Africa Moves Toward Using Local Currencies for Cross-Border Payments Amid Challenges

SEOUL – African countries are increasingly embracing the use of local currencies for cross-border payments, a shift aimed at reducing dependence on major international currencies like the US dollar. This move is significant given the continent’s exposure to the international currency market, largely due to the small size of African economies and their reliance on trade with the rest of the world.

According to World Economic Forum, African countries, primarily exporters of primary commodities and importers of a range of goods, often find themselves as “price takers” in global markets. Prices for their exports and imports are set in the world’s major reserve currencies, which exposes these economies to fluctuations in global prices. Furthermore, intra-African trade currently constitutes a small fraction of their total trade, and most African currencies cannot be directly exchanged in international transactions, perpetuating the dominance of the dollar in trade, even among African countries.

The new system aims to facilitate trade between African countries without relying on the US dollar. However, this transition faces significant challenges. Intra-African trade, currently less than 15% of Africa’s exports, is expected to grow but will not entirely eliminate the need for foreign currencies in trade settlement. Moreover, imbalances in trade between African countries present another hurdle. For instance, if a country exports more than it imports from another, it could end up with a surplus of a currency it does not need, necessitating a universally accepted settlement currency, likely the US dollar.

A critical concern in the new system is who bears the exchange rate risk in transactions where one African currency depreciates relative to another. In the previous system, this risk was borne by traders, as transactions were priced in dollars. The African payment system will have to address this risk allocation for intra-African trade as well. Additionally, the success of this system hinges on its scale – the more trade it processes, the easier it becomes to settle in local currencies. However, achieving this scale will require a strong balance sheet to ensure swift and risk-free settlement, a goal that remains to be fully realized.

The best-case scenario for the African payment system would involve addressing trade imbalances, managing risks effectively, and reaching a significant scale of operation. Ultimately, the success of this initiative is tied to the underlying economic performance of African countries, the development of intra-African trade, and reduced dependence on external trade. This evolution in trade depends not just on settlement and financing, but more so on broader economic factors like production, consumption, trade, and fiscal policies.