Africa Loses $5 Billion Annually Due to Foreign Currency Trade

Experts say eliminating reliance on non-African currencies and the need for foreign currency trade could make intra-African trade cheaper, faster, and more competitive.

The Cost of Foreign Currency Dependence in Africa

Africa loses an estimated $5 billion annually due to its reliance on foreign currencies for trade between its own countries. This staggering figure highlights a major financial drain that weakens intra-African trade, making transactions more expensive and reducing economic efficiency.

Foreign currencies, particularly the US dollar, euro, and British pound, dominate cross-border transactions in Africa. Businesses often need to convert local currencies into a foreign intermediary currency before reconverting it into another African currency—a costly and time-consuming process. These expenses reduce trade efficiency and limit the competitiveness of African markets.

How the AfCFTA Could Offer a Solution

The African Continental Free Trade Area (AfCFTA) is a key initiative that could help address these inefficiencies. By promoting the use of local currencies within Africa, the AfCFTA aims to cut transaction costs, increase trade volume, and improve economic integration. The shift away from foreign currency dependence could transform intra-African trade, making it more affordable, efficient, and accessible for businesses across the continent.

Dr. Melaku Geboye Desta, Coordinator of the African Trade Policy Centre (ATPC), stressed the importance of reducing reliance on non-African currencies. He explains, “The moment we remove the non-African currencies, the hard currency serving as an intermediary, the moment we start saving the transaction cost involved in the conversion and reconversion process, we believe trade will be facilitated, it will be cheaper, it will be more competitive.”

Dr. Desta further emphasizes, “And through that [the removal of the use of foreign currencies], we believe that there are huge opportunities to save on the transaction cost and to facilitate, to speed up, to expedite and to make it more competitive to conduct trade between our own countries.”

The Economic Benefits of Currency Independence

Eliminating the use of foreign currencies in African trade would bring several advantages:

• Cost Savings: Businesses would save billions annually in conversion fees.
• Faster Transactions: Eliminating the need for multiple conversions would speed up cross-border trade.
• Improved Competitiveness: Lower costs and faster transactions would make African businesses more competitive on the global stage.

Challenges and the Path Forward

Despite the benefits, moving away from foreign currencies presents significant challenges. Many African economies remain heavily tied to global financial systems that rely on the US dollar and euro, making a sudden shift difficult. Additionally, some African currencies suffer from instability, which could discourage traders from abandoning foreign exchange options.

However, initiatives like the Pan-African Payment and Settlement System (PAPSS), introduced by Afreximbank, are working to create a more seamless intra-African payment infrastructure. If widely adopted, PAPSS could reduce reliance on external currencies and pave the way for a more self-sufficient African trade environment.

Reducing Africa’s dependence on foreign currencies could be a game-changer for intra-African trade. With the AfCFTA and initiatives like PAPSS, the continent has an opportunity to boost competitiveness, lower costs, and drive economic growth. While challenges remain, the potential benefits of currency independence make this a crucial issue for Africa’s economic future.

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