Africa is playing an increasingly important role in both the global economy and the political landscape as the world moves from one that has been Western dominated to a multipolar world where China and India are making investments into the continent.
With the African Continental Free Trade Area (AfCFTA) becoming a catalyst for intra-Africa trade, talk of a universal African currency is once again topical.
AfCFTA secretary-general Wamkele Mene has made it clear: Africa is moving towards a single currency. Speaking to Bloomberg in 2023, he reiterated a statement he’s made many times: “If you look at the founding documents of the Organisation of African Unity in May 1963, a common currency in Africa is one of the objectives.”
While it is still early days in terms of the AfCFTA, Africa may be closer than we think to achieving that goal, but it is important that those discussing this topic have a grasp of the issue. If African businesses execute a cross-currency trade, the payer’s currency must leave Africa and be converted into a third-party currency.
When you do intra-African trade you settle via Swift — if you are a business in SA and you do a transaction paying somebody in Ghana, your rands have to go via either Europe (the euro) or the US (dollar), and then come back into Africa as Ghanaian cedi. If this leg of the transaction could be eliminated we estimate we could see savings of up to $5bn in annual transaction costs.
In theory, a common currency makes sense, but how easy would it be to integrate a single African currency that would be the equivalent of the euro? Our challenge is that we have four separate unions in Africa, each with its own timeline and strategy to achieve this goal.
First there’s the African Monetary Union, the AU’s proposed monetary union to be administered by the proposed common union bank — the African Central Bank. The timeline under the Abuja Treaty initially called for a single pan-African currency, called either the “afro” or the “afriq”, was initially set for 2023.
Then in West Africa there’s the Economic Community of West African States (Ecowas), which has committed to launching a common currency to be called the “eco”, by 2027. Meanwhile, the East African Community (EAC) Treaty called for a single currency in the community by 2023.
The Southern African Monetary Union (Samu) is a proposed common currency for the 15 member states of the Southern African Development Community (Sadc). The Samu was conceived in 1980 and was supposed to be established by 2018.
However, the Samu has faced many challenges, such as the dominance of SA’s economy, the economic diversity of the Sadc countries, and the lack of political will and institutional capacity.
Lastly, there is also the Common Monetary Area (CMA), which links Namibia, Lesotho, Eswatini and SA in a monetary union, using the rand.
Breaking that hegemony is a major barrier to creating a single African currency, because the continent is not speaking with one voice.
While a common currency is still some way off, there is the pan-African Payment & Settlement System (PAPSS), which was launched in 2022 as an interim solution that consolidates these intraregional payments. PAPSS is still a net settlement in hard currency, but without having to go via the euro or dollar on a transaction-by-transaction basis — ultimately filling the single-currency gap.
It is important to emphasise that this is not “dedollarisation” or “de-euro-isation” — one cannot ignore the fact that many African countries are struggling with hard currency liquidity issues. Rather, we need to recognise that Africa is becoming a more influential player in global trade and we need to identify ways to reduce the cost of intra-African trade while retaining hard currency flows and market depth.
Our annual Absa African Financial Markets Index (AfMI) provides valuable insights into the growing maturity and sophistication of financial markets across the continent. It is clear that we are innovating and deepening our capital pools and we should build on this progress.
While a common African currency emulating the euro would be an achievement, iterating on existing infrastructure is an easier win than trying to establish a common monetary framework in the short term.
If we can retain $5bn in transaction costs annually, this will not only deliver true economic benefits to the continent but will scale each year as trade volumes increase. Let’s not waste this opportunity.
• Katsenga is head of global markets sales at Absa Corporate & Investment Banking.
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