There are several economic implications that a likely move by Nigeria to adopt a shared currency with other West African countries would have on its economy, and policymakers must take note.
From losing its grip on determining interest rates to controlling any surge in inflation and portfolio outflows, Nigeria faces intense external risk if it signs on to the “Eco,” along with several other West African countries, analysts tell BusinessDay.
According to them, though the currency pact facilitates quick transactions and trade among member states, the negative implications outweigh the gains. As such, Africa’s largest economy should resist any temptation pushing it from inking to the deal.
“Our economic fundamentals are still weak, signing on to the eco could further inflict more pain as the Nigerian economy would be affected by developments in other West African nations,” an investment banker and economist says.
As part of plans to make Africa a more integrated continent, leaders of the 15 member-states of the Economic Community of West African States (ECOWAS), had in July 2019, agreed to adopt the name ‘Eco’ for a planned single currency to be used in the region.
Of the 15-members states in the region, a total of eight adopts a singular currency known as the CFA Franc, while Nigeria, Ghana and five others, use a different currency.
Late last month, the eight West African countries using the CFA Franc, announced plans to adopt the unified currency “Eco” by 2020, after a meeting between Ivory Coast President, Alassane Ouattara, and French President, Emmanuel Macron.
Under the deal, the currencies of Benin Republic, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger Republic, Senegal and Togo, which were originally tied to the French-backed CFA, would cut financial ties with their colonial masters and adopt the new shared eco currency, which would then be pegged to the euro.
Following the announcement, the Ghanaian government in a communiqué dated December 28, said it was determined to join the already eight West African countries in adopting the “Eco,” but expressed concerns over the currency being pegged with the euro.
But back home, analysts have thrown support behind Nigeria reservation on inking to the unified currency deal, which would see it swap the naira for the eco and open its economy to external shocks from member states.
The key lesson for Nigeria, they say, could be drawn from the “euro” agreement that has created a huge burden for members of the pact following structural imbalance from the Greece economy.
The economy of Greece is faced with worsening trade balance alongside increasing current account deficit, which is rubbing on other member countries to the agreement including the economy of Germany.
SBM Intelligence in a research report notes that the fact that West African countries are largely net trade importers is yet another setback for the single currency decision.
“For instance, Nigeria, according to former minister of agriculture, Audu Ogbeh, spends $22 billion annually on food importation and spends significantly more on importing refined petroleum products. This puts the country in a position where its scarce foreign exchange supplies must continually chase these goods whose prices are set externally,” SBM notes.
Nigeria is Africa’s largest economy and heavyweight in the region and accounts for about 67 percent of ECOWAS GDP, a situation that has prompted analysts to say the current deal would be between Nigeria and the 14 other West African countries.
“Although we are going to have a larger market, Nigeria is not a productive economy, hence it will not be competitive to benefit from the currency deal,” Johnson Chukwu, managing director at Lagos-based Cowry Asset Management Limited, says.
Chukwu notes that Nigeria is still faced with a lot of structural issues that would hinder the gains from a currency pact.
The Eco is expected to be invoked by July this year, however, there are indications the unified currency might not come to limelight given its numerous conditions the majorities of its members are yet to meet.
The single currency was first planned to be introduced in 2003 but the launch has been postponed several times; in 2005, 2010 and 2014.
The currency agreement obliges member countries to meet conditions such as maintaining inflation rates below 10 percent and achieving budget deficit-to-GDP ratios of 4 percent. It also stipulates that the Central Bank financing of budget deficits should be no more than 10 percent of the previous year’s tax revenue while Gross external reserves of country members must cover at least three months of imports. To date, no country in the bloc has fully met such stringent conditions.
Nigeria’s inflation jumped to 11.9 percent in November following a government directive to shut its land borders to check smuggling of products particularly petrol and rice.
Nigeria is also faced with poor infrastructure, non-tariff barriers, and inefficient customs significantly inhibit intra-regional trade in the bloc. Thus, analysts argue that establishing a common currency would fail to achieve its purpose unless trade relations are strongly augmented the sub-region.