Under the shadow of Trump's tariffs, Africa quietly built a “payment in US dollars” system

The Zhitong Finance App learned that Africa's efforts to promote a local currency payment system — once a vision — have now made substantial progress. This breakthrough brought hope to reduce trade costs for the African continent, which has long been limited in development due to the depletion of resources in dollar transactions.

However, attempts to get rid of the dollar faced strong resistance, as well as threats of retaliation from US President Trump. Trump is determined to maintain the dollar's status as the dominant currency in global trade.

Africa's creation of a payment system that does not rely on the US dollar echoes China's push to establish a financial system independent of Western institutions. Countries such as Russia, which are facing economic sanctions, are also urgently seeking alternatives to the US dollar.

With the transformation of the trade pattern and geopolitical restructuring after Trump returned to the White House, the de-dollarization campaign became even more urgent. But Africa's core appeal to promote payment alternatives is still based on cost considerations.

Mike Ogbalu, CEO of Pan-African Payment and Settlement System (PAPSS), said: “Contrary to external perception, our goal is not 'de-dollarization'.” The system allows counterparties to settle directly in local currency, bypassing the US dollar. “If you look at African economies, you'll find it difficult to obtain third-party global currencies to settle transactions.”

Commercial banks in Africa usually rely on overseas agent banking relationships (so-called “agent banking”) to facilitate international payment settlements, even transactions between neighboring African countries. According to data from the United Nations Trade and Development Agency, this has greatly increased transaction costs. Coupled with factors such as poor transportation infrastructure, Africa's trade costs are 50% higher than the global average.

According to the Mauritius MCB Group report, this is one reason why 84% of Africa's trade depends on external partners rather than transactions between countries within the region. Daniel McDowell, professor of international finance at Syracuse University in New York, said, “This existing financial network, which is highly dependent on the US dollar, has become increasingly inefficient and expensive for Africa.”

Innovation in local payment systems

According to data compiled by PAPSS, under the current agency banking system, the two African counterparties completed a trade of 200 million US dollars, and the transaction cost is expected to account for 10% to 30% of the transaction amount. Switching to a local payment system can reduce costs to just 1%.

Taking PAPSS as an example, the system allows companies in countries such as Zambia to purchase goods from Kenya and other countries, and buyers can directly settle in local currency without exchanging it into US dollars to complete the transaction. Ogbalu revealed that using currencies such as Nigerian naira, Ghanaian cedi, or South African rand in intra-African trade can save the continent $5 billion in hard currency every year.

According to information, when PAPSS was launched in January 2022, there were only 10 participating commercial banks. It has now been implemented in 15 countries including Zambia, Malawi, Kenya, and Tunisia, and the network covers 150 commercial banks. Ogbalu said “the increase in trading volume has been extremely significant,” but no specific data was released.

Meanwhile, the World Bank's private sector lender, the International Finance Corporation (IFC), has begun issuing local currency loans to African companies. IFC vice president of African affairs, Ethiopis Tafara, said the agency believes this transformation is critical to corporate growth and can help them avoid the exchange rate risks of dollar borrowing. “If businesses don't generate hard currency revenue, hard currency loans will become a heavy burden, making it difficult to succeed.”

Geopolitics and Trump Factors

Africa's efforts to promote regional payment systems have received platform support from the Group of Twenty (G20), and South Africa, which holds the rotating presidency, is taking the lead in advancing the relevant agenda. While hosting the G20 finance ministers and central bank governors meeting, South Africa held at least one special meeting on strengthening the regional payment system, and hoped to turn discussions into concrete actions. The next G20 finance officials meeting is scheduled to be held in mid-July.

Bank of South Africa Governor Lesetja Kganyago said at the G20 meeting in Cape Town in February: “Some of the world's most expensive cross-border payment channels are located on the African continent. To achieve the integrated operation of the African continent, we must start trading and settling in local currency.”

However, any discussion about breaking away from the US dollar (whether for trade or as a reserve currency) has attracted a tough response from Trump. After the BRICS countries (including Russia, China, India, Brazil, and African countries such as South Africa, Egypt, and Ethiopia) considered reducing their dependence on the US dollar and planning to create a common currency, Trump threatened to levy 100% tariffs.

In January of this year, he wrote on the Truth Social platform: “The BRICS countries will never be able to replace the US dollar in international trade or other fields. Anyone who tries will face tariff sanctions and say goodbye to the US!” Over the next few months, Trump has repeatedly demonstrated his determination to use tariffs to pressure and punish allies and rivals. This strategy has disrupted the global trade and geopolitical landscape.

McDowell of Syracuse University pointed out that regardless of Africa's original intention to promote local currency transactions, it is difficult to get rid of the link with more politically motivated de-dollarization efforts led by countries such as China and Russia. “Outsiders are likely to see it as part of a geopolitical game.”