Africa’s reliance on foreign currencies such as the U.S. dollar, and euro is draining its economies, exacerbating financial instability, and stunting growth. With essential imports—from fuel to machinery—priced in these currencies, fluctuations in their value directly drive up costs, fueling inflation and widening trade deficits. When African nations sell goods internationally, they are forced to reconvert foreign earnings into local currency, incurring additional costs in exchange rate spreads and banking fees.

A 2024 report by the United Nations Conference on Trade and Development (UNCTAD) highlighted that currency volatility further strains small businesses reliant on foreign currency transactions. The report noted that energy dependency poses another major challenge for African economies.

In an interview with Sputnik Africa on the sidelines of the 57th session of the ECA Conference of African Ministers of Finance, Planning, and Economic Development in Addis Ababa, Dr. Melaku Geboye Desta, Coordinator of the African Trade Policy Centre (ATPC), explained, “By removing non-African currencies as intermediaries and eliminating the costs associated with currency conversion and reconversion, we can significantly reduce transaction costs. This will make trade cheaper, more efficient, and highly competitive.”

Dr. Melaku further highlighted that Africa’s dependence on currencies like the U.S. dollar costs the continent approximately USD5 billion annually, according to data from Afreximbank.

He also pointed to the Pan-African Payment and Settlement System (PAPSS), an innovative solution developed by the continent to address this challenge. PAPSS allows for the direct clearing of transactions between African countries, bypassing the need for an intermediary currency.

“With PAPSS, there are vast opportunities to cut transaction costs, speed up trade, and make intra-African trade more competitive,” Dr. Melaku added.

PAPSS, supported by 15 central banks, is set to launch an African currency market platform later this year. This initiative aims to facilitate direct exchanges between local currencies, bypassing the need for intermediate currencies like the U.S. dollar.