RISK MANAGEMENT | 14 APRIL 2022

The AfCFTA’s Early Promise
for African Trade

Absa-CIB-Author

Gerald Katsenga

Head of Corporate Sales:
Absa Regional Operations

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Just over a year since it opened, the African Continental Free Trade Area (AfCFTA) is already showing positive signs of facilitating easier – and cheaper – trade on the continent

On 1 January 2021 the continent officially opened the AfCFTA, breaking down barriers to trade in an area covering 1.2 billion people across 55 countries. The World Bank has described the AfCFTA as “a major opportunity”, noting that it “has the potential to lift 30 million people out of extreme poverty”. Now, more than a year after trade commenced, how is the AfCFTA performing?

“In the first 100 days we saw goods freighted from Ghana to South Africa, and from Uganda to Guinea via sea, so there is some movement of goods around the continent,” says Gerald Katsenga, Head of Corporate Sales: Absa Regional Operations. “But one could argue that it’s been more than a year and we still haven’t seen significant traction. Intra-continental trade still accounts for just 17% of African exports, compared with 59% within Asia and 68% within Europe. But we have started to see some green shoots, and we can now talk about the glass being half-full rather than half-empty.”

Katsenga points to two key reasons for that lack of traction. “The first is that the AfCFTA was introduced in the midst of the COVID-19 pandemic, which slowed down economic activity not only in the Africa region but also globally,” he says.

The second is around the issue of seamless cross-border payments and settlements, which he says “remains a big challenge within the continent”. According to World Bank estimates, the AfCFTA’s trade facilitation could drive USD292 billion (about ZAR4.4 trillion) in potential income gains, just by cutting red tape and simplifying customs procedures.

“The pandemic has taught us that there is a need for a paradigm shift in banking and trade on the continent,” says Katsenga. “Contemporary times call for investing not only in intra-regional trade – which is what the AfCFTA does – but also in innovative, multicurrency clearing and payment platforms.”

The Pan-African Payment and Settlement System (PAPSS), launched in January 2022, does exactly that, serving as a cross-border payment system for intra-African trade. The system allows a buyer in one African country to make a payment in their national currency, with the seller in another African country receiving payment in their local currency. That removes the need to convert those currencies into and out of a “middleman” currency such as the US dollar.

“While money is the lifeblood of any economy, I would argue that a well-implemented payment and settlement infrastructure in all relevant currencies within the free trade area is its circulatory system,” Katsenga says. “This is our philosophy at Absa. We continue to drive the building of channels such as Absa Access, that can integrate into PAPSS and will allow for seamless settlement and payment within Africa, as well as foreign exchange (forex, or FX) management within the continent. For us as clearing and settlement commercial banks, this will lead to less reliance on hard currencies like the euro, pound and dollar for settlements.”

PAPSS is a significant early milestone in the AfCFTA’s history. Katsenga expects more initiatives to be introduced and implemented as the free trade agreement matures and as more countries see its benefits. “The AfCFTA is still in its infancy,” he says. The early signs, however, point to a positive future for intra-African business.

Contact us to access Pan-African foreign exchange expertise for your business, corporate and institutional needs.

 

Absa-CIB-Author
Gerald Katsenga

Head of Corporate Sales: Absa Regional Operations

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