ECO: a real new chapter for western Africa?
The implementation of a single currency in Western Africa only seems a matter of time. But some hurdles still need to be taken to achieve the goal of an open and united economic environment encompassing infrastructures, taxes and jurisdictions.
Western Africa has been devising for many years to build a consensus on a single common currency. 2020 seems promising, as several country leaders are more determined than ever in promoting the ECO, which would be the name of the future common currency of the Economic Community of West African States (ECOWAS). The ECOWAS region includes 15 countries1, 6 of which belong to the West Africa Monetary Zone (WAMZ), 8 belong to the West African Economic and Monetary Union (WAEMU) and Cape Verde which belongs to none of the above.
One of the reasons why these authorities are confident in a single currency policy, may be that the WAEMU countries, together with France, have already taken the first step by announcing, at the end of December 2019, the reform of the CFA Franc (Franc of the Financial Community of Africa) in the region. The main changes include:
The name changes of the currency from CFA to ECO;
The conservation of all reserves in the Central Bank of West African States (BCEAO) (instead of transferring 50% forex reserves to French Treasury);
The reduction of the number of French representatives on the Board of Directors of regional central banks.
ECO: Pros and cons
However, difficulties still exist. For instance, the peg to euro at fixed rate is challenged by some important member countries. In particular, Nigeria, who occupies 60 to 75% of GDP of the ECOWAS region2, prefers to keep their currency (NGN for the moment) in a floating rate since the country got rid of its pegging with US dollars in 2016.
Moreover, the criteria set for being eligible as a member of the ECO zone are difficult to reach which hinders the project. The four main convergence criteria3 are:
A single-digit inflation rate at the end of each year;
A fiscal deficit of no more than 4% of the GDP;
A central bank deficit-financing of no more than 10% of the previous year's tax revenues;
Gross external reserves that can give import cover for a minimum of three months.
Having already been postponed 4 times, the implementation of ECO for 15 countries in 2020 remains a question. Like all structural reforms, the ECO project has its pros and cons.
Positive results of the policy could be the facilitation of trades and payments, transaction costs reduction and enhancement of the competition in the region which unleashes economic vitality. The economic dynamics will attract investments which should be key to the development of western African countries. Take the example of the eurozone: After the implementation of the EURO, the region became more preserved from global economic changes and market fluctuations.
Daniel Kwesi SARPONG, Head of Corporate Banking at Societe Generale Ghana, says:
I see more positives than negatives. Take example of Nigeria and Ghana, Nigeria has to close its border because of the smuggling on importation of rice through its neighbour Benin. If all the three countries enter the ECO zone and borders are opened, it will create lots of synergies.
However, critics point out that the CFA Franc region has already been in place since 1945, but the region didn’t show an outstanding development resulting from this unique currency. Some also worry about Nigeria, the region’s economic giant, who might to some extent take the lead on the monetary region. Another potential danger could be looming on the euro area: Will the latent cascading effect of the ECO economic region be a threat in the same way as the Greek financial crisis in 2008 impacted the whole European currency region?
The impact of the future ECO on regional financial markets can hardly be predicted. However, we can make some forecasts:
A unique currency managed by a single central bank should make it easier for international investors to understand the regulation compared to the current dozens of national authorities;
Liquidity should be improved as well, resulting in additional international inflows boosting regional economic growth;
As far as bonds and equities are concerned, the ECO might kick off local stock exchanges mergers and help the regional securities take on an international dimension, thanks to national and international brokers enjoying a single membership to access several former ECOWAS stock exchanges;
The regional stocks and bonds should entice more international investors thanks to a lesser exchange rate risk.
ECO plan is such a vast project and the goals pursued shall not be achieved overnight.
It is not only a matter of currency but more about building an open and integrated economic environment encompassing infrastructures, taxes, jurisdictions to name a few streams. As Daniel Kwesi Sarpong states: “We may have a common currency we’re looking for, but to make the ECO a real success, we need the members to think ECOWAS as a whole instead of building artificial barriers among individual countries.”
Article written by Liyan HU, Business Analyst (intern ) within the SGSS International Country Supervision team, and Jean-François Marchand, Supervisor for Africa & India within the SGSS International Country Supervision team.
1 Gambia, Ghana, Guinea, Liberia, Nigeria, Sierra Leone (WAMZ), Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal, Togo (WAEMU) and Cape Verde.
2 Eva Wesley, Born2invest, 09/01/2020, born2invest.com/articles/nigeria-is-still-lukewarm-on-the-cfa-franc-reform/
3 Eco dream shot down, AU Monitor, August 11, 2012, Retrieved June 17, 2013, http://news.moneygh.com/pages/economy/201208/554.php