One of the main barriers to intra-African trade is currency issues. Large contracts often involve US dollars or other non-African hard currencies, despite their scarcity throughout the continent. However, due to volatile exchange rates, notably those against the dollar, trust in many African currencies is low. The continent would become more independent if there were only one African currency, but this is still a long way off.
According to the 2024 Pan-African Private Sector Trade & Investment Committee (PAFTRAC) survey of African trade trends, only 39% of African companies utilise African currencies to finance their cross-border transactions, a significant decline from the 69% reported in 2022.
This is probably the effect of more volatile currency movements in recent years due to the disruption of trade during COVID-19 and the aftermath of Russia’s invasion of Ukraine.
Many African currencies have lost value in terms of the US dollar, which has reduced their appeal to recipients. Previously considered an African hard currency, the South African rand’s value has experienced significant fluctuations in recent years.
Although there are currently two connected single currencies on the continent, there has been relatively little movement in the many regions that have proposed the creation of regional or continent-wide currencies.
Each of the primarily francophone nations in Central and West Africa uses a different form of the CFA franc. The French treasury backs them and links them to the euro, covering six and eight nations, respectively. Despite the backing of several African presidents, a single currency for the entire continent is the ideal but will be extremely challenging to realise.
During the Common Market for Eastern and Southern Africa (COMESA) Heads of State and Government summit in Lusaka in June 2024, Kenyan President William Ruto said, “Our people cannot trade without worrying about which currency to use. For our people to start trading and integrating, we urgently need to eliminate these and other non-tariff impediments.”
Meanwhile, at the annual meeting of the Association of African Central Banks in September, African Union (AU) Commissioner for Trade and Industry, Albert Muchanga said, “We require effective and timely implementation of the macroeconomic convergence criteria to lay the groundwork for the establishment of the African Central Bank, and immediately after that, a single African currency.”
Echoing similar views, Wamkele Mene, Secretary-General of the African Continental Free Trade Area, remarked that Africa is already heading toward a single currency.
“A common African Union currency is critical if we are to eliminate some of the transaction costs related to intra-Africa trade,” said Gerald Katsenga, Absa’s head of global markets and corporate sales.
He noted that using non-African currencies costs the continent around $5 billion annually. Notwithstanding the advantages, the unified currency has been a stated objective since the founding of the Organisation of African Unity in 1963; therefore, it is unlikely to occur anytime soon.
To reduce currency exchange risks, 63.33% of respondents to the PAFTRAC survey expressed a strong desire to see the establishment of a unified African currency. Participants in the poll identified these dangers as the main barrier to commerce with other African nations.
The creation of a unified currency is, however, fraught with difficulties. First and foremost, each participating nation must guarantee that several national economic indices, such as inflation and public debt-to-GDP ratios, converge within predetermined bounds. The continent appears to be no closer to accomplishing these goals now than it was in 1991, when the Abuja Treaty stipulated that the “Afro” or “Afriq” would be launched by 2023.
Second, even in cases where the economic benefits have been proven, national governments will be hesitant to relinquish control of their current currencies and monetary policies.
National governments would lose authority if monetary unions were to help lower the cost of financial transactions, remove exchange risk, and lower transaction costs while also assisting in price harmonisation.
Local currencies
The proposal has generated a lot of conversation since the AfCFTA was introduced, though, which implies that it may now be a real possibility—however remote—rather than just wishful thinking. Regional currencies are probably going to be established initially. The push for a single currency for the entire continent will increase once they have demonstrated the advantages of such projects.
While the AU has a long-term goal of introducing a single African currency as part of a monetary union, the Southern African Development Community (SADC), East African Community (EAC), Economic Community of West African States (Ecowas), and Common Market for Eastern and Southern Africa (Comesa) all have plans for monetary unification leading to regional currencies.
A dispute over which nation should house the East African Monetary Institute, which is to act as a forerunner of the East African Central Bank, caused the EAC’s proposal for a unified currency to be postponed once more, most recently in August, which was pushed to 2031.
Although ECOWAS had set 2027 as the timeframe for the formation of its one currency, the eco, its member states have yet to meet the convergence requirements. Due to a lack of progress and the abrupt withdrawal of Burkina Faso, Mali, and Niger from the community, the block decided in September 2024 to halt its single currency plan.
In an attempt to further sever their links with France, the three nations claim that they are thinking of issuing their own currency. According to some, other West African countries ought to work to harmonise their institutions and laws to establish distinct Anglophone and Francophone West African currencies in the coming days, with the ultimate goal of combining the two.
South Africa, Namibia, Lesotho, and Eswatini are all part of the Southern African Common Monetary Area, which is largely controlled by the most developed economy in the region. The Samu, the SADC’s single currency, was supposed to be introduced by 2018, but it has fallen short of that goal. Convincing members to meet inflation, interest rate, budget deficit, and debt targets is a challenge for all of these activities.
Combining two or more regional currencies or progressively expanding one may be the next step, even after the regional currencies have been introduced. The first iteration of a continent-wide currency is unlikely to cover all African nations, even if and when it is introduced. Each country will need to clear several budgetary and economic requirements before being permitted to take part, just like in the EU.
PAPSS: A welcome solution
The Pan-African Payment and Settlement System (PAPSS) provides a wonderful way to lower the currency risks involved in cross-border transactions when new currencies are unavailable.
The African Export-Import Bank (Afreximbank) and AU introduced this cross-border payment, clearing, and settlement system in 2022. It enables people, companies, and governments to make instant payments to finish cross-border transactions in over 40 African and foreign hard currencies.
PAPSS should assist by expediting the process because unstable exchange rates might cause the conditions of an agreement to worsen between the conclusion of a contract and the actual payment being made. At least 14 central banks, including those in Malawi, Nigeria, Sierra Leone, and Zambia, have joined it, along with more than 50 commercial banks, such as Absa, Ecobank, United Bank for Africa, and Zenith. Although it is currently optional to join, more banks are anticipated to do so soon.
It is believed that PAPSS would also inspire African companies to alter their business practices. Cash in advance is currently the preferred mode of payment, surpassing open account sales, letters of credit, and documentary collection.
The widespread usage of cash in advance discourages intra-African trade because it is the least desirable alternative for buyers and less hazardous for exporters than letters of credit. It is frequently coupled with free-on-board terms, which obligate the buyer to assume ownership of the cargo as soon as it is placed onto a truck, train, or vessel. In these cases, the buyer bears the financial risk of any freight loss or damage.
Gerald Katsenga of Absa claims that the payment setup is an obstacle facing African companies. Using SWIFT to settle intra-African transactions entails paying intermediary bank fees.
“If I’m in, say, South Africa and I’m paying someone in Ghana, my rands must travel through either Europe (the euro) or the US (the dollar) before returning to Africa as Ghanaian cedi. With PAPSS, we can still make a net settlement in hard currency without using the US dollar or the euro,” he said.
Africa still lacks the financial and political will to adopt a unified currency. Decades passed before the EU’s member states’ economies were sufficiently aligned to introduce the euro.
However, the AfCFTA’s success is severely hampered by currency and payment obstacles, hence it is hoped that the PAPSS will be widely adopted and that at least one regional currency will soon be established.
ECOWAS and single currency
In December 2024, news emerged from West Africa that the leaders of the Economic Community of West African States (ECOWAS) have pledged to revitalise efforts to launch the region’s single currency, the ECO. The new target date for its implementation has been set for 2027.
Originally scheduled for a 2020 rollout, the ECOWAS member states had to delay the currency’s launch due to challenges, including the COVID-19 pandemic. As per the latest reports, ECOWAS leaders have approved the criteria for selecting member states to participate in the ECO launch.
The bloc is currently working on the practical arrangements for launching a new currency, which is expected to significantly boost regional trade, lower transaction costs, and promote economic integration, ultimately leading to greater prosperity.
The ECOWAS Commission and the West African Monetary Agency (WAMA) have been tasked with incorporating new criteria into the protocol for establishing the ECOWAS Monetary Union. Additionally, regional leaders have called for immediate financial contributions from member states and central banks to support the reforms and institutions needed for the single currency project.
Now one of the reasons behind the ECO getting so much prominence is the urge to replace the CFA franc, which is currently used by 14 African states. The CFA franc, whose initials come from the French words for African Financial Community, was launched on 26th December 1945, as a “franc of the French colonies of Africa.”
Fourteen nations, divided into West and Central African groups, use the currency today. CFA franc covers 155 million people (14% of Africa’s population and 12% of its GDP), according to the International Monetary Fund (IMF).
The currency’s value was initially pegged to the French franc and then to the euro, at a fixed rate of 655.96 CFA francs to one euro. While the Bank of France holds half of the currency’s total reserves, the European country pays an annual ceiling interest rate of 0.75%. The arrangement also guarantees unlimited convertibility of CFA francs into euros and facilitates inter-zone transfers.
While the supporters of the CFA franc credit the “French Link” behind the currency’s credibility and price stability, critics call the arrangement “post-colonial,” preventing countries from exercising monetary sovereignty and enabling France to wield clout in its former colonies.
During the debate, several options were proposed regarding the CFA. These included a symbolic name change and pegging the CFA to a basket of currencies, such as the euro, US dollar, and Chinese yuan, which would better reflect Africa’s main trade partners. Economists also suggested transferring CFA reserves to other institutions and easing the strict monetary policy to promote development and job creation.
So, in December 2019, the CFA franc got its name changed to the ECO, with reforms ensuring that the user countries would no longer have to lodge 50% of their reserves with the Bank of France. France, on the other hand, will also sever institutional ties, withdrawing from the CBWAS board and monetary policy committee.
However, the ECO will maintain its fixed exchange rate with the euro and Paris will keep its role as a backup for the eight WAMU (West African Monetary Union) countries, apart from providing a guarantee, in the form of a line of credit, if the CBWAS faces a currency crunch and needs euros.
The road to a unified African currency will be long and challenging, but it is a journey worth pursuing. By addressing the structural impediments to trade, fostering regional cooperation, and leveraging innovative solutions like PAPSS and ECO, Africa can unlock its vast economic potential. The creation of a single currency throughout the region may still be decades away, but each step taken today brings the continent closer to this transformative goal.