Martedì, Gennaio 18, 2022
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High transaction costs in inter-African trade: understanding the PAPSS

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For many businesses, individuals and government agencies, making or receiving payments that cross borders is a necessary activity. Many businesses serve customers abroad and rely on buying goods from suppliers abroad but, in order to do so, they need to be able to receive payments from those customers and make them to those suppliers. In Africa, the existence of 41 currencies in use within the entire continent, many of them characterised by their illiquid and rarely traded status on the global financial market, as well as their volatility, make these financial transactions particularly expensive.

In a multi-currency context such as Africa, a cross-border payment operation arranged by a buyer in a certain African country in favor of a supplier in another African State, follows these typical steps: once an order of payment is placed with his bank, the corresponding amount needs to be converted first in a hard currency (such as the US dollar or the Euro) before being transferred to the supplier’s bank. The buyer needs therefore to buy dollars or euros from its bank, which in turn has to buy it from correspondent bank, so that the amount in the foreign devise can be transferred to the bank of his supplier. For this operation the buyer pays a currency exchange fee to his bank, plus a commission for processing the transaction. On the other edge, once received this amount, the supplier’s bank will need to convert again this amount in the local currency before depositing it on its bank account, charging him with another fee.

According to Afreximbank, a Pan-African multilateral financial institution mandated to finance and promote intra-and extra-African trade, this practice apart from causing long transaction time for African traders, produces additional costs (in terms of transaction fees) that are estimated to be of about 5 billion USD per year.

The Pan African Payment and Settlement System (PAPSS) is a centralized payment, clearing and settlement system for intra-African trade payments that was adopted during the 12th Extraordinary Session of the Assembly of the AU held in Niamey, Niger in July 2018 as the payment and settlement system to support the implementation of the African Continental Free Trade Area (AfCFTA). Rolled out end of September 2021, ts objective is to eliminate the hard currency conversion operations in the context of trade transactions occurring across the continent. This means that cross border retail payments can be initiated in the local currency of the sending country and funds are received in the beneficiary's country in local currency by eliminating the conversion processes.

The system has been successfully piloted in the countries of the West African Monetary Zone (WAMZ), including Nigeria, where the Central Bank issued on October 2021 guidelines to describe how the system works. Basically Afreximbank acts as a Settlement Agent in partnership with participating African Central banks, providing guarantees on the payment system to the banks involved in the financial transactions.

 

 

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