The De-Dollarization of Africa

The recent decision by the Central Bank of Kenya to join the Pan-African Payment and Settlement System (PAPSS) marks a significant milestone in the country’s pursuit of enhancing cross-border trade within the African continent. The membership allows Kenyan businesses to conduct trade and financial transactions efficiently with counterparts across the African continent, marking the tenth African Central Bank to join the framework. Joining other authorities, the Central Banks of Nigeria, Liberia, Guinea, Djibouti, The Gambia, Bank of Sierra Leone, Reserve Bank of Zimbabwe, Bank of Zambia, and Bank of Ghana, this step signifies a de-dollarization approach that could boost trade and enhance intra-African trade for the benefits of countries like Kenya.

PAPSS, a brainchild of Afreximbank with the support of the African Continental Free Trade Area (AfCFTA) Secretariat, will not only simplify and expedite cross-border trade transactions but also have a significant impact on Kenya’s economy and its broader engagement in the regional and continental trade ecosystems. What is more encouraging is that Kenyan-based banks, including Standard Chartered Bank of Kenya, EcoBank, and Kenya Commercial Bank, have already joined the ranks of the PAPSS network to be among the 28 banking entities spearheading the move.

Understanding the PAPSS

The Pan-African Payment and Settlement System (PAPSS) is an evolutionary platform that is designed to allow instant payments across African borders in local currencies while reducing the associated transaction costs. With over 42 different currencies in Africa, intra-African transactions have often involved conducting trade in the traditional way of converting local currencies into hard currencies, largely the dollar, which attracts high fees and lengthy transaction times. The PAPSS is therefore expected to save businesses across the continent US$5 billion in transaction costs that are incurred annually. This is a significant boost to Africa’s economic growth considering that domestic and cross-border payments generate approximately $24 billion in revenues, of which $15 billion are domestically generated from 47 billion individual transactions amounting to over $800 billion in value.

The consequences of the past tedious transaction landscape are therefore not only felt by individuals but also by businesses, SMEs, and entrepreneurs whose potential profits have been increasingly eroded by bank charges, exchange rates, and transfer fees. The PAPSS seeks to ease the pain by allowing change in the way cross-border transactions for African countries are handled in five simple steps. The process starts in the initiation stage where an Individual or business in Kenya will issue payment instructions to their local bank or payment service provider. Secondly, the local partner provides payment processing instructions to PAPSS which then validates the payment instruction while ensuring that it adheres to necessary regulations in the third step. In the fourth step upon successful validation, PAPSS sends instructions to the beneficiary bank or service provider in the recipient African nations who then pay the transferred funds in the local currency in the last step.

Why PAPSS is Significant for Kenya

One of the most substantial barriers to efficient cross-border trade in Africa has been the necessity to convert local currencies into hard currencies. This has been a cumbersome business process that results in extra costs and delays in trade hindering economic growth to the tune of $5 billion lost across the continent annually. The PAPSS has thus promised to reduce currency conversion handles for countries seeking to enhance their participation in cross-border trade, such as Kenya, which is a welcome move. With PAPSS, a customer in Kenya can now engage in cross-border transactions in their own currency, simplifying the process and eliminating the need for multiple currency conversions. This is expected to further streamline trade, reduce transaction costs, and bolster Kenya’s competitiveness in the regional and continental markets. With the elimination of intermediary fees, SWIFT charges, and currency conversion fees, businesses and individuals in Kenya can expect substantial savings on their cross-border transactions.

Kenya has been consistent in pursuing trade partnerships in Africa, especially through the African Continental Free Trade Area (AfCFTA) agreement and regionally through the East African Community, COMESA, and bilateral trade deals. Within the continent, the PAPSS framework aligns well with this pursuit in strengthening its foothold in the intra-African trade agenda. Thus, by enabling Kenyan businesses to conduct transactions in local currency with their African counterparts, the PAPSS will facilitate the growth of intra-Africa trade. This is bound to increase the volume of goods and services exported by Kenya to other African nations while unlocking new markets for Kenyan businesses to accelerate growth and wealth creation.

The adoption of PAPSS by Kenya represents not only a technical upgrade but also a strategic move to stimulate economic growth. With a simplified cross-border payment system in place, Kenya becomes more attractive to foreign investors. Supported by the AfCFTA investment protocol that seeks to enhance foreign investment efficiency and harmonize trade regulations, the PAPSS could see a rejuvenation of value creators flocking into the country in search of opportunities. The reduction of transaction costs and the elimination of complex currency exchange procedures will encourage more foreign direct investment, fostering economic development and job creation.

Small and Medium Enterprises (SMEs) are the backbone of Kenya’s economy accounting for the majority (98%) of all business entities, both registered and non-registered, that operate in the country. However, they often encounter challenges when conducting cross-border transactions due to high fees, slow transaction times, and the need to convert currency. The PAPSS framework will create a level playing ground for these businesses allowing them greater integration and efficient participation in regional trade. SMEs will experience a reduction in transaction costs and faster payment processing times, giving them the competitive edge they need to grow and expand.

Continental Aspirations

PAPSS has the potential to enhance financial inclusion in Kenya and across Africa. As cross-border transactions become more accessible and affordable, it will encourage more individuals and businesses to participate in regional and continental trade. The ability to send and receive payments in local currency makes the system more user-friendly and approachable for those who were previously excluded from international trade due to high costs.

PAPSS is also not just about Kenya. It represents a collective effort of African Nations in driving economic integration. With Kenya’s adoption of the African Export-Import Bank’s (Afreximbank) initiative under the AfCFTA, it aligns itself with a broader vision of Africa as a united economic bloc and in enhancing intra-African Trade. The AfCFTA, for instance seek to create a single African market of 1.3 billion people with an approximate GDP of US$3.4 trillion, boost incomes by $450 billion (7% gain) by 2035, and lift 30 million people out of extreme poverty. Kenya is thus poisoned to tap into this promise with more ease and efficiency. PAPSS provides a common platform for all AfCFTA member states, promoting mutual trust, cooperation, and shared economic goals. Kenya’s participation exemplifies its commitment to this vision.

The Central Bank of Kenya’s decision to join PAPSS signifies a significant step toward transforming cross-border trade for Kenya and the African continent. By simplifying payment processes, eliminating currency conversion hurdles, reducing transaction costs, and promoting financial inclusion, PAPSS has the potential to catalyze economic growth in Kenya and throughout Africa. With Kenya on board, PAPSS is one step closer to realizing its mission of saving Africa over $5 billion annually in payment transaction costs and facilitating the operationalization of the AfCFTA. As Kenya embraces this innovative platform, it strengthens its position as a regional trade hub and contributes to the broader goal of an integrated and prosperous African economy.