Crypto as a solution to Intra-African trade in a post-covid world

The need for efficient intra-African trade is more prominent now than ever. A major reason for this is the invasion of the novel coronavirus which disrupted the status quo. Now, it wasn’t that the status quo was working as it should as we could see many African economies already struggling with incessant inflation and lack of drivers for growth even before the pandemic. However, with COVID-19, things got worse.

For instance, SMEs could no longer perform businesses smoothly because they relied on an existing model that made use of traditional channels powered by local fiat currencies. And if anything is known about the shortcomings of fiat especially within Africa, it is that regulations and tariffs are a major blocker for trade between African nations. Thus, the already existing flawed system collapsed under the weight of COVID-19.

In light of this, experts and global powers have identified trade as a crucial driver of growth for African economies seeing that it solves many problems particular to these nations, as well as promote a better relationship between the nations in terms of both exports and imports and human resources. This is why a number of regional/sub-regional organizations that were set up to facilitate smooth political and economic relations between African countries have recently focused on finding ways to facilitate intra-African trades.

A notable move was the establishment of the African Continental Free Trade Agreement (afCFTA) which aims to lower or eliminate tariffs on 90% of goods. While this is projected to improve intra-trade relations by 33%, certain issues with the existing model on which this trade will operate remains a critical cause of concern.

Trade in a post-covid Africa

With the world adjusting to the “new normal”, it is necessary to understand the implication on businesses and trades. For context, two things will be considered:

– The impact of COVID on transportation: For a while, everything was at a standstill in an effort to reduce the spread rate of the virus. This affected movements of people and goods. But the world soon learned to take precautions and things started returning to normal. However, what that meant was that extra care must now be taken where physical exchange of goods and even money was involved. While the export of raw materials from African nations and the import and redistribution of finished products were previously placed on hold, now a well-structured transport system that accounts for the new reality has allowed the resumption of this exchange. This leaves the issue of money.

– The impact of COVID on financial transactions: Even before the pandemic, cross-border payment within Africa has been a major problem, mainly because of the cost of sending money and the time taken. Using traditional mediums to send money often incur huge transaction costs. For instance, sending money from Zambia to Senegal could incur over 10% of the money to be sent as transaction cost. The other part is the time taken to complete the transaction due to the intermediary checks processes, several days often pass before payment is received by the recipient.

In a 2019 report, more than half of Nigerians and South Africans said it took them more than a day to receive money transferred to them from within the continent. And, due to Covid, the exchange of physical cash is not really an option. Besides, a sender would need to convert the money to different currencies if they were a distributor with retailers in different countries. It just doesn’t make sense.

Part of the proposed solution to the absence of a unified currency is the creation of the African Central Bank which is to be completed by 2028. This institution will be responsible for the issuing of an official single currency for Africa. But the challenge with this plan is that the world is fast moving away from depending on fiat currencies because of the inefficiencies often associated with a central issuer.

In addition, there is a lack of trust within African governments that may impact the success of such an initiative. Furthermore, in the dawn of a fast-moving Africa where new businesses are being established, there is an urgent need for an effective way to trade goods.

A crypto-themed solution
The invention of blockchain technology, on which many cryptocurrencies operate (including bitcoin), inherently solves many of the problems facing intra-African trade. First, the decentralized nature of the blockchain has allowed bitcoin to be a natural global currency. This is because, without a central issuer, it can be accepted anywhere and its value will be recognized. Also, without a middleman to complete transactions, the cost and time to complete transactions are greatly reduced.

Perhaps more importantly, it eliminates the need for trust. How bitcoin does this is simple: trust is needed in a world where transparency and security are absent — blockchain provides both. The blockchain is a distributed ledger that secures money with cryptography and records all transactions openly so that it is near impossible to alter the record. This makes it possible for businesses and governments to engage in trade via a channel with almost instant payment resolution and cheaper transaction costs.

An added advantage is that cryptocurrencies are fully digital, so with everyone going cashless in a way to reduce the spread of COVID, bitcoin solves this without any additional cost.

A pan-African payment system
Without a doubt, cryptocurrencies provide a better solution to the stifled growth of trade within Africa. While bitcoin has been mainly used for speculation by financial traders, in recent months, it has gained popularity as a payment tool — for which it was originally designed. In Africa, there has been an increase in the number of monthly transfers with bitcoin, according to US blockchain research firm, Chainalysis, with most of the activities taking place in Nigeria, South Africa and Kenya.

Recently, financial technology has taken a foothold in Africa. These startups are aiding the sending and receiving of money for Africans in the wake of the flawed traditional systems. However, more prominent in the African financial space are cryptocurrency fintech companies that are aiding individuals and businesses to send cryptocurrencies like bitcoin within and outside Africa.

A major advantage of crypto fintech over other fintech is that they also aid seamless trade between African countries. This is done by allowing the purchase of bitcoin in one’s local currency and sending it to other parts of Africa where the recipient can instantly convert to their own currency. Particularly, a pan-African crypto exchange like Yellow Card also offers Over The Counter (OTC) trading desks to governmental organizations and big corporations which is a cost-effective means of conducting cross-border trades without delay.

Conclusion

Bitcoin is built to solve existing problems with cross-border payments within Africa. The adoption of bitcoin as a payment method by African governments and organizations can fast track the plan for a better Africa. With efforts already in place to improve trade relations between countries, using an already recognized global currency like bitcoin saves time, cost and friction between the players to make this a reality.

Source: FurtherAfrica

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