Charles Nwaoguji, [email protected]
On June 29, 2019, the leaders of the Economic Community of West African States (ECOWAS) formally adopted the name “Eco” for their project of a single currency and planned to introduce the currency from 2020.
For decades it was a dream of West African finance ministers: ushering in a regional single currency to boost trade and growth. For some members of the Organised Private Sector (OPS), this is best thing that has ever happened to the region. Almost 30 years since the goal was first sketched out, the Economic Community of West African States, (ECOWAS ) plans to accelerate trade and commerce with the adoption of an African version of the Euro, the European Union’s single currency that was forged out of national units over two decades ago.
The African 15-nation bloc had previously committed to creating a common currency, which supporters argue would significantly boost cross border trade in West Africa, by 2020. In an interview with Daily Sun, the President of Manufacturers Association of Nigeria (MAN), Engr Mansur Ahmed said ECO would boost economic development in the West African subregion and improve cross border trade. If implemented, countries across the region will be able to move and spend money across different countries without worrying about exchange rate costs. The single currency if properly implemented will improve trade by allowing specific countries to specialise at what they are good at, and exchange it for other goods that other countries in the bloc produce more efficiently,” he stated.
The single currency will also help to address the region’s monetary problems like the difficulty in converting some of its currencies and the lack of independence of central banks. But despite these possible benefits, some members of the OPS remain worried about the lack of integration policies among member countries in the region.
According to Mansur, a single currency will only work if all the countries involved are economically aligned, which is not currently the case. In this new arrangement, Nigeria is poised to play a major role in this process as the plan apparently has unanimous support.
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 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.
The idea of introducing a single currency within ECOWAS is based on several historical observations. Monetary unions tend to foster regional trade as long as they attain a critical mass.
Secondly, 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. 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).
Implementing a single currency in ECOWAS will, the MAN boss said, depend on each region. A monetary union has better chances of 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.
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 that Europe had. 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, among other considerations.
Nigeria’s role in single currency regime
Nigeria is the only ECOWAS country that has the capacity to support the single currency to succeed, according the National President of Nigerian Chambers of Commerce, Industry, Mines and Agriculture ( NACCIMA), Hajiya Saratu Iya Aliyu. She said Nigeria ‘s economic and financial weight in the zone and its central bank’s experience managing an independent currency will be easier. “Another aspect of it 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 raising production costs if most production inputs are imported. In the eyes of Nigerians, the single currency should serve to protect the zone’s agricultural and industrial potential; and so 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 , 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).