Slow progress casts shadow on possibility of West African Monetary Union
The latest January 1, 2015 deadline for the launch of a monetary union and adoption of a single currency (the Eco) for the West African Monetary Zone ((WAMZ) is missed yet, again.
Various deadlines for the commencement of the Monetary Union project in 2003, 2005, 2009 were also missed and 2020 is now being considered. This is because the six members states of WAMZ, which a few years back conceived the idea of establishing a common monetary space and the adoption of a single currency for the sub-region are finding it quite difficult to simultaneously meet all agreed macroeconomic convergence criteria before the project can take off.
There are now warnings that it would be in their best interest to significantly push the project launch time further to allow all member countries prepare and at least fulfill the basic convergence criteria, no matter when they are able to do this.
“An example is what happened in European Union where some members were not ready but went into the monetary union that was obviously not founded on a very solid platform and were not able to withstand when the financial crisis came,” the Coordinating Minister for the Economy and minister of Finance, Ngozi Okonjo-Iweala, warned during the week.
WAMZ was established by the Authority of the Heads of State and Government of five West African Member States, including Nigeria, Ghana, The Gambia, Sierra Leone, Guinea in December 2000. The objective was to establish a Monetary Union, a common Central Bank and introduce a single currency to be called the Eco.
After a decade of being an observer status, Liberia was absorbed as a full-fledged member of WAMZ in 2010. The West African Monetary Institute (WAMI) which would primarily undertake technical preparations for the launch of the monetary union and the establishment of a West African Central Bank (WACB) was established and commenced operations in March, 2001.
The WAMZ project requires all member states to meet four primary and six secondary macroeconomic convergence criteria as preconditions for take-off of the common monetary space.
The four primary criteria include that each member state must maintain end-of-year inflation rate at a single digit level; keep fiscal deficit within 4 percent of GDP; ensure that its Central Bank’s financing of fiscal deficit does not exceed 10 percent of previous year’s tax revenue; and keep to gross external reserves that cover at least three months of imports.
The six secondary convergence criteria on the other hand include; clearance and non accumulation of arrears; tax revenue that should be at least 20 percent of GDP; salary mass of not more than 35 percent of tax revenue; public investment from domestic resources of at least 20 percent; real deposit interest rate which must remain positive; and nominal exchange rate appreciation or depreciation within a band of +/- 15 percent of 2006 WAMZ exchange rate.
But West African Monetary Institute, WAMI says that the multilateral surveillance missions it had conducted so far to assess the compliance of the member countries show that “members find it difficult to satisfy and sustain their performance on the convergence criteria.”
No country, for instance satisfied all the primary convergence criteria between 2001 and 2005, hence, the postponement of the launch of the monetary union to December, 2009.
From 2006 to 2008, The Gambia satisfied all the 4 criteria but slipped in 2009, 2010, 2011, 2012 and 2013.
Nigeria met all the 4 conditions in 2006, 2007 and 2013 but slipped in the other years. In 2009 and 2010, only Liberia met all the 4 criteria on its accession to the WAMZ Programme, but it failed in subsequent years. Ghana was only able to meet all the 4 criteria in 2011 while Guinea and Sierra Leone have never met all the conditions.
However, the WAMZ monetary union was originally scheduled to commence in January 2003’ after a convergence process.
Despite efforts by member states to meet the benchmarks required for the emergence of the monetary union and the single currency, the launch was postponed to July 1, 2005 due to lack of macroeconomic and structure convergence.
Member countries also failed to simultaneously satisfy all the convergence criteria, leading to further postponements of the launch dates to 2009 and the latest on or before January 2015- which is again not likely.
The inability of WAMZ members to fulfill these macroeconomic convergences at various times had been attributed to the negative impact of civil conflicts experienced by some of them and till recently the huge impact if the global financial crisis which slowed their progress.
Another factor is the persistent expansionary fiscal policy being pursued by governments of these member states, which tend to frustrate efforts of their central banks on tight monetary policies.
WAMI notes for instance, that an observable behaviour or trend regarding performance on the convergence criteria is that, since the introduction of the WAMZ Programme, member countries’ performance on the convergence criteria, especially fiscal deficit to GDP and inflation criteria, continued to deteriorate during election years.
But despite the commitment of the countries to achieve this particular goal, the continued drag and failed attempts are particularly raising concerns as to whether the aspired monetary union is even necessary or better still, would ever come to light since even the global macroeconomic conditions remained tight and ever challenging.
Thus, Wednesday’s pronouncement by Godwin Emefiele, governor of the Central Bank of Nigeria that the planned take-off date of January 2015 for the WAMZ Monetary Union was no longer feasible only reaffirmed the apparent slow pace of achieving this lofty goal and persisting difficulties.
Emefiele confirmed that the date was no longer likely since the preparedness study commissioned by the 32nd meeting of the Convergence Council showed that the performance of Member States’ on the convergence scale relative to requirements for the establishment of a monetary union was still inadequate.
He said member countries’ business cycle synchronisation in terms of real GDP, inflation, broad money and interest rates remained weak, while their level of institutional preparedness for the monetary union was still not sufficient.
On a positive note, however, the CBN governor said the same study found that member countries continued to make remarkable progress towards the establishment of a common market and the implementation of the ECOWAS Trade Integration Protocols and Convention as well as significant progress towards reforms of their financial systems. The Zone is also making significant progress especially in building necessary infrastructure and institutional capacity to support the establishment of a sound monetary union, Emefiele also said.
“It is important that we remind ourselves of the need for the buy-in of all Member States in the WAMZ Project. We need to constantly up-date ourselves with the level of progress made, challenges and level of cooperation required,” he advised.
Analysts say that that benefits of adopting a monetary union is almost as huge as the costs.
It has been argued that the potential benefits of a monetary union are questionable and that the potential costs could be very serious. A successful monetary union, basically requires that the economies joining it are broadly the same, especially in regard to their response to external and internal inflation shocks.
While it leads to greater competition, lower prices, and more international trade and investment because there is greater price transparency, for instance, joining a monetary union can lead to larger economic fluctuations, budget deficits (in the case of negative asymmetric shock) and particularly a possible moral hazard in the legislation and execution of government budgets.
Therefore, a hasty launch, without getting the strong macroeconomic fundamentals right would be disastrous, following experience from the recent financial crisis of the Eurozone. And for Nigeria, it would even be more catastrophic being the largest economy among the WAMZ states and indeed Africa.
Kadre Desire Ouedrago, President of ECOWAS Commission confirms this, as he warned that it is critical to draw lessons from successive postponements of missed deadlines in 2003, 2005, 2009 and probably 2015 for WAMZ, and also to take into consideration the factors behind the euro crisis, which were hugely fiscal and budgetary problems.
“It is clear that the intended aim is not to rush to create a currency without a solid foundation,” he also affirms.
And according to Okonjo-Iweala, “Nigeria being the largest economy in Africa is likely to bear the brunt of any union or launch that is not based on solid grounds.
“Therefore, before we go in, it is very important to make sure we get everything right to ensure sustainability because if this does not happen, members will begin to exit when they cannot keep up with the criteria.”
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