Analysis-Under shadow of Trump warning, Africa pioneers non-dollar payments systems

African nations are increasingly adopting local currency payment systems to reduce reliance on the U.S. dollar and lower trade costs, which are currently 50% higher than the global average. The Pan-African Payments and Settlements System (PAPSS) is now operational in 15 countries with 150 commercial banks, potentially saving the continent $5 billion annually; however, these efforts face potential headwinds from U.S. protectionist policies, as former President Trump has threatened tariffs against countries seeking to reduce dollar dependence.

Analysis

African nations are strategically advancing the adoption of local currency payment systems to mitigate the substantial economic burden associated with U.S. dollar-denominated transactions, which contribute to intra-African trade costs being 50% higher than the global average, according to the UN Trade and Development agency. A pivotal initiative, the Pan-African Payments and Settlements System (PAPSS), has expanded significantly since its January 2022 launch, now operating in 15 countries with 150 commercial banks, and projects potential annual savings of $5 billion by facilitating direct local currency settlements. This transition could dramatically reduce transaction costs from an estimated 10-30% to as low as 1% for a $200 million trade. Supporting this shift, the International Finance Corporation is also issuing loans to African businesses in local currencies, thereby alleviating their foreign exchange risks. However, these initiatives face considerable geopolitical headwinds, primarily potential U.S. protectionist policies, highlighted by former President Trump's threats of tariffs against countries aiming to lessen dollar dependence. Despite African proponents, including PAPSS CEO Mike Ogbalu, emphasizing that the primary drivers are cost reduction and improved currency availability rather than explicit de-dollarization, Syracuse University's Daniel McDowell suggests this distinction may be overshadowed by perceptions of geopolitical motivations in the current global climate.

Key Decisions for Investors

• Investors should monitor the adoption rate and transaction volumes of platforms like PAPSS, as successful implementation could significantly reduce operational costs for businesses engaged in intra-African trade and create investment opportunities in enabling financial infrastructure.
• Consider evaluating companies operating within Africa for potential benefits from reduced FX transaction costs and enhanced trade efficiency, alongside assessing African fintech and banking sectors involved in developing these new payment systems.
• Closely track U.S. trade policy pronouncements and actions related to currency dominance, as any adverse measures could introduce significant volatility to African markets, currencies, and trade-exposed investments.
• Re-evaluate the foreign exchange risk profiles for businesses with substantial operations in Africa, as a successful, widespread shift to local currency settlements could necessitate adjustments to existing hedging strategies and impact reported earnings.