This is the 14th post in a blog series to be published in 2023 by the APET Secretariat on behalf of the AU High-Level Panel on Emerging Technologies (APET) and the Calestous Juma Executive Dialogues (CJED)

The impact of COVID-19 pandemic and the ongoing conflict between Russia and Ukraine have had a significant impact on trade and value chains in Africa. The pandemic, for instance, disrupted global supply chains, leading to shortages of goods and rising prices. This has had a direct negative effect on  trade in Africa, as many countries rely on imports for essential goods. The war between Russia and Ukraine has resulted in a sharp increase in the prices of energy and food, which are two of Africa's most important imports. Additionally, the decline in tourism, a significant source of income for many African countries, further compounded the economic challenges. This has put a strain on the budgets of many African countries and has further complicated their capacity to import the goods they need.

Beyond the economic ramifications, the disruption of trade and value chains has also had a social impact. For example, the increase in food prices has made it increasingly challenging for people to afford proper nourishment, resulting in a rise in hunger and malnutrition. Moreover, the disruption of trade has also led to job losses, which has made it more difficult for people to support themselves and their families. As a result, this has hurt economic growth and poverty reduction efforts on the continent. The war has also disrupted trade in other commodities, such as wheat and fertiliser, which play a crucial role in African agriculture. Similarly, climate change is also hurting trade and value chains in Africa. Droughts and cyclones are becoming more frequent and severe, which is disrupting agricultural production and making it more difficult for farmers to get their goods to market.

The African Union's (AU) development blueprint, known as Agenda 2063, emphasizes the significance of trade as a vital sector for the full realisation of Africa's potential for human and socio-economic development. It underscores the need to develop, enhance, and sustain trade to address various challenges, including inequality, the standard of living, and the adverse impacts of events such as the COVID-19 pandemic, natural disasters, and conflicts. Recognising the role of intra-African commerce in poverty reduction, the AU acknowledges the regrettable disparity in trade volumes between African countries compared to other continents such as Europe and Asia. Consequently, concerted efforts are required to strengthen trade within Africa and bridge this gap.

Trade plays a pivotal role in benefiting the low-income group who are mainly involved in the informal sector by reducing the price of essential goods they consume and increasing the price of the products they sell.  For example, if a farmer can sell their crops to a neighbouring country for a higher price, they will be able to earn more money and improve their standard of living. Likewise, when affordable goods become accessible to a person in the low-income bracket, they can allocate their remaining funds to other important needs like education and healthcare.

In order to enhance inter-country trade on the continent, the AU established the African Continental Free Trade Area (AfCFTA) to remove trade barriers and accelerate the free movement of goods and services on the continent. The AfCFTA is envisaged and help increase the amount of trade between African states.[1] However, it is important to acknowledge that trade alone cannot  serve as  a magic bullet as it is only one part of the solution. Other factors, such as education, healthcare, and infrastructure, play equally vital roles in poverty reduction. Despite this, the AfCFTA has the potential to make a significant difference in the lives of millions of people in Africa. By removing trade barriers and increasing trade, the AfCFTA can help to reduce the price of goods and services, create new jobs, and boost economic growth. These developments will directly benefit many citizens, while also indirectly creating a more prosperous environment for countries.

A few challenges have stalled the effective performance of the AfCFTA. Thus despite the launch of the AfCFTA in 2021, the main challenges to achieving trade integration across the African continent are the potential loss of tariff revenue and an uneven distribution of costs and benefits. Additionally, the lack of effective cross-border customs and duties, and banking systems presents a significant obstacle to the implementation of the AfCFTA, hindering the smooth payment of goods between trading countries. Small and medium-sized enterprises (SMEs) face particular difficulties as most cross-border transactions are conducted in foreign currencies. This leads to high transaction costs, lengthy processing times, and an increased risk of fraud associated with such transactions. Consequently, businesses, especially resource-constrained SMEs, struggle to operate and trade efficiently due to these difficulties.

The absence of formal financial services such as banking and credit severely further limits access to financial resources and hampers business expansion. As a result, the lack of banking services impedes the full participation of the unbanked population in economic activities, thereby, leading to slower growth in trade and commerce. Currently, African businesses are using banking systems such as Visa, Society for Worldwide Interbank Financial Telecommunication (SWIFT), Faster Payments Service (FPS), and PayPal. However, these banking systems are a challenge in Africa because of their high fees. As such, traditional banking systems often charge high fees for international payments. This can be a significant barrier for businesses in Africa, which often have limited financial resources.

Furthermore, these banking systems exhibit slow processing times. This is because international payments processed through traditional banking systems can take several days to clear. This can be a problem for businesses that need to make quick payments to suppliers or customers. Most importantly, traditional banking systems are not always accessible to businesses in Africa. This is due to several factors, such as limited internet access and a lack of financial infrastructure. The volatility of cryptocurrencies poses a risk to African economies due to significant price fluctuations. Besides, the lack of effective regulatory frameworks for cryptocurrencies in many African nations raises concerns about money laundering and consumer protection.

Traditional banking systems can be vulnerable to security risks, such as fraud and cyberattacks. This is a particular concern for businesses in Africa, which may not have the resources to invest in robust security measures. As a result of these challenges, businesses in Africa are looking for alternative means to conduct business and undertake business transactions.  Due to the above difficulties APET calls on African governments to create an enabling environment for trade by seeking alternative means to conduct business and undertake business transactions in simpler and faster means.

The African Union High-Level Panel on Emerging Technologies (APET) calls on governments, businesses and individual businesses to explore the utilisation of appropriate alternative blockchain-based payment systems such as mobile money, cryptocurrencies, and peer-to-peer payment systems to facilitate cross-border trade for context-specific needs of countries. Mobile money, for instance,  enables users to send and receive money using their mobile phones. This payment method has gained popularity in Africa due to its convenience, affordability, and accessibility. On the other hand, cryptocurrency is a digital or virtual currency that uses cryptography for security. It operates in a decentralised manner, free from government or financial institution control. However, cryptocurrency is still in its early stages of development, but it has the potential to revolutionise the way that businesses and individuals in Africa make payments. Peer-to-peer (P2P) payment systems also allow users to send and receive money directly to each other, without the need for a third party. This can be a more convenient and affordable way to make payments, especially for small businesses and individuals.

APET encourages African countries to explore, where appropriate, the adoption of cryptocurrency, a digital or virtual currency that relies on cryptography technology for enhanced security. The panel draws attention to come distinct advantages of cryptocurrency. Firstly, its transactions are highly secure due to the implementation of cryptographic protocols. Secondly, transactions are processed much faster compared to traditional bank transfers. Moreover, the fees associated with cryptocurrency transactions are currently lower, enhancing affordability. Moreover, cryptocurrency is accessible to anyone with a mobile device and internet access, regardless of their geographical location or financial status.

Further, the transparency of the blockchain allows anyone to view all cryptocurrency transactions, fostering transparency and accountability. This cryptographic technology ensures that transactions are verified and recorded in a highly secure manner, making it extremely difficult to counterfeit or duplicate digital currency. An essential characteristic of cryptocurrency is its peer-to-peer nature, which means it operates without the need for banks or other financial institutions to facilitate transactions. Instead, users directly verify and record transactions on a decentralised ledger known as the blockchain. This distributed public ledger maintains a transparent and immutable record of all cryptocurrency transactions.

Additionally, the decentralised nature of cryptocurrency sets it apart from traditional currencies as it is not subject to government or financial institution control. This attribute appeals to those who prefer making payments without intermediaries. Cryptocurrency can be used for various purposes, including online and in-store purchases, international remittances, and even as an investment option due to its potential for high returns, albeit with high volatility.

Figure 1: BitPesa platform[2]

The panel points out that several African countries are actively incorporating cryptocurrencies into their systems. Nigeria, for instance, stands as a frontrunner in cryptocurrency adoption on the continent. While the Nigerian government has yet to regulate or ban cryptocurrencies, it has fostered a regulatory sandbox environment that allows businesses to experiment with digital currencies without fear of government interference. Similarly, Kenya, as seen in figure 1 above, has displayed a positive stance towards cryptocurrencies, establishing a task force to examine their potential benefits and risks. This task force is expected to provide recommendations for cryptocurrency regulation in Kenya. For example, the company BitPesa has raised over US$10 million in cryptocurrency to invest in African businesses. In South Africa, a highly developed country with a robust financial sector, the government has taken a cautious approach. While the South African Reserve Bank has warned consumers about the risks associated with cryptocurrencies, it has also recognised its potential in promoting financial inclusion.

Cryptocurrencies can be used to send remittances more quickly and cheaply than traditional methods, such as wire transfers. This can be a major benefit for African families who rely on remittances from relatives living abroad. APET highlights that the decentralised nature of cryptocurrencies, independent of traditional banking institutions, offers a faster and more cost-effective alternative for remittances and international transactions. Further to this, APET acknowledges that cryptocurrencies can reduce transaction costs in cross-border trade within Africa. Traditional payment methods involving numerous intermediaries often lead to high costs and lengthy processing delays. By eliminating middlemen, cryptocurrencies enable fast and secure transactions. Additionally, cryptocurrencies are built on blockchains, which provide secure and transparent transaction recording. APET opines that the increasing accessibility of the internet and mobile technology access in Africa makes cryptocurrencies a more appealing and practical option for transactions across the continent.

The High-Level Panel, however, draws attention to the challenges associated with cryptocurrency. One significant challenge is its high volatility, resulting in rapid price fluctuations. The panel notes that fraudulent activities, such as scams and theft, have been reported in the cryptocurrency space. Also, regulatory frameworks for cryptocurrency are still being developed in many countries, posing potential risks for users. Moreover, the energy-intensive process of cryptocurrency mining raises concerns about its environmental impact.  

The panel notes that despite the challenges enumerate above, cryptocurrency has the potential to revolutionise the payment landscape by offering enhanced security, efficiency, and global accessibility, thereby enhancing trade in Africa. APET, therefore, urges all relevant stakeholders to weigh the importance of the benefits and challenges of cryptocurrency such as volatility, fraud risks, regulatory environments, and environmental implications before engaging in its usage. Hence the panel advises African countries to exercise responsible use of cryptocurrencies, where appropriate.

APET notes that cryptocurrencies can play a role in financing cross-border trade and therefore urges African governments to explore this option as countries work towards the implementation of the AfCFTA. This can be done by using cryptocurrency as collateral for loans or by using cryptocurrency-based platforms to facilitate trade. For example, Flextrade has developed a platform allowing businesses to trade goods and services using cryptocurrency. Alternatively, cryptocurrencies can also be used to invest in African businesses and projects. This can help to boost economic development by providing businesses with access to capital and by helping to create jobs.

However, for cryptocurrencies to be used successfully in the AfCFTA, African countries need to create successful regulatory frameworks for them. This means that governments need to carefully consider the potential risks and benefits of cryptocurrencies before regulating them. They also need to ensure that regulatory frameworks are clear and consistent across different countries. In addition to creating regulatory frameworks, African countries also need to investigate ways to use cryptocurrency technology to increase financial inclusion and lower transaction costs. This could involve developing mobile payment apps that use cryptocurrency or providing financial literacy training to people who are new to cryptocurrency. By taking these steps, African countries can create a successful cryptocurrency regime that will hasten the AfCFTA and boost economic development in Africa.

In conclusion, the panel asserts fundamentally, African countries can use cryptocurrency technology to increase financial inclusion and lower transaction costs. For instance, African countries can utilise mobile payment applications that use cryptocurrency to make it easier for people in rural areas or with limited access to traditional financial services to send and receive money. Also, financial literacy training can help people understand the risks and benefits of cryptocurrency and how to use it safely and securely. These blockchain-based platforms can be used to record and track transactions securely and transparently.  APET opines that by using cryptocurrency technology in these ways, African countries can help to create a more inclusive and efficient financial system for enhancing the implementation of the AfCFTA that will benefit all citizens.

 

Featured Bloggers – APET Secretariat

Aggrey Ambali

Justina Dugbazah

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Chifundo Kungade

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[1] https://businessday.ng/opinion/article/revolutionising-intra-african-trade-through-cryptocurrencies/

[2] https://disrupt-africa.com/2017/08/31/kenyas-bitpesa-secures-more-investment-to-hit-10m-total-funding/