West African currency faces sternest test
Andrew Starke Published: 17-MAY-05

Ambitious plans by five West African countries to establish a central bank that will issue and manage a common currency are likely to face their fiercest test over the coming months ahead of a possible 1 July launch.

The West African Monetary Zone (WAMZ) – which comprises Ghana, Nigeria, The Gambia, Guinea and Sierra Leone – had initially hoped to achieve monetary union by 1 January 2003. However a 2002 assessment revealed that the Anglophone West African countries involved had not met the conditions needed to achieve macroeconomic convergence. The next few months will determine whether member countries are any closer to meeting the convergence criteria which have been set by the West African Monetary Institute (WAMI).

With a population of over 250 million, there are obvious advantages for the sub-region should it succeed in harmonising its economic structures. A regional precedent can already be found in the West African Economic Monetary Union, comprising Cote d’Ivoire, Senegal, Mali, Burkina Faso, Niger, Benin, Togo and Guinea Bissau. These Francophone countries have a common currency pegged to the Euro at a fixed rate.

“The experience of the Frenchspeaking countries in West Africa points to the fact that when you have a common currency, you tend to have more macroeconomic stability and you tend to grow faster in terms of GDP,” said Anthony Kyereboah-Coleman, an economist and lecturer at the University of Ghana.

“For that reason, West African countries have looked at the Francophone experience with the view to setting up a second monetary union with the ultimate goal of combining and then forming one currency for the West African sub-region.”

Kyereboah-Coleman says the notion of a single currency for the region was conceived in 1999, when the Economic Community of West African States (ECOWAS) decided on a two-track integration programme. This led to a resolution later that year between Ghana and Nigeria, now the two key drivers behind the WAMZ, to cooperate on matters of trade and monetary integration. The second step would be to merge the two West African monetary zones, although the WAMZ would certainly need some time to establish itself first.

Furthermore, a number of criteria must be met before a united West African currency joins the Euro on global trading boards. According to Robert Hinson, a lecturer at the Ghana Business School, the countries involved will need to show budgetary discipline and maintain single-digit inflation.

To ascertain member state readiness for the launch of the new monetary union in 1 July 2005, each state was given the task of assessing its level of preparedness to meet the deadline. The results of this study will be discussed at a WAMZ meeting in May 2005 in Banjul, The Gambia.

“Topical areas that are being researched in this regard include payment systems of the various member countries, banking supervision and how they fit with the basic core principles of exchange rates, gross reserves for each country and the harmonisation of statistical data,” said Hinson.

An organising committee with representatives from each member country has held a series of meetings over 2003 and 2004 with the aim of informing and allaying the fears of key stakeholder groups. In Nigeria the committee met private operators; in Ghana, the financial sector; in The Gambia, civil servants; in Guinea, mass media representatives, and in Sierra Leone a workshop was held with parliamentarians.

Ghana and Nigeria are considered the most ready for monetary union as they have more modernised payment systems. The other three countries will have more difficulty in meeting convergence criteria, while Liberia and Cape Verde have observer status and may still qualify to join the union. (Article 3 of the WAMZ Agreement states that “Any African state which becomes a member of ECOWAS may become a member of WAMZ upon application to the Council and fulfillment of all eligibility criteria.”)

However, Kyereboah-Coleman argues that it will take more than meeting technical requirements to forge a new monetary entity.

“The implementation and the pushing forward of ideas has always been a problem on the African continent and unless the political will and motivation is there … then such ideas will sit on the drawing board until thy Kingdom come,” he said.

WAMI’s mandate to facilitate the launch of monetary union expires in June 2005, which should up the stakes at the May meeting. Hinson agrees that the launch will be contingent on the two key forces of political and economic willpower.

“Economic willpower speaks to all the technical prerequisites that need to be in place before the start of the union and political willpower speaks to the commitment of the various heads of state to make this union work,” he said. “As it is, the economic willpower needs to be established and the political willpower will have to take second place to the fine-tuning of all the technical details prior to the launch.”

One detail that has been decided on is the name of the new currency should the WAMZ initiatives come to pass. The Convergence Council adopted Eco as the name of the WAMZ common currency in 2003. The name is derived from “economic” or “economique”, existing words in both the English and French languages.

For the moment, it is envisaged that the Eco unit of account will be an “artificial basket” of currencies, which will be used by member states of the WAMZ as their internal accounting unit. This unit would be the precursor of Eco as a currency.

WAMZ has also anticipated possible scenarios where only two countries meet the initial criteria, or where a country meets the convergence criteria and commences the union, but subsequently falls below economic performance standards.

In the first instance, the Union would be established with just the two qualifying countries, while other member states would be invited to join once they can comply with all the criteria. In the second scenario, an adjustment would have to take place within the union to cushion the country affected as the union would by then have a single currency, a common central bank, a single monetary policy and common reserves managed for the whole union.

Once again, a great deal can also be learnt from the experience of the Francophone countries in the West African Economic Monetary Union. The regional central bank for this union recently launched a massive operation to replace all the old notes issued in 1992 with new ones that are harder to forge. The new banknotes are modernlooking and brightly coloured with silver holograms. Perhaps the next rollout of currency will see the Eco being introduced to an economically united West Africa.

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