The African Continental Free Trade Area (AfCFTA) was born out of an audacious vision: to weave 54 nations into a single, unified market for goods and services, unlocking the potential of 1.5 billion people and a staggering USD 3.4 trillion in combined GDP. At the heart of this grand endeavor lies the Pan-African Payment and Settlement System (PAPSS), an endeavor designed to eliminate one of the continent’s longest standing trade barriers—currency convertibility.
“It aims to overcome one of Africa’s greatest obstacles to trade,” said Million Habte, Coordinator of AfCFTA Implementation at the AfCFTA Secretariat. “By enabling transactions in local African currencies, PAPSS seeks to lower costs, improve trade efficiency, and accelerate economic integration.”
A major hurdle to cross-border trade in Africa has long been the multiplicity of currencies. For decades, Africa’s trade has been shackled by its dependency on external currencies. Businesses are often forced to convert local currencies into hard currencies—such as the US dollar, the euro, or the British pound—before finalizing transactions. This not only inflates transaction costs but also delays payments, creating an unnecessary financial strain on businesses and economies alike.
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“The involvement of foreign intermediaries significantly increases the cost of doing business and slows down the payment process,” Million noted. “This makes it harder for African businesses to compete on a global scale.”
Moreover, Africa’s dependence on external currencies exposes businesses and governments to the volatility of foreign exchange markets. PAPSS seeks to upend this status quo by allowing businesses to trade directly in their national currencies, paving the way for a self-reliant, financially fortified continent.
PAPSS: A Potential Game-Changer for Ethiopia
For Ethiopia, PAPSS has the potential to reshape its trade landscape. “This system will reduce transaction costs and alleviate pressure on Ethiopia’s foreign currency reserves,” Million explained.
Although still in the early stages of implementation, PAPSS has garnered interest from the Ethiopian government. The country has long faced a chronic shortage of foreign currency, a challenge that has hindered businesses reliant on international trade. Ethiopian enterprises often wait months to access foreign exchange, stalling operations and limiting competitiveness.
“By allowing businesses to settle cross-border transactions using local currencies, PAPSS could ease the forex crunch that has constrained Ethiopia’s trade,” Million added. “It would enable businesses to operate more efficiently and reduce their reliance on hard currency.”
The implications for Ethiopia’s economy are profound. A decreased dependency on volatile foreign exchange markets could stabilize financial systems, while businesses would gain a faster, more cost-effective mechanism for conducting trade.
PAPSS is designed to integrate with existing financial infrastructure, including central and commercial banks. Currently, 17 central banks and more than 50 commercial banks have signed onto the system, signaling its growing acceptance across the continent. As more central banks adopt PAPSS, businesses will gain wider access to its benefits, making cross-border payments smoother and more efficient.
Despite its transformative potential, PAPSS faces formidable challenges that must be addressed to ensure its success. Chief among these is security. As a digital payment system, PAPSS is exposed to cyber threats such as fraud, hacking, and data breaches, according to Million. “Robust cybersecurity measures will be critical to safeguarding financial transactions and maintaining trust across the continent. Additionally, access to reliable internet and digital infrastructure remains uneven across Africa, posing another hurdle to the widespread adoption of PAPSS,” he said.
Million emphasizes that these challenges can be mitigated by strengthening data security protocols and implementing digital identity systems for individuals and businesses involved in cross-border trade. As digital identity solutions gain traction, they will not only enhance security but also help integrate more businesses into the formal economy, fostering intra-African trade.
Currency Swap and Convertibility: A Growing Continental Interest
The idea of trading in local African currencies is gaining traction among policymakers. High-ranking officials at the African Union have echoed a shared ambition to minimize reliance on external currencies and facilitate trade using national tenders.
“We want to use the Ethiopian Birr for our business in Djibouti, Somalia, and beyond,” said Mahmoud Ali Youssouf, the newly elected Chairperson of the African Union Commission, during a press conference at the Djibouti Embassy in Addis Ababa. “And we want the Djibouti Franc to be traded in Kenya, the Somali Shilling in Ethiopia,” he added.
Yet, with enthusiasm comes concern. Currency fluctuations present a significant risk, raising the question of compensation mechanisms for businesses affected by unpredictable exchange rates. Youssouf underscored the need for a compensation mechanism to shield exporters from such risks. “If I, as an exporter, lose money due to exchange rate fluctuations, there must be an African-led mechanism to compensate me,” he said. “That mechanism exists on paper but has yet to be implemented.”
Ethiopia is among the African nations poised to benefit from a USD one billion fund provided by Afreximbank to mitigate losses associated with AfCFTA implementation. The fund, announced in February 2023, was established to address concerns that tariff reductions under the agreement could lead to short-term revenue losses for governments.
However, Youssouf raised concerns about the adequacy of the fund. “We don’t have enough financing for this compensation mechanism,” he admitted. “Experts suggest we need between USD five billion and 10 billion to cover potential losses.”
Despite financial and logistical hurdles, the AfCFTA is making steady progress. AfCFTA Secretariat Secretary-General Wamkele Mene highlighted the strides made since the Secretariat’s establishment in 2018 in Addis Ababa.
“So far, 48 countries have ratified the AfCFTA, and trade has already commenced among 19 nations,” Mene said during the 38th Ordinary Session of the African Union Assembly and the 46th Ordinary Session of the Executive Council. He also expressed optimism about the private sector’s role in driving AfCFTA’s success. “We are pleased with the progress made and have finalized all legal protocols required by heads of state.”
The Long-Term Vision: A Unified African Currency?
Looking ahead, some experts speculate that PAPSS could be a stepping stone toward a single African currency. Such a development would eliminate the need for currency conversions altogether, making transactions more efficient and reducing dependency on foreign currencies.
Yet, Million cautions that this vision remains a distant one.
“Replacing widely used international currencies like the US dollar with African local currencies will be a complex and gradual process,” he told The Reporter Magazine.
Other experts also opined that the creation of a single currency would require deep political, economic, and regulatory integration among the 54 countries that make up the AfCFTA—a process that could take decades to achieve.
Meanwhile, Youssouf cited Europe’s experience as a model for Africa, urging nations to follow a similar trajectory. “If you look at Europe,” he said, “it was only after the Treaty of Rome was signed in 1957 that the first steps toward the euro, as we know it today, were taken. The Treaty of Rome sought to develop a common market.”
Europe adopted its common currency in 1999 after more than a decade of meticulous preparation. “It’s not an easy thing to do,” Youssouf acknowledged. “But Agenda 2063 envisions that by 2063, we will have the Africa we want—with a common currency, unified customs laws, and harmonized trade policies. These are the goals we are working toward.”
The Road Ahead
The journey toward seamless intra-African trade through initiatives like PAPSS is still in its early stages, but progress has been encouraging. Overcoming hurdles such as security concerns, infrastructure deficits, and regulatory misalignment will be key to unlocking the full potential of the AfCFTA.
Infrastructure challenges, in particular, have been widely acknowledged by Mene, Youssouf, and Million as a major bottleneck.
“Digital infrastructure is not installed in every part of the continent, which could hinder the widespread adoption of PAPSS,” Million explained. He stressed the need for businesses to be educated on the benefits and security features of PAPSS, as shifting from hard currencies to local currencies requires trust—a transition that will take time but is crucial for boosting intra-African trade.
Youssouf underscored the importance of physical infrastructure, arguing that Africa must invest heavily in roads and railways to enable the smooth movement of goods across borders. “An open trade policy alone is not enough; we need the infrastructure to support it,” he said.
Mene pointed to the staggering costs associated with infrastructure development. “The infrastructure deficit is estimated to be USD 150 billion, which constrains our ability to trade in larger volumes,” he noted. He also highlighted the high cost of interconnectivity as a major barrier. Beyond infrastructure, he emphasized that restricted movement of people across the continent is another critical issue.
“It has a direct impact on trade and economic integration,” he warned. “However, I remain optimistic that collaboration with institutions like the African Development Bank and Afreximbank will drive progress in this regard.”
Mene reinforced the need to consolidate and implement the agreement’s negotiated rules. “On paper, we have a strong framework, but the next phase—accelerated implementation at national and regional levels—is critical. This is a pressing challenge, especially amid rising global trade protectionism. Our focus must be on strengthening Africa’s domestic market.”
Meanwhile, initiatives like PAPSS are expected to help African nations retain more value from trade that currently leaks to foreign intermediaries, Million noted.
AfCFTA’s Role in Ethiopia’s Economy
A 2024 study on the impact of AfCFTA on Ethiopia’s economy projected significant economic gains if the country can fully leverage the trade agreement’s potential. Under a conditional scenario, Ethiopia’s real Gross Domestic Product (GDP) is expected to rise by 1.4 percent—substantially higher than the average gain of 0.1percent for all member nations.
In a full endowment scenario, Ethiopia’s GDP growth could reach 2.5 percent, surpassing Africa’s average growth rate of 1.1 percent. The study also forecasts that AfCFTA would increase Ethiopia’s total exports by 1.1 percent under the full endowment scenario, compared to an average growth of 0.4 percent for the continent.
Even under the conditional scenario, Ethiopia’s total exports are projected to rise by 0.1 percent—an indication that the country stands to benefit significantly from deeper regional trade integration.
