A “euro’’ for Africa is closer than you think

Absa | Corporate and Investment Banking > Insights and Events > A “euro’’ for Africa is closer than you think
Absa-CIB-Author

Gerald Katsenga

Head of Global Markets
Corporate Sales
Absa Regional Operations

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Africa is still many years away from a common currency, but for businesses across the continent, PAPSS is ably filling the gap.

Wamkele Mene, Secretary-General of the African Continental Free Trade Area (AfCFTA), has made it clear: Africa is moving towards a single currency. Speaking to Bloomberg in 2023, he reiterated a statement he’s made many times before and since. “If you look at the founding documents of the Organisation of African Unity in May 1963, a common currency in Africa is one of the objectives,” he said, adding that within the AfCFTA “there is an objective to have a common currency”.

Are we there yet? No. But we’re closer than one might think, says Gerald Katsenga, Head of Global Markets, Corporate Sales: Absa Regional Operations at Absa CIB. “A common African Union currency is critical if we are to eliminate some of the transaction costs related to intra-Africa trade,” Katsenga says. Currently, if African businesses execute a cross-currency trade, the payer’s currency must leave Africa and be converted into a third-party currency (typically the US dollar or euro) before being converted into the payee’s currency.
“As a continent, we’re spending almost USD5 billion a year by using third-party currencies as a common currency,” he says.

Bumpy road to a common currency

A common African currency would solve that, as the euro does in the Eurozone. “However, the challenge is that we currently have four separate unions in Africa, each with its own timeline,” Katsenga explains. First there’s the African Monetary Union, which is the African Union’s proposed monetary union to be administered by the proposed common union bank, the African Central Bank. The timeline under the Abuja Treaty initially called for a single pan-African currency, variously called the AFRO and the afriq, by 2023.

Then in West Africa, there’s the Economic Community of West African States (ECOWAS), which has committed to launching a common currency, called the Eco, by 2027. Meanwhile, the East African Community (EAC) Treaty, signed in 2013, called for a single currency in the EAC by 2023. The Southern African Monetary Union (SAMU) is a proposed common currency for the 15 member states of the Southern African Development Community (SADC). The SAMU was conceived in 1980 and was supposed to be established by 2018. However, the SAMU has faced many challenges, such as the dominance of South Africa's economy, the diversity of the SADC countries, and the lack of political will and institutional capacity. Meanwhile, there is also the Common Monetary Area (CMA), which links Namibia, Lesotho, Eswatini and South Africa in a monetary union, utilising the rand.

“Breaking that hegemony is a major barrier to creating a single African currency, because we’re not speaking with one voice,” Katsenga says. “I don’t see an African currency emerging for at least the next 10 years.”

How PAPSS fills the gap

“Having said that, what is realisable in the near term is a pan-African Payment and Settlement System (PAPSS), which at least consolidates those intra-continental payments,” Katsenga says. “So while we don’t have a single African currency, at least we have a single payment system that settles within the jurisdictions of intra-African trade.”

He emphasises that the issue is not de-dollarisation or de-euroisation. “It’s about reducing transactional costs and promoting intra-African regional trade,” he says. “The real challenge for African businesses lies in the payment set-up. When you do intra-African trade, you settle via SWIFT, where you have the costs of intermediary banks. If I’m in, say, South Africa and I do a transaction paying somebody in Ghana, my rands have to go via either Europe (the euro) or the United States (the dollar), and then come back into Africa as Ghanaian cedi. When we use PAPSS, it’s still a net settlement in hard currency, but without having to go via the euro or the US dollar. “

PAPSS is far more than just a short-term solution. “PAPPS only launched in 2022, but it’s already filling the single-currency gap,” Katsenga says. And the reality is that any common currency for Africa – be it the AFRO, afriq or any other name – is still many years away, partly because of the different stages of development of African countries, and partly because of the lack of political will around creating a common currency.
“A common monetary union requires a common fiscal framework,” Katsenga concludes. “And as things stand, there’s no unison in that regard among Africa’s various regional blocks, let alone integration at a country level among the African Union’s 55 member states. PAPSS has filled that void because it acts like a common monetary union without a single currency.”

Absa-CIB-Author
Gerald Katsenga

Head of Global Markets Corporate Sales Absa Regional Operations

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