Should Nigeria Adopt The Eco Currency?

(Text of position canvassed at a debate at Capital Club Lagos on January 30, 2020 Featuring Banji Fehintola CFA, Treasurer AFC and Haruna Jalo-Waziri, CEO CSCS)

By Toyin F. Sanni

Founder/ CEO, Emerging Africa Capital Group  

BACKGROUND

The Economic Community of West African States (ECOWAS) had its roots in earlier attempts at a West African economic community in the 1960s with the primary purpose to promote economic trade, national cooperation, and monetary union, for growth and development throughout West Africa. The single currency adoption was initially meant to take effect in 2003, but it has since been postponed several times between 2005 and 2020 due to the inability of member States to pass a resolution for commencement.

Recent Developments

The decision by members of the 8 Francophone countries of the West African Economic & Monetary Union, WAEMU comprising Benin Republic, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo to adopt the Eco as a currency with effect from 2020, the Issue of a single regional currency for the ECOWAS sub-region has brought the issue to the front burner. Nigeria, and the rest of West Africa now needs to make a call.

The precipitate and somewhat ‘unilateral’ adoption of the Eco by the WAEMU bloc has indeed presented Nigeria and other members with a ‘fait accompli” as it were. One point not to be missed is that this decision is NOT, for the WAEMU countries, an entirely radical one because these nations have been in a union with a common currency (the CFA), common central bank, stock exchange and central securities depository for several years. For them it is mostly a renaming of their common currency.

 Despite the undeniable merits of establishing a single currency, such as greater economic integration, ease and reduced cost of trade transactions which should hopefully increase trade volumes within member nations, and stronger negotiating power on the international level, the wisdom of the West African countries adopting a single currency without addressing key economic fundamentals prevailing in most of the countries can definitely be challenged.

 Main Objectives of the Single Currency Initiative 

1. To leverage political cooperation amongst member nations 
2. to promote greater intra-bloc trade relationships by eliminating the cost of doing business across multiple currencies, particularly now, in the spirit of the African Continental Free Trade Agreement (AfCFTA).

Convergence Criteria

Prior to now, certain criteria were set as critical milestones and conditions precedent to the adoption of the Eco as a Single Currency. These ten convergence criteria were set out by the West African Monetary Institute WAMI and divided into four primary and six secondary criteria. Member States struggle with many of these criteria:-

The four primary criteria to be achieved by each member country were:

? Sustained single-digit inflation 

? A fiscal deficit of no more than 4% of GDP

? A central bank deficit-financing of no more than 10% of previous year's tax revenues

? Gross external reserves- import cover for a minimum of three months.

The six secondary criteria were:

? Prohibition of new domestic default payments and liquidation of existing ones.

? Tax revenue should be equal to or greater than 20 percent of the GDP.

? Wage bill to tax revenue equal to or less than 35 percent.

? Public investment to tax revenue equal to or greater than 20 percent.

? A stable real exchange rate.

? A positive real interest rate.

Implications of Adopting a Common Currency

The adoption of a single currency by the 15 member states at this time has, however, given rise to the following concerns.

      ? The governments would transfer monetary authority to ECOWAS institutions.

·     Are member states willing to subordinate national interests to regional interests?

·     Are there lessons to be derived from the experience of the eurozone?

·     Today across the globe, the protection of national sovereignty seems to be all the rage and now seems to trump cross-border collaboration.

Developments within the Eurozone hold lessons which may include: -

? Leaders must be absolutely clear about the expected benefits of the single currency lest they turn out to be illusory.

? Leaders must anticipate unintended consequences and costs such as the impact of migration on more attractive economies.

? A fiscal pool is important for crisis response and for an effective monetary union.

? Public opinion matters. The decisions by the Danes, Swedes, and Brits to retain their national currencies came largely under public pressure opposed to the euro.

·     Today, the Brexit saga illustrates the dangers of taking public opinion for granted. It would thus be na?ve for the ECOWAS leaders to march full steam ahead in their quest for a single currency on the erroneous belief that the Eco is Good for ALL of West Africa.

·     Even with strong institutions of governance, the euro experiment continues to face serious challenges—both economic and political including the recent exit of the United Kingdom.

More on the Eurozone Experience 

At the outset, the deutschemark was seen as a success of hard money orthodoxy—a stable currency regime protected from manipulation for political ends. Embedded in the postwar industrial success of the then-West Germany, it won praise from capitals around Europe.

The appeal of exporting the same level of trust that the strong German currency had earned to the rest of Europe was undeniable. The aims were integration of the markets and promotion of a stable monetary regime across the Region a way that advanced the progressive concept of integration for economic developmentwhilst embracing conservative monetarism across Europe.

The Greek debt crisis 

Unfortunately, the fiscal irresponsibility of Greece was a brutal reminder of the inherent vulnerability of members of a single currency union to the actions of other members of the union. Whilst monetary easing was eventually implemented in aid of recovery, the initial resistance on account of the European Central Bank (ECB’s) hard money orthodoxy has been criticised.

Nigeria and the Naira

Nigeria’s naira has often been seen as the likely anchor currency for ECOWAS, due largely to its sheer economic size and political importance. This role would be akin to the one played by the German deutschemark in the period leading to the introduction of the euro.

However, for the naira to serve as an anchor currency means that the Central Bank of Nigeria (CBN) will have to give up its control of the naira to a supranational West African monetary authority.

This would be like asking the Brits (of course prior to Brexit), the Danes, and the Swedes—to give up their national currencies and adopt the euro. This may be seen as a no-go area for Nigeria.

What benefits do Nigeria or the other members of ECOWAS derive through control over their own currencies? What do they currently enjoy from their existing status that they might be unwilling to lose?

1) The loss of individual sovereignty and political control over monetary policies and to some extent also fiscal policy. Such may lead to similar frustrations as those expressed by Britain and other Eurozone countries where the political authourities sometimes felt redundant in comparison to the European authorities in Brussels where the real power lay. This is particularly of significance to developing economies where the main duty and source of power of the government revolves around its ability to grow the economy and keep it stable. Presently, Nigeria, like each of the other African countries yet to join the eco, is able to determine and vary all economic policies in line with its domestic priorities. Under a Single currency union, it would have to surrender a lot of such autonomy to the regional authorities.

2) As with the Eurozone countries to Greece and to a lesser degree Spain during their financial troubles, each member of the new single currency union will become vulnerable to economic challenges in the other States, some of which are presently quite fragile.

3) There are concerns about empowering an intra-bloc hegemony which could then hold other members to ransoms for its own purposes. One concern is that the WAEMU countries of Francophone Africa were already operating a common currency and common central bank for well over a decade and have simply changed the name from CFA to Eco. Perhaps the Anglophones like Nigeria who clearly have a much wider gap to close would have been more trusting if they hadn’t been presented with a fait accompli.

4). Further concern has been expressed about the perceived overbearing influence of France over the eco deriving from the legacy attachment of the WAEMU bloc now driving the eco to France and the joint pronouncements by President Oattara of Cote D’Ivoire and President Macron of France.

5). Loss of independence by the Central Bank:

The CBN would lose its power to control interest, exchange and inflation rates by monetary policy. With the utilization of a single currency, macroeconomic fluctuations will no longer be controlled by individual nations but by a unified Apex bank. Central bank direct financing of government activities through ways & means or overdraft will be stricter and sole authority of printing and minting the currency is outside national control. Recent measures like the segmentation of the OMO market that effectively crashed interest rates to single digit would no longer be possible.

The sovereign ability of individual countries to adjust their currency’s exchange rate, and notably devalue their currency in case of the economic downturn such as Nigeria’s recent recession will be lost. National governments would not be able to adjust interest rates and exchange rates to encourage investments

6) Unpreparedness of members -To all appearances, the West African countries pursuing the single currency are ill-prepared economically and one of the indications of this is the abandonment of previously set convergence criteria.

7)Leadership Issues - Another concern is that on one hand the WAEMU countries would not wish to cede monetary policy to Nigeria, Nigeria may be unwilling to cede leadership to countries some of whom it would see as comparable to one of the 36 component States within the federation in both aeconomic and population size. 

8)Domestic Politics - Political Developments in Britain culminating in Brexit as well as nationalist tendencies in the US are a lesson that governments must factor domestic and political sentiments into integration matters and foreign policy. A complex nation like Nigeria which is currently battling internal divisions amongst its own domestic regions needs to exercise caution and resolve internal pressures to implement true federalism before further complicating its position by regional integration.

9)Misplaced Priorities. Nigeria currently faces significant internal security as well as economic challenges such as its fragile post recession status, high fiscal deficits and other structural imbalances which the government is better advised to focus on rather than be distracted by the extensive resource implications and logistic and other costs attached to the Single Currency Project.

10)Other Unintended Consequences- The Impact of a currency change will be huge on banks and the financial market, especially the debt market due to short term distortions around transition mechanism, maturities of bills and bonds and currency translations, Financial reporting and other transitional issues.

Immediate Alternatives

• Clearly the prospect of ultimate integration of currencies and eventually a full economic union for first West Africa and ideally all of Africa is a desirable medium to long-term goal. However, West African governments are not quite there yet. Nonetheless, they do need a cohesive plan to eliminate trade barriers and grow intra-Regional trade in the short term and there are measures that can support this.

These include Trade facilitation measures such as:-

1. Efficiency Measures.

• These include the elimination of bureaucratic bottlenecks at our borders which according to The World Bank’s Doing Business Report 2019 shows that Mali, ranked 92, is the only ECOWAS country included in the top-100 best performing countries for “trading across borders.” Eventhen, exports from Mali take 48 hours to comply with border requirements. ECOWAS countries need considerable efforts to close the evident gap and ease constraints to trading across borders.

2.    Digital Solutions to eliminate/minimise Currency exchange barrier

• Members should embrace and support the Pan-African Payment and Settlement System being developed by the African Export and Import Bank (AFREXIM). This new digital platform will enable settlement of transactions between African countries in local currencies and reduce dependence on hard foreign currencies. The new platform to be designed in support of the African Continental Free Trade Agreement is expected to boost intra-area trade by making cross-border payments easier, cheaper and safer.

Conclusion 

• In conclusion, I submit that Economic integration beginning with a Single currency is a wonderful ideal for the Sub-Region in the medium term but to all indications, we are not yet where this can work. In the immediate term, we need to work a great deal more on our individual economies. For now, the eco may not be the panacea for West Africa’s myriad of problems, including high levels of unemployment, insecurity, poverty, corruption and political instability in many member States. The lessons from the eurozone highlight continuing challenges among a group of highly developed countries with very strong institutions. ECOWAS will do well to heed these lessons. Second, efforts by member states to strengthen domestic macroeconomic frameworks are important. Third, concerted efforts must be made to reduce the inordinate bureaucratic delays that severely constrain exports and imports at the border. Launching the single regional currency, the “Eco,” May be for Nigeria, an expensive distraction that its people can ill afford at this particular time when all hands should be on deck to solve its clearly evident domestic challenges.

Toyin F. Sanni

January 2020