Introducing a Common Currency: The ECOWAS Experience

1. Introducing a Common Currency: The ECOWAS Experience By Essien Abel Essien Director, Strategic Planning ECOWAS Commission A Paper Presented at the ECOWAS-ZEI Academy in Comparative Regional Integration, Centre for European Integration Studies, Bonn, Germany, March 16-28, 2009

2. Outline • Conceptual Issues • Historical Overview of Economic and Monetary Integration in West Africa • The West African Experience • Performance Assessment • Lingering Constraints • Concluding Remarks

3. 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

4. Conceptual Issues: Economic and Monetary Integration • 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),

5. 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? • Does causality run in both direction

6. Historical Overview • Partitioning of West Africa, a major distinction in the evolution of economic and monetary integration • Aim : • to facilitate exchange between colonial powers (Britain and France) and colonies (except Portuguese Guinea, Cape Verde and Liberia) • 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

7. 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.

8. 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 union

9. 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 Free trade area: A designated group of countries: Eliminate tariffs, quotas and preferences on most (if not all) goods between them. Customs union: A free trade area: Common external tariff Common external trade policy (may have different import quotas) 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 Economic and monetary union: A single market with a common currency. Complete Integration: No or negligible control of economic policy, including full monetary union and complete or near-complete fiscal policy harmonisation

10. 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)

11. 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: • Compliance with agreed convergence criteria • Harmonisation of regulations on exchange rate and adoption of a market driven exchange rate regime • Harmonisation of fiscal, monetary and financial policies • Measures towards the establishment of a common market (ETLS, CET, Payments System, etc.) • Capital and current account convertibility

12. 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

13. 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, to- undertake all preparatory activities leading to the establishment of the WACB and the introduction of a single currency. • Suffered two postponements (2003 and 2005)

14. 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

15. 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 non-accumulation 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 balance are not in the ECOWAS and WAMZ. • The Convergence criteria for both Zones have not been met on s consistent basis

16. 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

17. 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.

18. Lingering Constraints Journey has been tortuous • Politics • National sovereignty • Political Instability • Poor Governance and Corruption • Institutions • Failure by governments to meet their financial obligations to regional organisations • Lack of follow up by sectoral ministries on decisions taken at regional meetings by Heads of State • Macroeconomic • Slow convergence • Fiscal dominance and high inflation

19. Lingering Constraints • Structural Issues • Payments System development • Statistical harmonisation • Financial sector integration • Shallow, Small and fragmented financial landscape, lack of competition, narrow range of financial products, high costs of financial service, poor access • Poor infrastructural and transport facilities • Non-convertible currencies • Small and Fragmented Markets and Non-Tariff Barriers to trade

20. 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

21. Concluding Remarks • 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.

22. THANK YOU FOR YOUR KIND ATTENTION