The battle between the “Nigerian” ECOWAS and the “Ivorian” UEMOA to establish a single currency (ECO) in West Africa is already lost, despite the potential benefits for their economies.
The Covid-19 pandemic demonstrated the structural and endemic problems in the African economic system, especially regarding the possibility to implement fiscal stimuli in their fragile economies. Indeed, some African states called the international community for financial aid of $100 billion to help restart their economies after the pandemic but lacked the instruments not only to finance this capital injection but deliver it effectively.
One of the possible solutions for this weakness could be implementing a common currency with a strong, credible central bank between these countries. Indeed, the Economic Community of West African States (ECOWAS) believes that enforcing a common currency between these 15 countries could be a viable strategy. Although the benefits for these economies could be immense, not only in terms of trade and investment flows but also of political stability, a shared agreement and roadmap are difficult, if not unlikely, to be established in the short term.
Eco: Is It Possible?
The concept of a single currency inside ECOWAS was firstly raised in 2003 following the successful implementation of the Euro currency in the EU, despite the first idea being more than 30 years old. However, its enforcement has been postponed multiple times due to the difficulties and antagonisms between countries and problems reaching the convergence criteria.
Indeed, in July 2019, ECOWAS agreed in the convergence criteria for a new single currency, called ECO, to be enforced before the following year. After a few months, in December 2019, the West African Economic and Monetary Union (UEMOA) decided to convert the CFA franc (a common currency shared between the French-speaking ex-colonies and France) into a new common currency with the same name ECO. This decision started a struggle between Anglo- and Francophone countries in ECOWAS with, as leading countries, respectively Nigeria and the Ivory Coast.
The former group worries about the intromission of France in the West African economy since the UEMOA’s ECO will be pegged to the Euro, and the Banque of France is still an influential actor in UEMOA’s monetary policy decisions. On the other hand, the latter group need stability with the Euro since it is its biggest trading partner.
As the Mundell’s Optimum Currency Area (OCA) and the Euro crisis remind us, to have an efficient and effective currency union, four crucial convergence criteria are needed: regionally integrated labour markets, capital mobility with price and wage flexibility, centralisation of fiscal transfers, and similar business cycles. Reasonably, ECOWAS established convergence criteria that strictly follows this theorisation to develop a stable and credible union.
For this reason, ECOWAS asks for a single-digit inflation rate, low fiscal deficit-to-GDP ratio, low public debt-to-GDP ratio, stable exchange rate, stock of foreign-currency reserves large enough to cover imports, and restrictions in central banks capacity to finance budget deficits. However, West Africa is not an OCA since there are many differences between countries in their economic structures and their levels of market development.
For example, there are economies based on oil exports while others based on agricultural exports, some with higher advanced manufacturing while others still based on extractive production. Moreover, ECOWAS, following the military coup-wave that is spreading in the region, instead of imposing further cooperation between the countries, is sanctioning countries such as Mali, Guinea, and Burkina Faso, further jeopardising the possibility of a monetary union with those countries.
However, as disputed by economist Salami, professor at the University of East London, another severe problem hindering West African countries in achieving the convergence criteria requested by ECOWAS is the lack of central bank independence. This absence, she continues, is principally due to a lack of a robust legal framework that can effectively protect central banks from political influences.
Further, the launch of “eNaira” in Nigeria instituted another issue against the implementation of ECO. The eNaira is indeed the first African central bank digital currency, and it was programmed as a means to attract further international attention and investment in the country. Moreover, Nigeria invested a significant amount of time and money in developing this project.
Therefore, it will not willingly abandon its digital currency to join a common currency, demonstrating that Nairobi does not think of ECO as a short-term scheme. Additionally, eNaira could be a reliable alternative to ECO since it can provide an easy and economical method for cross-border transactions. Now, more than ever, conversations about national sovereignty and power are obstructing the possibility of a single currency in West Africa. For instance, Abuja still obscures the real value of its naira to egoistically manipulate the exchange rates and decelerate the convergence process.
However, some alternative solutions can resolve the same economic and political problems but circumvent the difficulties entrenched in sharing a single currency. Indeed, trade and financial arrangements can be the first way to tackle this problem. For instance, the African Continental Free Trade Area (AfCFTA), ratified by 41 of the 54 signatory states, could help reduce the trade barriers between African states and increment the economic growth in this region.
Further, the African Export-Import Bank provides funds and financial stimuli to persuade and incentivise them to ratify the trade agreement. Otherwise, African states could implement financial arrangements – like the Chiang Mai Initiativethat developed a swap arrangement to face regional short-term liquidity challenges – to create regional mechanisms that share the financial and economic risks.
For example, one of such mechanisms could pool together some of their foreign exchange reserves to be prepared for financial bursts or speculation attacks and increase their security perceptions about imports.
Besides, a better application and management of digital platforms, such as the Pan African Payment and Settlement System, can further improve economic relations between countries. This platform would convert transactions into local currencies, aiming to reduce reliance on hard ones, increase the demand and value of regional coinages, and generate easier, cheaper, and safer cross-national payments.
Indeed, the Euro crisis made a noteworthy example and point of reference for these countries on how to manage and correctly set up a currency union. Despite strong institutions and senior democracies in the Euro Area, numerous flaws created some forms of political and economic instability.
In countries where insecurity and volatility are endemic, the European solution cannot be the panacea for all their problems. For instance, ASEAN thought about a common currency after the 1997-98 crisis to reduce vulnerability to external shocks. However, they understood the impracticability of their proposal and, hence, they started different programmes and agreements based on structural reforms to liberalise their economies and substantial investments in the education and infrastructural sectors to boost the digital revolution in their economies.
Indeed, respectively in 2005 and 2007, they implemented a free trade areawith China and South Korea, while in 2010, with Australia, New Zealand, and India. Together with the numerous other financial agreements between member states and other neighbouring countries, ASEAN countries are rapidly growingand increasing, through cooperation, their autonomy and influence in the global economy without risking the political struggles and economic risk of employing a common currency.
According to the economist Nubukpo, a researcher at Oxford University and commissaire at the UEMOA, there are four possibilities in developing the ECO currency. Firstly, the UEMOA could gradually include the Anglophone countries that share an economy based on agricultural export. During the transition period, fixed exchange rates could help stabilise the monetary conversion toward a subsequent adjustable exchange rate. Although this process could be started when Ghana communicated its intention to join the UEMOA’s ECO, this trend is highly unlikely to continue due to the strong opposition and reluctancy of other English-speaking countries in sharing their foreign reserves and the opposition of Nigeria to lose its geopolitical and geo-economic dominant position in favour of a French-speaking Ivory Coast. Secondly, ECOWAS will gradually implement its project of ECO based on the convergence criteria established in 2021. However, in this scenario, the monetary union would both need Abuja as a stabilisation centre for the single currency development and as the biggest manager of lending of last resort. Thus, this scenario is highly improbable, with a low probability that Nigeria will abandon its naira, especially after adopting its digital currency, eNaira. Thirdly, in April 2000, six countries planned to create a second monetary union to oppose the CFA franc. Since then, except for a formal pledge to preserve exchange rates within a range of 15%, no other developments or progress has been made. Indeed, it is quite probable that this project will remain dormant also for the foreseeable future. Finally, the ECO could be designed as a common but not single currency that, together with mechanisms of correction for trade imbalances, would improve the regional economic integration. This development can be more achievable by these countries. However, I argue that a fifth development is the most likely. To resolve the imbalances and numerous issues between these countries, only enforcing alternative solutions. like the trade and financial agreements accomplished in the Asian case, can better settle their disputes and promote healthy economic growth in West Africa. These states, therefore, have to first concentrate on strengthening their domestic economies and boosting trade, regional investments, and job creation.