I suspect that when the nations that make up the Economic Community of West African States or ECOWAS, dreamt up a single monetary union, they probably modelled it after the European Union.
Of course that was long before the Greek sovereign debt crises or the rise of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), sovereign debt contagion that threatened to unravel the common European currency, the Euro.
Some economists believe the genesis of the problem largely was in the January 1999 introduction of the euro, which bound 19 nations into a single currency zone watched over by the European Central Bank but left budget and tax policy in the hands of each country.
ECOWAS last week agreed on the name “ECO” for the single currency to be used in the region.
The commission also adopted a flexible exchange rate regime along with the name, according to a communique.
The regional body is expected to now work with the West African Monetary Agency, West African Monetary Institute and central banks to speed implementation of the single-currency road map, expected to be issued by 2020.
ECOWAS members including Nigeria, Ghana, Guinea and Liberia have their own currencies.
The bloc’s French-speaking members have since colonial times used the CFA franc, which is now pegged to the euro.
So does Nigeria need a common currency with the rest of ECOWAS to drive trade and open borders?
In a sense the sovereign debt problems of Greece and the rest of the PIIGS, provide a cautionary tale about the perils of a common currency among such a disparate group of countries.
Within the European Monetary Union, Germany has often been blamed for imbalances, and for being the main beneficiary of the EURO, as German export performance provided the competitive advantage to dominate trade and capital flows within the Eurozone.
The German economy is the largest in Europe with a GDP equivalent to 21 percent of the economy of the European Union.
Now if Germany is eliciting such reactions from its neighbours for being so dominant, imagine how it would be for Nigeria to be in a monetary union with the rest of West Africa.
The Nigerian economy towers above the rest in the West African sub-region, with its GDP of $445 billion, equivalent to 67 percent of ECOWAS.
Ghana comes in a distant second at $68 billion and Cote D’Ivoire third at $45 billion (see chart).
In that sense, Nigeria would not just be to ECOWAS what Germany is to the European Union, it would be like having an economy with the combined GDPs of Germany, France, Italy and the U.K in the European Union.
Surely such a dominance would be a recipe for breeding large imbalances and distortions in smaller economies within such a monetary union.
Another little wrinkle for the ECO would be member states meeting the criteria to join.
These include having a budget deficit of not more than 3 percent of GDP, average annual inflation of less than 10 percent, with a long term goal of not more than 5 percent, gross reserves that can finance at least 3 months of imports and public debt as a percentage of GDP below 70 percent.
There is also the issue of Central Banks financing budget deficits not more than 10 percent of the previous year’s tax revenue.
We think Nigeria would have difficulty meeting the inflation, as well as the CBN financing of Government debt, criteria.
For French speaking West African countries joining the ECO, would be difficult to justify and provide limited upside since losing the CFA currency zone carries clear costs, such as the credibility of the French guarantee and the Euro peg that gives some stability to the currency.
The inflation targeting regime recommended as a framework will probably not also be seen as feasible by Nigerian authorities since it was based on the adoption of a flexible exchange rate policy, which the Central Bank of Nigeria (CBN), has come out against.
A bigger obstacle to the ECOWAS monetary union however is the idea of nation states like Nigeria, surrendering monetary policy to a supranational institution like a West African Central Bank.
In such a scenario the ability for a sovereign to adjust their currency’s exchange rate, and notably devalue in case of an economic downturn, is not possible.
We think that the ECO would cause more harm than good for now for West African economies, but perhaps it could be a currency of the future for the region. It may also make sense to begin to develop a framework for a future block chain or digital ECOWAS wide currency that would be compatible/circulate, side by side, with current currencies of member states, which may be the norm 50 years from now.
PATRICK ATUANYA
