Africa’s dollar detour drains trade gains

Africa is losing about $5 billion a year to currency conversion costs, exposing a costly weakness in the continent’s ambition to build a seamless single market.

A fresh assessment of cross-border trade barriers says limited currency convertibility remains one of the biggest obstacles facing businesses, traders and consumers across the continent. The cost arises because payments between African countries often pass through foreign currencies, mainly the dollar or the euro, before reaching their final destination. Each conversion adds fees, exchange-rate losses and delays, reducing the value of trade that is already constrained by weak transport links, customs bottlenecks and fragmented regulation.

The Pan-African Payment and Settlement System, known as PAPSS, has emerged as the central instrument designed to reduce that leakage. Launched publicly in 2022 by the African Union and the African Export-Import Bank, the platform allows a buyer in one African country to pay in local currency while the seller in another country receives funds in their own currency. Settlement is handled through participating central banks, removing the need for many transactions to be routed through correspondent banks outside the continent.

The system is closely tied to the African Continental Free Trade Area, which aims to create the world’s largest single market by number of participating countries. Full implementation of the trade pact is expected to lift intra-African trade sharply from the low levels seen today, expand manufacturing output, raise incomes and support millions of jobs by 2035. Those gains, however, depend on whether traders can move money as efficiently as goods and services.

Currency conversion costs weigh most heavily on smaller firms, informal traders and businesses operating in countries whose currencies are not widely accepted outside their borders. A trader moving goods from West Africa to East Africa can face several layers of conversion before payment is completed. The problem is compounded when banks quote wide spreads, settlement takes days, and businesses must hold scarce foreign exchange to complete routine commercial transactions.

PAPSS seeks to change this structure by netting transactions across participating countries and settling only the final balances. That reduces the amount of hard currency required, speeds up payments and gives local currencies a greater role in regional commerce. The model also gives central banks a clearer view of cross-border flows, which could strengthen oversight and reduce pressure on foreign reserves.

Adoption is expanding, but unevenly. More than 150 banks are connected to the PAPSS network, and the platform has broadened beyond its initial focus on instant payments to include an African Currency Marketplace and PAPSSCARD. These products are intended to deepen local-currency settlement, widen access for payment service providers and support retail use cases beyond large corporate transactions.

The challenge is that payments infrastructure alone cannot resolve Africa’s trade frictions. Businesses still face non-tariff barriers including customs delays, inconsistent product standards, border-management problems, poor transport corridors and high logistics costs. A payment system can make settlement faster, but goods still move through roads, ports and rail networks that remain uneven and, in several corridors, expensive or unreliable.

Trust is another issue. For PAPSS to scale, banks, fintechs, regulators and traders must be confident that exchange rates are fair, liquidity is adequate and settlement risk is tightly managed. Countries with volatile currencies may be cautious about deeper local-currency exposure, while firms accustomed to dollar invoicing may take time to shift long-standing practices. Political commitment at national level will be decisive, particularly where central banks remain protective of foreign-exchange systems.

Competing and complementary initiatives are also appearing. Regional blocs are building local-currency payment platforms aimed at reducing the cost of trade for micro, small and medium-sized enterprises. These schemes reflect a wider push to keep more value inside African financial systems rather than allowing conversion fees and settlement income to flow through offshore banking channels.