On September 1, 11 members of the Southern African Development Community will enter a free-trade arrangement leading to the total abolition of tariffs and the creation of a common market. Will everybody be a winner or will some nations lose out? Tom Nevin discusses.

The 14 member countries of the Economic Community of West African States (ECOWAS), excluding Mauritania, have ambitious goals of launching a common currency by 2004, modelled on the euro. This will be preceded by a single monetary zone from January 2003, which in turn will merge with the seven CFA franc zone members: Benin, Burkina Faso, C™te d’Ivoire, Mali, Niger, Senegal and Togo. The ECOWAS Anglophone members are Cape Ve
Gambia, Ghana, Guinea, Liberia, Sierra Leone and Nigeria. The combined gross domestic product of West Africa is estimated at $86bn, with the regional power house - Nigeria - representing 50% of the sub-region’s GDP, Cote d’Ivoire representing 13% , and Ghana 9%.

What exactly is meant by Economic and Monetary Union (EMU)? To an economist, a monetary union signifies a bloc where one currency prevails, and where a single institution, like the European Central Bank or the US Federal Reserve System, is responsible for controlling the money supply and interest rates policy.

There are two distinct forms of monetary integration. The first involves fixing of exchange rates and the existence of financing facilities to ease money and trade adjustments, referred to as a ‘currency union’. The second form, ‘financial integration’, involves the unification of financial institutions and markets to facilitate free capital mobility.

Tough tests to pass

Economic tests, based on the European Union’s Maastricht Treaty criteria for currency convergence, prove stringent for the member-states to pass. Participating countries must first achieve, by 2002, a marked degree of macroeconomic stability, curbing their budget deficits to within 4% of GDP (excluding foreign grants). By 2003, Central Bank’s deficit financing must be limited to 10% of the previous fiscal year’s tax revenues while achieving an inflation rate lower than 5% and possessing healthy forex reserves equivalent to an import-cover of six months.

The formation of a monetary union also requires harmonisation of exchange rate mechanisms, fiscal-and-monetary policies, as well as the overall pace of implementing structural adjustment programmes within the member-countries.

A Central Bank, commanding impeccable anti-inflationary credentials, would be responsible for overall policy coordination and preserving regional economic stability in post EMU era.

Benefits and Costs

In principle, the governor of the Banque Centrale des Etats de L’Afrique de I’Ouest (BCEAO) for Francophone West Africa, Charles Konan-Banny, supports the goals of monetary union. “The advent of a single currency is a response to financial globalisation and the unavoidable phasing out of national currencies,” says Konan-Banny. He emphasised that the new currency must be based on solid economic foundations, as resilient as the CFA franc (pegged to the euro) and freely convertible.

The most likely important direct benefits to accrue are thought to be a reduction in cross-border business transaction costs and exchange rate uncertainties.

Greater currency stability should simplify the business decision-making process as exchange risks discourage cross-border investment. A single monetary zone should also lead to better fiscal control mechanisms.

Revenues from unproductive channels - such as resorting to the printing press to finance budget deficits causing a ballooning money supply and higher inflation, will no longer be a policy option. Fiscal prudence can only enhance the credibility of a government’s policies. Other potential long-term gains are that an enlarged market will encourage foreign direct investments and increase intra-regional trade.

A stable macroeconomic framework contributes to higher GDP growth and supports job-creation in member-countries. In addition, a single currency will improve monetary co-operation in banking sectors. This will lead to more efficient payments and clearing systems.

Costs of a single currency

The potential costs of the proposed currency are more complex and difficult to evaluate. The most significant cost will arise from the loss of political sovereignty over key aspects of policies, such as future direction of interest rates, adjustments in nominal exchange rates, taxation and spending programmes.

Proponents argue that members, including small countries like Cape Verde or The Gambia, would participate in a collective decision-making process.

Fiscal constraints are important because an excessive budget deficit in one member country could undermine the zone’s exchange rate stability. This in turn could subject other participants to ‘external diseconomies’.

Strong intra-governmental co-operation, sustaining geo-political regional stability is necessary for the overall success of the project. While general principals underpinning the proposed single currency are sound convergence timetables do appear unrealistically short.

In addition to the technicalities of rigid monetary integration, fixed exchange rates, central control of budget deficits and the eventual creation of a common Central Bank, there are numerous other issues still to be resolved on both the political and economic front.

Add to the scenario the potential for bureaucratic inertia and delays, it seems likely that the single currency project may be remaining on the drawing board for some time to come.

Whether a ‘currency union’ or ‘financial integration’ is the preferred option, we can at least anticipate some modified form of greater regional integration stimulating improved economic performance.

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