Dear Editor,
I am writing to express my views on Barbados Prime Minister Mia Mottley’s endorsement of the Afreximbank’s payment system, which allows countries across the continent to trade using their local currencies.
This initiative was highlighted a few days ago at the Afreximbank meeting held in Nassau, Bahamas, where eleven Caribbean Community (CARICOM) countries joined Afreximbank, and the Association of CARICOM Central Banks adopted the Pan-African Payment and Settlement System (PAPSS) as their preferred payment infrastructure for a pilot project. While this initiative aims to enhance economic independence and reduce reliance on dominant global currencies, it also presents several significant international economic challenges that warrant closer examination.
Firstly, the adoption of local currencies for international trade could lead to increased currency volatility. Many African and CARICOM countries have relatively small and less liquid financial markets, making their currencies more susceptible to fluctuations. This volatility could complicate trade transactions, as exchange rate risks would become more pronounced, potentially leading to higher costs for businesses and consumers.
Secondly, the lack of a widely accepted and stable reserve currency among these nations might undermine trade efficiency. The current global trade system benefits from the use of established currencies such as the US dollar, which provides stability and predictability. A shift towards multiple local currencies could create a fragmented market, increasing transaction costs and reducing the efficiency of cross-border trade.
Moreover, the proposed currency shift might face significant resistance from international businesses and investors. Companies typically prefer to operate in stable and predictable financial environments. Introducing multiple, potentially unstable currencies could deter foreign investment, which is crucial for the economic growth of these regions. The perceived risks associated with currency instability might outweigh the potential benefits of local currency utilization.
Another concern lies in the technical and infrastructural challenges of implementing such a system. Establishing a framework for currency conversion, payment settlement, and exchange rate management among numerous countries with varying economic conditions would be a complex and resource-intensive endeavor. The costs and logistical hurdles could be prohibitive, especially for nations with limited financial infrastructure.
Lastly, while the initiative aims to promote economic sovereignty, it may inadvertently lead to greater economic isolation. By moving away from widely accepted international currencies, African and CARICOM countries risk reducing their integration into the global economy. This could hinder access to global markets, capital, and technologies, which are essential for sustainable economic development.
In conclusion, while the proposal by African and CARICOM countries to use their own currencies for trade is rooted in a desire for economic autonomy, it raises several critical issues from an international economic perspective. Increased currency volatility, higher transaction costs, deterrence of foreign investment, technical implementation challenges, and potential economic isolation are significant concerns that need to be thoroughly addressed before moving forward with this initiative.
Sincerely,
Keith Bernard
