Cross-Border Payments for BRICS+ and Africa — China’s Innovation Leading the Way / Dr Jaya Josie

Media observers and other interested parties are waiting in anticipation for the decisions that will emerge from the final BRICS+ Summit. From Africa the three BRICS+ countries, South Africa, Egypt and Ethiopia will be in attendance. From the Middle East Iran, Saudi Arabia and the United Arab Emirates will also join the Summit. Over the past year since the BRICS Summit in Johannesburg in 2023 there has been much speculation about whether the BRICS+ will move towards a BRICS+ common currency or an alternative intra-trade payment mechanism that makes the BRICS+ countries less dependent on using scarce foreign exchange that negatively impact foreign exchange reserves and economic development. In Africa the Africa Union has set-up the African Continental Free Trade Area (AfCFTA) to address similar challenges in cross-border payments in intra-African trade.

At a recent meeting in Russia the BRICS+ ministers of finance did not make any recommendation to the BRICS+ Summit to adopt a common currency instead they proposed that the status quo be maintained, and the group continue using their own currencies for intra-BRICS+ trade. Despite this cautionary approach BRICS+ ministers of finance are aware of several limitations to the establishment of a BRICS+ common currency to reduce the risks in using foreign exchange in intra-BRICS+ trade. Nevertheless, the next BRICS+ Summit in Kazan, Russia is expected to take a decision on a payment mechanism that will remove BRICS+ members from over exposure to international sanctions and the weaponization of the use of foreign currency in international trade in a global climate fraught with risks for the BRICS+ group. Eurasia, Asia, the Middle East and Africa are most susceptible and vulnerable given their dependence on international trade for development. China, India, Russia, Brazil, have already taken steps to cushion their dependence on foreign currency in international trade. In Africa, South Africa, Egypt and Ethiopia are all in a precarious situation. The three African members of the BRICS+ are also members of the African Continental Free Trade Area (AfCFTA) that was established by the members of the African Union (AU) to promote intra-African trade on the continent. However, intra-African Trade is confronted with the same challenges in cross-border payments that the BRICS+ countries are facing.

The addition of more members to the BRICS+ group is likely to add additional levels of developmental hurdles to market integration with respect to trade, investment and finance.

However, it will also add a new dimension to deepening and extending economic cooperation with the strong possibility of creating a BRICS+ wide market. Of course, the question is whether such an initiative could include a payment mechanism for international trade and investment that could deepen and strengthen South-South market integration and development in the medium to long term through a BRICS+ payment mechanism. Solving the challenges currently associated with intra-BRICS+ trade and investment could be a first step in financial integration and an instrument for trade and industrial policy development not only in the BRICS+ group but also for intra-African trade. The BRICS+ summit in Kazan in October 2024 will give a clear indication of the political will of the group to address the cross-border payment challenges facing intra-BRICS payment mechanisms for trade.

While such speculation has been playing out in the media, in Africa the African Union has formalised the African Continental Free Trade Area (AfCFTA) with the majority of the continent’s countries, including, South Africa, Egypt and Ethiopia signed up to the group.

The group faces similar cross-border payment limitations for intra-African trade as the BRICS+ group. To address these limitations African countries are introducing an alternative payment mechanism. The CBDC system was first proposed by the Bank of International Settlements (BIS).The alternative mechanism uses a Central Bank Digital Currency (CBDC) that was initiated in a pilot scheme in China and is currently used for transactions in a select few provinces. The pilot scheme was subsequently extended for cross-border payments for China, Hong Kong, Thailand and the United Arab Emirates (UAE) and, the scheme is called the mBridge System pilot. The AfCFTA is proposing a similar alternative to resolve its own cross-border challenges. The mechanism is called the Pan-African Payment and Settlement System (PAPSS) and is likely to transform financial transactions across Africa. The PAPSS is being led by the African Export-Import Bank (Afreximbank) and has the objective of streamlining and harmonizing payment systems for financial transactions, promoting financial inclusion, boosting intra-African trade and economic integration.

Afreximbank has four classes of shares – A, B, C and D where “Class A” shares are held by African Governments/States, their public institutions or their designated institutions, including continental, regional, and sub-regional financial institutions; “Class B” shares are held by African national financial institutions and African private investors; “Class C” shares are held by non-African international financial institutions and economic organizations, as well as non-regional financial institutions and non-African private investors; while “Class D” shares can be held by any person and are structured to be freely transferrable - the Bank’s “Class D” shares are currently issued as depositary receipts, which are listed on the Stock Exchange of Mauritius (SEM). As China is already a leader in using CBDC payment systems domestically one of its banks, the Eximbank, is a major non-African Class C shareholder and playing a leading role in Afrixembank. As more banks from China show interest in investing in Afrixembank the CBDC technology will likely make the PAPSS a useful alternative mBridge payment system for the AfCFTA. China is viewed as the undisputed leader in FinTech technology and leads the current operational CBDC technology. It is expected that African central banks will buy into CBDC technology and make the PAPSS a reality in Africa. This policy relationship will be imperative if African countries wish to promote AfCFTA, intra-African trade and economic integration in the continent. Perhaps the BRICS+ may be able to propose a similar initiative at the Kazan BRICS+ summit.

China’s initiative in piloting the CBDC domestically and for cross-border payments places the country in a position where it can combine several cross-border payment mechanisms to assist the BRICS + group and the Global South generally. Such a move may help overcome the challenges and vulnerabilities facing the group in the current global climate of conflicts and threats of sanctions and imposition of tariffs on goods. Each of the original five BRICS states tested a CBDC based on research of the country’s needs. The Central Bank of Brazil announced guidelines for adopting a CBDC in May 2021.The Brazilian model seeks to break the cash dependence in the country, where 60% of the population uses cash more frequently than any other payment channel. In Russia, the Bank of Russia launched a pilot digital Ruble CBDC, hoping to promote a seamless transition from the traditional fiat currency to the digital version. The currency is being tested by twelve local banks. India has also announced a phased implementation plan for a CBDC to launch where the Reserve Bank of India collaborated to develop the framework for the currency and identified four major use cases: programmable payments, cross-border remittances, retail payments and lending for micro, small and medium enterprises.

South Africa too developed a pilot CBDC project. After four years of research conducted by the South African Reserve Bank (SARB), it has tested a CBDC to facilitate cross- border payments while seeking solutions to overcome the barriers faced in the rollout of legacy infrastructure. In Africa Nigeria launched a CBDC called the eNaira, while Kenya was exploring a version of the CBDC that may use its already developed electronic payment system called mPesa. For BRICS+ countries, this progress highlights technological expertise shared by the BRICS Central Banks, and that can be exploited to benefit the BRICS+ societies and their regional partners. China has made the most progress in implementing a CBDC when it launched the digital Yuan in four cities and is used for local payments and used during the Winter Olympics in 2022. The trade finance cycle for using a blockchain system of payments is gaining momentum in the BRICS+.