By the end of 2020, the leaders of the Economic Community of West African States (ECOWAS), a regional trade bloc committed to establishing a monetary and currency union. ECOWAS is made up of 15 nations and has a population of roughly 400 million people.
The ECOWAS community agreed on the use of a common currency controlled by a single central bank with nations in the economic bloc giving up their sovereign control over the currency.
ECOWAS believed that eliminating multiple currencies would lay the groundwork for greater prosperity by removing obstacles to the movement of goods, services and people.
In the end, the community hoped its regional monetary organization would lead the way to an Africa-wide currency union that could see the continent uniting further to increase its global influence through the ease of free trade advanced by a single currency.
A Daunting Task
The West African Monetary Agency (WAMA) is the agency of the ECOWAS charged with the duty of developing the spread of a single currency in the sub-region. WAMA was confronted with significant difficulties every step of the way.
WAMA estimated that at least $1,000 per capita is earned annually by six of its 15 members, all of which are middle-income states. Of the remaining nine nations with per capita below a thousand dollars, Liberia, Niger, and Sierra Leone all have less than $600 per capita, making them low-income states.
Even in the best of times, countries with such divergent economic situations are unlikely to agree on short-term economic priorities, making it difficult to develop a common monetary policy for all of West Africa.
ECOWAS convergence requirements for its member states appear to be the single currency project’s downfall. The criteria are significant, nonetheless, they also set very high standards for the countries in question.
The Obstacles
To overcome the possibility of having a failing currency across the region, the regional economic body established some conditions for the implementation of the single currency.
One such condition was for member states to have an inflation of 5% or less in single digits. It is challenging for all nations to achieve inflation of 5% or less in the single digits, especially for a low-income economy.
Between 2000 and 2016, the average annual rate of inflation in Ghana was 16.92%, this is far from the single-digit requirement by the community. Between 2003 and 2016, the largest economy in the region, Nigeria, experienced an average inflation rate that was significantly higher than 5%, at 11.92%.
Second, before the introduction of the single currency, the regional economic body mandates that each member nation maintain ratios of a budget deficit to a GDP of 4% or less.
To put it in another way, deficits in the budget should not exceed 4% of the total market value of all goods and services produced in each member country. This would require almost a miracle to occur.
With an average debt-to-GDP ratio of 43.3% in 2021 in west Africa. Some of the worst-hit nations are the Gambia, whose public debt in 2015 was 108% of GDP. Even Nigeria, which has a debt-to-GDP ratio that is among the lowest in West Africa, is far from reaching the ECOWAS 4% point. Spending plan shortages have taken off and state-run administrations will keep on acquiring to back open consumption.
The dream of a single currency will continue to be a work in progress for the foreseeable future if the convergence criteria are not updated to take into account the actual macroeconomic situation in the sub-region; this is due to the sub-regions slow economic growth, widespread poverty, and far-off integration fundamentals.
Is a single currency even a reality?
West Africa’s monetary issues, such as the non-convertibility of some currencies and central banks’ lack of independence from politics, could be addressed by creating a single currency controlled by an independent central bank.
In the end, a single currency and the regional institutions that go with it could also boost trade within the sub-region and boost investor confidence.
Sadly, though, West Africa rarely does business with itself. Over 80% of all trade on the African continent is conducted overseas. Only 10% of trade between African nations occurs, compared to 40% and 60% between European and North American nations, respectively.
The situation is no different in West Africa, where there is very little trade between countries. The European Union (EU) is the largest trading partner of the sub-region, accounting for over 37.8% of total trade.
In contrast, in 2010, Nigeria, which has the largest economy in the sub-region, only exported 2.3% and imported less than 0.5% of its goods from other West African nations. Even in 2022, this trend is yet to change.
Except for the regional commission’s hope that West Africa will increase trade with itself or attract more investors following the launch of the single currency adoption, the necessity of a single currency in the current circumstances is unsustainable if trade is the primary motivation.
Nonetheless, trade between members of the community wouldn’t happen immediately. Even the Francophone nations using the CFA Franc as a common currency since 1945 report less than 16% of their trade within the union.
Reasons why West Africa shouldn’t have a single currency
1. Loss of monetary sovereignty
The introduction of a single currency will necessitate the establishment of new regional institutions, such as the West African Central Bank, with the authority to manage or supervise the member countries’ monetary policy.
The regional commission has made it abundantly clear that it will do whatever it takes to achieve its objective; however, it remains to be determined whether this commitment is genuine or fictitious.
Politics in Africa are driven by the pursuit of wealth. As a result, it will be fascinating to observe how politicians respond to losing control of the management of money, one of the primary factors that draw them into politics.
Although Nigeria is expected to be a driving force behind the single currency initiative, it is also one of Africa’s most corrupt nations. Nine of the 15 part nations of the sub-district were positioned somewhere in the range of 101st and 168th in the 2020 debasement file, out of a total of 176 nations.
A regional central bank and a common currency will, to some extent, reduce corruption in individual nations. The big question is whether West African politicians’ avarice will permit this. When the reality begins to set in, spectators shouldn’t be surprised by any chaos or abandonment of previous political commitments, even if the single currency is successfully implemented in 2022.
2. Differing effects of policies
Even when nations are closely aligned, a single policy can have different effects on each nation. For instance, the United Kingdom has a much higher percentage of homeowners than many other European nations.
The UK becomes even more dependent on mortgage lending as a result. Therefore, the UK may be affected differently than other nations by a change in interest rates fixed by the central bank.
3. Economic shocks
Economic shocks from outside the country may harm all members of the community. A rapid fall in oil prices, as was seen from 2015 to date, could serve as an illustration.
The Naira saw a free fall to almost 50% of its actual value against the dollar in 2014. Depending on how dependent countries are, this could have different effects on different nations within the currency bloc.
4. Expenses associated with the transition
The economic union based on a single currency incurs short-term expenses associated with the transition (which would vanish once the new currency was fully established).
For instance, new currencies must be issued and the old currencies would be withdrawn; new coins must be accepted by vending machines, and some financial institutions may reduce the size of their foreign exchange departments. All this might strain the economy of nations in these already present difficult times.
Conclusion
On Saturday, June 29, 2019, the 15 countries that make up the ECOWAS, agreed to use a new currency called The West African Eco in place of their respective domestic currencies to improve economic integration and align trade and investment in the sub-region.
During their 55th Ordinary session in Abuja, the heads of state of the ECOWAS nations not only reached an agreement on the adoption of the single currency but also set January 2020 as the anticipated start date. As of the time this article was published in 2022, the Eco is yet to be a currency in the West African sub-region.
