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					INTRODUCING A COMMON CURRENCY:
THE ECOWAS EXPERIENCE



                                       By

                            Essien Abel Essien
                        Director, Strategic Planning
                          ECOWAS Commission



         1
 A Paper Presented at the ECOWAS-ZEI Academy in Comparative Regional Integration,
      Centre for European Integration Studies, Bonn, Germany, March 16-28, 2009
OUTLINE

Conceptual Issues
Historical Overview of Economic and Monetary Integration
in West Africa
The West African Experience
Performance Assessment
Lingering Constraints
Concluding Remarks



                                                     2
CONCEPTUAL ISSUES: ECONOMIC AND
MONETARY INTEGRATION

Faster, all encompassing, and least-costs way to achieving rapid
economic development.
Facilitate the pooling of risks between otherwise vulnerable economies,
reduce wars, promotes intra-regional trade
Enables countries within the region to exploit complementarities,
entrench competitiveness thereby attracting the required levels of
investment for development
Ensuring better access to markets and technology.
Elimination or reduction of impediments to trade and investment;
Minimizes the un-intended externalities arising from globalization
Enhanced human and physical capacities to conduct bilateral and
multilateral negotiations, reduce negotiation costs, and increase
bargaining power

                                                                     3
CONCEPTUAL ISSUES: ECONOMIC AND
MONETARY INTEGRATION
    Trade and competition effects argument, where trade
     openness create incentives for policy makers to pursue
     virtuous macroeconomic policies (because they have bound
     themselves in the regional agreements, implicit or explicit that
     provide a check on policy.
    Price and Exchange Rate Stability Effects--freeing economic
     decisions from uncertainties and distortions, as well as
     banishing nominal exchange rate variations among members
    Implies there is a high degree of commonality among
     countries in union—Macroeconomic, policy, structural
     convergence
    With commonality, shocks could be assymetric. Following
     Robert Mudell (1961), Ronald Mackinnon (1963), and Peter
     Kenen (1969),


                                                                        4
FOOD FOR THOUGHT
 Does the region have preconditions for adjustment in the
  real economy? Does it satisfy the OCA?
 Did the UEMOA satisfy the OCA Criteria?

 Is it a necessary or sufficient condition?

 Can it be satisfied ex-post rather than ex-ante

 Is macroeconomic and policy convergence necessary in its
  strict sense
 Common market before a single currency?

 Since a currency is used as a medium of payment for
  transaction.
 Did UEMOA have a common market before a single
  currency?                                                5

 Does causality run in both direction
HISTORICAL OVERVIEW
Partitioning of West Africa, a major distinction in the evolution of
economic and monetary integration
Aim :
 o to facilitate exchange between colonial powers (Britain and France)
   and colonies (except Portuguese Guinea, Cape Verde and Liberia)
 o Exploit resources of colonies for the benefit of colonial powers
Several monetary arrangements were established
These mechanisms were to bring about monetary integration to create
interdependent markets
This influence is still very strong—Cape Verde and Liberia is still not
part of either UEMOA or WAMZ
The West African Currency Board-December 6, 1912 (Issued the West
African pound for The Gambia, Ghana, Nigeria, Sierra Leone



                                                                      6
HISTORICAL OVERVIEW

From Banque du Senegal (1855-1901) through La Banque de l’Ouest or
Bank of West Africa (1901-1955) to L’Institut d’l’ Afrique Occidentale
Francaise et du Togo or Institute of Issuing for French West Africa and
Togo (1955-1959)
The purpose were the same so was the rationale for collapse—agitation
for independence.
The French transformed the monetary institution into a Central Bank.
For the British colonies an independent currency was a major indicator
of sovereignty.
There were pre-colonial obstacles to integration
Colonialism only strengthened them and created fragmented territories
Invariably colonialism recognized the disadvantage of multiplicity of
currencies
The passion of territorial and colonial identity has failed to give way to
pan-territorialism and regionalism up till today—WAMI Interview.
                                                                       7
THE WEST AFRICAN
EXPERIENCE: ECOWAS

16 West African countries signed the treaty for an Economic Community
of West African States (Treaty of Lagos) on 28 May 1975

Main purpose was to promote co-operation and development in all fields
of economic activities in member states

Initially couched in the context of a gradual progression from a free trade
area via a customs union to a common market

Promotion of trade flows via the establishment of a multilateral payment
system arrangement, WACH, in 1975

A revised treaty of 1993 (initiated in 1991) recognized other challenges
and extended the common market program to incorporate adoption of
common policies beyond economic, to include socio-political and
cultural policies and a definitive statement on the creation of a monetary
union                                                                  8
ECOWAS INTEGRATION
ARRANGEMENT: STEPS

The ECOWAS was to p roceeds in the following direction



 Preferential                     Free trade area: A                   Customs union: A
 trading area:                    designated group of countries:       free trade area:
 Preferential access to certain   Eliminate tariffs, quotas and        Common external tariff
 p roducts by reducing tariffs,   preferences on most (if not all)     Common external trade policy
 but does not abolish them        goods between them.                  (may have different import
 com pletely                                                           quotas)




                                  Economic and                       Single market: A
Complete                                                             customs union:
                                  monetary union: A                  Common policies on product
Integration: No or                single market with a common        regulation
negligible control of             currency.                          Freedom of movement of
economic policy, including                                           factors of production. Removal
full monetary union and                                              of the physical (borders),
complete or near-complete                                            technical (standards) and fiscal
fiscal policy harmonisation                                          (taxes) barriers
THE WEST AFRICAN EXPERIENCE:
ECOWAS PROGRAM FOR INTEGRATION

  The ECOWAS Programme was expected to create the necessary
  conditions for the establishment of a monetary union and to
  provide an effective architecture for the creation of a common
  economic space

  The main economic policy objectives of ECOWAS are
    to enhance intra-regional trade,
    reduce transaction costs,
    eliminate exchange rate risk,
    boost factor mobility,
    enhance investment and growth and reduce poverty.


  ECOWAS Monetary Co-operation Programme (EMCP)
                                                              10
THE WEST AFRICAN EXPERIENCE:
EMCP
 A launch of an EMCP in 1987 was logical component of the economic
 integration scheme and would create a harmonised monetary system
 through the observance of a set of convergence criteria
 It was to be operationalized in 1992, 5 years after the launch
 During the five year period the institutional and policy frameworks for
 a single currency project was to be put in place (WAMA was set up)
 Major requirements under the EMCP were:
 o Compliance with agreed convergence criteria
 o Harmonisation of regulations on exchange rate and adoption of a
    market driven exchange rate regime
 o Harmonisation of fiscal, monetary and financial policies
 o Measures towards the establishment of a common market (ETLS,
    CET, Payments System, etc.)
 o Capital and current account convertibility
THE WEST AFRICAN ECONOMIC
AND MONETARY UNION: UEMAO

Became a full economic and monetary union in 1994.
Has continued to operate as an independent economic and monetary
arrangement within ECOWAS.
Since 1994, WAEMU has operated under its own macroeconomic policy
framework and convergence process.
The convertibility of CFA guaranteed by the French Treasury and
reasonable credibility in the monetary union, with experience over three
decades has culminated in a drag to ECOWAS framework
Harmonising its programme with those of ECOWAS continues to be a
challenge



                                                                   12
THE WEST AFRICAN ECONOMIC
AND MONETARY UNION: WAMZ

 A two track approach to ECOWAS integration programmes by the
 Authority of Heads of State and Government of ECOWAS--Lome,
 Togo in December 1999, to accelerate the process in the sub-region.
 Made up of; The Gambia, Ghana, Guinea, Nigeria and Sierra Leone
 Member countries agreed to the establishment of a common central
 bank which would issue a common currency for the zone.
 An interim institution, WAMI was set up in January 2001, to-
 undertake all preparatory activities leading to the establishment of the
 WACB and the introduction of a single currency.
 Suffered two postponements (2003 and 2005)



                                                                     13
THE WEST AFRICAN ECONOMIC
AND MONETARY UNION: WAMZ
Major Reasons (2003) and 2005
    Poor macroeconomic performance: persistence of fiscal dominance,
    high inflation, and low levels of foreign exchange reserves
    accumulation.
    No country met all the criteria
    Short time frame necessary for the requisite infrastructure to be put in
    place
    National economic policies were at variance with WAMZ objectives
    Member countries failed to incorporate in their National laws WAMZ
    Statutes
    Policy harmonization was weak
    Payments systems development was still rudimentary
    Significant variations in statistical Standards
    Sensitisation was still poor and lack of trade integration agenda 14
 PERFORMANCE ASSESSMENT:
 CONVERGENCE CRITERIA
Primary                                    Secondary
 Fiscal Balance (excl. grants) (≤4; ≤4;    Tax Revenue /GDP > 20 % of GDP
   primary balance/GDP≥0)                   Wage Bill / Domestic Revenue < 35%
 Inflation (≤10; ≤10; Annual                of Tax Revenue
   Average≤3)                               Public Investment Expenditure/
 Central Bank Financing (≤ 10.0 % of        Domestic Revenue> 20%
   previous yr tax revenue for both but     Positive Real Interest Rate
   not in UEMOA rather non-
   accumulation of domestic and             Exchange Rate Depreciation
   external arrears)                         (Luc/US$) +/-15% (W-ERM)
 Gross Official Reserves (≥ 6; ≥3          Domestic Arrears - No Accumulation
   months of imports but not for             and Settlement of Existing Stock
   UEMOA)

    A major difference is that the arrears criterion is a secondary criterion for the
    ECOWAS and WAMZ
    ECOWAS criteria is similar to WAMZ but some targets are different
    Real interest rate and exchange rate criteria are absent in the UEMOA secondary
    criteria, while total public debt/GDP (≤ 70%) and external current account
    balance are not in the ECOWAS and WAMZ.                                         15
    The Convergence criteria for both Zones have not been met on s consistent basis
EMCP: PERFORMANCE ASSESSMENT



  Some progress in terms of overall macroeconomic stability (stable
  exchange rate, declining inflation, market oriented money control,
  etc., ECOWAS, however, has so far failed to meet its stated goals in
  the field of sub-regional economic integration.
  Key protocols pertaining to free movement of goods and persons
  are casually contravened.
  Slow Movement towards convergence
  Low intra-regional trade
  Capital controls still persist
  Existence of a parallel monetary arrangement--A mainly
  francophone West African Economic and Monetary Union
  (WAEMU) exist with its own set of criteria, outside the EMCP—
  exchange rate regime
                                                                    16
EMCP: PERFORMANCE ASSESSMENT

  Reasonable level of macroeconomic stability has been achieved
  because:
  A credible commitment to price stability, which relieves financing
  decisions from the plague of large inflation uncertainty, diminishes
  inflation risk premia in borrowing costs to the benefit of households,
  businesses and government, and free economic decisions from
  uncertainties and distortions.
  The fiscal requirements of the commitment to monetary stability has
  contributed to fiscal consolidation
  Growth was robust in almost all the countries while inflation
  moderated significantly and foreign exchange reserves improved
  substantially.



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LINGERING CONSTRAINTS

 Journey has been tortuous
   Politics
    o National sovereignty
    o Political Instability
    o Poor Governance and Corruption
   Institutions
    o Failure by governments to meet their financial obligations to
      regional organisations
    o Lack of follow up by sectoral ministries on decisions taken at
      regional meetings by Heads of State
   Macroeconomic
    o Slow convergence
    o Fiscal dominance and high inflation

                                                                  18
LINGERING CONSTRAINTS


 Structural Issues
 o Payments System development
 o Statistical harmonisation
 o Financial sector integration
     Shallow, Small and fragmented financial landscape, lack of
      competition, narrow range of financial products, high costs of
      financial service, poor access
 o   Poor infrastructural and transport facilities
 o   Non-convertible currencies
 o   Small and Fragmented Markets and Non-Tariff Barriers to trade


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NEXT CRUCIAL STEPS IN THE
PROCESS

 Political Will should start with the removal of non-tariff barriers to
 trade.
 Single currency based on sound macroeconomic fundamentals
 and following the stages of integration.
 Fnancing-payments system infrastructure
 More private sector involvement
 A more resilient financial sector (through the sustained reform of
 the banking system)
 The Renewed Call for a Single Track Approach—Several technical
 meetings have taken place.
 A new time frame has been discussed that would see the
 launching of a single currency by 2020

                                                                      20
CONCLUDING REMARKS

   Sequencing the process. Path to union is critical-merits of intermediate
    steps.
   Is a win-win situation both for small and large countries.
   There are associated costs of not having a monetary union?
    A vibrant informal sector where real economic integration is taking
    place and transcends the thinking of bureaucrats that needs to be
    formalised via a medium of payments.
   Similar economic structure but we need strong institutions
    Much has been accomplished in recent years, but important challenges
    remain in achieving West African economic integration. The process is
    irreversible.



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       THANK YOU
FOR YOUR KIND ATTENTION




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