Replacing the dollar? Africa pushes for local payment system to save costs

The push for a local payment system in Africa, once just an idea, has now made tangible progress. African nations are making this effort as China is also attempting to establish a financial system independent of Western mechanisms.

Russia, a country facing economic sanctions, is also eager to seek alternative paths to the dollar. However, African countries say their main driver is cost issues.

"Perhaps contrary to what people think, our goal is not to de-dollarize," said Ogbara, head of the Pan-African Payment and Settlement System (PAPSS), which allows direct transactions in local currencies, bypassing the dollar.

"If you look at African economies, you will find it difficult for them to obtain third-party international currencies to complete transaction settlements," he said.

African commercial banks usually rely on overseas partners through so-called "correspondent banking relationships" to assist with international payments, including those between neighboring African countries.

This significantly increases transaction costs. Added to this are other factors such as weak transportation infrastructure, resulting in African trade costs being 50% higher than the global average. This is according to data from the United Nations Conference on Trade and Development.

"For Africa, the existing dollar-based financial network has become less efficient and more expensive," said Michael McDowell, a professor of international finance at Syracuse University in New York.

Local Payment System

According to data provided by the Pan-African Payment and Settlement System, under the current "correspondent bank" system, the estimated payment cost for a $200 million trade between two African countries accounts for 10-30% of the transaction amount.

However, if a local payment system is used, the payment cost can be reduced to 1% of the transaction amount.

In a local payment system like the Pan-African Payment and Settlement System, for example, when Zambia and Kenya engage in commodity trade, buyers and sellers use their own national currencies instead of converting into dollars to complete the transaction.

Ogbara told Reuters that using national currencies such as the Nigerian naira, Ghanaian cedi, or South African rand for internal African trade payments could save $5 billion in hard currency annually.

The Pan-African Payment and Settlement System, established in January 2022, initially had only 10 member banks, but now operates in 15 countries, including Zambia, Malawi, Kenya, Tunisia, etc., with 150 member banks connected.

"We see very significant growth in transactions," Ogbara said, but he did not provide specific figures.

Geopolitics and Trump Factor

The current G20, chaired by South Africa, also discussed promoting regional payment systems at its recent meeting of finance ministers and central bank governors. The G20 finance ministers will meet again in early July.

Gov. Kajega of the South African Reserve Bank told Reuters at a G20 meeting held in Cape Town in February: "Some of the most expensive cross-border payments occur on the African continent."

He said: "For us as a continent, it is important to start trading and settling in our own currencies."

However, at the end of last year, after the BRICS countries - Russia, China, India, and Brazil - and some African countries like South Africa, Egypt, and Ethiopia considered reducing their reliance on the dollar and creating a common currency, former U.S. President Donald Trump threatened a 100% tariff.

"The BRICS countries cannot replace the dollar in international trade or any other field; any country attempting this should face tariffs and part ways with the United States!" Trump wrote on his Truth Social platform in January.

Source: Reuters

Original article: https://www.toutiao.com/article/1835634330961927/

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