Kenyan President William Ruto has called upon commercial banks to join the Pan-African Payments and Settlement System (PAPSS) in order to minimize dependence on the U.S. dollar for intra-African trade transactions. His statements came during the official launch of Kenya’s Micro, Small, and Medium Enterprises (MSME) Accelerator Programme and the release of the Banking Industry Total Tax Contribution Report at the Kenyatta International Convention Centre in Nairobi on October 18, 2024.

PAPSS is a central payment and settlement platform designed to facilitate cross-border payments using local African currencies. Launched in 2019 by the African Continental Free Trade Area (AfCFTA), the system aims to reduce transaction costs and remove the need for dollar-based trade among African nations. President Ruto’s endorsement of PAPSS reflects a growing desire to enhance regional economic integration and empower local businesses.

PAPSS: A Milestone in African Economic Integration

The Pan-African Payments and Settlement System was conceived to create a unified financial market across Africa, boosting intra-continental trade and making transactions more efficient. PAPSS was officially launched by the AfCFTA in collaboration with the African Export-Import Bank (Afreximbank), an institution that has been instrumental in the system’s development.

The idea behind PAPSS is simple but powerful: it allows businesses and individuals to settle transactions in their local currencies without the need for an intermediary currency like the U.S. dollar or the euro. This reduces the complexities and costs associated with exchange rates and eliminates delays in cross-border payments. As a result, intra-African trade can flourish, and African businesses can become more competitive globally.

In his speech, President Ruto highlighted the $5 billion that Africa loses annually in transaction costs by relying on external currencies. “With the PAPSS, we can sell and buy products from the continent in our local currencies,” he emphasized. This, he pointed out, would help not only in reducing unnecessary exchange rate fluctuations but also in making Africa more self-reliant in its trade practices.

The Challenge: Slow Adoption of PAPSS

Despite its clear advantages, PAPSS has been slow to gain traction among African financial institutions. While some countries, including Kenya, Djibouti, Ghana, Nigeria, and Zambia, have committed to the system, many banks have yet to adopt it. President Ruto expressed frustration with this slow uptake and encouraged banks to accelerate their plans to join the platform, stating, “It is good for you. It reduces your transaction costs, reduces unnecessary exchange rate issues, and helps us pay for products from different countries.”

The president’s comments are particularly significant given the current global economic environment. Many African nations, including Kenya, have been struggling with currency volatility and inflationary pressures exacerbated by the ongoing challenges in global financial markets. The recent strength of the U.S. dollar, driven by high interest rates and global uncertainty, has further complicated trade for many African countries. Adopting PAPSS would provide a way for these countries to shield themselves from the adverse effects of dollar dependency.

Raimond Molenje, the acting CEO of the Kenya Bankers Association (KBA), echoed Ruto’s sentiments, stating that Kenyan banks are keen to join PAPSS. “We are having a meeting with the Central Bank of Kenya to ensure that we have a national switch to the system,” Molenje said, emphasizing the need for a centralized payment infrastructure that will facilitate smoother trade with East African countries. This would mark a significant step in aligning the region’s financial systems with broader pan-African goals.

PAPSS and the Future of African Trade

The slow adoption of PAPSS may stem from several challenges, including the lack of technical infrastructure, regulatory concerns, and an entrenched reliance on established international payment systems. Nevertheless, the system’s potential to transform African trade cannot be overstated.

Intra-African trade remains underdeveloped compared to other regions. For instance, trade between African nations accounts for only about 16% of the continent’s total trade volume, compared to 68% in Europe and 58% in Asia. A significant reason for this is the high transaction costs and logistical barriers that African traders face when trying to do business with neighboring countries. PAPSS could address many of these issues, providing a seamless and cost-effective way for businesses to operate across borders.

Afreximbank, which operates PAPSS, has been vocal about its goals for the platform. In a statement issued in September 2021, the bank said that the system would be rolled out across the continent to facilitate seamless trade and commerce. The official launch of PAPSS activities on January 13, 2022, followed a successful pilot phase in the West African Monetary Zone, which includes countries such as Nigeria, Ghana, and Sierra Leone.

As more banks and financial institutions sign up, PAPSS could become a cornerstone of Africa’s economic future. By lowering the costs of cross-border transactions and reducing dependency on foreign currencies, the system has the potential to significantly increase the volume of intra-African trade. Moreover, it could pave the way for a more integrated and resilient African economy, less vulnerable to external shocks and more capable of charting its own course in the global marketplace.

The Importance of Political Will

President Ruto’s public endorsement of PAPSS underscores the importance of political will in driving economic reforms. While technical and logistical challenges remain, it is clear that the support of national governments is crucial for the success of initiatives like PAPSS. By encouraging banks to join the system, Ruto is signaling his administration’s commitment to creating a more integrated and competitive African economy.

This commitment is in line with broader continental goals. The AfCFTA, under which PAPSS was launched, aims to create a single market for goods and services across Africa, with free movement of people and capital. The agreement, which came into force in 2021, is one of the most ambitious economic projects in Africa’s history, with the potential to lift millions out of poverty and foster sustainable development.

However, for these goals to be realized, African countries must work together to overcome the challenges that have historically hindered intra-African trade. These include not only technical issues like payment systems but also non-tariff barriers, infrastructure deficits, and regulatory misalignments. PAPSS is a critical piece of this puzzle, but it is not a silver bullet. Success will require the concerted efforts of governments, financial institutions, and businesses across the continent.

Conclusion: PAPSS as a Catalyst for Growth

As Africa looks to the future, the role of financial integration in driving economic growth cannot be ignored. PAPSS offers a unique opportunity for African countries to reduce their reliance on external currencies, lower transaction costs, and boost trade within the continent. However, for the system to succeed, it will require the support of not only banks and businesses but also national governments.

President Ruto’s call for Kenyan banks to join PAPSS is a step in the right direction. By embracing this new system, African countries can create a more resilient and self-sustaining economy, capable of withstanding the challenges of an increasingly uncertain global financial landscape. The success of PAPSS could well be a turning point in Africa’s quest for economic sovereignty and sustainable growth.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

22nd October, 2024