Introduction to ECOWAS Single Currency Policy
This article discusses the single currency or one currency for West Africa countries called ECO, it implication for the region, the negative and positive side of the policy with focus on the benefit and disadvantages it poses to Nigeria economy. The coordination of monetary policy is an important aspect of the modern economy and a cardinal function of central banking authorities. As noted by Zafar and Sabo (2013), ‘a monetary policy is a key tool in economic management and macro-economic stabilization’. Single currency or one currency is hinged on the idea that there is a need to guide and regulate the value and supply of money in an economy in consonance with the level of economic activities. This is necessary because of the marked inadequacy of the market mechanism- left to itself- to regulate money supply.
The nexus of monetary policy and exchange rates is important in determining the direction of the economy as a whole, the interaction between the two is susceptible to the emergence of another innovation; currency unions. This examines the merits and demerits of the adoption of single currency or one currency (a currency union) by Nigeria and the constraints on adoption.
History of Single or One currency Policy by ECOWAS countries
One of the key financial innovations of the last century was the introduction of currency unions. Conceptualized as the notion of two or more states basically sharing the same currency. It is essentially a monetary union and might include or exclude other integrations such as common markets and common customs’ unions. There are currently about 16 currency unions all over the world with the most prominent one been the European Union (countries sharing the euro). Other currency unions include the CFA Franc (Cote’d Ivoire, Mali, Niger, Cameroon etc.), Eastern Caribbean dollar (Anguilla, Antigua, Montserrat, Saint Lucia etc.), Hong Kong dollar (Hong Kong, Macau), and the Pound Sterling (UK, Gibraltar, South Georgia etc.).
The agitation to have a single currency regime in West Africa has garnered a lot of interest in recent years, however such shift cannot be lightly taken, and it relies on a number of considerations and an outlining of the advantages and disadvantages of a currency union. Such information is critical to the decision- making process. A review of studies done by Pagano (1993), Macklem et al (2000), and Kalemli- Ozcan et al (2001) revealed that the decision to join a currency union is often predicated on an objective weighing of costs and benefits. These benefits are derived from various effects which a single currency is deemed to have.
Recall that in June 2019, about 15 heads of states and governments of the Economic Community of West African States (ECOWAS) agreed to launch a new currency, the “Eco,” in January 2020 or what is known as single currency or one currency. The leaders of Economic Community of West African States (ECOWAS) believe that business people and travelers will be freed from the hassles of exchanging currencies, intra-area trade will boom, and an integrated and prosperous region will flourish. A monetary union with a single currency for the 15 member states would mean that governments would transfer national political authority to ECOWAS institutions.
The question begging for answer from the arrangement according to Brooking (2019) include: are the member states willing to subordinate national interests to regional interests? Are there lessons from the eurozone? Will Nigeria ever give up its national currency, the naira? These are fundamental questions. There are also lessons to be learned. In this day and age, national sovereignty is all the rage and seems to trump cross-border collaboration. Certainly, flaws of an integrating world are evident but so are those of their populist detractors. In a recent study of Africa’s monetary unions, Debrun, Masson and Pattillo (2010) demonstrate that, in ECOWAS, net benefits from a single regional currency will accrue to Nigeria, modest benefits will accrue to Côte d’Ivoire, and the Gambia will suffer net losses.
Evaluating the Criteria of adopting Single currency by West African State
(a) Criterion 1: trade and openness: The literature on optimal currency area emphasises trade as the main channel through which benefits from a common currency will be enjoyed. The more countries trade with each other, especially in a particular region, the more they will value regional exchange rate stability. In other words, the larger the volume of intra-regional trade, the greater the benefits for countries in a region to form a currency union. In this regard, currency unions are expected to be welfare enhancing because they reduce the potential disruptions to intra-regional trade brought about by relative price fluctuations and disturbances in bi-lateral exchange rates. Moreover, Frankel and Rose (2000) provide empirical evidence to show that trade has positive impacts on growth and a common currency encourages trade in turn.
(b) Criterion 2: labour and factor mobility Mundell (1961) argues that an optimal currency area is a group of countries in which labour and factor mobility is relatively high. If for example a member of an OCA is hit by negative asymmetric demand shocks, then labour and other factors of production will move from this country to other member countries, thereby restoring employment to its original level. With high labour and factor mobility, there will be movements in the region so as to equalize wages and factor prices from areas with excess supply to areas with deficit supplies.
(c) Criterion 3: fiscal transfers and geo-political factors At the present, no official fiscal transfer mechanisms exists in the region except for some form of official and military aid provided by Nigeria to some other countries in the region. This issue has to be addressed before the actual take-off of the common currency regime. While the economic criteria discussed above are essential for determining the suitability of a common currency regime in West Africa, the geopolitical factors play an equally important role in this process. Two developments in the international environment make the prospects of a successful monetary union more challenging and at the same time needful. First is the global financial crisis which has weakened the growth in the world economy, thereby adversely affecting the export performance of the region. Second, with the proliferation of regional economic blocs and growing protectionism in the developed and developing regions, West African countries may find it difficult to gain access to these markets.
Evaluating Single Currency (ECO) policy for Nigeria’s economy: Merits and demerits
Adopting a single currency or joining a single currency union has a number of benefits which can be considered as the merits of a currency union and serve as a justification or rationale for joining one. The adoption of a single currency will help mitigate the risks associated with international investments. A single currency creates a situation in which risk-averse agents can insure against income shocks by diversifying their portfolio across the whole unified currency area, rather than being restricted to the (smaller) national asset markets.
The adoption of a single currency changes significantly, the nature of financial markets by fostering financial integration. As noted by Kalemli et al (2001), financial integration enhances the quality of investments by connecting financial intermediaries- and creating a pool of expertise which can be tapped into across the region. Financial integration create a more liquid market by allowing for a large population pool from which savings and other investment must be sourced.
In the regions that have adopted a single currency and especially the EU, the benefits of a single currency have mainly been in the economic sense. Introducing the single currency leads to gains in economic efficiency. These gains can be divided into two groups. One is the elimination of transaction costs and the other is the elimination of risk which comes from uncertain fluctuation of the exchange rates. These economic benefits also have far reaching impact on monetary and exchange rate policies. Another demonstrated advantage of a common currency us the expansion of commerce which it encourages. A single currency creates a simple platform for price comparison, makes price differences more noticeable and helps to equalize it across borders.
While the merits of a currency union in themselves make a strong case for the adoption, it is imperative to point out the demerits of such a policy move. A key demerit is the loss of autonomy on monetary policy occasioned by the adoption of a single currency. This essentially translates into whereby a country- Nigeria for instance- cannot autonomously make policy changes in cases of economic shocks to the economies of other members of the union (Greenspan, 2007). This demerit means a country cannot in effect have a monetary policy response to asymmetric economic shocks.
Evaluating Single Currency (ECO) policy of ECOWAS: Lesson from Eurozone
This section makes reference to the discussion of Brooking (2019) where Ashoka Mody (2018) provides sweeping historical context to the unfolding eurozone crisis. The author noted that the ECOWAS policymakers will do well to heed. First, leaders must be absolutely clear about the expected benefits of the single currency. Second, a fiscal pool is important for crises response and for an effective monetary union. Third, public opinion matters. The decisions by the Danes, Swedes, and Brits to retain their national currencies came largely under public pressure opposed to the euro. Even today, the U.K.’s battle around Brexit illustrates the dangers of taking public opinion for granted. It would thus be naïve for the ECOWAS leaders to march full steam ahead in their quest for a single currency on the erroneous belief that the Eco is Good for West Africa. The bottom line here is that even with strong institutions of governance, the euro experiment continues to face serious challenges—both economic and political. At the outset, the deutsche mark was seen as a success of hard money orthodoxy—a stable currency regime protected from manipulation for political ends. Embedded in the postwar industrial success of the then-West Germany, it won praise from capitals around Europe. The idea to export the trust that the Bundesbank had earned across Europe, to facilitate integration and also promote hard money discipline in the south, seemed to combine conservative monetarism with the progressive idea of bringing Europe together.
In hindsight, it is easy to see the appeal. The illusion was that hard money and industrious economic development would go hand-in-hand right from the start. The Greek debt crisis served as a brutal warning that a currency union was no deterrent, though. It may be tempting to conclude the opposite, but then identifying the currency union as the major culprit is challenging too. The unsustainable build-up of debt at the heart of the crisis mirrored the dynamics experienced under floating currency regimes. What was certainly different was the reaction to the ensuing crisis. Monetary easing met resistance as it conflicted with hard money orthodoxy coded into the European Central Bank’s DNA. Eventually, the ECB had to bend to political pressure, but politics also had to bend to the ECB. At this point, if anyone has clear evidence that the outcome was tangibly worse or substantially better than under a flexible regime s/he should come forward. All we have seen is a muddle across the eurozone but the same applies to their free-floating neighbors. A credible “lender of last resort” had to first save the day while questions are still being asked about the side effects in and outside the currency union. The ECB certainly was not as accommodating to stability at all costs but eventually gave in. Did the ECB’s often criticized slow response cause unnecessary friction, or could this accrue a long-term rent by keeping moral hazard at bay? What seems apparent though is that the benefits of trust, just like the corrosive effects of manipulation in currency arrangements, do only accrue over long periods of time. As Keynes famously noted, in the long run we are all dead. There is no instant gratification. Proceed with caution is all we can say. Nigeria and the Eco. Nigeria’s naira is often seen as the likely anchor currency for ECOWAS, due largely to country’s sheer economic size and political importance. This role would be akin to the one played by the German deutsche mark in the period leading to the introduction of the euro. However, for the naira to serve as an anchor currency means that the Central Bank of Nigeria (CBN) will have to give up its control of the naira to a supranational West African monetary authority. This is like asking the Brits, the Danes, and the Swedes—to finally give up their national currencies and adopt the euro. We now know the answer to that. The response of Nigerians to give up the naira will most certainly be negative. In any case, the true value of the naira remains unknown as the CBN currently uses hard-earned foreign reserves to mechanically manipulate the exchange rates. As a consequence, Nigeria now has a multiplicity of exchange rate windows. Under the circumstances, one may well ask what benefit a country like Nigeria or Ghana or the other members of ECOWAS derive through control over their own currencies? Or in the context of real-world complexities, maybe one should rather ask what benefit does the state and its proxies in West Africa derive, and what benefits do the people of the region derive? Inflation and currency manipulation have acted as a sovereign tax throughout history mostly for the benefit of the few. Exchange rate manipulation allows officials to serve specific interest groups but at least also in theory to hit specific economic development goals. In the case of Nigeria, limited naira convertibility and potential volatility act as tax on foreign portfolio flows as well as direct investments. Currency manipulation can serve specific goals but will corrode trust. Constituents can therefore not be taxed forever. It is not just any other tax. The importance of foreign exchange reserves indicates when trust wears thin. Foreign merchants have little appetite for the naira. The euro lessons show that even with robust institutions and strong political commitment, sustaining a single currency remains a challenge. These challenges are likely to be much more difficult to surmount in West Africa where the pre-conditions for success, including strong political will and robust institutions, are evidently absent. Let us also be clear that the euro was never just about monetary policy and trade. It was shaped by a vision of a united Europe. And this does not appear to be an entirely fruitless effort, especially in the eyes of Europeans coming of age in the new millennium. Alternatives to the Eco towards solving some of ECOWAS’s problems. Are there other ways to boost intra-area investment, trade and create jobs in West Africa? Absolutely. Take, for instance, trade facilitation measures. The World Bank’s Doing Business Report 2019 shows that Mali, ranked 92, is the only ECOWAS country included in the top-100 best performing countries for “trading across borders.” Even then, exports from Mali take 48 hours to comply with the bureaucratic requirements at the border. The comparable numbers for some of the larger ECOWAS members are as follows: Cote d’Ivoire is ranked 162 and export compliance takes 239 hours; Ghana is ranked 156 and export compliance takes 108 hours; and Nigeria is ranked 182 and export compliance takes 135.4 hours.
- Hindrance or Constraints on adoption of a single currency
Implementing a single currency in a region or enacting the creation of a currency union is subjected to a number of constraints which might limit its adoption among prospective member countries. A key constraint is related to the costs of implementing the common currency. An important cost is the cost of institutions’ and individuals’ adjustment to a new currency. A common currency necessitates enormous expenditures in form of adjusting invoices, price lists, office forms, payrolls, bank accounts, databases, and software. Operational changes such as re- evaluation of securities, computation of new transaction costs and conversion of old securities and other financial instruments into the new currency require vast changes to existing processes and procedures impose costs which act as constraints on adoption.
The paper discusses the merit and demerits of Nigeria adopting single joining other West African countries to adopt single currency or currency union called ECO. This paper will recommend the adoption of a currency union by Nigeria, this is because of the benefits associated with such union; economic growth, financial integration and reduced levels of international risk which would spur investments. Also the demerits and constraints associated with currency unions are short termed and present costs which are negligible when compared with the benefits.
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Greenspan, A. (2007). The Age of Turbulence. New York: Simon & Schuster.
Kalemli-Ozcan, S., Sorensen, B. and Yosha, O. (2001). Economic Integration, Industrial Specialization, and the Asymmetry of Macroeconomic Fluctuations. Journal of International Economics, 55 (1): 107–37.
Zafar, M. S. and Sabo, S. (2013). The effects of monetary policy on exchange rate determination. Journal of Social Sciences, 24(2), 24- 36