With the structural failings of the European monetary union at the root of Europe’s economic malaise, the viability of a single monetary union in West Africa has come squarely under the microscope.
Fifteen states in this African bulge formed a regional economic union in 1975 known as the Economic Community of West African States (ECOWAS) to promote growth, stability and economic development. Languages and currency, however, divide the regional grouping.
ECOWAS’s seven former French colonies use the CFA (for Communauté Financière Africaine) franc as their common currency. These French-speaking nations – Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal and Togo – together form the West African Economic and Monetary Union (or UEMOA after its French initials), a customs and currency union established alongside ECOWAS in 1994. Former Portuguese colony Guinea-Bissau also uses the CFA franc.
ECOWAS’s five English-speaking countries – Gambia, Ghana, Liberia, Nigeria and Sierra Leone – each use their own legal tender. Portuguese-speaking Cape Verde trades with its escudo. French-speaking Guinea, the 15th ECOWAS member, uses the Guinean franc.
The currency divide has long been one of ECOWAS’s major stumbling blocks. Since 2000, however, six ECOWAS nations have been planning to introduce a common currency, known as the eco, in a new monetary union, the West African Monetary Zone (WAMZ). The long-term strategy is for the CFA to merge with the eco and transform into the region’s only currency.
This scheme raises many arguments about the merits of monetary unions, especially in light of Europe’s ongoing financial crisis. Monetary unions make regional trade simpler and ensure monetary stability by demanding prudential policy in member states, proponents say.
Such unions, however, fail to acknowledge the complexities of members’ individual economies, critics claim. They force domestic policymakers to fight economic battles with “one hand tied behind their backs”. One such critic is Sanou Mbaye, a former senior official at the African Development Bank. He blames the CFA, which is pegged to the euro, for making exports from CFA member countries more expensive than those of their competitors.
WAMZ was born in April 2000 at a summit in Accra, Ghana. Five ECOWAS members – Gambia, Ghana, Guinea, Nigeria and Sierra Leone – agreed to create a common central bank and currency by 2003, and then merge with UEMOA the following year. Liberia joined WAMZ in February 2010. Cape Verde, whose currency is pegged to the euro, is expected to join WAMZ once the eco is established. According to this plan, the eco would run parallel to the CFA franc until 2020, when all the ECOWAS countries would adopt one currency.
The body set up to make the technical preparations for the transition, known as the West African Monetary Institute (WAMI), has postponed this implementation several times. WAMI has been dragging its feet because most WAMZ members have failed to achieve the prescribed economic indicators needed for the smooth take-off of the common currency: single-digit inflation, central bank financing of government deficit of less than 10% of the previous year’s revenue, a government budget deficit of no more than 4% of GDP, and enough foreign exchange reserves to cover three months of imports.
As of June 2013, only Nigeria was close to reaching the required goals. Ghana is doing particularly badly: battling a fiscal deficit, double-digit inflation as well as other domestic and external headwinds, according to the IMF. Other WAMZ members have had similarly inconsistent records.
Lessons in the euro crisis
Considering Europe’s recent recession, however, the eco’s delay may be a blessing in disguise. The euro – the common currency among 23 European nations – has been besieged by the debt crisis in some parts of the continent, especially Greece.
The euro crisis holds lessons for Africa. Although the EU is an imperfect political union and has a monetary union co-ordinated by the European Central Bank, it does not have fiscal union. European countries still control their budgets and spending. Without this fiscal alliance, the EU was unable to overcome “asymmetric shocks”, where some unproductive countries, such as Greece, suffered downturns and needed fiscal help while others did not. It was difficult to discipline members who breached the pact.