The Intra-African Trade facilitated with PAPSS
The current level of intra-Africa trade is low, barely about 16% when compared to other regions, despite the fact there is established high potential for trade within the continent. Inevitably, there are several reasons why intra-African trade is relatively low. These include but not limited to lack of adequate trade information, structural rigidities, historical trading patterns (historical ties with former colonial countries), poor trade facilitation and regulatory issues, slow implementation of regional commitments, poor state of trade related infrastructure (barriers to the movement of goods), and fragmented payment, clearing and settlement infrastructure.
The fragmented payment and settlement infrastructure is one of the soft infrastructural issues and a critical impediment to increased intra-African trade. In addition, this makes it difficult to formalize a significant percentage of intra-African trade which is conducted informally by traders.
In its establishment agreement and charter, respectively Article II,2(x) and Article 5(2)(x), the African Export-Import Bank (Afreximbank), is empowered to provide support to payments arrangements aimed at expanding the intra-and extra-African trade. It stems from that legal basis that Afreximbank started the initiative to provide a Pan African Payment Clearing and Settlement System (PAPSS).
The PAPSS is a Financial Markets Infrastructure that has been developed and initiated by the Afreximbank. It enjoys the backing of the AU Assembly and the support of the African Continental Free Trade Area (AfCFTA) Secretariat. It’s designed to ensure instant payments and in local currencies. The major reasons for a continental wide system are the following: i) The success of the AfCFTA would require an integrated continent-wide payment infrastructure because the current payment systems are fragmented and cannot support intra African trade. ii) Cross border transactions are very expensive leading to an estimated loss of $5bn in payment charges annually for the whole continent and iii) the current correspondent banking is highly dependent on foreign currencies to the detriment of African currencies which inhibits trade and economic development.
It is in 2016, that’s it all began with engagements taking place with the Common Market for Eastern and Southern Africa (COMESA) clearing house to understand the operations of their Regional Payment and Settlement System (REPSS) and the Southern Africa Development Community (SADC) as well to get to know how the SADC-RTGS works and settles transactions. Discussions with the West African Monetary Zone (WAMZ) commenced in 2017 with a presentation to the technical committee and the Central Bank Governors agreed to serve as a pilot and immediately discussions with the market participants kicked off in earnest.
System development commenced in 2018 and training for central banks was conducted in 2019. The regulatory framework including the PAPSS bye-laws, Scheme rules and membership agreements were all put in place in 2019. To date, the PAPSS system has gone live with the commencement of transactions within the WAMZ’s central banks. Engagements with other Central Banks in Africa has commenced in earnest and subsequently, further engagements are also in the offing with Regional Payment systems/Institutions and national and regional switches. A couple of switches in the WAMZ have signed the technical connectivity agreement with PAPSS and ready to bring on their member banks. PAPSS is a central bank centric model payment system and hence, Central Banks are the major partners and Payment Switches and regional payment systems as well. Central Bank Governors constitute the Governing Council and carry the oversight role through a committee that they have formed.
In sum, after a successful pilot in the WAMZ, PAPSS is now ready to be replicated in any region or with any set of central banks.