February 13, 2020/United Capital
The news of a new currency adoption by some ECOWAS States has dominated headlines for the past few weeks and has also spurred questions in the minds of investors. What is Eco? Is it a good idea? Will the adoption happen eventually? Why are the parties divided? What is the impact?
Economic Community of West African States (ECOWAS): A regional, political and economic union of fifteen countries located in West Africa. The union was established to promote economic integration across the region. However, ECOWAS is further divided into sub-regional blocs including WAMZ and WAEMU members States as well as Cabo Verde.
West African Economic and Monetary Union (WAEMU): The WAEMU region is both a common currency and customs union of former French colonies (Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo) and a former Portuguese colony (Guinea-Bissau) in West Africa. Beyond a shared currency, the CFA franc, which is pegged to the euro, WAEMU member States also have a shared language and legal system due to their shared history of colonization by France.
Notably, the adoption of the CFA franc has its good and bad aspects. Proponents observed that the shared currency has stabilized prices within the zone (inflation rate averaged 6% in 50 years compared to +20% in Nigeria and Ghana), fostered trade with Europe, neutralized FX uncertainties, and eased repatriation of funds. On the contrary, the opposers tagged it as a colonial relic, pegged to the euro and guaranteed by France, robbing users of their monetary autonomy. This is supported by the fact that the European Central Bank (ECB) technically dictates the direction of rates and a French delegate is a voting member of the periodic monetary policy meeting. Furthermore, despite its adoption, intra-regional trade, real sector lending, industrialization and income growth remain at a sub-optimal level.
West African Monetary Zone (WAMZ) and the convergence plan
The West African Monetary Zone is a set-up of Non-WAEMU ECOWAS member States. The union comprises of six member states – five English-speaking (Nigeria, Ghana, The Gambia, Liberia, and Sierra Leone) and one French-speaking (Guinea) countries. Notably, the core objective of the formation of WAMZ was a plan to work towards creating a single currency region, similar to the eurozone, in West Africa for all ECOWAS Member States. Particularly, the adoption of the single currency, “the eco” was designed to begin with WAMZ member states pioneering the adoption and then a second phase involving WAEMU members transitioning from CFA franc to eco.
To achieve the above, the West African Monetary Institute (WAMI) was set up in 2001 – to help WAMZ members prepare for the adoption of the currency. The currency adoption was initially slated for 2003 but was postponed continuously to 2005, 2010, 2015 and now slated for 2020. In the past, the factors that have caused the adoption of the currency to be postponed include the absence of a macroeconomic convergence of the member states, the 2008/2009 Global Financial Crisis, and failure of the states to meet the specified criteria.
Why the divergence?
Contrary to the initial ECOWAS plan for WAMZ members to pioneer the adoption of the eco, the Ivorian President, Alassane Ouattara, announced late in Dec-19, that the WAEMU members have agreed to rename the CFA franc to eco while maintaining the euro peg. This, however, resulted in some form of push back by the WAMZ members who had initially set 2020 as a date for commencement of the single currency market. The reasons highlighted by WAMZ members included the fact that no consultation was made with all members of ECOWAS before the announcement. Also, the significant influence of France in the transition from CFA Franc to the eco rather than ECOWAS created a cause for concern, due to fears of an extended influence to non-WAEMU countries, if adopted by all ECOWAS states. Theoretically, the success of any form of money is dependent on the general acceptability. Accordingly, the recent division between the two sub-blocs might further frustrate the adoption of eco across the ECOWAS States. In addition, other criticisms of the WAEMU transition from CFA franc to eco include the fact that apart from a name change, most of the features of the eco as proposed by the Ivorian President remains broadly similar to that of the CFA franc.
The failure of convergence
Four primary criteria out of the ten stated, which should be achieved before countries can be adopted into the Eco-zone include; A single-digit inflation rate at the end of each year, a fiscal deficit of not more than 4% of the GDP, a central bank deficit-financing than 10% of the previous year’s tax revenues, gross external reserves of no more that can give import cover for a minimum of three months.
An analysis of the ECOWAS States shows that while WAEMU seemed to be within the threshold of the primary criteria, due to the history of a shared currency, language and legal system, most WAMZ States are not fit enough to be a part of a joint currency.
According to the African Development Bank, the 2020 deadline for the single currency adoption will most likely be postponed again. This is not far fetched, judging from the facts surrounding the adoption of the eco and the state of the economies of the ECOWAS. The adoption of a single currency will mean that each participating country will have to surrender their monetary autonomy to the regional monetary body, amid huge misalignment with fiscal policy. As a result, Ghana backtracked its initial intention to join the new-eco zone. From all indications, we doubt the readiness of most of the non-WAEMU ECOWAS members to surrender their monetary autonomy, amid rising debt profile among many of these countries, especially in Nigeria and Ghana, the largest among the pack. Also, the issues of the convergence criteria are a concern as noted above. Accordingly, Nigeria is pushing for an extension of the adoption deadline, insisting that the time is not yet right.
However, we think the WAEMU member States are set to go ahead and adopt the eco as a first step for the ECOWAS region. As observed earlier, the union is in a better position in terms of economic convergence due to their shared history of a common currency. Also, most of the proposed changes between the CFA franc and the eco, suggest that the process is nothing more than a name change.
While the pushback between the WAMZ and WAEMU might be a hindrance to the progress of the adoption of eco, We think the contentious issues can be easily resolved, via a clearance from ECOWAS. Accordingly, we think the adoption of the eco by the WAEMU member countries is considerably likely in 2020. This position is buttressed by the unrelenting calls by different interest groups within the French-speaking bloc to jettison the CFA franc.
Eco adoption by WAEMU and the implications
As noted above, we are of the view that the WAEMU member countries are better positioned to transition from the CFA franc to eco. This is predicated on their shared history of common currency which has kept inflation rate low, exchange rate relatively stable and boosted economic activities among the member States. However, the transition from CFA Franc to eco is unlikely to have a far-reaching implication these economies.
For the ECOWAS bloc, the transition from CFA franc to co by the WAEMU bloc does not have a significant immediate effect on trade or economy of the countries in the bloc, except the convergence plan of the WAMZ is taken seriously and achieved in the near future, so that the whole of ECOWAS can enjoy the benefits of a single currency.
For the wider African continent, while there has been excitement surrounding the possible impact of the launch of the Eco on the implementation of AFCTFA, the current circumstances do not provide any cause for celebration as the situation remains relatively the same. For instance, pegging the WAEMU version of the eco to the euro will keep volatility minimal and pressure on inflation muted. Also, France will remain very influential via its right to nominate a member of the MPC, which is not different from what is currently obtainable. Perhaps the only change will be that the bloc can now print and mint its currency within the region rather than in France. This will give the Regional Central Bank some degree of autonomy to control money supply with implication for inflation and increases in debt. However, this is subject to the approval of the members of the monetary policy committee.
Overall, our view is that WAEMU States are likely to transit from CFA franc to a new shared currency by July 2020, but the nomenclature may not be the eco, given that transiting from CFA franc to eco will require a clearance from the Nigeria-led ECOWAS. Nigeria’s position, which is that the time for the adoption of the eco is not right, is a clear indication that transiting from CFA franc to eco by WAEMU members as proposed by the Ivorian President may not fly, suggesting that a transition to a shared currency with a different name other than the eco might be the last resort.