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How PAPSS will revolutionise free trade in Africa

By Oluwatobi Ojo
01 November 2022   |   2:39 am
The ratification of the African Continental Free Trade Agreement (AfCFTA) in 2020 presented an opportunity to revolutionise Africa’s economy.

The ratification of the African Continental Free Trade Agreement (AfCFTA) in 2020 presented an opportunity to revolutionise Africa’s economy.

The primary goal is to increase intra-Africa trade by eliminating trade barriers like import and export taxes. Despite the impressive stride of the AfCFTA, barriers like border delays, high tariffs, infrastructural deficits, and the high cost of cross-border payments continue to impede regional integration.

Addressing ‌cross-border payments necessitated the development of the Pan-African Payment and Settlement System (PAPSS). PAPSS is a centralised financial system aimed at facilitating cross-border payments across Africa. It facilitates payment between originators and beneficiaries in their respective local currencies.

In January 2022, the African Import-Export Bank (Afreximbank) and the AfCFTA secretariat launched PAPSS for commercial use after a successful pilot phase in the West Africa Monetary Zone (WAMZ).

With $500 million in support from Afreximbank and a further $3 billion injection fund, PAPSS will ensure swift clearing and settlement across the continent.

Before the launch of PAPSS, Africa remits about $5 billion in transaction fees per annum using the Society for Worldwide Interbank Financial Telecommunication (SWIFT) platform in cross-border payments. With the introduction of PAPSS, Africa will retain value lost in transactions using the SWIFT payment platform.

How PAPSS works
The central banks of Afreximbank member states connect and enter a PAPSS Membership Agreement and Settlement Bank Agreement. They oversee, supervise, and enforce compliance with banks and financial institutions in their jurisdiction. PAPSS operates on three core processes: instant payment, pre-funding, and net settlement.

For instant payment and net settlement, the originator and beneficiary transact in their respective local currencies and get value within 24 hours of initiating the transaction. For pre-funding, the system ensures the availability of funds to complete the originator’s transaction. After confirmation, the system effect corresponding credit and debit between participating accounts.

Direct participants (commercial banks, payment service providers, and FinTech) maintain a real-time gross settlement (RTGS) account with their domestic central bank. Without a settlement account, intending participants must agree with a direct participant to facilitate the transactions on PAPSS. Indirect participants pre-fund their accounts with a direct participant. The direct participants then ensure liquidity in their settlement account with the Central Bank, and PAPSS gets notice to effect real-time payment processing.

PAPSS is a game changer in realising the benefits of the AfCFTA and the actualization of the African Union Agenda 2063. Its swift implementation will aid a smooth continent-wide market operation.
Simplify cross-border payment

PAPSS provides solutions to core infrastructure and regulatory barriers to cross-border payment across Africa. It eradicates the hassle of currency conversion and delayed turnaround time (TAT). Using the SWIFT platform, transactions take 2 to 14 days before completion. The United States process over 80% of the transactions originated in Africa before net payment to the beneficiaries.

The complexity and TAT of payments on SWIFT pose operational challenges and compliance concerns around trade monitoring in local countries. In contrast, the PAPSS system processes all transactions within 24 hours across all participating central banks. The Central Banks of participating countries also ensure compliance with the trade policies and regulations of their local countries.

Reduce dependency on third-party currencies and Forex demand
Reduced reliance on third-party currencies (dollar, pound, and euro) is a crucial factor in the proposition of PAPSS. SWIFT requires foreign currencies (dollars, pounds, and euros) to complete the transaction between the originator and beneficiary. This process strains the demand for foreign currency in the host country. As demand continues to outweigh the supply of FX, the country’s foreign reserves plummet.

According to the governor of the Central Bank of Nigeria, “trading in third-party currency subverts and destabilises the domestic foreign exchange market.” While eliminating the use of foreign currencies in intra-African trade will undoubtedly be challenging, the emergence of PAPSS will drastically reduce its demand.

Strengthen intra-African trade
PAPSS will increase intra-Africa trade from 16%, representing $70 billion, to about 50–55%, equating to $300 billion in the next two to three years.

This significant increase in intra-African trade will herald prosperity in the continent by creating jobs, improving quality of life, and ease of doing business. By reducing the cost of intra-African trade under the AfCFTA and facilitating cross-border payment through the PAPSS, we expect an increase in intra-African trade and investment.

As Africa continues to forge ahead in integrating its regional market by creating a viable continental value chain, payment and clearing will always pose a significant challenge. However, PAPSS offers competent solutions to all infrastructural, regulatory, and compliance challenges affecting cross-border payment.

Ojo is a writing fellow at the African Liberty.