BANKING
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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