Dismantling the currency trade barrier

The idea that Africa’s 1.4 billion-strong population would do so much better if they could trade more with one another has been circulating for decades. It was this that led to the signing of the African Continental Free Trade Agreement (AfCFTA), with the aim of lowering barriers to trade between members and facilitating the flow of goods and services around the continent.

AfCFTA is edging forwards but faces an age-old problem – currency conversion and its inevitable effect on the cost of transactions. To trade among themselves, African businesses currently must convert from their own national currencies into the US dollar, or (to a lesser extent) the euro, to complete the exchange.

For decades, the creation of some form of common currency has been seen as a solution. The African Economic Community, founded in 1991, envisaged a common continental currency by 2020 and complete monetary union by 2028, but the idea was dropped when it became clear that it would be impracticable to get all 54 member countries to meet all the requirements.

Regional currencies

Then the idea of regional currencies took root. There are already two monetary unions in Africa, both vestiges of the colonial era: the West African Economic and Monetary Union (WAEMU – Benin, Burkina Faso, Côte D’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo), which uses the West African CFA franc; and the Central African Economic and Monetary Community (CEMAC – Gabon, Cameroon, the Central African Republic (CAR), Chad, the Republic of the Congo and Equatorial Guinea), which uses the Central African CFA franc.

There is also the Common Monetary Area, made up of members of the Southern African Customs Union (SACU – South Africa, Namibia, Lesotho and Eswatini), which uses the South African rand.

The Economic Community of West African States (ECOWAS) also put years of effort into the launch of its currency, the eco, but progress has been painfully slow. The planned launch has been shifted several times, most recently to 2027, with another shift likely.

Plans are also under way for the East African Community (EAC) to launch a common currency in 2027, but slippage is likely there too – both these initiatives face difficulties in getting members to meet macroeconomic standards related to inflation, interest rates, fiscal deficits and debt levels.

Euro influence

The quest for common currencies was encouraged by the success of the euro. However, it should be remembered that process took a lot of effort and is yet to achieve all it set out to – it has not so far succeeded in displacing the US dollar as the dominant reserve currency, and currently makes up just under 20% of global reserves – about the same proportion the European currencies did before they coalesced into one. Some of its members also struggle to keep their macroeconomic indicators within the limits required to remain in the currency union.

Africa’s development depends on intra-African trade. Transaction costs need to get lower and trade settlement needs to be more efficient. The Pan-African Payments and Settlement System (PAPSS) is doing its bit, but a common currency would do a much better job. If a common currency is not near, is there an interim solution?

In my view, if a few African currencies could be convertible across Africa, these would help to facilitate trade within the continent. The South African rand, Egyptian pound and Nigerian naira – the currencies of the largest economies, responsible for the largest trade flows on the continent – are good candidates.

To make them available across the continent, the monetary authorities involved could learn from the Renminbi Internationalisation playbook of the Peoples’ Bank of China. The African Union could back this, with criteria set for choosing what currencies to make convertible.

Africa needs to trade more efficiently with itself. The barrier currency convertibility poses can be lowered. Making some African currencies convertible would be an African solution to an African problem.