Despite the approval by Economic Community of West African States (ECOWAS) to adopt the ECO (ECOWAS single currency) from January 2020, the odds against the implementation of the currency seem higher than mountain Kilimanjaro.
The new medium of exchange was approved by the authority of ECOWAS Heads of State and Government in Abuja, Nigeria’s capital on June 31st 2019. The leaders endorsed the currency at their 55th Ordinary Session and signed a road map towards the currency’s issuance.
The roadmap was set up to ensure that all member countries meet certain criteria for the adoption of the currency. Some of the primary convergence criteria needed from each member state include; a budget deficit of not more than 3 percent, a single-digit inflation rate at the end of each year, with a long-term goal of not more than 5 percent by 2019.
It has been two decades since the idea of a single West African currency was hatched, however, issues including the lack of needed legal framework and achieving a criteria like a single digit inflation of 5 percent or less have delayed the implementation process.
Single digit inflation is a difficult requirement to meet, especially for Nigeria, the largest economy in the region, whose in inflation rate averaged 11.92 percent between 2003 and 2016; Ghana experienced an average inflation rate of 16.92 percent between 2000 and 2016, rates which by far exceed the 5 percent requirement.
Nigeria’s inflation rate rose by 11.40 percent on a year-on-year basis in May. The highest so far in 2019.
Nigeria’s CBN Governor, Godwin Emefiele, said in his five-year policy that he projects double-digit growth, single-digit inflation, $12 billion non-oil exports by 2023. Three years more than the estimated 2020 for the adoption of the ECO.
“The ECO cannot happen in 2020,” Ayo Teriba, the Chief Executive Officer of Economic Associates told BusinessDay, adding that until Nigerians can work freely in Ghana and other member countries, and the banks be able to do transactions in other countries like they are in their home country, ECO cannot work.
“First, you have to set up a unified market, then labour, followed by the financial system and finally the single currency, just like the Euro area did. When you have not takien any step to set up the first three, you cannot achieve the latter,” Teriba explained concluding that “they are still far from achieving the single currency.”
It is expected that the Eco would be modelled after the Euro, the unified currency used by 27 member countries of the Eurozone.
Checks by BusinessDay revealed that the Euro area had a transition time period in which they created a single market in 1992 and a decade after they were able to adopt a single currency.
However, the Euro has several shortcomings, notably the inability of any individual economy to control for economic shocks. With the utilization of a single currency, macroeconomic fluctuations have in the past been controllable by the individual country.
The inability of any individual economy to control the ECO, lack of a single voice to speak, low inter-trade between countries, the fear of loss of sovereignty, and the implications of the move on the economies of individual countries, are some of the shortcomings of ECO as listed by an analysis produced from the partnership between SBM Intel and Geomarkets Africa LL.
According to the analysis, the implication of ECO is that countries will find it difficult to fully be in control of managing their economic recovery process.
“The sovereign ability of individual countries to adjust their currency’s exchange rate, and notably devalue their currency in case of an economic downturn, is lost. In such an instance whereby an exchange rate value is retained at an excessively high rate, foreign purchases of the countries’ goods are discouraged,” the publication noted.
Nigeria adjusted its FX regime during the 2016 economic recession, fueled by the drop in global oil price and the decline in the country’s level of production coupled with foreign exchange shortages.
SBM Intel and Geomarkets Africa LL are of the opinion that if ECO is adopted such decision made by Nigeria would not be possible, and would have had “the potential impact of prolonging the recession.”
“Single multi- country currencies lean towards stability as opposed to flexibility and this can hamper policy responses. There is no exchange-rate fluctuation for individual Euro countries,” it said.
ECOWAS has a combined population of 385 million in 15 countries and was set up in 1975.
It comprises Benin, Burkina Faso, Cape Verde, Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo.
Eight of these countries use one currency called the CFA franc. Those are Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo.
“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,” SBM Intel and Geomarkets Africa LL said.