Reassessing the Prospects for ECOWAS Monetary Union

1. MONETARY UNIONS AMONG DEVELOPING AND EMERGING MARKETS: A REASSESSMENT OF THE PROSPECTS FOR ECOWAS PROFESSOR BEN E. AIGBOKHAN DEPARTMENT OF ECONOMICS AMBROSE ALLI UNIVERSITY EKPOMA OUTLINE Introduction - Alternative Forms of Monetary Union - Benefits and Costs of Monetary Union - Feasibility of Regional Monetary Union in ECOWAS - Conclusion

2. INTRODUCTION - The desirability of economic and monetary integration - Evolution of common market programme in West Africa - UMOA 1948-93, 1994 to date, 50 CFA and 100 CFA = 1Frf. Resp. - ECOWAS common market programme 1975 - ECOWAS monetary cooperation programme 1987, with 1994 as target date - ECOWAS WAMZ project 2000 with 2003, and later 2005 as target date. - WAMZ expected to create necessary conditions for MU. - WACB scheduled for 2003 - WAEMU and WAMZ expected to merge into ECOWASMU. - How feasible is ECOWASMU

3. ALTERNATIVE FORMS OF MONETARY UNION - informal exchange rate union - formal exchange rate union - full monetary union

4. Table 1: Characteristics of different types of monetary integration Source: ACMS (1991)

5. - choice of strategy: EU model - two-stage scenario: committed to MU and committed to MI. - preparatory period: convergence and convertibility, and regional CB - transition period: new single currency - currency competition strategy: free circulation of national currencies until one dominates - parallel currency strategy: a new currency created, competes and dominates other national currencies - challenges for ECOWAS countries: (i) limited trade and financial flows, so intensive competition unlikely; (ii) national rivalries (iii) multiple currencies in each country and problem of controlling money growth and inflation - lesson from EU model: two-stage strategy and essence of greater economic convergence before MU.

6. Table 2: Costs and benefits of different forms of monetary integration Source: ACMS (1991)

7. FEASIBILITY OF REGIONAL MONETARY UNION IN ECOWAS - WAEMU already exists, characterized by: - macroeconomic stability, low inflation, low monetary growth, budgetary discipline (Medhora 1997, Coboham and Robson 1997) dissenting view Chang (2000): growth -3% to 1.8% relative to 3.4% to 4.3% for developing countries strong institutional support and external anchor - WAMZ, 1987 to date. Eco proposed by end-2009 - Challenges: - economic convergence not yet met - differences in external shocks - Nigeria’s fiscal dominance and its negative effects on ECOWAS MU prospects - disciplined leadership - traditional national rivalries - political commitment.

8. Table 3: Performance on WAMZ Convergence Criteria, 1999 – 2004

9. Table 3 (continued) Source: West African Monetary Institute (2001, 2003, 2006).

10. Table 5(a): WAEMU: Net Benefits 1/ 1/ a=0.9657,b=9.0759,=1.7723,c=1, π =1, μ =0.50,ӨA=0.0399 Source: Debrun et al (2002) p.20 Table 5(b): ECOWAS Monetary Union: Net Benefits for Participants 1/ 1/ ӨA=0.0591 Source: Debrun et al (2002) p.20

11. Table 6: Adding Countries Individually to WAEMU

12. 1/ ӨA = 0.0408 2/ ӨA =0.0486 3/ ӨA =0.0377 4/ ӨA =0.0445 5/ ӨA =0.0394 Source: Debrun et al (2002) p.25. Table 7: ECOWAS Monetary Union: Net Benefits for Participants when Nigeria’s Spending Distortion is Equal to Average Source: Debrun et al (2002) p.26

13. CONCLUSION: - Desirable and benefitial as ECOWAS MU would be, the necessary and sufficient conditions are yet to be met.