Debunking the Myth: Trade Currency Diversification Will Deliver Local Currency and Economic Nirvana Across Africa

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The belief that switching or diversifying trade settlements from USD will lead to economic improvement must be clarified, particularly on currency valuation. The core of currency valuation is the principle of Trade Balance. Irrespective of the currency used for trade settlements, a country with more imports than exports will likely continue to face currency depreciation due to the increased demand for foreign currency to pay for imports, surpassing the supply generated from exports. The choice of trading currency, whether the US Dollar, Indian Rupee (INR), Chinese Renminbi (CNY), or local African currencies, does not inherently resolve these trade imbalances.

The AfCFTA and PAPSS are transformative approaches to African trade that encourage settlements in local currencies. PAPSS will play a pivotal role in this process. Ideally, this system will allow for the netting off of trade imbalances among African nations, potentially creating a semblance of currency stability. For instance, if Kenya has a trade surplus with South Africa but a deficit with Burkina Faso, and Burkina Faso similarly has a deficit with South Africa, the ledger could theoretically net these imbalances. However, the effectiveness of this system is contingent upon the relative magnitudes of trade surpluses and deficits among participating countries.

Sidebar 1: The impact of global economic trends, such as fluctuations in commodity prices and international trade policies, must also be appreciated in African Trade Dynamics. Many African economies, heavily reliant on commodity exports, are particularly vulnerable to global price swings. For instance, a drop in oil prices significantly affects Oil Exporting Countries, decreasing foreign exchange earnings and putting pressure on their currencies. Similarly, international trade policies and agreements can facilitate or hinder Africa's trade with other regions, further influencing currency stability.

The operational details of PAPSS, as understood currently, depend on the final implementation by the AfCFTA. A ledger will be instrumental in tracking transactions, ensuring accurate conversions between various currencies, and potentially netting off trade imbalances. It is one of several components necessary for the system's overall functionality, including currency conversion mechanisms, transaction processing infrastructure, and regulatory compliance measures. This multi-faceted approach underscores the complexity and the collaborative effort required to implement PAPSS successfully across the continent.

Sidebar 2: The commissioning of PAPSS followed a successful pilot phase in the West African Monetary Zone (WAMZ) countries, with live transactions done instantly. To accelerate expansion and ensure settlement finality, Afreximbank approved US$500 million to support the clearing and settlement in WAMZ countries. Furthermore, an estimated US $3 billion will be available to support the system's continent-wide implementation. As such, Afreximbank will play a crucial role in providing the necessary financial infrastructure and support, ensuring the viability and operational success of PAPSS.

While the ledger system offers a novel approach to managing trade imbalances within Africa, the presence of multiple African currencies and the continent's trade dynamics with the rest of the world challenge its efficacy. The currency stability envisioned through ledger netting is at risk if a country's overall trade balance with the world is negative. For example, even if a country like Kenya appreciates its currency against other African currencies through regional trade surpluses, its currency may still depreciate against global currencies if its worldwide trade balance is negative.

Sidebar 3: The idea of a single African currency, while appealing for its potential to simplify trade and reduce currency risk, faces significant challenges. These include vast differences in economic policies, political stability, and development levels across African Nations. Implementing a single currency would require unprecedented economic integration, policy harmonization, and political cooperation, presenting a formidable task for the continent.

The success of the AfCFTA and PAPSS in stabilizing African currencies will also hinge on the enhancement of intra-African trade. Increased self-sufficiency and balanced trade within the continent can diminish reliance on external imports, thereby reducing the pressure on African currencies against major global currencies. However, achieving this level of trade equilibrium is complex, requiring concerted efforts in economic policy, infrastructure development, and regional cooperation.

Sidebar 4: The East African Community (EAC) illustrates a successful intra-African trade initiative. The EAC facilitates the movement of goods, services, and people, contributing to economic growth and stability in the region. This success highlights the potential benefits of regional economic integration in Africa, serving as a model for other regional groups under the broader umbrella of the AfCFTA.

Sidebar 5: Agriculture, in particular ,stands to benefit substantially from reduced trade barriers and enhanced market access under AfCFTA. Smallholder farmers could gain new opportunities to export their products across borders, potentially leading to higher incomes and improved livelihoods. PAPSS would facilitate easier and more cost-effective transactions for these farmers, who often face challenges accessing foreign currency for trade. However, caution is also needed, as increased competition may pressure local farmers who cannot compete with larger producers from other African countries.

Sidebar 6: Manufacturing could also experience a significant boost from the AfCFTA. By creating a larger integrated market, the initiative encourages economies of scale, attracts foreign direct investment, and fosters industrialization. PAPSS would streamline cross-border transactions, reducing costs and delays hindering manufacturing growth. However, the success of this sector will depend on countries' ability to address infrastructural deficiencies and enhance their manufacturing capacities to compete effectively in the new market environment. Countries with larger and more entrenched manufacturing sectors will be the initial benefactors.

Sidebar 7: The services sector, including areas like banking, insurance, and telecommunications, is likely to see expanded opportunities due to both AfCFTA and PAPSS. Enhanced market access and harmonized regulations across countries could lead to a more vibrant intra-African services trade. Digital services, in particular, might experience rapid growth, benefiting from streamlined payment systems and reduced currency conversion challenges.

Nevertheless, the successful operationalization of PAPSS and AfCFTA requires robust Technological Infrastructure, including advanced digital platforms for transaction processing, secure communication channels, and data management systems capable of handling large volumes of trade data. The lack of such infrastructure in some African nations poses a significant barrier to the uniform application and efficiency of these systems. Also, with multiple currencies involved and fluctuating values, the risk of currency speculation, which could lead to financial instability, is not eliminated. Effective regulatory frameworks and monitoring mechanisms will be essential to mitigate such risks. Lastly, harmonizing policies across diverse African countries with varying economic policies, political systems, and levels of development will be required. Political commitment and cooperation are essential to align national interests with the collective goals of AfCFTA and PAPSS.

While the AfCFTA and PAPSS introduce promising mechanisms for currency diversification and trade facilitation within Africa, their potential to stabilize local currencies is intricately linked to resolving underlying trade imbalances, both within the continent and globally. The ledger system, though innovative, must operate within the broader context of a country's total trade dynamics to effectively contribute to Currency Stability. A more nuanced understanding of these complex economic interactions is crucial for navigating the path toward sustainable economic growth and stability in Africa.

Call To Action: African Leaders must transition from rhetoric to action. The roadmap for its complete functionality needs to be clear, comprehensive, and actionable. African nations must commit to addressing structural needs, including infrastructure development, policy harmonization, and enhancing capacity for trade negotiations. Strengthening these areas will be crucial for the AfCFTA to achieve its full potential in boosting intra-African trade and fostering economic growth. Either we accelerate the full operationalization of the AfCFTA with dedication and vigor, or we continue to bask in delivering growth that does not realistically and expeditiously close the wide economic gaps with the developed world.

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Dean N Onyambu is the Executive Head of Trading at Opportunik Global Fund (OGF), a CIMA-licensed fund for Africans and diasporans (Opportunik), and is a co-author of Unlocking African Prosperity. Passion and mentorship have fueled his 15-year journey in financial markets. He is a proud former VP of ACI Zambia FMA (@ACIZambiaFMA) and founder of mentorship programs that have shaped and continue to shape 63 financial pros and counting! When he is not knee-deep in charts, he is all about rugby. His motto is exceeding limits, abounding in opportunities, and achieving greatness. #ExceedAboundAchieve

For more insights from Dean, you can follow him on LinkedIn @DeanNOnyambu,? X @InfinitelyDean, or Facebook @DeanNathanielOnyambu.?

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