Good year. January is going to be a very long month, or a very normal month, depending on how much money you saved with Detty December. Either way, the New Year is another chance for any currency you live with, physical or digital, to prove its worth.
Speaking of digital currencies, last year we discussed how they could work in Africa. Today we will be discussing the future of the still unrealized African Union single currency project in the face of digital currencies.
Africa’s attempt to achieve economic and monetary integration goes back many years.
In 2018, the continent’s heads of government negotiated the African Continental Free Trade Area (AfCFTA) agreement, the world’s largest trade deal since the World Trade Organization (WTO). The AfCFTA is an agreement to create a single market for African countries to trade goods and services seamlessly and deepen economic integration on the continent. The agreement is signed by all AU member states – with the exception of Eritrea, which prefers to pursue regional rather than continental integration – and is expected to have the potential to increase Africa’s revenues from 450 billion dollars and lift 30 million people out of extreme poverty. by 2035.
In July 2020, the Secretary General of the AfCFTA Secretariat, Wamkele Mene, predicted that the benefits promised by the trade agreement would lead to the realization of a common currency for Africa, a project that has been underway since 1991.
But is Mene right? Is a single currency for Africa more feasible today than it was 5 years ago, before the AfCFTA agreement?
It has been 31 years since the AU conceived the idea of a single currency for Africa. Some – or perhaps too little – progress has been made in this regard, with the establishment of the Pan-African Payments and Settlement System (PAPSS), which facilitates the exchange of several African currencies. PAPSS is still in pilot phase in 6 countries and is expected to be officially launched in Accra, Ghana on January 13, this Thursday.
Coming to a region of the continent, in West Africa, the adoption of the eco as a single currency, proposed by the Economic Community of West African States (ECOWAS), did not not materialized either, its launch having been postponed 4 times since its creation. was designed in 2003.
Why does the single African currency look like a chimera?
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The AfCFTA is part of the AU’s plan to make Africa one day look like the European Union (EU). And a single currency is at the heart of this project. The EU euro was introduced 20 years ago and it is currently used by more than 340 million people in 19 EU countries, with 27.6 billion euro banknotes in circulation worth € around 1,500 billion euros. It is currently the second most widely used currency in the world, behind the US dollar. Unsurprisingly, the EU has attributed the prosperity that European countries have experienced in recent years to the euro. It therefore makes sense for Africa to envision such mouth-watering gains for the continent.
But creating a single currency is not easy. This would require the establishment of a central monetary system for different countries – a regime which, given the varying economic needs of countries, may be deemed unsuitable for some member states.
In fact, discussions around the euro date back to the 1960s, but it was not until 1999 that the currency was finally introduced. And even then, only 11 countries have adopted it. Now that number is 19; despite 20 years of existence of the currency, the 27 countries of the EU have not yet fully adopted it.
Countries may prefer digital currencies to single currencies
The recent creation of central bank digital currencies (CBDCs) in Nigeria and Ghana – with Rwanda, South Africa, Tanzania and Kenya in the research phase – could further delay the materialization of a single currency for the ‘Africa. The launch date of the ECOWAS eco was January 2020, but this deadline was not met; instead, the major players in the region, Ghana and Nigeria, have developed their own CBDCs.
It is important to note that Nigeria is crucial to the creation of the eco, not only because it is the largest country in the region, but also because it is the only country in West Africa to have a banknote printer and a coin mechanism. The West African giant has spent massive resources developing its CBDC, eNaira, perhaps a demonstration of its lack of faith in a continental currency.
CBDCs can facilitate cross-border payments, but only if they are designed with interoperability in mind. A paper on cross-border CBDCs, published by the Bank for International Settlements (BIS), in collaboration with the International Monetary Fund (IMF) and the World Bank, urges collaboration between countries in the design of CBDCs to enable cross-border payments.
Some counties have ongoing collaborations for cross-border CBDCs—Jasper–Ubin Project, between Canada and Singapore in 2019; Project Jura, the recent lawsuit between France and Switzerland; Inthanon–LionRock project, between Thailand and Hong Kong; mCBDC Bridge project, between Thailand, Hong Kong, China and the United Arab Emirates; and the Aber project, between the United Arab Emirates (UAE) and Saudi Arabia.
The global payments giant, Visa, has developed a new concept called the “Universal Payment Channel” (UPC), which acts as a hub, interconnecting multiple blockchain networks and enabling secure transfer of digital currencies. This will, for example, allow your cousin in Canada to send you USDC, a stablecoin, to Nigeria, and by the time it arrives in the CBDC wallet, it will have been automatically converted into eNaira.
Already, cryptocurrencies are viable options for cross-border payments in Africa, bypassing the hassle of transacting in over 40 different currencies and their various corresponding financial systems.
It is time for the AU and ECOWAS to rethink their approach – a physical single currency – and focus on the development of a single currency digital currency, as the EU does. Or, better yet, African countries must ensure that the digital version of their currencies can easily interact with each other, across borders.
Of the Cabal
Trade finance transactions in Africa amount to $1.1 trillion annually. To facilitate these transactions, however, the continent relies on foreign technology, which often does not take into consideration the particularities of African markets. That’s why a local trade finance technology company, Union Systems, creates technology solutions that meet the needs of African markets. You can find out more here.
Have a good week.
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Sultan Quadri, Editor, TechCabal.