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Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know

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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford


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BUSINESS & ECONOMY

Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria

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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website: https://focus.afrief.org/trending/a-salutary-tribute-to-general-ibrahim-badamasi-babangida-architect-of-islamic-finance-in-nigeria/

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.

Sincerely,

 

Abba Musa Mamman Lagos

Kaduna


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BUSINESS & ECONOMY

10 Megatrends Shaping the World in 2024

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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.


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BUSINESS & ECONOMY

Ghana’s Shea Industry is not Taking Care of the Women Behind its Growth

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By Abiba Yayah

Ghana’s shea industry has a rich history. Shea – nkutokaritegalam in some west African languages – is deeply embedded in the culture and tradition of the country’s northern regions. It is often considered a woman’s crop – women pick the fruit and extract its “butter” – and has acquired the name “woman’s gold” because rural women earn income from its sale. The crop is not just locally important, though. Shea butter, derived from the nuts of the shea tree, has become a global commodity. It is used widely as an ingredient in the confectionery, cosmetics and pharmaceutical industries.

report by Future Markets Insights values the global shea butter market at US$2.75 billion. It’s expected to reach US$5.58 billion in 2033. In Ghana, shea is one of the top export commodities. According to the Ghana Export Promotion Authority, the export of shea butter was estimated to be worth US$92.6 million (38,792 tonnes) in 2022 and kernels US$20 million (36,162 tonnes) in 2021.

In spite of shea’s global prominence, primary actors in this sector aren’t reaping the benefits from these exports. Rural women, who are the primary producers, are also the lowest earners in the shea value chain, with an annual income of about US$234 per capita.

Importance of shea

Economically, shea has gained international prominence stemming from its properties and value. Stearin, a creamy fat, is used industrially as a cocoa butter equivalent in chocolate production and confectionery. Olein is used to make cosmetics. Socially, activities in the shea industry confer on women a level of respect and power that they do not possess in other economic sectors. It’s also an area where women pass on indigenous knowledge from one generation to another by observing and participating in shea activities. Shea trees also provide carbon sinks and storage, improve soil fertility and promote better yields in agroforestry systems. The shea industry is potentially a vehicle for economic development, environmental sustainability, gender empowerment and social progress.

Shea policies

These benefits are not all being realised, however. Structural adjustment reforms were implemented in Ghana in the late 1980s and early 1990s to address economic woes. The shea export policy devised within that framework has been identified as a watershed moment for the problems inherent in the industry. The state’s involvement in the economy was reduced, and this created the conditions for continued gender inequality and exploitation. The plight of women in the shea industry was not helped, either, by long-held gender norms and cultural underpinnings in northern Ghana.

Successive governments and institutions over the years have sought to revamp the industry through regulatory policies and interventions. A chapter of my PhD thesis conducted in 2017 analysing the yearly budget statements from 2002 to 2017 noted the government’s knowledge of the persistent challenges of rural women. These challenges relate to quality control and standardisation. Others are the lack of fair-trade practices, limited access to direct markets and resources, and challenges in land tenure and resource management.

Liberalising the shea market was expected to promote economic growth through reducing trade barriers and encouraging foreign investment. However, a downside was the breakdown of social contracts, leading to a “gold rush” mentality that prevails when there are no structures and regulations.

The 2008 Tree Crops Policy was supposed to support agricultural growth, rural development and food security. A Shea Unit under the Ghana Cocoa Board was formed in 2011 to develop strategy for the sector. This unit was expected to become a Shea Development Board, responsible for introducing effective production, post-production and marketing initiatives. But it remains under the cocoa board.

The shea industry over time has been a niche where middlemen and women buy shea from rural women at low prices. Price negotiations are done on behalf of rural women on a mostly informal contractual basis. A chapter of my PhD thesis analysing the cost structure and assigning a value to the unpaid labour of rural women reported the profit margin of a shea nut picker as Gh₵ 8.82 (66 US cents) while a middleman earned Gh₵ 49.5 (US$4) on a 100kg bag of shea nuts. Similarly, a shea butter extractor earned Gh₵ 1.92 (8 cents) while a middleman earned Gh₵ 63.42 (US$6) on a 25kg box of shea butter.

This is aptly captured in an interview:

We are always here and we see people troop in for them (shea butter). Because we don’t understand the English language they always request for Madam. She directs us to sell to them at a certain amount. We don’t know the buyers. They are those bringing them, we will just be sitting, and they will tell you that they are to buy shea, there is a buyer in, we will not even see the person. She is going to negotiate with the buyer till they finish buying.

Shea business model

Even with the best of intentions, desired policy objectives can’t always be reached. It’s necessary to analyse why.

Empowering rural women shea actors to make choices and to transform those choices to desired outcomes must start by recognising them as knowledge producers and involve them as knowledge contributors in policies. Ghana needs to bring all the players in the shea industry together to develop a business model. Primary producers, middlemen, sourcing companies and government should collaborate.

Drawing from lessons on the marketing of cocoa in Ghana, this model should focus on:

  • regulation of ceiling and floor prices of shea nuts and butter
  • promoting community-based rural producer groups
  • capacity building
  • quality improvement
  • preserving the shea landscape.

There is also a need for a government instituted shea body to enforce a regulatory framework on the licensing and registration of activities and the promotion of partnerships between actors in the shea supply chain. It’s very important for the various stakeholders to keep working together to minimise undesirable effects of proposed interventions. Shea is indeed golden. But there are real people living with the impact of weak institutional structures and policy frameworks. The most affected are rural women.

Courtesy: The Conversation


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