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On the way to a single currency for ECOWAS Countries ?

The ECOWAS countries are on the way to establishing a
single currency by 2020. Nigeria is poised to play a major
role in this process. While the plan apparently has unanimous
support, “the devil is in the details.”

Grain de sel: What is your analysis of the currencies
now in use in West Africa?

Gilles Dufrénot: The “currency map” of West Africa
comprises several different exchange regimes.
There is a monetary union, made up of the eight countries
of the franc zone, whose currency is tied to the
euro; and a set of non-convertible national currencies
whose exchange rates in relation to the dollar or the
euro are fixed administratively to a greater or lesser
degree. The fact that different exchange regimes coexist
in a small area does not favour trade between
countries due to the high transaction costs involved
(for example, fees for currency conversion and the
insurance costs incurred by importers and exporters
to cover exchange risks). Furthermore, for currencies
not pegged to an international currency, the
problems linked to the credibility of their exchange
policies and the uncertainties linked to volatile exchange
rates discourage stable foreign capital and
investment over the medium and long term.

GDS: What are the arguments in favour of a single
currency for the countries in the Economic Community
of West African States (ECOWAS)? Are there difficulties
and stumbling blocks to be overcome?

GD: The idea of introducing a single currency within
ECOWAS is based on several historical observations.
First, monetary unions tend to foster regional trade
as long as they attain a critical mass. Second, regional
trade is what drives economic growth, rather than
transactions in the context of North/South specialisation.
The reason for this is that regional trade
most often involves the exchange of similar products,
avoiding the pitfall of national industries evicted by
imports. Lastly, following on the trade Triade [1], the
global economy is likely to take shape around currency
poles in coming years. It will be important for
African countries to have their own poles, alongside
international currency poles (the dollar, the euro and
the yen). The timetable for implementing a single
currency in ECOWAS is outlined as follows. First,
the countries that are not members of the franc zone
will set up their own monetary zone called the West
African Monetary Zone (WAMZ) in 2014, adopting
a common currency, the West African Currency
Unit. These countries are Gambia, Ghana, Guinea,
Nigeria and Sierra Leone. Next, starting in 2020, the
WAMZ and WAEMU will merge their two currency
zones to create a single monetary zone throughout
ECOWAS, adopting a new currency. Cape Verde and
Liberia should also join this zone. The Cape Verde
escudo is pegged to the euro, and the governor of the
Central Bank of Liberia has officially requested that
Liberia join the WAEMU.

There are not any barriers per se but, as we all know,
the devil is in the details. First, a monetary union
has better chances for survival when the member
countries have similar economic structures, when
their economic policies are coordinated, and when
each country agrees to refrain from adopting policies
that would be harmful to other members. An institutional
framework that favours this must therefore
be set up. The countries outside the franc zone have
adopted economic policy convergence criteria. However,
it is more difficult to attain the convergence of
living standards within a union composed mostly
of poor countries that do not have the equivalent
of the “structural funds” [2] that Europe had. Second,
it is not enough to have a single currency. The exchange
regime is a fundamental issue, because decisions
have to be made about what is best for the
countries in their relationships with the rest of the
world. The future single ECOWAS currency could be
allowed to float against international currencies, or
it could be pegged to them at a fixed exchange rate,
or it could even fluctuate in relation to a bundle of
selected currencies. Choosing an exchange regime is
difficult because to do so one must take all aspects of
economic and social “well-being” into account: debt
levels, impact on trade, inflation, growth, etc.

GDS: What specific role would Nigeria play in setting
up this currency? Could the idea of a commodity-currency
emerge?

GD: Nigeria is the only ECOWAS country that has
the capacity to support the single currency, given its
economic and financial weight in the zone and its
central bank’s experience managing an independent
currency. Another aspect is that, given agriculture’s
significance for the zone’s economic growth, the
choice of an exchange regime is not a trivial matter.
For example, currency devaluation can improve the
terms of trade for export markets, but at the same
time raise production costs if most production inputs
are imported. In the eyes of the Nigerians, the
single currency should serve to protect the zone’s
agricultural and industrial potential; consequently,
the exchange policy and trade policy will have to be
linked when it comes to agriculture. The single currency
should help limit the risk of Dutch disease [3], the
impact of international exchange rate variations, and
the instability of agricultural income due to widely
fluctuating domestic prices. Nigeria has extensive
experience in these areas, and this should benefit
the zone. In this context, the notion of a commodity-
currency is making headway. Just as there once
was a gold standard, the exchange rate for the future
single currency could be set, not in relation to an international
currency, but in relation to the prices for
the main commodities exported by ECOWAS countries.
For example, if the world cotton price falls the
currency could be devalued automatically, and the
zone’s export revenue—in national currency—would
not be affected (unlike what happens today). Obviously,
the countries would have to agree on which
agricultural products should to serve as the reference
for the commodity standard.
Naturally, there are alternatives to adopting a
commodity-currency. One can also imagine a currency
whose the exchange rate would be set in relation
to a bundle of currencies, or an international
currency. These options have the advantage of enhancing
the credibility of the future central bank
(credibility is important to investors who lend capital,
and to funding agencies, insofar as it eliminates
exchange risk). The drawback, however, is that in
terms of competitiveness the single currency would
be entirely exposed to international currency fluctuations.

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