How will the wider African continent benefit from the recent African Continental Free Trade Area (AfCFTA)? This is being spotlighted with fintech and digital being clear examples.
What is the AfCFTA and some benefits?
Founded in 2018, the AfCFTA commenced on 1 January last year and was made via the African Continental Free Trade Agreement amongst 54 of the 55 African Union (AU) nation members.
The list of the potential benefits is long. The World Bank report, ‘The African Continental Free Trade Area: Economic and Distributional Effects’, for instance, highlighted key ones unique to the continent:
- Extreme poverty would decline across the continent as a result of AfCFTA, estimating approximately 30 million Africans would be lifted out of extreme poverty;
- Almost 68 million other Africans living less than $5.50 a day would see a boost in incomes.
- It can spur larger wage gains for women (at 10.5 per cent) than for men (at 9.9 per cent)
- AfCFTA can boost wages for both skilled and unskilled workers—10.3 per cent for unskilled workers, and 9.8 per cent for skilled workers.
- In terms of extreme poverty, West Africa potentially would see the biggest decline of 12 million Africans (over a third of the total for all of Africa), following Central Africa with 9.3 million Africans then Eastern Africa at 4.8 million and Southern Africa at 3.9 million.
Also, as with free trade agreements in general, a key aim for free trade agreements such as AfCFTA would be to reduce bureaucracy to help facilitate trade between member countries in the area.
For example, the estimated $450billion in income gains from AfCFTA by 2035 (this would be a gain of seven per cent), almost $300 billion ($292billion) would come from stronger trade facilitation. These benefits, coupled with the wider social advantages, are forecasted for AfCFTA.
AfCFTA is a clear example of part of the wider economic development transformation happening in the African continent. But where does fintech and wider digital fall into this?
Spotlight on how fintech and digital can help
Last September, the African Export-Import Bank (Afreximbank) and AfCFTA Secretariat announced the operational roll-out of the Pan-African Payment and Settlement System (PAPSS).
PAPSS was actually launched in July 2019 in the country of Niger during the 12th ‘Extraordinary Summit of the Assembly of the African Union’, which the AU adopted as a key tool for helping implement the AfCFTA.
What exactly is PAPSS?
PAPSS aims to be a revolutionary financial market Infrastructure that enables instant, cross-border payments in local currencies between African AfCFTA member nations. The infrastructure will help simplify cross-border transactions, thereby reducing the dependency on hard currencies for these transactions.
According to Afreximbank, PAPSS will serve as a continent-wide platform for the processing, clearing and settling of intra-African trade and commerce payments, leveraging a multilateral net settlement system.
To note, at present, over 80 per cent of African cross-border transactions originating from the continent’s banks are currently cleared and settled offshore. This creates inefficiencies and increases the cost of African cross-border payments. Once PAPSS is fully implemented, it is expected to save the African continent over $5billion in payment transaction costs annually.
PAPSS launching follows a successful pilot phase in the countries of the West African Monetary Zone (WAMZ), with live transactions done in an instant. The WAMZ member countries are Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone.
With the benefits of PAPSS at a government level – some benefits include promoting financial inclusion (a key challenge in Africa as a whole), increased transparency and easing pressure on current accounts and decreased foreign exchange liquidity. From a consumer and business level, benefits include instant/near instant payments without converting to other currencies as well as improved working capital with payment certainty.
With PAPSS and a free trade agreement such as the implementation of AfCFTA, it will overall promote synergies, trade and investment, and wider economic development and prosperity in the area amongst member nations.
How does PAPSS work?
According to PAPSS, it will ensure instant or near-instant transfers of funds between originators in one African and beneficiaries in another.
First, an originator will issue a payment instruction in their local currency to their payment service provider or bank. Then, the payment instructions are sent to PAPSS. Afterwards, PAPSS will carry out the necessary validation checks on the payment instruction.
With the next step, the payment instruction is then forwarded to the beneficiary’s payment service provider or bank. And, finally, the beneficiary’s bank will clear the funds to the beneficiary in their local currency.
In a nutshell, the way the network works is by collaborating with Africa’s central banks. Together, they’ve created a centralised payment and settlement infrastructure, on which African commercial banks, payment service providers and fintechs can join as fellow participants.
As of 26 April 2022, PAPSS has expanded its footprints across Africa with eight central banks, six switches and about 25 of the largest commercial banks on the continent. PAPSS has signed very significant strategic relationships with other key institutions.
Partnerships and collaborations
Since the operational rollout of PAPSS, there have been some strong partnerships and headlines. First, MFS Africa, one of the continent’s most established digital payments networks, has announced that it has joined the PAPSS network. This has extended the network’s reach to over 320 million people across 35 African markets.
In addition, on 26 April this year, it was announced that PAPPS signed a Memorandum of Understanding (MoU) with BUNA, the cross-border and multi-currency payment system owned by the Arab Monetary Fund (AMF).
The collaboration between PAPSS and Buna will further these benefits to the Buna network and vice versa. Upon reflection, this collaboration will potentially further integrate the wider Middle East and Africa (MEA) region due to trade and historic ties – as well some AfCFTA members are also Arab nations.
PAPSS also plans to collaborate with other regional and continental cross-border payments systems to extend its range beyond the African borders to support the growth of trade and investments with the African continent and BUNA looks to be one of those clear partnerships.
As the African continent as a whole further grows and much like the rest of the world recovers from not only the Covid-19 pandemic but recent inflation and supply chain woos, there have been underrated success and fintech and wider digital is that spotlight this year.
Time will tell but the wider AfCFTA and PAPSS could maybe one day lead to a strong economic and political integration in the African continent (i.e. an African Central Bank and an African currency similar to the Euro). Nevertheless, at present, PAPSS continues to set boosting intra-African trade significantly and underpin the implementation of the AfCFTA.