Nigeria, others advised to build efficient foreign exchange mechanisms

A new report by the African Export-Import Bank (Afreximbank) has highlighted the need for Nigeria and other African countries to push for efficient exchange rate mechanisms if they hope to positively transform trade in today’s interconnected world.

The said inter-African trade is lagging because of the inefficient payment and settlement systems and the high cost of currency conversion, involving over 40 currencies.

It noted that intra-African trade has remained at 17 per cent of total trade in the continent despite the creation of the African Continental Free Trade Area (AfCFTA). The figure is low when compared to 68 per cent in Europe and 59 per cent in Asia.

It recommended a common currency for Africa, which it said could unlock growth, explaining that regions adopting a common currency benefit from more predictable trade environments, which lower transaction costs and foster trust among businesses and investors.

“This approach could support the eventual goal of a single continental currency for Africa,” it said.

The report, a collaboration between Afreximbank and the University of Ghana Business School, is titled ‘Exchange Rate Mechanism: Towards an Efficient Payment and Settlement System’.

According to the report, seamless cross-border payments and stable exchange rates are not just technical requirements but also essential drivers of Africa’s economic future.

The report highlighted critical insights into how improved exchange rate mechanisms and efficient payment systems can revolutionise intra-African trade. It said that exchange rate stability boosts trade, noting that countries with stable exchange rate mechanisms experience higher levels of cross-border payments and trade efficiency.

“The Pan-African Payment and Settlement System (PAPSS), championed by Afreximbank, allows for transactions to be settled in local currencies, eliminating the need for foreign exchange conversions and reducing transaction costs,” the report said,

It added that if scaled, PAPSS could significantly cut payment delays, lower costs and drive regional economic integration.

It also stated that embracing innovations like blockchain and digital payment platforms enhances the speed, security and reliability of cross-border transactions, adding that fintech solutions are critical for integrating informal traders into Africa’s formal trade networks.

Among the recommendations contained in the report is that African countries need to strengthen their regulatory frameworks.

“They need coordinated exchange rate policies and harmonised regulations to support efficient trade and financial integration; they need to develop and expand digital and physical infrastructure for cross-border payments to ensure fast, secure and cost-effective transactions; they need to lower the costs associated with currency conversion by promoting the use of local currencies and regional payment systems like PAPSS and foster collaboration among African central banks,” the report said.