Examining the Central Bank of Nigeria’s Guideline on Pan African Payment and Settlement System

The African Continental Free Trade Agreement (AfCFTA) is built on the lofty ideals of the free market, as expounded by Scottish economist Adams Smith. Covering 55 countries, the agreement is expected to address the intra-African trade deficit and facilitate economic growth by removing duties, tariffs, and quotas on intra-African goods and services.

How does the Pan African Payment and Settlement System (PAPSS) work? What are the Central Bank of Nigeria’s guidelines for banks and other financial institutions hoping to co-opt the PAPSS infrastructure into their banking systems? This article provides an in-depth perspective on PAPSS and the Central Bank of Nigeria’s guidelines on its adoption.

Flowing from the Bretton Woods Agreement of 1944 and the dollar’s legacy as the world’s only gold standard currency, the US dollar became the world’s reserve currency and the major instrument for international trade.

Even after the Nixon administration removed the dollar from the gold standard, it still remains the world’s most preferred currency for international trade. For instance, a South African gold processing company needs the dollar to import raw gold from Ghana. This constitutes an impediment to free trade, especially in countries like Nigeria facing a forex scarcity.

The Pan African Payment and Settlement System (PAPSS) is a cloud-based intra-African payment solution infrastructure developed as a trade facilitation measure under the African Continental Free Trade Agreement. It was developed to facilitate seamless intra-African trade by supporting intra-African payments using local currencies. For instance, it allows a South African fashion brand to import raw cotton from Nigeria by paying with the South African Rand while the Nigerian cotton supplier receives payment in Naira.

How does the Pan-African Payment and Settlement System work?

PAPSS is the product of a comprehensive synergy between the African Export-Import Bank (AFREXIMbank), African Central Banks, and the AfCFTA secretariat. By this arrangement, central banks are required to be registered under PAPSS, which serves as a connector between central banks, financial institutions, and businesses. Here are the major players in the Pan African Payment and Settlement System:

• The payment-issuing company
• The payment is issued by the company bank or financial institution
• The central bank of the payment-issuing company bank or financial institution
• The Pan-African Payment and Settlement System
• The central bank of the beneficiary bank or financial institution
• The beneficiary bank or financial institution
• The beneficiary company

The payment-issuing company sends a payment instruction to its bank to pay a beneficiary company in another African country. The payment-issuing company bank connects to the Central Bank, which then connects to PAPSS. PAPSS validates the transaction and then connects to the beneficiary bank’s central bank.

The beneficiary central bank connects to the beneficiary Bank, which then connects to the beneficiary and credits its account with money from the payment-issuing company. Here is an illustration that best explains how the system works:

A Nigerian steel processing company (payment issuing company) imports iron ore from a Zambian company (beneficiary company). It instructs its Nigerian bank to pay the beneficiary in Naira. The Nigerian bank sends the payment instructions to the Central Bank of Nigeria, which then connects to PAPSS as a window to the beneficiary through the beneficiary’s central bank. PAPSS validates the transaction and forwards the payment instructions to the Zambian Central Bank, which then connects to the Beneficiary Bank, which receives the payment instructions and then pays the beneficiary in Kwacha. Thus, the Nigerian steel processing company is able to import iron ore from Zambia with the Nigerian Naira.

While PAPSS dispenses the dollar requirement for intra-African trade, every trade transaction, including transaction costs, is settled in US dollars.

Central Bank of Nigeria Guideline on Pan African Payment and Settlement System

Pursuant to its mandate under Section 2 of the Central Bank of Nigeria Act, the CBN released its guidelines on the operation of the Pan African Payment System as follows:

• Payment of imports and receipt of export proceeds that are eligible for PAPSS, as decided by the CBN, shall be restricted to transactions that are solely for the purpose of trade.
• All required documents must be provided before a transaction is initiated on PAPSS by authorised dealers and their customers.
• The prevailing exchange rate at the Investors and Exporters Forex Window and the Financial Market Departments shall be used to determine conversion rates between the Naira, USD, and any other third currency within Africa.
• Only eligible transactions, as may be determined by the CBN from time to time, are eligible for payment on PAPSS.
• Banks in Nigeria would be given the opportunity to maintain a United States Dollars settlement account within the PAPSS settlement bank (Afrixembank) for transactions that fall outside eligible transactions.
  

Flowing from the foregoing, it is clear that the CBN reserves the right to determine transactions eligible for payment within the PAPSS payment and settlement infrastructure. While it remains rather unclear the criteria on which the CBN will base its eligibility requirement, we submit that transactions not related to items on the export prohibited list curated by Nigerian customs should be allowed under PAPSS to avoid policy conflict.

Furthermore, in light of the Federal Government’s decision to float the country’s exchange rate, it remains unclear what exchange rate window will regulate transactions under PAPSS.

Conclusion

Practically, the success of the African Continental Free Trade Agreement (AfCFTA) depends on the availability of trade facilitation mechanisms, including the Pan African Payment and Settlement System.

True to its mandate under the CBN Act, the CBN’s guidelines on PAPSS appear limited. It fails to state the criteria for deeming transactions ineligible or otherwise under PAPSS.

This Article Was Written By: Ibrahim Bolakale Omoleke ACIarb (UK)