Towards common currency regime for the West African sub-region
Font size:
It seems obvious that the English speaking West African states lag behind when it comes to the sub-regional goal of economic integration. The facts are clear. The French speaking countries have, since the colonial times, operated as a common monetary zone using same currency while their counterparts in the old British West Africa have till date used their different currencies.
A businessperson travelling from Benin Republic to Togo or Cote d’Ivoire doesn’t need to worry about currency conversion. He might very well not carry cash beyond the one he needs for use while in transit, as he can easily withdraw his money in the branch of his bank on arrival in Lome or Abidjan. The same cannot be said of a Nigerian businessman going to Ghana or Sierra Leone.
Despite the growing presence of Nigerian banks in Ghana and lately The Gambia and Sierra Leone, an account owner in say UBA or Intercontinental Bank or indeed any other Nigerian bank, cannot directly access his account in the same bank in Ghana. The same businessperson cannot use his bank ATM cards on the ATMs of the same bank in Ghana. He cannot even issue, for instance, a cheque to be cashed in the Ghana branch of his bank.
An American businessman, on the other hand, can come to Ghana with his Citibank or JP Morgan Chase Bank card and easily withdraw from his account in far away United States. He can issue a cheque and the local banks will easily accept it for transactions done in Ghana.
While the process is easy for the foreigner, it is virtually impossible for the Anglophone ECOWAS citizen. This capacity constraint places huge burden on business people in English-speaking countries who transact business across the countries of the sub-region. The cry for change is as old as the Economic Community of West African States (ECOWAS) itself.
It must be acknowledged that the push towards regional integration has witnessed much rejuvenation in the last few years. However, crucial to the success of the sub-region’s free trade agreement, is the restructuring of fiscal systems to allow trade to be made easier and to reduce the cost of doing business. The old ECOWAS payment and settlement system allowed payments in regional currencies to be made between participating central banks. Central banks would then settle with each other periodically in US dollars through the Reserve Bank of New York.
In the days when exchange rates were fixed by governments, and when central banks had combined commercial bank functions, this system suited the needs of the sub-region’s traders. While a new payment system cannot address underlying macroeconomic constraints, a common regional currency would help to facilitate greater economic dealings among member states of ECOWAS.
In 1999, the sub-regional body decided to fast-track its integration process through the establishment of a second monetary zone. This is expected to merge in future with the CFA Zone that already exits for eight Francophone countries. Called the West Africa Monetary Zone (WAMZ), the union is made up of Nigeria, Ghana, Sierra Leone, The Gambia and Guinea, with the possibility of others joining.
WAMZ will midwife the introduction of Eco, the new ECOWAS currency planned for December 2009. The benefits of monetary union are enormous. It offers greater opportunities to trade in a bigger market, reduces transaction costs, eliminates exchange rate risks, and ensures increase in scale economy, which will translate in cheaper prices for goods produced in the sub-region.
In addition, according to Joseph Nnanna, Director General of the West Africa Monetary Institute (WAMI), the existence of such a union will lower interest rates thus reducing the cost of borrowing; lead to lower inflation ensuring higher value for money and price stability; and guarantee more sustainable economic growth, which will increase job security. All these are benefits that Anglophone West Africa countries are for now denied due to the non-existence of a common currency.
According to the master plan for the single currency, the establishment of the West Africa Central Bank (WACB) to be headquartered in Accra, Ghana will precede its introduction. WACB is expected to begin operations on July 1, 2009 – six months before Eco comes into existence. At start, Eco will be used in the five WAMZ countries. The whole process has come under intense criticism in recent times for what some call the foot-dragging by leading countries.
Indeed, the subregional integration scheme has suffered from implementation lapses – including those due to weak governance. Although these were attempts before 1999 to advance the agenda of monetary cooperation, political problems and other economic priorities in several of the member countries have inhibited progress.
Eco scepticism is still strong in some quarters. The first substantial disadvantage of a common monetary zone is the fact that member countries will lose the freedom over many elements of their monetary policy. They would most likely lose freedom over the ability to revalue their currencies, as well as losing control over domestic interest rates which are a vital tool in controlling inflation, investment, and aggregate demand.
The implementation of the Eco is likely to mean that both Nigeria, and the collective Eco-zone will have increasing influence in the world economy, and this will reduce the volatility of the Eco, thus promoting long-term trade with countries external to the Eco-zone. Nigeria is key in the effective implementation of Eco. For the country which alone is more than half the population of the sub-region, Koli Kofi, a stronger believer in the necessity of the single currency says “big is good but bigger is better”.
“It is the beginning of a new chapter in African history. It is the future we have always looked forward to even from the days of Kwame Nkrumah and other pan-Africanists. We are witnessing the dawn of an age that the people of West Africa have dreamed of for centuries,” says Kofi.
Despite past failures and the lacklustre implementation of the scheme, the case for integration remains compelling. In considering the possible net economic benefits of the monetary zone, similarity of production structures, factor mobility, flexibility of wages and prices, and symmetry of shocks hitting the economies all enhance the attractiveness of such a union.
The sub-region is drawing substantially from the experience of Europe which in January 2002 introduced a common currency. The Eco is part of efforts by ECOWAS member states to implement policies that will encourage the creation of a single African market throughout the African Union (AU) in the long run. At the last AU summit in Accra where the issue of a union government for Africa was debated, it was resolved that the continent should consolidate on sub-regional integration and transit from there eventually to the bigger continental dream.
Given the potential of the common currency project to contribute to the attainment of the poverty reduction objective of the Millennium Development Goals (MDGs), the World Bank gives its full backing to it. The bank which has poverty reduction as its primary mandate, is committed to facilitating the ECOWAS dream because of the great future it holds for the economies of the countries involved.
The bank recently approved a $408.69 million package to help the West Africa Economic and Monetary Union (WAEMU), the CFA union, enhance its global competitiveness. The union at the moment comprises the eight French-speaking countries of Benin, Burkina Faso, Niger, Cote d’Ivoire, Mali, Senegal, Togo and Guinea Bissau, which altogether is home to about 75 million West Africans.
The WAEMU Capital Market Development Project for which the World Bank facility is specifically meant, is intended to help the countries create a more functional common market, with common tariff and commercial policies, supporting the free circulation of people, goods, services, and capital.
A major impediment to regional economic growth has been the lack of diversified financial projects and services for individuals and businesses. The capital market project is part of a broader regional strategy to create a stable economic environment for investors and increase foreign direct investments.
The objectives of the West African Capital Market Development Project are to:
• Contribute to the development of the capital market in the eight countries that form WAEMU;
• Support key institutions in the regional financial market to improve their institutional capacity to provide access to medium a long-term commercial financing; and
• Mobilize public and private financing for the region’s infrastructure development through Banque Ouest-Africaine de Development (BOAD), the regional development bank of the WAEMU countries
The people of the participating countries would benefit from the development of an efficient and liquid regional capital market supporting the financial needs of the countries without resources for businesses and individuals to finance investments. Other gains include, more employment opportunities and efficient services for the population and private commercial financing for local and regional infrastructure like the integrated road network. In addition to major financial and economic reforms, WAEMU countries have developed a regional transport strategy, laying the foundation for an inter-connecting road system to link the eight countries.
World Bank’s contribution to the project consists of an International Development Association (IDA) credit of $96.39 million, an IDA insurance guarantee of $70 million, and a Multilateral Investment Guarantee Agency (MIGA) insurance guarantee of $70 million. As added incentive, the IDA/MIGA guarantee facility will provide guaranteed insurance for longer-term private investments in small and medium-sized infrastructure and privatization projects by mitigating the political and commercial risks that constrain investors.
The time is now to make finance work for West Africa. Actions such as enabling stock exchanges and financial market to perform more effectively, and widening the accessibility of transparently priced business capital, observers say, are crucial to unlocking the entrepreneurial potential of small and medium enterprises (SMEs) within the subregion.
What are the implications of a single sub-regional currency for SMEs bearing in mind that West Africa is a small economy dominated by small businesses? Edwin Baffoe, an SME consultant in Accra believes the success of the monetary zone, with free movement of capital goods and services and the internet, will make it possible for SMEs to compete against larger companies with minimum set-up costs, opening up new strategic options. “With such a move towards cross-border operations, businesses capable of managing international logistics will be able to capitalise on competitive advantage,” says Baffoe.
Ghana’s decision last year to redenominate its currency, cedi, according to Bank of Ghana sources, is an expression of lack of faith in the Eco project but part of the country’s strategy to meet the convergence criteria required for the eventual emergence of Eco-zone. The country’s old cedi exchanged for 9,500 cedis to one US dollar. With the knocking off of four zeros, the new cedi now exchanges for 95 pesewas (equivalent of US cent) to a dollar.
The Eco currency when introduced will make it easier to pay for and receive payments in Eco as the sub-regional banks will be able to open Eco-accounts for business owners. SMEs will have greater choice and business opportunities. Many small businesses will be made more competitive by the disappearance of exchange risk. A single central bank with higher forex reserves and improved technical capabilities can provide stable exchange rates, lower inflation and sustained growth.
To effectively participate in today’s global trade and financial systems, African countries must achieve real integration - along the lines of the European Union, and compete as regional trading blocs. The ECOWAS single market project remains an attractive proposition and its success could ultimately lead to the greater African union goal of a union government with common defence and foreign policies. This would give Africa a more effective voice in international affairs.
A businessperson travelling from Benin Republic to Togo or Cote d’Ivoire doesn’t need to worry about currency conversion. He might very well not carry cash beyond the one he needs for use while in transit, as he can easily withdraw his money in the branch of his bank on arrival in Lome or Abidjan. The same cannot be said of a Nigerian businessman going to Ghana or Sierra Leone.
Despite the growing presence of Nigerian banks in Ghana and lately The Gambia and Sierra Leone, an account owner in say UBA or Intercontinental Bank or indeed any other Nigerian bank, cannot directly access his account in the same bank in Ghana. The same businessperson cannot use his bank ATM cards on the ATMs of the same bank in Ghana. He cannot even issue, for instance, a cheque to be cashed in the Ghana branch of his bank.
An American businessman, on the other hand, can come to Ghana with his Citibank or JP Morgan Chase Bank card and easily withdraw from his account in far away United States. He can issue a cheque and the local banks will easily accept it for transactions done in Ghana.
While the process is easy for the foreigner, it is virtually impossible for the Anglophone ECOWAS citizen. This capacity constraint places huge burden on business people in English-speaking countries who transact business across the countries of the sub-region. The cry for change is as old as the Economic Community of West African States (ECOWAS) itself.
It must be acknowledged that the push towards regional integration has witnessed much rejuvenation in the last few years. However, crucial to the success of the sub-region’s free trade agreement, is the restructuring of fiscal systems to allow trade to be made easier and to reduce the cost of doing business. The old ECOWAS payment and settlement system allowed payments in regional currencies to be made between participating central banks. Central banks would then settle with each other periodically in US dollars through the Reserve Bank of New York.
In the days when exchange rates were fixed by governments, and when central banks had combined commercial bank functions, this system suited the needs of the sub-region’s traders. While a new payment system cannot address underlying macroeconomic constraints, a common regional currency would help to facilitate greater economic dealings among member states of ECOWAS.
In 1999, the sub-regional body decided to fast-track its integration process through the establishment of a second monetary zone. This is expected to merge in future with the CFA Zone that already exits for eight Francophone countries. Called the West Africa Monetary Zone (WAMZ), the union is made up of Nigeria, Ghana, Sierra Leone, The Gambia and Guinea, with the possibility of others joining.
WAMZ will midwife the introduction of Eco, the new ECOWAS currency planned for December 2009. The benefits of monetary union are enormous. It offers greater opportunities to trade in a bigger market, reduces transaction costs, eliminates exchange rate risks, and ensures increase in scale economy, which will translate in cheaper prices for goods produced in the sub-region.
In addition, according to Joseph Nnanna, Director General of the West Africa Monetary Institute (WAMI), the existence of such a union will lower interest rates thus reducing the cost of borrowing; lead to lower inflation ensuring higher value for money and price stability; and guarantee more sustainable economic growth, which will increase job security. All these are benefits that Anglophone West Africa countries are for now denied due to the non-existence of a common currency.
According to the master plan for the single currency, the establishment of the West Africa Central Bank (WACB) to be headquartered in Accra, Ghana will precede its introduction. WACB is expected to begin operations on July 1, 2009 – six months before Eco comes into existence. At start, Eco will be used in the five WAMZ countries. The whole process has come under intense criticism in recent times for what some call the foot-dragging by leading countries.
Indeed, the subregional integration scheme has suffered from implementation lapses – including those due to weak governance. Although these were attempts before 1999 to advance the agenda of monetary cooperation, political problems and other economic priorities in several of the member countries have inhibited progress.
Eco scepticism is still strong in some quarters. The first substantial disadvantage of a common monetary zone is the fact that member countries will lose the freedom over many elements of their monetary policy. They would most likely lose freedom over the ability to revalue their currencies, as well as losing control over domestic interest rates which are a vital tool in controlling inflation, investment, and aggregate demand.
The implementation of the Eco is likely to mean that both Nigeria, and the collective Eco-zone will have increasing influence in the world economy, and this will reduce the volatility of the Eco, thus promoting long-term trade with countries external to the Eco-zone. Nigeria is key in the effective implementation of Eco. For the country which alone is more than half the population of the sub-region, Koli Kofi, a stronger believer in the necessity of the single currency says “big is good but bigger is better”.
“It is the beginning of a new chapter in African history. It is the future we have always looked forward to even from the days of Kwame Nkrumah and other pan-Africanists. We are witnessing the dawn of an age that the people of West Africa have dreamed of for centuries,” says Kofi.
Despite past failures and the lacklustre implementation of the scheme, the case for integration remains compelling. In considering the possible net economic benefits of the monetary zone, similarity of production structures, factor mobility, flexibility of wages and prices, and symmetry of shocks hitting the economies all enhance the attractiveness of such a union.
The sub-region is drawing substantially from the experience of Europe which in January 2002 introduced a common currency. The Eco is part of efforts by ECOWAS member states to implement policies that will encourage the creation of a single African market throughout the African Union (AU) in the long run. At the last AU summit in Accra where the issue of a union government for Africa was debated, it was resolved that the continent should consolidate on sub-regional integration and transit from there eventually to the bigger continental dream.
Given the potential of the common currency project to contribute to the attainment of the poverty reduction objective of the Millennium Development Goals (MDGs), the World Bank gives its full backing to it. The bank which has poverty reduction as its primary mandate, is committed to facilitating the ECOWAS dream because of the great future it holds for the economies of the countries involved.
The bank recently approved a $408.69 million package to help the West Africa Economic and Monetary Union (WAEMU), the CFA union, enhance its global competitiveness. The union at the moment comprises the eight French-speaking countries of Benin, Burkina Faso, Niger, Cote d’Ivoire, Mali, Senegal, Togo and Guinea Bissau, which altogether is home to about 75 million West Africans.
The WAEMU Capital Market Development Project for which the World Bank facility is specifically meant, is intended to help the countries create a more functional common market, with common tariff and commercial policies, supporting the free circulation of people, goods, services, and capital.
A major impediment to regional economic growth has been the lack of diversified financial projects and services for individuals and businesses. The capital market project is part of a broader regional strategy to create a stable economic environment for investors and increase foreign direct investments.
The objectives of the West African Capital Market Development Project are to:
• Contribute to the development of the capital market in the eight countries that form WAEMU;
• Support key institutions in the regional financial market to improve their institutional capacity to provide access to medium a long-term commercial financing; and
• Mobilize public and private financing for the region’s infrastructure development through Banque Ouest-Africaine de Development (BOAD), the regional development bank of the WAEMU countries
The people of the participating countries would benefit from the development of an efficient and liquid regional capital market supporting the financial needs of the countries without resources for businesses and individuals to finance investments. Other gains include, more employment opportunities and efficient services for the population and private commercial financing for local and regional infrastructure like the integrated road network. In addition to major financial and economic reforms, WAEMU countries have developed a regional transport strategy, laying the foundation for an inter-connecting road system to link the eight countries.
World Bank’s contribution to the project consists of an International Development Association (IDA) credit of $96.39 million, an IDA insurance guarantee of $70 million, and a Multilateral Investment Guarantee Agency (MIGA) insurance guarantee of $70 million. As added incentive, the IDA/MIGA guarantee facility will provide guaranteed insurance for longer-term private investments in small and medium-sized infrastructure and privatization projects by mitigating the political and commercial risks that constrain investors.
The time is now to make finance work for West Africa. Actions such as enabling stock exchanges and financial market to perform more effectively, and widening the accessibility of transparently priced business capital, observers say, are crucial to unlocking the entrepreneurial potential of small and medium enterprises (SMEs) within the subregion.
What are the implications of a single sub-regional currency for SMEs bearing in mind that West Africa is a small economy dominated by small businesses? Edwin Baffoe, an SME consultant in Accra believes the success of the monetary zone, with free movement of capital goods and services and the internet, will make it possible for SMEs to compete against larger companies with minimum set-up costs, opening up new strategic options. “With such a move towards cross-border operations, businesses capable of managing international logistics will be able to capitalise on competitive advantage,” says Baffoe.
Ghana’s decision last year to redenominate its currency, cedi, according to Bank of Ghana sources, is an expression of lack of faith in the Eco project but part of the country’s strategy to meet the convergence criteria required for the eventual emergence of Eco-zone. The country’s old cedi exchanged for 9,500 cedis to one US dollar. With the knocking off of four zeros, the new cedi now exchanges for 95 pesewas (equivalent of US cent) to a dollar.
The Eco currency when introduced will make it easier to pay for and receive payments in Eco as the sub-regional banks will be able to open Eco-accounts for business owners. SMEs will have greater choice and business opportunities. Many small businesses will be made more competitive by the disappearance of exchange risk. A single central bank with higher forex reserves and improved technical capabilities can provide stable exchange rates, lower inflation and sustained growth.
To effectively participate in today’s global trade and financial systems, African countries must achieve real integration - along the lines of the European Union, and compete as regional trading blocs. The ECOWAS single market project remains an attractive proposition and its success could ultimately lead to the greater African union goal of a union government with common defence and foreign policies. This would give Africa a more effective voice in international affairs.
Add to:
del.icio.us |
Digg
del.icio.us |
Digg
Email to a friend
Print version
Plain text
Comments ( posted):
Post your comment