Dissecting challenges to ECOWAS single currency
Recently, the Economic Community of West African States (ECOWAS), consisting of 15 countries, revived its plans to adopt a common currency “the Eco”, targeting 2020 as the new date for implementation across the member nations. CHIMA NWOKOJI in this report, looks at the possibility of meeting the deadline for adoption.
After a series of postponement since the initial 2003 target launch date, countries in the West African sub-region under the platform of ECOWAS are set to have a single currency from next year. But just how possible to meet the target and how prepared is the business community in the region?
According to ECOWAS, the preconditions for member countries to participate in the single currency union are; budget deficit of not more than 4per cent; maximum average annual inflation rate of 5.0per cent by 2019; maximum public debt to Gross Domestic Product (GDP) ratio of 70.0per cent; minimum of three-month import cover; and consolidation of custom unions.
But according to the African Development Bank, regional inflation has stood at double digits since 2015, way above the five percent target outlined as one of the convergence criteria for ECO’s implementation.
On April 20, 2000, in Accra, Ghana, the leaders of six West African countries1 declared their intention to proceed to monetary union among the non-CFA franc countries of the region by January 2003, as a first step toward a wider monetary union including all the ECOWAS countries in 2004. The six countries committed themselves to reducing central bank financing of budget deficits to 10 percent of the previous year’s government revenue; reducing budget deficits to four per cent of GDP by 2003; creating a Convergence Council to help coordinate macroeconomic policies; and setting up a common central bank. Their declaration states that, “Member states recognise the need for strong political commitment and undertake to pursue all such national policies as would facilitate the regional monetary integration process.”
The goal of a monetary union in ECOWAS has long been an objective of the organization, going back to its formation in 1975, and is intended to accompany a broader integration process that would include enhanced regional trade and common institutions. In the colonial period, currency boards linked sets of countries in the region. On independence, however, these currency boards were dissolved, with the exception of the CFA franc zone, which included the francophone countries of the region
Modeled after the ‘Euro,’ a single currency for use by the member states of the European Union, countries within the West African sub-region have adopted the Eco as a single currency.
Following from this, leaders of the 15-nation West African bloc have called for greater structural reforms as they step up efforts for the introduction of a shared currency, aimed to be launched in 2020.
The bloc, which represents an estimated population of about 385 million people, said it acknowledged a 2018 report which underlined “the worsening of the macroeconomic convergence” and urged member states to do “more to improve on their performance” as the deadline for the establishment of a monetary union approached.
Meanwhile, Nigeria, which controls two-thirds of the regional economy, has struggled to meet its growth projections. There is also, the challenge of security to the smooth operations of the currency. In recent years, several countries in the region have been dealing with both internal and external security threats.
Ethnic clashes in Mali have left hundreds dead and thousands displaced, while armed groups operating across the Sahel have been attacking targets in Niger and Burkina Faso.
Nigeria has long tried to effectively deal with threats from the Boko Haram armed group, while clashes between herders and farmers have also increased insecurity concerns in the country.
Violence between the groups over access to grazing land and water, which is becoming scarce in the face of rapid population and drought, has left thousands dead.
But, determined to see to the success of this initiative, the Governors of Central Banks of the Economic Community of West African States (ECOWAS), who constitute the Central Banks Working Group on the ECOWAS Single currency, met on the 10th of June 2019 in Abuja, Nigeria. The meeting was to discuss findings of a study commissioned to address key issues confronting the process leading to the establishment of a momentary union in the ECOWAS Region namely: the exchange rate regime, momentary policy framework and the model of the future ECOWAS Central Bank.
While welcoming the Central Bank Governors, Jean-Claude Kassi Brou, the President of the ECOWAS Commission reminded them of their commitment to seek consensus on the outcome of the studies.
President Brou added that expectations are high within the Community and as such the need to double their efforts to put in place all the key pillars that are required for the establishment of the monetary union.
The ECOWAS 2018 report called, among others, for the promotion and liberalisation of regional trade, the consolidation of the customs union and the creation of a free trade area – all of which are yet to be met.
Mahamadou Issoufou, ECOWAS chairman and Niger’s president, said there was “a real firm political will” to increase efforts ahead of the January 2020 deadline.
“We are of the view that countries that are ready will launch the single currency and countries that are not ready will join the programme as they comply with all six convergence criteria,” Issoufou said.
Currently, eight ECOWAS countries – Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo – use the CFA Franc, while the other seven – Cape Verde, The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone – have their own currencies.
Moses Tule, Director of Monetary Policy Department of the Central Bank of Nigeria (CBN), says that the actualization of the ECOWAS single currency is of great importance as every region in Africa will have a monetary union by 2034 as stipulated by the African Union.
Johnson Chukwu, Managing Director and Chief Executive Officer, Cowry Assets Management Limited said, there is what is call common Ecowas Tarrif, CET, that is in place but it has not been fully implemented.
“So before we get to the point of convergence of currency, we must also define convergence criteria. Ultimately the objective of having a common currency within the ECOWAS countries is a very altruistic and positive economic idea but we have not gotten to the level where the convergence standards are about the same level,” observed.
In considering the possible net economic benefits of monetary union, some analysts said the countries will begin to have production structures that are similar, easier movement of workers, flexibility of wages and prices, and balance of shocks hitting the economies. All these they believe will enhance the attractiveness of such a union. One of the reasons for proceeding to monetary union quickly is to promote improvement in macroeconomic policies and to enhance prospects for other aspects of regional integration, including regional trade.
Doubts over meeting adoption deadline
As the deadline approaches, a herd of analysts are doubtful of the preparedness of member countries to meet up. According to Chukwu, there are certain other things that needs to be done in the region.”We need to improve the level of infrastructure within the West African region so that transport infrastructure is enhanced, goods and people can move easily from one location to the other. You open up the borders; you have a common external tariff. These are factors that will enhance the convergence before you adopt a common currency,” he observed.
Also, there are fears by other policy analysts that looking at the criteria set for member countries, the reality on ground does not suggest its possibility. Countries must have average annual inflation of 10 per cent. Nigeria is currently at 11.22 per cent. There has to be flexible exchange rate and due to the low interest rate enjoyed by countries who use France-backed franc, such could be discouraged as the currency (CFA) is already driving high investments for them already. Countries must have not more than 3per cent of budget deficit. This means that their annual spending must not be more than 3 per cent of their budgets among others.
However, the capacity of countries to repay debt has deteriorated sharply. Interest payments on public debt as a share of government revenues are now close to their historic peak of the early 2000s. This reflects higher debt, greater reliance on non-concessional external financing against a backdrop of declining grants, and insufficient domestic revenue mobilization.
Analysts at the research arm of United Capital Plc reasons that apart from a few member states in the French speaking African countries, most member states may not meet up with the set criteria for the West African single currency known as ‘ECO’ by 2020.
According to the firm, “it is unlikely for most member States to meet up with the set criteria by 2020. Save for a few member countries in the Francophone bloc. Majority of the members have inflation rate above 5per cent, sharp rising debt profiles as well as a fragile external buffer.
“Accordingly, we believe the new launch date is likely to be missed again, as most of the countries are yet to satisfy most of the preconditions.”
Additionally, the fact that no progress has been made as regards the design and production of the currency, adds to “our doubt,” United Capital research further observed.
In its report seen by Nigerian Tribune, the firm however stated that the policy comes with a lot of benefits for member states, ranging from; elimination of foreign exchange (FX) risks, a bigger and stronger single market as well as a stable domestic economy.
Other analysts believe that the ECOWAS bloc is particularly volatile, both politically and economically. This means countries might need to create unique responses to shocks which would be limited by the common monetary policy control.
Moreover, it’s uncertain that regional economies are strong enough to back bailouts in the event of a crisis among participating member states.
Separately, in his address welcoming the leaders to the summit, Nigerian President Muhammadu Buhari expressed concerns about increasing violence and attacks in the region.
“Despite the overall appreciable progress we have made, particularly in the field of political governance, our sub-region continues to face considerable security challenges,” Buhari said.
“We are all witnesses to the recurring incidents of intercommoned clashes, herder-farmer conflicts, banditry and terrorist attacks in all our countries,” he added. “The need for the adoption of a common strategy at the national and regional level to combat them [Insecurity], has become imperative”.