The Eco-currency: A new chapter for West Africa

The ECO is supposed to boost economic development in the West African region and improve cross border trade. Twenty years ago in the capital city of Ghana, Accra, six leaders from the West African states declared their intentions of proceeding towards a monetary union among the non-CFA franc countries in the region as a first step towards a monetary union which will spread towards all states in the ECOWAS region by 2004. The union was and is still intended to reduce central bank financing of budget deficits to 10%. A strong declaration from the member states was that, a strong political commitment such as national policies would facilitate the regional monetary integration process (IMF, 2001). The Eco is the proposed name for the single or common currency that the West African Monetary Zone (WAMZ) plans to introduce in the framework of the Economic Community of West African States (ECOWAS). The single currency will further be adopted by both WAMZ and UEMOA across the ECOWAS states. Under the new agreement or deal, the Eco will remain pegged to the Euro, but the African states will not keep half (50%) of their reserves in the French Treasury and there will no longer be a French representative when it comes to the currency union’s board. The changes, however, will only affect the West African form of the currency used by Benin, Burkina Faso, Guinea Bissau, Ivory Coast, Mali, Niger, Senegal and Togo — all former French colonies except Guinea Bissau. Although advocates of this single currency such as myself, believe that the existence of different exchange regimes in the region impedes trade within the region due to high transaction costs particularly from fees in currency conversion and hedging costs to cover exchange rate risk, it is worth noting the challenges in the implementation process. With the AfCFTA agreement set to eliminate tariffs on goods and services, I think the adoption of a single currency, if successful, will facilitate trade, lower transaction costs and facilitate payments among ECOWAS countries. If implemented, countries across the region will be able to move and spend money across different countries without worrying about exchange rate costs. To begin with, exchange rates in the region are relatively volatile. A case for a monetary union or integration will help address the issue of multiple currencies and exchange rate fluctuations that affect intra-regional trade. In 2013, market capitalisation was 13% of Gross Domestic Product for WAEMU, just over 8.5% for Ghana and 21% for Nigeria, against an average of 65% for Sub-Saharan Africa (IMF, 2019). A case for a single currency adoption is thus justified for the challenges recently mentioned. Furthermore, if the single currency is properly implemented, it has a huge potential to improve trade by allowing specific countries to specialize at what they are good at, and exchange it for other goods that other countries in the bloc produce more efficiently. The Eco currency will also help to address the region’s monetary problems like the difficulty in converting some of its currencies and the lack of independence of central banks. But despite these possible benefits, proponents of this integration such as myself, remain worried about the lack of integration policies among member countries in the region. It is a fact that a single currency will only work if all countries involved are economically aligned, which is currently not the case. Some might argue that economic alignment might not necessarily be a pre-requisite for the adoption of a single currency, as in the case of the EU, where you can find that some economies have received support from Germany, France and even from Nordic countries. The Guinean economy, for example, has a GDP of around $7 billion, that’s less than Nigeria’s 13th largest state, Abia with $8.7 billion. This difference in economies already makes a sensible uniform policy like the trade currency very difficult but not impossible to achieve. A major requirement for the Eco to be implemented, there are ten convergence criteria that each country would be required to meet which have been set out by the West African Monetary Institute. The requirements are set below: 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 4% of the GDP.  A central bank deficit-financing of no more than 10% of the previous year’s tax revenues.  Gross external reserves that can give import cover for a minimum of three months. 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 percent. Public investment to tax revenue equal to or greater than 20 percent. A stable real exchange rate. A positive real interest rate. Up to the fiscal year 2011, only Ghana has been able to meet all the primary criteria in any single fiscal year. Critics of this monetary integration would signal this as an indication of weak implementation processes. Furthermore, a state like Nigeria that is not only known for having a history of high inflation but also oil dependent economy that is sensitive to external shocks represents over 70% of Ecowas’ wealth. This imbalance would surely exacerbate the significant structural differences between the 15 states inside the proposed economic union. Can it work? For starters, just five countries out of the fifteen states in the region currently meet the single currency’s criteria of a budget deficit which is 4% and below and an inflation rate that is not higher than 5% and not forgetting debts worth less than 70% of GDP. To me, this seems like a strict convergence criteria for joining the single currency which has proved to be a stubborn block to the introduction of the currency and almost seems unlikely to be met by most countries, more especially this year. While the objective of this monetary union is quite clear, it should be noted an adoption of a single currency alone will not address the serious domestic problems that the member-states are currently facing. Therefore, instead of trying to meet a short deadline for monetary union, member states should now, more than ever, invest their energies in reinforcing convergence on low inflation, sustainable fiscal policies and structural policies that will foster long term growth. If countries in West Africa can boost intra-regional trade, increase foreign investment and job creation, this will undoubtedly enable the achievement of the convergence criteria mentioned above. Much criticism stems from the fact that if goods in the region cannot move freely, how can then a single currency adoption succeed? It is for this reason that the establishment of Trade Agreements such as the African Continental Free Trade Area (AfCFTA) will foster the goods and services movement amongst African states with ease. The Eco will clearly not be the sole solution for West Africa’s mounting problems, but I am certainly hopeful that the region will do well to in successfully adopting and implementing their new single currency. The year 2020 brings so much hope the development for the African continent. Not only are we witnessing the adoption of a common currency, but major developments such as the African Continental Free Trade Area and not forgetting the formation of a Cocoa Cartel by two Cocoa giants, Ghana and Ivory Coast, certainly gives us an indication that Africa is certainly rising. Given that a law on the reform of the Eco only passes to the French parliament until the end of September 2020, the agreement to adopt the Eco does not risk doing this before October 2020.

A well seasoned Economist and Policy Analyst specializing in Intra-Africa Trade.