7 March 2012

West African Common Currency - A Worthwhile Venture?


Over the years, a popular view among economists and policy makers in West Africa is the need to have a common currency in the region. Obinna Chima examines the necessity of the proposed policy

Since 1987 when the Economic Community of West African States (ECOWAS) Monitoring Cooperation Program (EMCP), saddled with the responsibility of introducing a common currency in the sub-region was adopted, the body has continued on how to implement the policy.

ECOWAS member strongly believe that a common currency for the West African Monetary Zone (WAMZ) would facilitate trade in the region.

The proposed currency, which has been christened 'eco,' according to the plan, will be initially introduced in the member countries of WAMZ.

These countries include Ghana, Nigeria, Sierra Leone, Gambia, Guinea, Liberia, Benin, Togo, Cote d'Ivoire, Niger, Mauritania, Senegal, Burkina Faso, and Mali.

These, policy makers in the region also argued, would help form a trade bloc that would be a formidable force in international markets.

Speaker of the ECOWAS Parliament, Senator Ike Ekweremadu, recently re-echoed these plans, when he said the single currency objective would become effective by 2020 but by 2015 in English-speaking countries.

Unfortunately, Governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, declared recently that the EMCP, which formed one of the major pillars of the African Monetary Cooperation Programme (AMCP), expected to pave way for the adoption of the single currency had suffered a setback following the current global financial crisis as well as euro debt crisis.

According to Sanusi, the progress of the programme had been cut short partly due to the global financial crisis that impacted adversely on member economies since late 2007- causing the EMCP to remain stagnant in 2011.

Sanusi said: "The number of member countries that met the prescribed targets fell for all primary criteria, except the criterion on financing of the budget deficit by the Central Bank. Public finance continued to deteriorate generally and the public deficit criterion was met by six countries against seven in the first half of 2010."

Lessons from the Euro

The objective of European economic integration was borne out of a response to the horrors of the two world wars. Monetary integration was seen as a response to a variety of crisis that had affected the region previously.

Nevertheless, the euro - the common currency among 23 nations in Europe, which the ECOWAS' proposed 'eco' is expected to replicate, has come under intense pressure due to the debt crisis in some part of the continent, especially Greece.

These have even had a spiral effect on countries that are under the arrangement as analysts had predicted that the future of the euro, as a common currency, remains bleak. For instance, Italy's bond yields had remained unsustainably while France ratings had been downgraded.

Not minding the situation, Spain last Friday set itself a softer budget target for 2012 than originally agreed under the Euro zone's austerity drive, putting a question mark over the credibility of the European Union's new fiscal pact.

In comparison with the dollar, the euro has continued to wobble.

In fact, markets in Europe are currently awaiting business survey on the euro zone's private sector economy. The embattled common currency touched a 16-month low against the dollar on January 6 this year and there had been growing consensus in financial markets that the slide was very likely to continue.

Analysts' Opinion

A Lecturer in the Department of Economics, Lagos State University (LASU), Ojo, Dr Femi Edun, argued that ECOWAS was not ripe to have a common currency.

According to Edun, policy makers in the region should rather, devote more time in developing the volume of trade among member states as well ensure that the issue of weak infrastructure was addressed among countries in the region.

Edun explained: "Look at the production level of countries in West Africa, what are we producing? What is the volume of trade in the sub-region? Look at countries in south-east Asia, that records trade volume of about $600 billion yearly; they don't have a single currency yet.

"ECOWAS is just being over ambitious. They still need to do more. There is need to get other things such as infrastructure, manpower development, education, productivity, we really need to develop all these critical areas and the required capacity for us to start talking about eco. The issue of 'eco' should come last, after all these issues have been addressed."

On her part, the Regional Head of Research, Africa, Global Research, Standard Chartered Bank, Razia Khan, said that although a single currency could reduce transaction costs, saying that the euro zone crisis had shown that the economics of the policy, as well as its politics, "will have to work."

She averred: "A monetary union alone may not be enough to credibly achieve a single currency. Increasingly, it is now recognised that a fiscal union will also be needed. It is worth aspiring to, even if it doesn't happen just yet. The convergence criteria are still worthwhile economic aims, and if it ever did happen, it would lessen transaction costs and boost trade.

"ECOWAS should keep trying, but they should not put in into practice unless everything is in place. They don't need to fudge the convergence criteria as that will only cause problems later. Look at Italy."

To the Emerging Markets Strategist, Standard Bank Plc, Samir Gadio, the market was concerned about the ability of Euro zone policy makers to deliver a solution to the region's structural distortions, adding that as such, the credibility of the Euro zone framework might get worse before it gets better.

Gadio said: "We cannot rule out the possibility that some countries in peripheral Europe may be forced to drop the euro, but we think the risk of a full Euro zone break-up is exaggerated at present.

"This is because the authorities in core countries such as Germany or France realise that the end of the euro would have a disastrous impact on economic activity in the region, triggering a sizeable contraction in Gross Domestic Product (GDP). This threat will also force EU countries to consolidate public finances and even possibility speed up fiscal integration."

According to him, the project of a common currency in ECOWAS is a good idea.

He added that there was the need to support ECOWAS' steps towards further regional integration.

Gadio however said that the reality was that the structural differences among ECOWAS countries were such that a single currency would probably not materialise in coming years.

Gadio argued: "First, the size of Nigeria's economy compared to ECOWAS peers implies that smaller countries will have little say in exchange rate and monetary policy decisions. As a result, they will be worried about a loss of sovereignty should ECOWAS launch a common currency.

"Second, Nigeria, Ghana and the other English-speaking countries usually have elevated inflation rates while CFA countries have displayed marginal consumer price inflation over the past decade. Besides, the fiscal position of the Anglophone countries is typically more expansionary than that of CFA countries.

He added: "Third, the CBN has usually targeted exchange rate stability, which is consistent with the country's oil producer status, but forex stability is not necessarily a plus for soft commodity producers given the external competitiveness factor.

"Fourth, a common currency makes sense if member countries have important intra-regional trade ties. For now, this is not really the case, as the primary trade partners of most ECOWAS nations are developed economies and even emerging markets, including China. For example, the share of Nigeria's trade with ECOWAS in the country's total trade volumes is about 10 per cent."

A Senior Analyst at BGL Securities Limited, Mr. Femi Adeola, said there was need for honesty among member states, for the policy to succeed.

He said: "If the ECOWAS members can be honest to say the situation in their countries, the common currency idea will work. It is very difficult, but it is not impossible. But countries must have accurate data on their economies and there is also need for fiscal union."

Srinivasa Madhur, in a paper titled: "Costs and Benefits of a Common Currency," said the key economic cost in formation of a currency union by a group of countries was the loss of national autonomy in monetary policy.

Under a currency union, there is no scope for independent monetary policies by the member countries of the union.

He added: "The major benefit of a common currency that has been emphasised is that it facilitates trade (in both goods and services) and investment among the countries of the union (and hence increases income growth within the region) by reducing transaction costs in cross-border business, and removing volatility in exchange rates across the union.

"A currency is like language. As a common language facilitates effective communication among people, a common currency could promote trade and investment among countries. In an environment of different currencies, transaction costs, including the costs of obtaining information about prices, would be higher."

But the Chairman, Association of African Central Banks (AACB) Mr. Perks Ligoya, however, said there had been progress report on the implementation of AMCP following signs of economic recovery in some AACB member countries.

He encouraged members to step up efforts at improving their macro-economic indicators to facilitate convergence in the region.

But Sanusi said further: "On the back of increases in food and energy prices at the international market, only seven countries met the criterion on inflation against 11 during the same period of 2010. 10 countries satisfied the criterion on foreign reserves against 11 in the previous year.

"Performance on secondary criteria was also full of challenges exemplified by a worsening public finance position notably, tax revenue, salary mass and public investments."

The CBN Governor noted that the turn of events suggested the need for the relevant authorities to remain on guard since the threats of the global financial crisis are still around.

"In part, also due to the lingering European debt crisis lurking in the air: Our armoury and tool-kits to combat further global financial crisis should be intact and backed by sound economic policies, including tailored and collaborative measures to contain possible adverse effects and return our economies to the path of sustainable growth," he added.

However, he said the pace of harmonisation of structural programmes that began in West Africa early 2000s had been sustained as ECOWAS member countries continued to observe considerable number of common principles, notably the harmonisation of exchange rates, capital account liberalisation, integration of the financial markets and payment systems, banking supervision and regulation, and statistical harmonisation among others.

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