Africa: Are There Too Many Currencies?

It is commonplace to observe that the enormous US domestic market benefits from having a single currency, rather than, say, 50 state-level currencies.

Indeed, the case for a single currency across a broad market was compelling enough to persuade 19 of the 27 countries in the European Union to trade in their historically separate currencies for the euro. In contrast, the nations of Africa have 42 separate currencies.

There is a newly-founded African Continental Free Trade Area, seeking to reduce barriers to trade and investment across the countries of within Africa. It could offer a real boost to productivity and growth across Africa: a June 2022 World Bank study estimates that it could “bring income gains of 9 percent by 2035 and reduce extreme poverty by 50 million.” But for trade to work, it has to overcome the problems of 42 currencies. Chris Wellisz provides an overview in “Freeing Foreign Exchange in Africa” (Finance & Development, September 2022). He writes:

Making payments from one African country to another isn’t easy. Just ask Nana Yaw Owusu Banahene, who lives in Ghana and recently paid a lawyer in nearby Nigeria for his services. “It took two weeks for the guy to receive the money,” Owusu Banahene says. The cost of the $100 transaction? Almost $40. “Using the banking system is a very difficult process,” he says.

His experience is a small example of a much bigger problem for Africa’s economic development—the expense and difficulty of making payments across borders. It is one reason trade among Africa’s 55 countries amounts to only about 15 percent of their total imports and exports. By contrast, an estimated 60 percent of Asian trade takes place within the continent. In the European Union, the proportion is roughly 70 percent.

What are the options here? In theory, it would be possible for countries across Africa to unite with a single currency of their own. In practice, this seems pretty unlikely. At present, there are 14 countries in Africa that use the “CFA franc” as their currency: six in central Africa (Cameroon, the Central African Republic, Chad, the Congo, Equatorial Guinea and Gabon) and eight in west Africa (Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo). Indeed, there are technically two different CFA francs, one for each of these regions, but their exchange rate in terms of euros is always the same. Together, these countries comprise about one-eighth of Africa’s GDP.

Current perceptions of the CFA franc are, at best, only partially favorable. It has provided monetary stability, but at times the exchange rate value of the currency has been so high that it strangled exports from these countries. It’s also a legacy of colonialism by France. The current plan seems to be that the west African version of the CFA franc will be phased out in favor of a shared currency called the “eco,” which may be more widely used across other nations of west Africa. But the potential transition is scheduled for a few years away, and it’s unclear (at least to me), whether the countries using the central African version of the CFA franc will join in. There’s a lot of talk about “taking back control of the currency,” but the current proposals for the “eco” would continue to have a fixed exchange rate with the euro.

In short, the existing currency unions in Africa are being sharply question and seem to be in transition. A even broader currency union isn’t on the table. And frankly, it’s not obvious that a broader currency for Africa is a good idea at this moment in time. A shared currency across a geographic area works best when the economy of that area is already somewhat united by flows of goods and services, finances and people, and shared government programs. Obviously, the question of whether, say, Greece should share a currency with Germany, has posed real problems for the euro.

So the current plan, as Wellicz describes it, is to create a Pan African Payment and Settlement System (PAPSS):

The system aims to link African central banks, commercial banks, and fintechs into a network that would enable quick and inexpensive transactions among any of the continent’s 42 currencies. … PAPSS aims to solve such problems by settling transactions in local African currencies, obviating the need to convert them into dollars or euros before swapping them for another African currency. In essence, PAPSS would eliminate costly overseas intermediaries. The system aims to complete transactions in less than two minutes at a low though unspecified cost.

The careful reader will note that this description makes heavy use of “aims to.” PAPSS was apparently formally launched in January 2022, but had not cleared any commercial transactions through this summer. The success of Africa’s efforts to promote trade across the continent may well depend on whether PAPSS or a similar arrangement can succeed.