Faith Nyasuguta
Africa loses an estimated $5 billion every year due to its reliance on foreign currencies, particularly the US dollar, for trade. This dependency raises transaction costs, delays trade settlements, and exposes African economies to currency fluctuations, making trade more expensive and less competitive.
For decades, African nations have conducted both intra-continental and international trade using foreign currencies such as the US dollar, euro, British pound, and, more recently, the Chinese yuan. This practice stems from historical economic ties, post-colonial banking structures, and global trade norms that favor Western currencies.
However, the consequences are significant. African governments and businesses must maintain large reserves of these foreign currencies, often obtained through loans or trade surpluses, adding pressure to already strained economies.
Dr. Melaku Geboye Desta, Coordinator of the African Trade Policy Centre (ATPC), highlighted these challenges during an interview on the sidelines of the 57th session of the ECA Conference of African Ministers of Finance, Planning, and Economic Development in Addis Ababa, Ethiopia. Citing Afreximbank data, he revealed that the cost of conducting trade in non-African currencies amounts to approximately $5 billion annually.
“The moment we remove the non-African currencies, the hard currencies serving as intermediaries, we start saving on transaction costs involved in the conversion and reconversion process. Trade becomes cheaper, faster, and more competitive,” Dr. Desta explained.
One initiative aiming to address these challenges is the Pan-African Payment and Settlement System (PAPSS), designed to allow African countries to trade directly with each other in local currencies, eliminating the need for a third-party currency. Dr. Desta expressed optimism that PAPSS could significantly reduce transaction costs, facilitate faster payments, and promote intra-African trade.
The push to reduce reliance on foreign currencies is gaining momentum. In recent years, some African nations have explored conducting trade with non-Western partners using local currencies. One notable example is Russia and Ethiopia’s plan to trade directly in their respective currencies, signaling a shift toward financial independence.
As Africa continues striving for economic integration and self-sufficiency, reducing reliance on foreign currencies could unlock billions in savings while enhancing regional trade. The success of initiatives like PAPSS and partnerships with emerging economies could mark the beginning of a new era – one where African nations reclaim greater control over their financial systems and trade dynamics.
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