West Africa Single Currency - How Close to Take-Off?
For well over a decade, the West African Monetary Zone has been trudging towards establishing a common central bank and introducing a single currency called Eco. With another take-off target date fast approaching, NSE ANTHONY-UKO, examines how close the member countries are to meeting the convergence criteria.
Regional economic integration has been widely acclaimed as an important means to improve and maximise economic outcomes for member countries globally, especially in sub-Saharan African (SSA) countries for several reasons. One, several SSA economies are very small and fragmented.
Thus, integration will help increase market size and opportunities for member countries. Two, deeper financial integration achieved through economic and monetary integration would lead to greater financial stability. Three, there are potential trade gains for member states through trade creation. Four, the enlarged market leads to improved foreign direct investment flows from both within and outside the region.
Five, the larger market achieved at the back of regional integration holds the potential for increased returns to firms as they exploit economies of scale more fully.
In the order to harness these perceived dividends of regional integration as a move toward rapid economic growth, development and transformation, the Economic Community of West African States (ECOWAS) was established in 1975. In a move to consolidate the gains from this regionalization and quicken the pace of integration, the Francophone countries established a monetary union and strengthened the union with a macro-economic convergence and harmonisation moves in 1994.
Six years later, the Anglophone countries followed suit with the formation of the second monetary zone involving the non-CFA countries, namely, the West African Monetary Zone (WAMZ).
Though concerted efforts have been made to actualise the establishment of a single monetary union as well as a common currency, The Eco, among the member states, the formal take-off have been postponed three times.
The WAMZ was formally launched by the Heads of State and Government of The Gambia, Ghana, Guinea, Nigeria and Sierra Leone, in December 2000, while Liberia signed on to the WAMZ charter to effectively join the zone in 2010. The objective of WAMZ is establishing a common central bank and introducing a single currency Eco, of which take-off date was initially fixed for 2003 later postponed to 2005, 2010, 2014 and currently to on or before January 1, 2015.
To actualise the dream, member countries are required to meet the primary and secondary convergence criteria stipulated for the WAMZ.
However, with barely two years to the agreed formal take-off date of the monetary union being on or before January 1, 2015, recent assessment of member countries' performance on the convergence criteria showed very dismal outing for 2012, worse than previous years' performance.
According to the performance scorecard presented during the 2012 Annual Statutory Meetings of the WAMZ, average real GDP growth for WAMZ is projected to decline in 2012 to 6.9 per cent compared to 8.7 per cent in 2011. Growth is projected to decelerate in Ghana and Nigeria, while picking up in the four other member states. Sierra Leone is expected to record the highest growth rate of 21.35 in 2012, supported by the commencement of iron ore mining in the country.
A review of the activities of the WAMZ technical committee as at June 2012 indicated that performance of the six member countries on the convergence scale deteriorated significantly from a score of 79.2 per cent in June 2011 to 62.5 per cent in 2012 as no member met all the convergence criteria.
The sub-region also failed to meet the growth target as Real GDP for the Zone is projected at 6.9 per cent in 2012 down from the estimated growth rate of 8.7 per cent as at June 2011.
Available data also showed that inflation rate rose to 12.6 per cent in June 2012 from 11.6 per cent in June 2011, driven by price increases in non-food items within the zone. Fiscal deficit as a ratio of GDP was however, below the minimum four per cent in four of the six countries, while gross external reserves was enough to cover at least three months of imports in five countries.
With regard to individual country performance on the convergence scale, The Gambia, Ghana, Guinea and Nigeria satisfied three of the four primary criteria, same as in 2011, while Liberia slipped from four in 2011 to three in 2012 and Sierra Leone moved up the scale to satisfy two criteria in 2012 as against one in the previous year.
None of the countries satisfied all the four primary convergence criteria. Four countries (The Gambia, Guinea, Liberia, and Nigeria) complied with three primary criteria, while one country, Ghana achieved one criterion. As in the previous assessment periods, the inflation and fiscal deficit criteria were the most challenging for the member states. The four primary criteria include inflation rate, fiscal deficit level, central bank deficit and financing of gross external reserves
On the secondary convergence criteria, four countries - The Gambia, Guinea, Nigeria and Sierra Leone - complied with only two out of the six criteria, while Ghana satisfied only one and Liberia met none.
Minister of State for Finance, Dr. Yerima Lawan Ngama lamented that rather than improving on the challenges which led to the extension of the take-off date of the Eco to January 1, 2015 over three years ago, member countries' performance is deteriorating.
"We would recall that the Heads of State and Government of the WAMZ met in Abuja on June 22, 2009, where the decisions to postpone the commencement of the monetary union was taken, despite the challenges that necessitated the postponement, performance of member countries on the convergence scale deteriorated significantly," he said.
Acting Director General of the West African Monetary Institute, WAMI, John Kitcher, said the performance of member states on the micro-economic criteria was mixed, with none of them satisfying all four criteria in their performance for the first half of 2012.
With regard to other areas of the convergence process, Mr. Kitcher, said that notable progress was recorded in the improvements in trade relations within the WAMZ and the wider ECOWAS as all member states have adopted the ECOWAS protocols on trade and trade-related issues and are at different stages of implementation.
On the financial sector integration, he said efforts are underway to further integrate the various stock exchanges in the ECOWAS region while cooperation in cross-border banking supervision is being pursued vigorously, particularly under the auspices of the College of Supervisors of WAMZ.
The Director General said average real Gross Domestic Product, GDP, growth for the WAMZ is projected to remain strong in 2012 at 6.9 per cent, compared to 8.7 percent in 2011, while growth is expected to decelerate in Ghana and Nigeria, and pick up in the four other member states.
Sierra Leone, he said, is expected to record the highest growth rate of 21.3 per cent in 2012, supported by the commencement of iron ore mining in the country.
"Inflation remained relatively subdued at an average rate of 12.6 per cent at the end of June 2012, compared to 11.6 per cent recorded in the corresponding period of 2011.
"Fiscal operations improved during the review period as the average fiscal deficits (excluding grants) declined to 1.8 per cent, from 2.2 per cent in June 2011, owing largely to domestic revenue mobilisation efforts and expenditure management," Mr. Kitcher said.
The Director of Multilateral Surveillance ECOWAS Commission, LassaneKabore, who spoke on behalf of the President of the Commission, said members should explore additional sources of taxation to raise more revenue for government business.
"All ECOWAS member States, including the WAMZ countries, must increase domestic revenue mobilisation through effective implementation of programmes aimed at ensuring improved tax-payer voluntary compliance, effective tax administration and broadening of the tax base as well as minimising the operational cost of governance," Mr. Kabore said.
Noting the performance of the WAMZ member countries with regards to the secondary convergence criteria, Mr. Kabore said that slightly above 25 per cent of the members faced the problems of low tax yield and high operational costs of governance in the entire ECOWAS sub-region.
As the sub-region moves towards the launch of the second regional currency agreed for 2015, the ECOWAS commission expects WAMZ member states to satisfy the primary macroeconomic convergence criteria by sustaining their performance.
He described the performance as "a dismal", when compared to the situation in the first half of 2011, adding that in percentage terms, the performance score of the WAMZ countries on the convergence scale during the first half of 2012 was 62.5 per cent, compared to 79.2 per cent during the corresponding period in 2011.
He, however, reassured of the commitment of the ECOWAS Commission to the establishment of a credible and sustainable monetary union in the sub-region with the ultimate goal of improving the standard of living of the entire ECOWAS citizenry.
In this regard, he said the ECOWAS Convergence Council, made up of Ministers of Finance and Governors of Central Banks in the region, has given the Commission the overall responsibility of coordinating the activities in the Roadmap on the implementation of the ECOWAS Single Currency Programme, in collaboration with all the regional institutions involved in the implementation of the monetary cooperation programme.
To ensure the effective implementation of the Roadmap activities, the ECOWAS Commission is to harmonise the statistics, domestic tax policies, public procurement, public debt, accounting and statistical frameworks of public finance and adopt the convergence criteria.
Other activities include removal of all tariff and non-tariff barriers to free movement of goods, persons and services within ECOWAS, while ensuring financial market integration (money and capital markets and non-bank financial institutions, insurance, Pension/Social Security Funds industries).
With the performance as it currently stands, is the zone really ready to move on with the economic convergence come January 2015?
No doubt, member countries have been affected by uncertain economic environment characterised by crisis of confidence in the Euro Zone, slowing global economic growth, the threat of unstable capital flows and rising unemployment in our countries.
These developments have contributed substantially to the slowdown in performance of the economies in the sub-region considering its impact on capital inflow and commodity prices - two of the major determinants of economic performance in the sub-region.
The Minister of Finance and Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala, said that the proposed single currency in the zone cannot be achieved only by legislative instrument but also by concrete actions to be taken by the leaders to realise the dream.
She said there was increasing need for the WAMZ leaders and governments in the sub-region to muster the required political will and put more actions into the drive for the monetary convergence agenda.
To forge ahead despite these challenges, Governor of the Central Bank of Nigeria, Mallam Sanusi Lamido Sanusi said the Central Bank Governors need to sustain their commitment to the single sub-regional currency proposal by continuously and objectively reviewing the economic conditions of member-states with a view to determining the level of preparedness for the agenda by member-states.
Sanusi, who is now saddled with the responsibility of moving the train forward following his election as the Chairman of the Committee of Governors of the WAMZ, called for caution and a comprehensive re-appraisal of existing framework of monetary union in view of the recent experiences of the Euro Zone.
He said: "Recent appraisal revealed that the level of macro-economic convergence in the Zone has remained inadequate relative to the set targets over the years. This has been a major challenge and it is important that we evolve appropriate strategies to address the situation both at the individual country levels and collectively at the regional level (zone)."
The Deputy Governor, Economic Policy of the CBN, Sarah Alade, cautioned WAMZ member countries to avoid hasty decisions that would lead to the failure of the planned monetary union.
She said the West African Monetary Authority, WAMA, and the West African Monetary Institute, WAMI, must increase their collaboration in order to identify areas of improvement in addressing sound monetary, fiscal and exchange rate policies to promote macro-economic stability.
The Minister of State for Finance, Yerima Ngama, said Nigeria would always drive constructive pluralism by seeking to utilise the society's diversity towards its greater good, adding that Nigeria would continue to give its full political support to ensure the success of the WAMZ programme.