INTRODUCING A COMMON CURRENCY:
THE ECOWAS EXPERIENCE
By
Essien Abel Essien
Director, Strategic Planning
ECOWAS Commission
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A Paper Presented at the ECOWAS-ZEI Academy in Comparative Regional Integration,
Centre for European Integration Studies, Bonn, Germany, March 16-28, 2009
OUTLINE
Conceptual Issues
Historical Overview of Economic and Monetary Integration
in West Africa
The West African Experience
Performance Assessment
Lingering Constraints
Concluding Remarks
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CONCEPTUAL ISSUES: ECONOMIC AND
MONETARY INTEGRATION
Faster, all encompassing, and least-costs way to achieving rapid
economic development.
Facilitate the pooling of risks between otherwise vulnerable economies,
reduce wars, promotes intra-regional trade
Enables countries within the region to exploit complementarities,
entrench competitiveness thereby attracting the required levels of
investment for development
Ensuring better access to markets and technology.
Elimination or reduction of impediments to trade and investment;
Minimizes the un-intended externalities arising from globalization
Enhanced human and physical capacities to conduct bilateral and
multilateral negotiations, reduce negotiation costs, and increase
bargaining power
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CONCEPTUAL ISSUES: ECONOMIC AND
MONETARY INTEGRATION
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Trade and competition effects argument, where trade
openness create incentives for policy makers to pursue
virtuous macroeconomic policies (because they have bound
themselves in the regional agreements, implicit or explicit that
provide a check on policy.
Price and Exchange Rate Stability Effects--freeing economic
decisions from uncertainties and distortions, as well as
banishing nominal exchange rate variations among members
Implies there is a high degree of commonality among
countries in union—Macroeconomic, policy, structural
convergence
With commonality, shocks could be assymetric. Following
Robert Mudell (1961), Ronald Mackinnon (1963), and Peter
Kenen (1969),
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FOOD FOR THOUGHT
Does the region have preconditions for adjustment in the
real economy? Does it satisfy the OCA?
 Did the UEMOA satisfy the OCA Criteria?
 Is it a necessary or sufficient condition?
 Can it be satisfied ex-post rather than ex-ante
 Is macroeconomic and policy convergence necessary in its
strict sense
 Common market before a single currency?
 Since a currency is used as a medium of payment for
transaction.
 Did UEMOA have a common market before a single
currency?
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 Does causality run in both direction
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HISTORICAL OVERVIEW
Partitioning of West Africa, a major distinction in the evolution of
economic and monetary integration
Aim :
o to facilitate exchange between colonial powers (Britain and France)
and colonies (except Portuguese Guinea, Cape Verde and Liberia)
o Exploit resources of colonies for the benefit of colonial powers
Several monetary arrangements were established
These mechanisms were to bring about monetary integration to create
interdependent markets
This influence is still very strong—Cape Verde and Liberia is still not
part of either UEMOA or WAMZ
The West African Currency Board-December 6, 1912 (Issued the West
African pound for The Gambia, Ghana, Nigeria, Sierra Leone
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HISTORICAL OVERVIEW
From Banque du Senegal (1855-1901) through La Banque de l’Ouest or
Bank of West Africa (1901-1955) to L’Institut d’l’ Afrique Occidentale
Francaise et du Togo or Institute of Issuing for French West Africa and
Togo (1955-1959)
The purpose were the same so was the rationale for collapse—agitation
for independence.
The French transformed the monetary institution into a Central Bank.
For the British colonies an independent currency was a major indicator
of sovereignty.
There were pre-colonial obstacles to integration
Colonialism only strengthened them and created fragmented territories
Invariably colonialism recognized the disadvantage of multiplicity of
currencies
The passion of territorial and colonial identity has failed to give way to
pan-territorialism and regionalism up till today—WAMI Interview.
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THE WEST AFRICAN
EXPERIENCE: ECOWAS
16 West African countries signed the treaty for an Economic Community
of West African States (Treaty of Lagos) on 28 May 1975
Main purpose was to promote co-operation and development in all fields
of economic activities in member states
Initially couched in the context of a gradual progression from a free trade
area via a customs union to a common market
Promotion of trade flows via the establishment of a multilateral payment
system arrangement, WACH, in 1975
A revised treaty of 1993 (initiated in 1991) recognized other challenges
and extended the common market program to incorporate adoption of
common policies beyond economic, to include socio-political and
cultural policies and a definitive statement on the creation of a monetary
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union
ECOWAS INTEGRATION
ARRANGEMENT: STEPS
The ECOWAS was to proceeds in the following direction
Preferential
trading area:
Preferential access to certain
products by reducing tariffs,
but does not abolish them
completely
Complete
Integration: No or
negligible control of
economic policy, including
full monetary union and
complete or near-complete
fiscal policy harmonisation
Free trade area: A
Customs union: A
designated group of countries:
Eliminate tariffs, quotas and
preferences on most (if not all)
goods between them.
free trade area:
Common external tariff
Common external trade policy
(may have different import
quotas)
Economic and
monetary union: A
single market with a common
currency.
Single market: A
customs union:
Common policies on product
regulation
Freedom of movement of
factors of production. Removal
of the physical (borders),
technical (standards) and fiscal
(taxes) barriers
THE WEST AFRICAN EXPERIENCE:
ECOWAS PROGRAM FOR INTEGRATION
The
ECOWAS Programme was expected to create the necessary
conditions for the establishment of a monetary union and to
provide an effective architecture for the creation of a common
economic space
The main economic policy objectives of ECOWAS are
 to enhance intra-regional trade,
 reduce transaction costs,
 eliminate exchange rate risk,
 boost factor mobility,
 enhance investment and growth and reduce poverty.
ECOWAS Monetary Co-operation Programme (EMCP)
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THE WEST AFRICAN EXPERIENCE:
EMCP
A launch of an EMCP in 1987 was logical component of the economic
integration scheme and would create a harmonised monetary system
through the observance of a set of convergence criteria
It was to be operationalized in 1992, 5 years after the launch
During the five year period the institutional and policy frameworks for
a single currency project was to be put in place (WAMA was set up)
Major requirements under the EMCP were:
o Compliance with agreed convergence criteria
o Harmonisation of regulations on exchange rate and adoption of a
market driven exchange rate regime
o Harmonisation of fiscal, monetary and financial policies
o Measures towards the establishment of a common market (ETLS,
CET, Payments System, etc.)
o Capital and current account convertibility
THE WEST AFRICAN ECONOMIC
AND MONETARY UNION: UEMAO
Became a full economic and monetary union in 1994.
Has continued to operate as an independent economic and monetary
arrangement within ECOWAS.
Since 1994, WAEMU has operated under its own macroeconomic policy
framework and convergence process.
The convertibility of CFA guaranteed by the French Treasury and
reasonable credibility in the monetary union, with experience over three
decades has culminated in a drag to ECOWAS framework
Harmonising its programme with those of ECOWAS continues to be a
challenge
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THE WEST AFRICAN ECONOMIC
AND MONETARY UNION: WAMZ
A two track approach to ECOWAS integration programmes by the
Authority of Heads of State and Government of ECOWAS--Lome,
Togo in December 1999, to accelerate the process in the sub-region.
Made up of; The Gambia, Ghana, Guinea, Nigeria and Sierra Leone
Member countries agreed to the establishment of a common central
bank which would issue a common currency for the zone.
An interim institution, WAMI was set up in January 2001, toundertake all preparatory activities leading to the establishment of the
WACB and the introduction of a single currency.
Suffered two postponements (2003 and 2005)
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THE WEST AFRICAN ECONOMIC
AND MONETARY UNION: WAMZ
Major Reasons (2003) and 2005
Poor macroeconomic performance: persistence of fiscal dominance,
high inflation, and low levels of foreign exchange reserves
accumulation.
No country met all the criteria
Short time frame necessary for the requisite infrastructure to be put in
place
National economic policies were at variance with WAMZ objectives
Member countries failed to incorporate in their National laws WAMZ
Statutes
Policy harmonization was weak
Payments systems development was still rudimentary
Significant variations in statistical Standards
Sensitisation was still poor and lack of trade integration agenda 14
PERFORMANCE ASSESSMENT:
CONVERGENCE CRITERIA
Primary
 Fiscal Balance (excl. grants) (≤4; ≤4;
primary balance/GDP≥0)
 Inflation (≤10; ≤10; Annual
Average≤3)
 Central Bank Financing (≤ 10.0 % of
previous yr tax revenue for both but
not in UEMOA rather nonaccumulation of domestic and
external arrears)
 Gross Official Reserves (≥ 6; ≥3
months of imports but not for
UEMOA)
Secondary
 Tax Revenue /GDP > 20 % of GDP
 Wage Bill / Domestic Revenue < 35%
of Tax Revenue
 Public Investment Expenditure/
Domestic Revenue> 20%
 Positive Real Interest Rate
 Exchange Rate Depreciation
(Luc/US$) +/-15% (W-ERM)
 Domestic Arrears - No Accumulation
and Settlement of Existing Stock
A major difference is that the arrears criterion is a secondary criterion for the
ECOWAS and WAMZ
ECOWAS criteria is similar to WAMZ but some targets are different
Real interest rate and exchange rate criteria are absent in the UEMOA secondary
criteria, while total public debt/GDP (≤ 70%) and external current account
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balance are not in the ECOWAS and WAMZ.
The Convergence criteria for both Zones have not been met on s consistent basis
EMCP: PERFORMANCE ASSESSMENT
Some progress in terms of overall macroeconomic stability (stable
exchange rate, declining inflation, market oriented money control,
etc., ECOWAS, however, has so far failed to meet its stated goals in
the field of sub-regional economic integration.
Key protocols pertaining to free movement of goods and persons
are casually contravened.
Slow Movement towards convergence
Low intra-regional trade
Capital controls still persist
Existence of a parallel monetary arrangement--A mainly
francophone West African Economic and Monetary Union
(WAEMU) exist with its own set of criteria, outside the EMCP—
exchange rate regime
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EMCP: PERFORMANCE ASSESSMENT
Reasonable level of macroeconomic stability has been achieved
because:
A credible commitment to price stability, which relieves financing
decisions from the plague of large inflation uncertainty, diminishes
inflation risk premia in borrowing costs to the benefit of households,
businesses and government, and free economic decisions from
uncertainties and distortions.
The fiscal requirements of the commitment to monetary stability has
contributed to fiscal consolidation
Growth was robust in almost all the countries while inflation
moderated significantly and foreign exchange reserves improved
substantially.
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LINGERING CONSTRAINTS
Journey has been tortuous
Politics
o National sovereignty
o Political Instability
o Poor Governance and Corruption
Institutions
o Failure by governments to meet their financial obligations to
regional organisations
o Lack of follow up by sectoral ministries on decisions taken at
regional meetings by Heads of State
Macroeconomic
o Slow convergence
o Fiscal dominance and high inflation
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LINGERING CONSTRAINTS
Structural Issues
o Payments System development
o Statistical harmonisation
o Financial sector integration
 Shallow, Small and fragmented financial landscape, lack of
competition, narrow range of financial products, high costs of
financial service, poor access
o
Poor infrastructural and transport facilities
o
Non-convertible currencies
o
Small and Fragmented Markets and Non-Tariff Barriers to trade
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NEXT CRUCIAL STEPS IN THE
PROCESS
Political Will should start with the removal of non-tariff barriers to
trade.
Single currency based on sound macroeconomic fundamentals
and following the stages of integration.
Fnancing-payments system infrastructure
More private sector involvement
A more resilient financial sector (through the sustained reform of
the banking system)
The Renewed Call for a Single Track Approach—Several technical
meetings have taken place.
A new time frame has been discussed that would see the
launching of a single currency by 2020
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CONCLUDING REMARKS
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Sequencing the process. Path to union is critical-merits of intermediate
steps.
Is a win-win situation both for small and large countries.
There are associated costs of not having a monetary union?
A vibrant informal sector where real economic integration is taking
place and transcends the thinking of bureaucrats that needs to be
formalised via a medium of payments.
Similar economic structure but we need strong institutions
Much has been accomplished in recent years, but important challenges
remain in achieving West African economic integration. The process is
irreversible.
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THANK YOU
FOR YOUR KIND ATTENTION
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