The 53rd Ordinary Session of the Authority of Heads of State and Government of Economic Community of West African States (ECOWAS) has ended in Lome, Togo, with no clear cut date for the commencement of the region’s proposed Single Currency, Eco, with the deadline year of 2020 fast approaching.
Originally intended to be launched in 2000, the idea of a single currency project by ECOWAS was first mooted in the same Lome, Togo, at the 1999 ECOWAS summit. However, the commencement of Eco has been postponed on multiple occasions and the newest target is 2020.
A single currency for the ECOWAS sub-region is the ultimate objective of the 15 member-states. However, eight francophone countries in ECOWAS already have a common currency, the Communite Financiere Africaine (African Financial Community), which is controlled by the French treasury, through which it is attached to the Euro zone, thereby making it convertible.
With a very strong Naira back then, Nigeria almost single handedly financed the establishment of ECOWAS in 1975. Then, the Naira exchanged rate was about 70 Kobo to a Dollar and it was expected that Naira would eventually replace CFA or better still, both might be used as the adopted currencies for trade in the sub-region. Alas, the Naira is now battling to regain its lost glory and currently trade at N357 to a Dollar. The Eco will initially be adopted by five countries: Nigeria, Ghana, Gambia, Sierra Leone, Liberia and Guinea while other member states are expected to join the monetary union later.
Nigeria is the giant of the sub region, boasting of the largest economy not only among ECOWAS members, but also on the continent. Since Nigeria constitutes more than 75% of West Africa’s GDP and boasts of a population of over 180 million; she would absolutely play a very key role in facilitating the process of achieving Eco for the sub-region.
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However, the biggest challenge facing the realisation of the single currency is the reluctance of Nigeria to fully throw her weight behind the proposed monetary union. Within the last one year, Nigeria has twice cautioned against hasty moves to introduce the single currency for West Africa. At the Presidential Task Force on the ECOWAS single currency programme, held in Accra, Ghana in February 2018, Nigeria cautioned against hasty moves to introduce the Eco. President Buhari had earlier kicked against the fast-track moves to introduce the single currency, at the 4th meeting of the Presidential Task Force on the ECOWAS Currency Programme, in Niamey, last October. He cited the absence of right economic fundamentals and other important foundations to build on in the sub-region.
Benefits to Nigeria
A common currency is the last stage of an economic integration which means there will be free flow of goods and services, labour and capital, within the sub-region. This means workers in Nigeria can easily migrate to other countries in the sub region, where there are labour shortages or high wages.
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Also, the arrangement will enable Nigerian investors to have easier access to the economies of ECOWAS members, since they can freely move their capital to member states. Another huge advantage the Eco will give Nigeria is the fact that manufacturing companies in Nigerian will also have more access to the local markets in the sub-region.
Since trade barrier is expected to be very low, Nigeria can equally seize the opportunities and open up trade advantage for herself by expanding her export sector and importing cheaply from ECOWAS member states, without foreign exchange barriers.
It demerits to Nigeria
If the monetary union turns out to be a deep economic integration in future, smaller member nations might become over reliant on big brother Nigeria, since she is by far the biggest economy in the sub-region. A good case study is Germany, the dominating economy in the Euro zone who is greatly feeling the burden of Euro leadership. By extension, Nigeria would also be strongly vulnerable to any economic shock from the monetary union, since her economy constitutes over 75% of the GDP of West Africa.
Moreover, Nigeria would be losing a large chunk of her monetary autonomy to a new regional central bank. Even, if the Central Bank of Nigeria (CBN) were to remain in existence, it would have a very limited role. This regional central bank will also be dictating monetary policies for the bloc, including setting interest rates and regulating the money supply in the sub-region, which might not be to Nigeria’s economic advantage.
Also, the introduction of Eco could mean Nigeria would no longer be able to print her Naira, which is one of the monetary policy tools she uses to control her economy. Another big disadvantage the single currency may pose to Nigeria is that she could lose the opportunity of using the exchange rate as an automatic stabilizer. A good example is when the CBN devalues the Naira when the nation is experiencing economic shocks, thereby making her exports cheaper and her imports more expensive. She might not have been able to do so, during the recession period, had the single currency been introduced by then.
Impact on regional trade
For sustainable economic growth and development in the sub-region, intra-Africa trade is very crucial, because regional cooperation can bring down the level of poverty on the continent. The level of trade among ECOWAS members and African countries is too low to propel economic development in Africa.
According to the Foreign Trade Statistics Report by the National Bureau of Statistics (NBS), Nigeria only exported N195.2 billion worth of goods to other ECOWAS members in the first quarter of 2018 while her export to Netherlands alone was N963 billion during the same period. Also, Nigeria’s exports to her sub-regional neighbours stood at N782.66 billion in 2017, whereas, her export to China alone was N2.4 trillion in 2017.
Speaking with Nairametrics, an economic expert and a lecturer at the Adekunle Ajasin University, Akungba-Akoko, Makinde Tunde, said the regional economic cooperation will make transactions smooth just like intra-country transactions, since boarders will no longer be in existence in the sub-region. He went ahead to add that the monetary union will also enhance business planning since the problems of changing currency will be eradicated by the Eco.
Meanwhile, some ECOWAS countries will greatly depend on the Nigerian economy, which may have negative effect on the proposed monetary union. According to the United Nations Economic Commission for Africa (ECA), when Nigeria went into recession in 2016, it negatively affected the sub-region with economic growth in Niger, Bénin and Burkina Faso declining. However, when Nigeria exited recession in 2017, economic growth in West Africa immediately rose to 2.0% from 0.3% recorded in 2016.
Criteria before introduction
The following macroeconomic criteria have been set up by ECOWAS and the West African Monetary Agency (WAMA). The criteria must be met by member states, before the introduction of the single currency. The four primary criteria to be achieved by each member country include:
- Single-digit inflation rate at the end of each year.
- Fiscal deficit of not more than 3% of the GDP.
- Central bank deficit-financing of not more than 10% of the previous year’s tax revenues.
- Gross external reserves that could cover a country’s import bill for a minimum of three months
Also, six secondary criteria must be achieved by member nations:
- Prohibition of new domestic default payments.
- Liquidation of existing ones.
- Tax revenue should be equal to or greater than 20% of the GDP.
- Wage bill to tax revenue should be equal to or less than 35 per cent,
- Public investment to tax revenue should be equal to or greater than 20%.
- A stable real exchange rate as well as a positive real interest rate.
Challenges before Eco
The limited control over Franc CFA by Francophone West African nations is a major constraint facing the single currency proposal. Their monetary policies are set by the European Central Bank and executed by the Francophone West African Central Bank, in Dakar, Senegal. This set up has stabilized their economies and they may find it difficult to relinquish the control of CFA to Eco.
Meanwhile, with less than two years before the attainment of the targeted deadline of 2020, the pre-requisite conditions which are the set macro-economic goals have not been met by member nations, as they appear too high for them to achieve, since the region only relies heavily on imports and hardly engages in any serious manufacturing.
The single-digit inflation rate may be difficult to achieve. Even, Nigeria is yet to achieve that – as her June 2018 inflation rate stood at 11.23% – though, the rate has been dropping consecutively for 17 months now. Also, the requirement of a budget deficit ratio to GDP of 4% or less from member states will be a very tall order for them to achieve. According to Minister of Finance, Kemi Adeosun, Nigeria’s debt-to-GDP ratio currently stands at 21%.
A monetary union requires a single central bank. This bank may find it very difficult to address the monetary problems facing each ECOWAS member state. For example, if Ghana is battling unemployment and Gambia is facing high level of inflation, it will be a herculean task for the ECOWAS Central Bank, since both situations requires different monetary policies to fix.
Feasibility before 2020
Since Nigeria can be finding it difficult to meet the set criteria, then, the Eco might not be out by 2020, if ECOWAS and WAMA continue to insist on those criteria being met, before introducing the single currency.
There are five stages in economic integration, with economic and monetary union being the last stage. According to an economic expert, Julius Fadeyi, who spoke with Nairametrics, he said: “Considering our level of economic and infrastructural and development in West Africa, it may take a lot of time to achieve the single currency. ECOWAS leaders should focus on infrastructural development, promoting trade among members etc, before introducing the Eco.”
Nevertheless, all the 15 ECOWAS members do not have to be ready for single currency arrangement before it finally takes off; after all, it took European Union 42 years to create their single currency (Euro) in 1999.