Finance ministers and central bank governors of 15 West African countries, in June this year, met in Abidjan to deliberate and agree on technical issues surrounding the creation of a single currency for the Economic Community of West African States (ECOWAS) next year. The Côte d’Ivoire Finance Minister, Adama Kone, said the community has established a roadmap for the establishment and implementation of a new currency, which will follow a gradual approach that allows countries that have met the convergence criteria to join the monetary union, an intergovernmental agreement that involves two or more states sharing the same currency. The recommendation for the single regional currency is expected to be approved at the end of June 2019 when the countries’ leaders will gather for a summit in Abuja, Nigeria.
The intent of a single West African currency is to leverage the fairly robust terms of political cooperation that exist among the bloc’s members and promote greater intra-bloc trade relationships that are impeded in part by the cost of doing business across multiple currencies. Despite the efficiencies that would be gained from conducting trade using a single currency, as opposed to the nine (not to mention global currencies, such as the U.S. dollar, or Euro) that the region currently trades in, there are geopolitical reasons the single currency might not see the light of the day. The fear of loss of sovereignty, the implications of the move on the economies of individual countries, and the fear of empowering an intra-bloc hegemon make for acceding to a single regional currency geopolitically perilous.
It is expected that the Eco would be modelled after the Euro, the unified currency used by 27 member countries of the Eurozone. However, the Euro has several shortcomings, notably the inability of any individual economy to control for economic shock. With the utilization of a single currency, macroeconomic fluctuations have in the past been controllable by the individual country. National governments could adjust interest rates and exchange rates to encourage investments and large consumer purchases with national currencies. The Euro, unfortunately, makes interest-rates adjustments by individual countries impossible, so this form of recovery is lost as interest rate decisions for all of the Eurozone are controlled by the European Central Bank (ECB).
The sovereign ability of individual countries to adjust their currency’s exchange rate, and notably devalue their currency in case of an economic downturn, is lost. In such an instance whereby an exchange rate value is retained at an excessively high rate, foreign purchases of the countries’ goods are discouraged. The implication is that countries will find it difficult to fully be in control of managing their economic recovery process. The adjustments that Nigeria was able to make to its FX regime during the 2016 economic recession for example would have been impossible, with the potential impact of prolonging the recession. Single multi-country currencies lean towards stability as opposed to flexibility and this can hamper policy responses. There is no exchange-rate fluctuation for individual Euro countries.
One of the conditions set for the implementation of the single currency in West Africa is that all member countries must achieve single digit inflation of 5% or less. This is a difficult requirement to meet, especially for Nigeria, the largest economy in the region, whose inflation rate averaged 11.92 percent between 2003 and 2016; Ghana experienced an average inflation rate of 16.92 percent between 2000 and 2016, rates which by far exceed the 5 percent requirement.
West African countries do not trade primarily with themselves, which also stands as a challenge to the uniform currency in the region. The primary use for a single currency is to facilitate trade. In the situation where intra-bloc trade is so low, the outstanding question remains: what is the true agenda for a single currency? Geopolitics also informs the reticence toward deeper economic integration in West Africa: none wants to yield sovereignty to a neighbour. As much as the CFA franc is a meritorious regional currency, it was also established as a tool of geostrategy to unify and empower francophone West African countries to counter Nigeria’s hegemonic capabilities. National governments in the ECOWAS region will not want to cede monetary policy to Abuja, nor will any Nigerian government willing cede monetary policy to a neighbouring government smaller than several of its internal state governments.
A more compelling solution for facilitating greater intra-bloc trade, and which has a far lower risk to sovereignty, may be to address structural issues, such as inadequate supply chain infrastructure, arbitrary border tariffs and non-tariff barriers, abysmal corruption and wide-area insecurity, especially considering that eight of the 15 countries, the majority, already have the CFA franc as a common currency.
This analysis is the product of a strategic partnership between SBM Intel and Geomarkets Africa LLC. All the information contained in it is correct as of Tuesday, 25 June, 2019.