Friday, January 14, 2022, / 2:46 PM / by Tosin Ige, Proshare Research / Header Image Credit: PAPSS
The PAPSS was officially launched as a pan-African payment and settlement platform for commercial use on Thursday 13 January 2022 in Ghana following the operational roll-out of the platform on Tuesday 28 September 2021. While the PAPSS Governing Council chaired by Nigeria's CBN Governor, Godwin Emefiele, and the PASS Management Board chaired by Benedict Oramah have expressed their optimism on the prospects of the platform for Africa, a clearer understanding of the system could generate buy-in from traders and investors in Africa.
What is PAPSS?
Pan-African Payment and Settlement System (PAPSS) is a centralized payment and settlement infrastructure developed to bolster the implementation of trading in local currencies within the African markets. Invariably, the PAPSS would simplify and harmonise cross-border transactions and reduce the use of hard currencies in intra-African trade levering instant payment, pre-funding, and net settlement system.
The African Continental Free Trade Area (AfCFTA) was established to create a single market for goods and services facilitated by the movement of persons and resources to deepen the economic integration of the 54 African countries under the Pan African Vision of an integrated, prosperous, and peaceful Africa enshrined in Agenda 2063. However, one of the problems of intra-African trade is the high costs and long transaction times due to the continent's reliance on hard currencies such as dollars, euros, and pounds for payment and settlement of cross-border transactions.
So far, there are 42 currencies on the continent with little to no value outside the country of origin owing to the weak and volatile nature of the legal tenders. The Secretary-General of the AfCFTA Secretariat, Wamkele Mene estimated the cost of converting currencies on the continent at $5 billion annually which he considered as revenue foregone. Thus, facilitators of the PAPSS infrastructure intend to eliminate or at best significantly reduce the costs of currencies conversion and the high settlement cost in Africa.
Who are those behind the PAPSS?
The African Continental Free Trade Area (AfCFTA) Secretariat and the African Export-Import Bank (Afreximbank) are the main organisations behind the PAPSS. The system also garners support from leading financial institutions in the continent. While Afreximbank is the main settlement agent in collaboration with participating Central Banks in Africa, the African Continental Free Trade Area (AfCFTA) Secretariat with the endorsement of the African Union (AU) would facilitate the implementation of the payment infrastructure.
How Effective is PAPSS?
The Afreximbank in collaboration with the West African Monetary Zone (WAMZ) launched the pilot phase of the payment and settlement infrastructure in WAMZ countries where instant payment and settlement were conducted. With considerable success recorded under the pilot phase, the PAPSS has expanded its scope to cover the entire continent. Meanwhile, Afreximbank has injected $500million into the infrastructure to accelerate the expansion and finalisation of the settlement in WAMZ countries as the settlement guarantor and overdraft facilitator. The bank is set to also inject a further $3billion to support the coverage of the infrastructure across the whole continent.
How do PAPSS Works?
The PAPSS supports three main processes: instant/near instant payment, pre-funding, and net settlement.
Instant/Near Instant Payment: The PAPSS would enhance instant or near-instant payment between a sender of a fund in an African country and the receiver of the fund in another African country. The payment will be initiated through the sender's financial institutions in the local currency to the PAPSS platform and then to the receiver's financial institutions in the receiver's local currency. Thus, the PAPSS platform would serve as the clearing, processing, and settlement agent in the transaction.
Pre-funding: The direct participants-those who have settlement account with relevant central banks, would issue direct credit instruction to initiate settlement on the real-time gross settlement (RTGS) systems of the central banks and the PAPSS. Then, the RTGS credits the pre-funded account of the direct participant and alerts the PAPSS platform. The PAPSS, in turn, credits the clearing account of the direct participants. Indirect participants-those without RTGS account, must leverage sponsorship agreement to fund or defund their clearing accounts through the direct participants. Owing to the high speed of the real-time payment process, PAPSS must guarantee that funds are available to complete the originator's transaction before effecting the movement of debits and credits between participants' accounts. Invariably, the participants must agree to a pre-funding arrangement.
Net settlement: The PAPSS will enforce account settlement among participating central banks within 24 hours, specifically at 11:00 am UTC daily. The PAPSS will determine the net settlement position of each participating central bank at the end of the trading session and initiate credit or debit payment mandate to the RTGS of central banks depending on their net position. Central Bank RTGS debit or credits between PAPSS Pre-funded Account and Central Bank suspense account and confirms settlement to PAPSS.
The PAPSS platform mirrors the central bank's instruction to conclude local currency settlement. Then, the PAPSS issues equivalent hard currency settlement instructions to Afreximbank. Afreximbank credits or debits the central banks' hard currency settlement account held in Afreximbank and confirms to PAPSS. In essence, the PAPSS determines the net position for all participating central banks at the close of business every day in their local currency.
What are the benefits of the PAPSS?
The benefits of PAPSS varies across the stakeholders such as the African countries/market, financial intermediaries, and customers.
For African countries, the PAPSS would ease the pressure on current accounts and demands for foreign exchange liquidity. It would also increase the transparency of cross-border trade activity, bringing greater oversight of cross-border transactions and increased potential to generate revenue.
For intermediaries including commercial banks, payment service providers, and fintech companies, among others, PAPSS provides a simplified process that reduces the costs and complexities of foreign exchange for cross-border transactions between African markets. It is a platform that would enable innovation in cross-border trade and access to new African markets by providing instant and secure cross-border payment infrastructure.
For customers including corporates, MSMEs and individuals, PAPSS provides a near-instant payment of cross-border transactions without the hassle of currency conversion. It would also provide access to various payment facilitating options through a growing network of financial intermediaries.
What is the Prospect for intra-Africa trade?
Overall, the Pan-African Payment and Settlement System is set to resolve one of the main challenges in the implementation of the AfCFTA and intra-African trade. The infrastructure would enable effective and efficient flow of funds securely across Africa, minimising risk, and saving multibillion dollars in payment and settlement charges, thereby boosting intra-Africa trade.