reasons is cross-border payment and settlement solutions.
According to the TRALAC researchers, “this is a classic coordination problem in international monetary economics: where direct market liquidity is absent, a dominant vehicle currency emerges.”
Yet, it would be a mistake to infer that Africa’s solution must be the creation of a single continental currency, they wrote.
Their assessment has also revealed that in much of Africa, by contrast, bilateral currency markets are thin or non-existent.
The TRALAC researchers have suggested that intra-African trade would benefit from a more efficient cross-border payments architecture, and the continent does not need to rush into a full monetary union to achieve that result.
They said the real policy question is which digital monetary arrangement can reduce cross-border transaction costs while preserving monetary sovereignty. At the same time, maintaining macroeconomic discipline and avoiding the fragilities associated with poorly-designed private or supranational money.
A payment system is an institutional mechanism for transferring value; a currency is a unit of account, medium of exchange, store of value, and final settlement asset within a monetary jurisdiction.
The researchers stated in the Trade Brief that the case for improving cross-border payments in Africa is strong.
Firms trading across African borders often face high transaction costs, long settlement times, limited correspondent banking links, and shallow foreign-exchange markets for many currency pairs.
This is worsened by the frequent need to intermediate transactions through the US dollar or euro even when neither party is located in those currency areas, TRALAC found.
Namibian trade is mostly focused in Southern Africa, where it is part of a monetary union, and they have a regional cross-border payment and settlement system.
However, trading with the rest of Africa has been very low, limited to Zambia and the DRC.
The Pan-African Payment and Settlement System (PAPSS) was created precisely to reduce these frictions by enabling cross-border payments in local currencies through a continental financial market infrastructure.
Its value proposition is practical and immediate: faster settlement, lower transaction costs and less dependence on extra-African correspondent banking chains.
The Trade Brief has noted that the widespread use of the US dollar in African trade is not primarily a sign of preference for the United States as such.
Instead, “It reflects network effects, liquidity and credibility,” the researchers found.
The dollar remains the dominant reserve currency globally, though its share has gradually declined over time. According to IMF COFER data, the US dollar still accounted for 57.39% of allocated foreign-exchange reserves in 2024 Ǫ3 (IMF, 2024).
The TRALAC researchers noted that a successful monetary union requires more than trade integration.
It also depends on institutional and political conditions such as mechanisms for fiscal discipline, adjustment to asymmetric shocks, financial integration, and some degree of cross-jurisdictional risk sharing.
The Abuja Treaty rightly set out long-run ambitions for African monetary integration, including the eventual establishment of an African Central Bank and a single African currency.
“But that aspiration should not be confused with present feasibility. The existence of a treaty objective does not abolish the underlying economic preconditions for a viable currency area,” the researchers stated.
erastus@thevillager.com.na
