W’Africa Single Currency: A Journey to Nowhere? - THISDAY
Obinna Chima wonders if West African countries can ever meet the target of adopting a single currency in the region, especially with January 2020 no longer achievable
It is almost two decades when the idea of adopting a single currency in West Africa was conceived.
However, till date, the region is still far from achieving this objective which some analysts have now likened to a journey to nowhere.
At a meeting organised by the Economic Community of West African States’ (ECOWAS) ministerial committee of ministers of finance and governors of central banks in the region held in Abuja, last week, the focus once more was on the proposed single currency initiative for the region.
In 2000, the countries of West Africa expressed their desire to speed up the process of monetary integration.
This, then crystallised in a project for the two-phased creation of a single currency in West Africa.
Under this plan, in the first phase, a single currency called ‘ECO’ was to be launched by Member States of the West African Monetary Zone (WAMZ) in January 2015. This, was however, launched in June this year. ECO was expected to boost economic development in the region and improve cross border trade.
But in the second phase of the agreement, WAMZ was to merge with West African Monetary Union (WAMU) to create a single currency in all fifteen ECOWAS Member States by January 2020, according to a report by the African Development Bank (AfDB).
For the ECO to be implemented, ten convergence criteria were set out by the West African Monetary Institute (WAMI). These were divided into four primary and six secondary criteria.
The four primary criteria to be achieved by each member country are: a single-digit inflation rate at the end of each year; a fiscal deficit of no more than four per cent of the Gross Domestic Product (GDP); a central bank deficit-financing of no more than 10 per cent of the previous year’s tax revenue, and gross external reserves that can give import cover for a minimum of three months.
On the other hand, the six secondary criteria to be achieved by each member country are: Prohibition of new domestic default payments and liquidation of existing ones; tax revenue should be equal to or greater than 20 percent of the GDP; wage bill to tax revenue equal to or less than 35 per cent; public investment to tax revenue equal to or greater than 20 per cent; a stable real exchange rate, and positive real interest rate.
West Africa currently covers 15 countries and eight currencies being used in the region. They include the Cedi (used in Ghana), Dalasi (Gambia), Liberian Dollar (Liberia), Escudo (Cape Verde), Guinean Franc (Guinea), Leone ( Sierra Leone), Naira (Nigeria) and CFAF Franc (used by 8 member countries of the West African Monetary Union: Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo).
To proponents of the single currency initiative, which is to emulate the Euro, that is currently being used by the Eurozone, they believe it would offer West African countries the opportunity to pool their monetary resources in order to pursue their common and individual objectives.
However, with few days to the 2020 target, it is clear that the objective of adopting a single currency will not materialise.
In August 2018, WAMI, had raised concerns that no member country of the West African Monetary Zone (WAMZ) including Nigeria, had met all convergence criteria towards the implementation of a single currency for the sub-region.
Nigeria’s Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, at the weekend, gave a clear picture of where the region currently stands regarding the single currency initiative.
According to Ahmed, the 2020 implementation deadline set for the adoption of single currency by ECOWAS member states is constrained by the continuing macroeconomic vulnerabilities in the respective economies.
She stated that till date, only Togo out of the 15 ECOWAS member countries has been able to fulfil all four convergence criteria required for a smooth transition by the target date.
Nevertheless, she said the regional economies were improving despite the global slowdown, as they continue to record relative stability in oil production and prices and increasing investment in agriculture.
Ahmed, noted that Nigeria had nonetheless continued to record progress towards meeting the macroeconomic criteria, particular as it regards its debt levels.
Specifically, the minister said Togo remained the only country that has met the convergence criteria within the last two years, a development which makes it difficult to operationalise the proposed currency union, which is already christened as ‘ECO’.
She further admitted that macroeconomic stability remains uncertain in the region.
She said there had been a failure by most ECOWAS countries to implement critical roadmap activities to achieving the target.
Nevertheless, she said some significant progress had been recorded by member states in the areas of inflation targeting, flexible exchange rate, the establishment of the ECOWAS central bank as well as the adopted ECO as the single currency.
Ahmed further enjoined the gathering to be steadfast towards meeting all convergence criteria for a smooth monetary union.
Noting that Nigeria currently supported the established of ECOWAS central bank in no distant future, she tasked the meeting to work out a befitting name and location for the institution which is expected to facilitate regional trade among others.
Ahmed, also seized the opportunity to reassure the ECOWAS member countries that the country remained committed to trade liberalisation.
Is the Target Achievable?
To the Director General, West African Institute of Financial and Economic Management (WAIFEM), Dr. Baba Musa, the issue of having a single currency within the ECOWAS is a laudable initiative that has to be carefully implemented.
He pointed out that the idea was to imitate Europe, which is made up of countries that are much more developed in education, transportation, infrastructure and other aspects of economic life.
Musa explained: “We have also seen how they have developed over the years and the issues that are arising. So, if you are a late starter, you are to take advantage of it and avoid the mistakes of those who preceded you.
“The objective of this is to promote the economic prosperity of the 15 ECOWAS countries. The idea is, as a Nigerian, if I want to go to Sierra Leone or Gambia, I do not need to take US dollars there. If I have an ECO, I could just collect ECO and go and do my business and then come back. So, rather than taking the foreign exchange rate of the nation to go to another country to do business, I would use my local currency to do that.
“So, the cost of business is expected to go down if we implement the Eco. But the truth is that, have we met the conditions to bring the currency on board, which is the issue?
“We have had what we call the convergence criteria and in 2015 there was an agreement amongst the Heads of States that there must be sustained meeting so as to be able to reach the convergence level.
“In terms of convergence, what we found was that that a country would meet all the convergence in year one, in a year two later, they would miss some, which has been the trait amongst all of them. That shows us some things we need to look at.”
Continuing, Musa pointed out that, “If countries are missing the convergence criteria, what are the reasons? In many cases we do not determine the price of commodities that affect revenue and so many other indicators. So, are we designing policies that respond to those volatilities?
“In many cases you find out that countries are not implementing policies that avoid those types of volatilities which brings us to the issue of continuing fiscal sustainability because most of the targets that are missed relate to the fiscal issues.
“In this case what it tells us is that we need to look inward into our fiscal and make it sustainable so that it would be able to meet these convergence criteria.
“They have announced that by 2020, we would have a single currency. The implementation would start, but not in a physical form, rather it might be a virtual currency, pending when all the countries would converge and address the issue.
“On the aspect of politics, it is really about educating our politicians to understand the relevance of economics and at least implement policies that would stabilise the economy.”
Tahiru Azaaviele Liedong, who is an Assistant Professor of Strategy, at the University of Bath, argued that a single currency could help address West Africa’s monetary problems, such as the lack of independence of central banks and non-convertibility of some currencies.
According to him, ultimately, a single currency and its associated regional institutions could also boost investor confidence and promote trade within the sub-region.
But sadly, Africa does not trade with itself. Overseas trade represents 80 per cent of total trade on the continent.
Trade between African countries accounts for a woeful 15 per cent, compared to 40 per cent and 60 per cent between North American and European countries respectively.
The story is not different for West Africa where trade between countries is extremely low.
In the current circumstances, the necessity of a single currency is untenable if trade is the main motivation, except the regional commission is hoping West Africa will trade more with itself or attract more investors after the launch, Liedong stated, in a publication.
To the Lead Economist and Director of the African Governance and Development Institute, Dr. Simplice Asongu, ensuring that all members meet the convergence criteria is only the first step toward creating a successful West African currency union.
He, however, pointed out that ECOWAS countries were already beset by insecurity and corruption, and they currently have many arbitrary tariff and non-tariff barriers in place. Furthermore, the region’s supply-chain infrastructure remains inadequate.
“And, should Nigeria join, the union could be subject to a significant structural imbalance: with Africa’s largest economy, Nigeria accounts for 67 per cent of the bloc’s total GDP,” Asongu noted.
According to him, complicating matters further was the extent to which outside forces, especially France, would shape the currency union’s trajectory.
“ECOWAS includes eight Francophone countries – Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo – that have had a single currency, the West African CFA franc, since the days of French colonial rule.
“In fact, it was initially proposed that ECOWAS’s remaining seven countries – Cape Verde, The Gambia, Ghana, Guinea, Liberia, Nigeria, and Sierra Leone – should first form a monetary union on their own.
“Once this new currency union had proved functional and valuable for its members, it would be much easier to convince those using the CFA franc to join their West African partners.
“After all, the France-backed currency, which is currently pegged to the euro, offers significant advantages, including exchange-rate stability and lower interest rates.
“Members of the West African CFA franc currency union might not want to risk these benefits by joining an unproven currency union with countries that have a history of high interest and inflation rates. And France itself has an interest in the CFA franc countries’ rejection of the ECO, because they deposit half of their foreign reserves in the French treasury,” he explained.
Also, the Brookings Institution, a Washington-based non-profit public policy organisation, noted that this initiative can only become feasible if member states are willing to subordinate national interests to regional interests.
The Washington-based non-profit organisation wondered if Nigeria would ever give up its currency the naira?
“The bottom line here is that even with strong institutions of governance, the euro experiment continues to face serious challenges—both economic and political. At the outset, the deutsche mark was seen as a success of hard money orthodoxy—a stable currency regime protected from manipulation for political ends. Embedded in the postwar industrial success of the then-West Germany, it won praise from capitals around Europe.
“The euro lessons show that even with robust institutions and strong political commitment, sustaining a single currency remains a challenge. These challenges are likely to be much more difficult to surmount in West Africa where the pre-conditions for success, including strong political will and robust institutions, are evidently absent,” it added.
The institution stressed that the proposed currency would clearly not be the panacea for West Africa’s myriad problems, including high levels of unemployment, especially among the burgeoning population of youth and the increasing numbers of the poor.
“The lessons from the eurozone highlight continuing challenges among a group of highly developed countries with very strong institutions. ECOWAS will do well to heed these lessons. Second, efforts by member states to strengthen domestic macroeconomic frameworks are important.
“Third, concerted efforts must be made to reduce the inordinate bureaucratic delays that severely constrain exports and imports at the border. Launching the single regional currency, the ECO, by January 2020 is, at best, an expensive distraction that the people of West Africa can ill afford at this particular moment,” it stated.
From the foregoing, achieving the single currency target next year or even in the coming years would be a herculean task and the initiative will not in any way benefit Nigeria considering the size and level of sophistication of its economy, compared with others in Nigeria.
If Nigeria succumbs to this pressure, the country may end up using its resources to fund the union.
What West Africa needs to do presently is to focus on significantly improving trade within the region before considering talking about adopting a single currency.