Understanding the pan-African payment and settlement system (PAPSS) of the Afreximbank

On September 28, 2021, the Afreximbank in conjunction with the African Continental Free Trade Area (AfCFTA) secretariat officially made the Pan-African Payment and Settlement System (PAPSS) available to be used by African businesses doing business on the continent. This follows a successful pilot phase in the countries of the West African Monetary Zone (WAMZ- Nigeria, Ghana, Liberia, Sierra Leone, The Gambia and Guinea (Conakry).

The AfCFTA aims to bring together the 54 African countries to trade under a single market with liberalised tariffs and the elimination of the non-tariff barriers to cross-border trading. However, one of the problems which had hindered intra-African trade for a long time has been the reliance on third currencies- US dollars, Euros and the British Pounds for the clearing and settlement of cross-border payments and transactions which in turn leads to high costs and long transaction times. At the moment, 42 currencies are being spent on the continent and only a few of these currencies have any value outside the countries where they are legal tender. This situation has persisted due to the weak and volatile nature of these legal tenders.

Before the PAPSS, a buyer in Nigeria who intends to buy goods from a seller in Botswana will be required to pay the seller in a third currency from outside the continent- either US dollar, the Euros or the British Pounds, pay the extra charges to have the agreed sum processed and sent to the seller in Botswana and have to wait several days for transactions to clear. Aside from time constraints, the process of currency conversation adds to the cost of doing business and in reality, the money has to leave Africa before being sent back to Botswana. This has been the situation until the introduction of the PAPSS. The PAPSS has been conceptualised as a tool to address this by significantly reducing the constraints being experienced in African regional trade payments.

With the operationalisation of the PAPSS, the same business would only pay in Nigerian Naira for the goods, while the seller will receive Botswana Pula. The PAPSS serves as the clearing, processing and settlement agent in the transaction. In the end, it means that only the deficit between the two countries will be settled using the US dollar, Euros or the British Pounds. Whether for shopping, transferring money, paying salaries, dealing in stocks and shares or making high-value business transactions, the PAPSS real-time infrastructure provides a reliable, cost-effective answer for instant payments. It enables the efficient flow of money securely across African borders, thereby minimising risk and contributing to financial integration across the regions.

The PAPSS works through a process whereby a trader or business issues a payment instruction to their local bank or payment service provider, then the bank or the payment service provider sends the instructions to PAPSS. After which, PAPSS validates the payment instruction and upon successful validation, PAPSS will forward the instruction to the beneficiary’s bank or payment service provider. The beneficiary bank or payment service provider will then pay the transferred funds, in local currency, to the beneficiary. It is one of the five additional instruments that will support the operationalisation of the African Continental Free Trade Area (AfCFTA), the others being:

• The rules of origin, which would ensure that the products that are traded within the African market originate from within the continent to qualify them for tariff preferences;
• An online portal for tariff negotiations, which is meant to facilitate the ongoing discussions between states, customs unions and the other regional economic groupings on the tariff liberalisation;
• An online mechanism for the monitoring, reporting and elimination of non-tariff barriers (NTBs); and
• The African Trade Observatory, which will provide stakeholders with up-to-date and reliable trade data, as well as information about exporters and importers in African countries.

According to Afreximbank’s president, Benedict Oramah, the PAPSS has been designed to domesticate intra-regional payments thereby saving the continent more than US$5 billion in payment transaction costs per annum, formalise a significant proportion of the estimated $50 billion of informal intra-African trade, and above all, contribute in boosting intra-African trade.

To facilitate instant payments across African borders in local currency, PAPSS will support three core processes namely;

• Instant payment; whereby participants will no longer need to convert local currencies into hard currencies. Compliance, legal and sanctions checks are performed instantly within the system within 120 seconds.
• Pre-funding; whereby PAPSS guarantee the availability of funds to complete the originator’s transaction before effecting the movement of debits and credits between participants’ accounts
• Net settlement; whereby PAPSS determines net position in local currency for all participating central banks at the end of each day.

With the success recorded in the pilot phase in the West African Monetary Zone (WAMZ) countries, the Afreximbank and its PAPSS are now engaged in advanced discussions with other national and regional institutions to leverage on this success and rapidly expand the services continent-wide. Afreximbank provides settlement guarantees on the payment system and overdraft facilities to all settlement agents.

To accelerate the expansion and ensure settlement finality, Afreximbank has approved US$500 million to support the clearing and settlement in the West African Monetary Zone (WAMZ) countries. It is estimated that a further US$3 billion will be made available to support the systems continent-wide implementation.

Although in reality, it may not be possible to fully eliminate the US dollar, Euro or British Pounds from transaction settlements in Africa, the PAPSS is an innovative tool that can significantly reduce the trend. Trade with countries outside the continent for necessary components and other items will still be done in third currencies but the PAPSS will essentially help businesses save the cost of doing business with counterparts on the continent meaning that third currency transactions will only be required for transactions involving businesses from outside the continent.

Going forward, there is a lot of work required to create awareness about the PAPSS and how businesses can benefit from it as well in the implementation of the AfCFTA. The private sector groupings and business membership organizations across Africa need to be on-boarded to serve as the evangelist of the PAPSS so that the necessary awareness can be created and African businesses especially the informal cross border traders can begin to take advantage of the platform in earnest.

In addition to the PAPSS, the bank has created a fund for export development in Africa and a $1 billion AfCFTA adjustment facility to “enable countries to adjust in an orderly manner to sudden significant tariff revenue losses” as a result of the implementation of the agreement. Also, there is the Intra-African Trade Fair which holds from November 15 to November 21, 2021, which is a trade show that provides a platform for sharing trade, investment and market information amongst buyers and sellers, investors and countries to meet, discuss and conclude business deals. As well as enabling business to business (B2B) exchanges, the fair is a unique and valuable platform for businesses to access an integrated African market of over 1.2 billion people with a GDP of over $2.5 trillion created under the African continental free trade area.

As we herald this innovative payment system, we must ensure that it works for all and sundry and to our full benefit and that Africa should take its rightful place in the comity of nations.

Adefeko is chairman NACCIMA Export Trade Group and honorary consul of Botswana in Lagos