By Calum Drysdale
The push for a West African currency is now nearly 40 years old. However, after years of inertia and no public pressure African states have seen many setbacks including setting the implementation date back in increments, from 2003 to 2020. However, now only a year away from implementation, is the region ready for the new currency?
First proposed in 2000, the eco would become the common currency of the entire Economic Community of West Africa States (ECOWAS) area, excepting Cape Verde. It encloses over 300 million people and 15 countries, with only a slightly smaller population than the euro which has 341 million users.
The Eco would incorporate West Africa’s existing currency bloc, the Communauté financière d’Afrique (“Financial Community of Africa” (CFA) (West African), already used by eight of the countries planning to join the currency, while leaving its central African alternative to carry on as before. The countries using the CFA, a legacy of French colonialism, in place since 1945, deposit some of their foreign currency reserves in a French bank, which acts as a manager to guarantee monetary stability. The bank is also committed to providing a fixed exchange rate, promising to exchange euros for CFA at a fixed rate, effectively pegging the currency to the euro.
The members of the new currency would be Benin (CFA), Burkina Faso (CFA), The Gambia, Ghana, Guinea-Bissau (CFA), Guinea, Ivory Coast (CFA), Liberia, Mali (CFA), Niger (CFA), Nigeria, Senegal (CFA), Sierra Leone, and Togo (CFA)
Residents of the region are positive about the prospects with a Senegalese market trader, a resident of the CFA currency union, saying: “It is a great idea. If we have the same currency, we could be one big currency like America.”
Unfortunately, the union might not be as stable as she believes. The six other countries have, including Ghana and Nigeria, experience with their own currency volatility, the managing of which is left to the central banks of the sovereign nation. Proponents of the Eco currency suggest that a currency union would stabilise the non-CFA countries and encourage greater intra-regional trade. There is evidence for this. The CFA region has the highest intra-regional trade on the continent. However, opinion is divided over what the cause of this is.
This problem with holding the CFA up as a shining example of prosperity is that there are fundamental differences between the CFA and the proposed Eco. The CFA is pegged, through France to the euro, a notoriously stable currency. This has caused problems to exporters who find that their currency is artificially high, making the purchasing of it abroad very expensive, but has guaranteed that local governments would not print more money as a way of covering over error. This, rather than the currency union, is a possible explanation for the stability of the CFA. Unravelling this tight connection between former French colonies and France would also likely be an enormous task, equalling the complexity of creating the currency in the first place.
The belief in and admiration of the CFA conceals an ugly truth that is hiding in plain sight. It is France that controls the CFA, rather than the sovereign nations themselves. While often overlooked, this is an example of neo-colonialism, the practise of Western nations using their colonial connections to compel former colonies to offer them favourable terms.
The Eco would have no such mechanism. The currency would float alongside the basket of other world currencies, and would be traded freely.
Economists look to the euro zone, a large currency union of some of the biggest economies in the world, for examples of what could happen if things went wrong. The euro zone crisis of 2013 offers a sobering suggestion of what is possible.
By allowing euro member states control their own monetary policy and simultaneously share a currency, a model proposed by the framers of the Eco, the amount of debt in some euro zone countries reached incredibly high levels, requiring a large loan from the European Central Bank (ECB) in 2013, and direct intervention. Returning to the point of colonial influence, some of this money that was provided to nations that were on the verge of going bankrupt included the foreign currency reserves held by the French in the name of the nations of the CFA.
The problems of the Eco zone would potentially be smaller than this. ECOWAS countries have far greater levels of difference in monetary and fiscal policy than the countries of the euro. Governments, used to controlling their own money supply, may learn to resent the structures that bind them. For example, Nigeria would be, by far, the largest economy in the union and may dominate it. Some people threaten that as the Nigerian GDP would be around 67% of the region’s GDP, the union might become, in reality, the Nigerian naira plus a few economic vassals. There are other differences that extend to subjects which are wide ranging as trade, rate of growth and population. For example, the inflation in Liberia hit 27% at the end of 2018, while the inflation in Ghana is down at a much more reasonable level of 9%. ECOWAS is keen to play up the benefits of the currency union, which would include visa free travel all across the union, but critics are not convinced.
As of writing this, only five countries meet the criteria demanded by the West African Monetary Institute (WAMI), the organisation that will eventually become the West African Central Bank (WACB). These criteria are a budget deficit of less than 4%, and inflation rates of less than 5%. The failure of Ghana to meet these conditions is not a criticism, but instead a reflection of the economic reality of the country. A high budget deficit can be used to invest in the country to push development, and high inflation rates can be a sign of an active economy. Critics also claim that the barriers to internal trade are far more complicated than simply a matter of currency. Different levels of development, infrastructure, bureaucratic efficiency and external trade make finding a currency policy that suits two countries, as divergent and Ghana and Burkina Faso, will be very difficult.
This failure of countries to meet requirements for entry will likely cause the WAMI to further delay the implementation of the currency, so there is no cause for panic. However, the ambition of uniting the countries of Africa, if through currency rather than through politics as first proposed by the pan-Africanist post-colonial leaders, shows that the pan-Africanist dream is still alive.