Will West Africa’s proposed ‘eco’ currency ever float?

“We are really learning from the euro crisis,” said John H Tei Kitcher, WAMI’s acting director-general. “One lesson that stands tall is the need for individual countries aspiring to join monetary unions to be fiscally disciplined, transparent with their economic data with their peers and committed to converging to the agreed criteria.”

Fiscal discipline will help member countries to meet the convergence criteria and buffer them against potential shocks that could result from belonging to a monetary union. Such discipline requires a strong political commitment from member countries.

Nigeria’s influence 

Another worrying issue is the dominant influence Nigeria would have on the zone. Nigeria’s population currently accounts for about 80% of the estimated 200m people residing in the WAMZ area and about 85% of the region’s US$220bn GDP, according to 2012 IMF data. Lastly Nigeria, a major oil exporter, benefits from higher oil prices, while its oil-importing neighbours suffer from these fluctuations.

Nigeria’s dominant size and strength within ECOWAS means smaller countries will have minimal say in exchange rate and monetary policy decisions. As a result, these countries will worry about a loss of sovereignty should ECOWAS launch a single common currency.

In addition, the policies and priorities of the region’s English- and French- speaking countries have diverged historically. Over the last 10 years, the Anglophone countries have shown elevated inflation rates and pursued expansionary fiscal policies, while CFA countries have displayed marginal consumer price inflation and greater fiscal prudence. Each country will favour different approaches to exchange rate policy depending on whether it is import- or export-oriented.

“ECOWAS is just being overambitious,” says Femi Edun, a lecturer in the economics department at Lagos State University. “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 [the] eco. The issue of [the] eco should come last, after all these issues have been addressed.”

Little intra-African trade

Another critical drawback is the paucity of commerce within ECOWAS. “A common currency makes sense if member countries have important intra-regional trade ties,” says Samir Gaidio, emerging market strategist at Standard Bank in London. “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, total trade with other ECOWAS countries is about 10%, he adds.

The formation of the European Economic Community and the European Free Trade Association was based on heavy trading between European states and the benefits that removing customs duties, tariffs and currency restrictions would bring to all the partners.

Africa, with minimal intra-regional trade, is not comparable. For example, in the ECOWAS region, intra-African trade, even in foodstuffs, is only a small percentage of national trade for most countries in the union, according to a 2010 paper prepared by the Overseas Development Institute, a UK-based independent think-tank.

Intra-African trade is depressed because the continent lacks industrialisation and is limited to exporting raw, unprocessed materials abroad. It lacks a large and sophisticated domestic market for semi-finished goods which can be processed further, and it lacks efficient storage facilities. Most importantly, Africa’s poor roads, bridges, railways, inefficient border posts and other transport networks, as well as faulty communications and unreliable and insufficient energy, result in high production and transaction costs.

English-speaking West Africa can learn from the European crisis. A viable monetary union needs similar production structures, flexible wages and prices, and symmetrical shocks hitting the economies. Unless underpinned by sound economic fundamentals and a credible plan for economic convergence, the eco will fail.

This article was first published by Good Governance Africa