Impact of the Euro on Africa
The European single currency, the euro, makes its debut on the first of this month. There will be wide ranging implications not only for Europe but for Africa as well. Moin Siddiqi explains what impact the euro will have on the continent.
The debut of the European Economic and Monetary Union's (EMU) single currency, the euro, on 1 January, marks the most significant event in the forex markets since the collapse, in 1973 of the Bretton Woods Agreement of 1944.
The euro comprises a basket of the 11 European Union (EU) member currencies: Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, the Netherlands, Portugal & Spain. The exceptions are Greece, which failed to fulfil the Maastricht Treaty's economic criteria for membership, whilst Denmark, Sweden and the UK have met the criteria, but will not be joining in the first round.
Initially, the euro will be tradable between banks in electronic form only, until euro notes and coins are introduced on 1 January 2002. There is a 36-month transition phase under the Maastricht's 'No prohibition, no compulsion' clause. This means that customers and suppliers in the euro zone will not be required to invoice or use euros as sole legal tender until 1 July 2002. But major European banks and companies like Daimler Benz and Siemens will be managing their businesses in euros in full before the deadline. Their clients and suppliers inside and outside euro zone will need adapting to the new environment.
Official transactions by the 11 EU-member governments and central banks will be denominated in euros. The forex reserves of the 11 EU currencies held by African central banks, including deposits of French francs maintained by the CFA zone central banks - The Banque Centrale des Etats de L'Afrique de I'Ouest(BCEAO) and The Banque des Etats de L'Afrique Centrale(BEAC) - will therefore be redenominated in euros from 1 January 1999.
Like the US dollar, the euro will also perform traditional functions: a means of international trading and invoicing; a financial role; as a source of funding for public and private borrowers; a channel for investment and savings - a store of wealth for savers; and an international reserve instrument for central banks world-wide.
The benefits of a single regional currency which the euro will provide can also serve as a model for future regional economic integration in Africa. The various advantages are:
*The elimination of multiple exchange rate risks in the euro zone, and hence the promotion of greater currency stability, which in turn will encourage intra-EU trade and investment.
*The costs of hedging against currency fluctuations are reduced and treasurers will have to manage cashflows and risks only in two currencies - euros and dollars.
*The elimination of transaction costs linked with conversion.
*Better transparency in EU pricing, improved business competitiveness and simplification of procedures and operational issues.
*A sizeable, unified market will offer potential trading and investment opportunities for emerging market companies.
*Fiscal discipline by member countries will lead to a lower inflation and interest rate environments.
*The euro-zone will develop, over the coming years, into the world's largest capital market and for institutional investors raising capital on euro bond market will be cheaper and easier for multinationals. The euro interest rates will remain lower than those prevailing in the US.
The euro zone will form a sizeable economic and trading bloc, exceeding the US both in gross domestic product and in foreign trade. The EU's GDP in 1996 was $8,573bn, compared with $7,342bn for the US. The EU's share of world trade in 1996 was around 21%, compared to 19.6% for the US.
Notwithstanding its huge economic base, core EU currencies - D/Mark, French franc and the pound are under-represented in global capital and trade flows, relative to the US dollar. About 48% of trade flows are invoiced in dollars, compared with 31% in EU currencies.
Global assets (both private and public) are also disproportionately denominated in dollars. Currently, the dollar accounts for 67% of official forex reserves (with only 20% in EU currencies). Private portfolios of bonds and equities are estimated at $3,500bn; of which 40% is in dollars, and 33% in EU currencies. Finally, over 50% of developing countries' debts are in dollars and only 16% in EU currencies. The World Bank estimated sub-Saharan Africa's external debt at $222.6bn in 1997, of which 43.3% was in dollars, 12.3% in Ff, 5.1% DM and 3.9% in £. The IMF expects the euro to complement the dollar as a prime reserve currency partly for intervention purposes.
There are historical and commercial links between Africa and western Europe. The EU is a dominant trading bloc for Africa and one of the principal sources of bilateral and multilateral aid. Africa's exports to the EU zone in 1997 were worth $48bn, equivalent to 43% of all exports, and imports from the EU totalled $52bn, or almost 50% of the total imports.
Major trading partners are France (in the case of CFA countries), Germany, Italy, Spain and the UK. The EU's humanitarian assistance totalled ECU512m in 1996. Africa also receives substantial direct investment from the EU - major investors being France and the UK. The immediate impact of the EMU on Africa, excluding Francophone countries, will be limited, but long-term ramifications could be profound.
The CFA member states: Benin, Burkina Faso, Cote d' Ivoire, Cameroon, Central Africa Republic; Chad, Congo(Brazzaville), Equatorial Guinea, Gabon, Guinea-Bissau, Mali, Niger, Senegal and Togo will experience the most tangible changes in the post-EMU era. The CFA will be fixed against the euro at its existing parity rate of CFA100:Ffr1, fixed since 1994 and guaranteed by the French Treasury.
The job of preserving the existing CFA zone's mechanism will shift to the new European Central Bank from this month. The IMF's working paper, The CFA franc zone and EMU has suggested that the euro would offer some positive benefits for African partners:
*An enlarged expanding euro zone will increase markets for CFA exports, thus leading to higher output, and more emphasis on export diversification.
*Pegging the CFA to a hard-currency, underpinned by the world's largest forex reserves and an independent central bank, whose mandate is price stability, will contribute to exchange rate stability, thus containing imported-inflation in the CFA-zone.
*Increasing trade links with EU and continuing macroeconomic stability will encourage EU companies to invest in the CFA-zone.
*Better and easier access to euro-zone capital markets; free capital flows between France and her African partners will extend to all EMU-members, thus enabling CFA countries to tap offshore capital.
However, there are some risks for commodity-based developing countries from linkage to a hard, strong currency. A steep appreciation of the euro will undermine export competitiveness of CFA countries in dollar-based world markets for crude oil, coffee, cocoa and cotton.
Projected weakness in commodity prices in 1999-2000, if combined with an over-valued euro vs the US dollar, Yen and other OECD and emerging market currencies, would lead to a significant deterioration in the terms of trade for CFA countries, as in the 1986-93 period. Thus with the main markets for primary commodities outside the EU, producers' earnings in euros will decline, due to an appreciation in the real effective exchange rate. Therefore, the export-led growth in much of Francophone Africa since the devaluation of 1994, could be hit by a strong euro.
The CFA countries could face growing competition from low-cost imports from Anglophone countries with more competitive exchange rates such as Ghana, Zimbabwe, Nigeria or Kenya. But a strong euro would reduce the burden of dollar-denominated debts and vice versa. At micro level, the euro will have an impact on cash and treasury businesses of major banks such as Stanbic, Investec and Nedcor, companies like Anglo America, Lonrho Africa, De Beers as well as African airlines operating in euro zone. Thus, with a single currency, companies can use the services of just one or two prime European banks for handling their EU businesses.
The euro will encourage more efficient use of cash. Corporate treasurers will experience new forex market conditions. Treasurers will be able to devote more energy to areas such as corporate finance, managing cashflows and interest rate exposures. African companies and investors will benefit from only having to take one currency-risk, rather than 11.
Over the medium-to-long term, the euro may challenge the dollar's hegemony as a leading reserve and trading unit. The euro may become international currency of reference for much of Africa because around half of the region's external trade is with Europe. If the euro proves a success, other countries like Guinea or Ghana may link their currencies to the euro zone.
A super-economy EU bloc will boost European influence in the World Bank and the IMF. This may help to counteract the US and Japan's objection to enhanced official aid or debt relief for low-income countries. The EMU offers scope for Africa to integrate into the global economy by forging closer trade and investment ties with a super-trading bloc of the 21st century.
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