By Duncan Miliri
Nairobi (Reuters) – Promoting Africa’s local currency payment system – was only a misunderstanding at one time – finally gaining concrete benefits, bringing the promise of costly trade to the continent that has long been hampered by resource-supporting dollar trading.
But efforts to leave the dollar face strong opposition and threats of retaliation from President Donald Trump, who is determined to maintain it as the dominant currency of global trade.
Africa’s move to create greenback-independent payment systems reflects a push by China to develop a financial system independent of Western institutions. Countries like Russia, which are facing economic sanctions, are also keen on replacing the dollar.
But the movement has gained a sense of urgency after President Trump returned to the White House due to changes in trade patterns and geopolitical realignment, but African advocates for payment alternatives have made claims based on costs.
“Our goal is not to derail what people might think,” says Mike Ogbal, CEO of Pan Africa’s Payments and Settlement Systems.
“If you look at the African economy, you can see that third-party global currencies are struggling with availability to resolve transactions,” he said.
Commercial banks in Africa typically rely on overseas counterparts through so-called correspondent banking relationships to promote international payment settlements. That includes payments for African neighbours.
This has significantly increased Africa’s trade, along with other factors such as inadequate transport infrastructure, according to the UN Trade and Development Organization, as well as 50% higher than the global average.
It is also one reason why much of Africa’s trade (84%) is in external partners rather than between African countries, according to a report by the Mauritius-based MCB Group.
“The existing financial networks, primarily dollar-based, are inherently ineffective and more expensive for Africa,” says Daniel McDowell, a professor at Syracuse University in New York, who specializes in international finance.
Homemade system
Data compiled by PAPSS shows that under the existing correspondent banking system, a $200 million trade between two parties from different African countries costs between 10% and 30% of the value of the transaction.
The transition to a home country payment system could reduce the cost of that transaction to just 1%.
Systems such as PAPSS allow, for example, Zambian businesses in one country to pay for goods from another country, such as Kenya. Both buyers and sellers receive payments in their respective currency, rather than converting them to dollars to complete the transaction.
Using currencies like Nigerian Naira, Ghanaian Cedi and South African Rand, intra-African trade payments could save $5 billion a year on the continent, Ogbar told Reuters.
With only 10 commercial banks participating in January 2022, PAPSS is currently operating in 15 countries, including Zambia, Malawi, Kenya and Tunisia, and currently has 150 commercial banks in its network.
“We also saw a huge growth in transactions,” Ogbalu said without providing usage data.
Meanwhile, the International Finance Corporation, the private sector lending unit of the World Bank, has begun issuing loans to African companies in their local currency.
Ethiopis Tafara, Vice President of Africa at IFC, said it is considered essential to their growth, and is crucial to their growth, mitigating them from the currency risk of borrowing in the dollar.
“If they’re not generating hard currency, hard currency loans place a burden that makes it difficult for them to succeed,” he said.
Geopolitics and Trump’s Factors
The African campaign to boost regional payment systems has discovered platforms in groups of 20 major economic groups, with South Africa leading the charges as owner of the G20 revolving presidency.
When South Africa held a meeting between the G20 Finance Minister and the central bank governor, it held at least one session on boosting the regional payment system. And South Africa hopes to follow up on the talk with concrete actions. The next meeting for G20 finance officials is scheduled for mid-July.
“Some of the most expensive corridors for cross-border payments are actually found on the African continent,” South Africa’s central bank governor Resegja Kuganyago told Reuters at a G20 conference in Cape Town in February.
“In order for us to function as a continent, it is important that we begin trading and settling in our own currency.”
But the story of leaving the dollar – as a trade or reserve currency – has elicited an offensive response from President Trump.
Brick responded with a 100% tariff threat after grouping countries including Russia, China, India and Brazil along with Africans such as South Africa, Egypt and Ethiopia, reducing their dependence on the dollar and creating a common currency.
“There is no chance that BRICS will replace the US dollar in international trade, or anywhere else. And countries that try should greet tariffs and say goodbye to the US!” he wrote in January about the True Society.
For the next few months, Trump has shown his willingness to use tariffs to pressure and punish allies and enemies.
McDowell of Syracuse University said Africa will struggle to distance itself from more politically motivated derailment efforts, such as those led by China and Russia.
“Awareness is likely to be about geopolitics,” he said.
(Reporting by Duncan Milili of Nairobi and Andy Bruce of London, Additional reporting by Copano Gumbi and Colleen Goko of Johannesburg, Editing by Karin Strohecker and Joe Babier)
