By Samuel Matthews
For decades, there have been hopes for a greater degree of monetary integration across West Africa. The establishment of a currency union for the Economic Community of West African States (ECOWAS) would significantly impact the region’s macroeconomic situation and therefore its development. The continent is no stranger to currency zones: although it receives less attention than the larger Euro zone, the CFA franc zone covers fifteen countries with a total population of about 150 million. It was established by France in 1945 for its then-colonies, but the system survived the colonies’ independence. Initially pegged to the French franc, the CFA franc has been fixed to the euro since 1999 at a rate guaranteed by the French Treasury. There are two monetary unions that use the CFA franc: the West African Economic and Monetary Union (WAEMU) and the Economic and Monetary Community of Central Africa (CEMAC). The further monetary integration of West Africa has the potential to promote the region’s economic growth leading to rising living standards for its people.
For the eight member states of WAEMU, the CFA franc has been a source of both monetary stability and controversy. Compared to their neighbors, the nations of WAEMU have generally experienced lower rates of inflation and benefitted from the fiscal restraints imposed by the arrangement. This stability promotes trade and investment from Europe. But many of their citizens, particularly young people, have increasingly expressed dissatisfaction with what they see as a form of French neocolonialism. There are concerns among academics that the parity between the CFA franc and the euro has been set to “make France’s market the exclusive outlet for her former colonies’ raw materials.”
Along with seven additional West African nations, WAEMU members are also part of ECOWAS. Since its creation in 1975 with the Treaty of Lagos, there have been plans for the creation of an ECOWAS currency zone. These aspirations solidified in the form of the eco, a common currency that would replace the CFA franc and include all fifteen members of ECOWAS. Although its creation has been delayed many times over the last twenty years. In June 2019, ECOWAS announced plans to implement the eco by the end of 2020. However, Covid-19 and regional rivalries brought further delays. The pandemic is predicted to delay the implementation of the eco by three to five years. Perhaps even more important is the lack of agreement about what form the eco zone would take. At the beginning of 2020, WAEMU President Alassane Ouattara and French President Emmanuel Macron jointly announced reforms to the CFA franc that would decrease French involvement and involve renaming it to the eco – without input from the rest of ECOWAS. This prompted protest from prominent anglophone nations like Nigeria who want even less French involvement in the eco. For example, Ghana has proposed dropping the peg to the euro altogether.
Clearly, there is momentum behind the establishment of the eco. Even though serious questions remain about the system that would replace the CFA franc, it seems likely that it will be implemented sometime within the next ten years. This means that it is important to consider the ways in which West Africa’s monetary integration can be better facilitated. A common currency is no guarantee of stability; the history of the euro zone is proof enough of this. Therefore, ECOWAS should simultaneously pursue policies to ease this transition by simultaneously pursuing fiscal integration, embracing currency digitalization, and adopting a sound industrial policy.
Recommendations for the Transition to Monetary Integration
- Fiscal Integration
Fiscal integration is one of the criteria for optimal currency areas. It is necessary to allow for the redistribution of resources between zone members. During times of crisis, weaker states can receive support from more stable economies, promoting the wellbeing of the currency zone as a whole. There are serious concerns that Nigeria would dominate the eco zone as it represents 67 percent of ECOWAS GDP. If the eco loses the peg to the euro, Nigeria’s exposure to volatility through oil revenues would threaten the stability of the eco’s exchange rate. A centralized fiscal body would promote the efficient use of public resources as well as convergence which would help to ameliorate these concerns. Such an institution would work alongside the zone’s central bank to coordinate monetary and fiscal policy. These fiscal links would also improve the zone’s ability to collectively respond to crises, particularly in the face of evidence that there is a low degree of correlation between how the nations of West Africa experience shocks.
- Currency Digitalization
As West Africa contemplates monetary integration, it should take advantage of the benefits of currency digitalization. The use of digital currencies is not foreign to the region. According to one survey, Nigeria has the world’s highest rate of adoption of cryptocurrencies, which are used to avoid high transaction costs when sending remittances. In December 2016, Senegal became the second country in the world to launch a national digital currency. As Senegal is a member of WAEMU, the “eCFA” is equivalent to the CFA franc in value. The adoption of a digital eco would strengthen the transition to a unified currency zone and yield important benefits to the members of ECOWAS, including reduced expenses from handling cash, financial inclusion, and a more responsive monetary policy. There would be challenges, however, as West Africa was slower to adopt mobile banking than East Africa. Only 6 percent of Nigerians use their phones for mobile transactions compared to 73 percent of Kenyans. However, Covid-19 has served as a catalyst for digital finance in the region. Maintaining this momentum, ECOWAS should build upon existing progress and architecture to adopt a digital eco.
- New Industrial Reforms
Addressing the serious structural challenges facing the region’s economies will promote growth and macroeconomic stability, providing a healthy environment for the adoption of the eco. Alongside fiscal integration and currency digitalization, it is essential that ECOWAS adopt an integrated industrial policy to confront these barriers to development. Skills-based education programs, infrastructure development, and regulatory reform to attract foreign investors are all examples of what this industrial policy might entail. West Africa suffers from a lack of industrialization. In 2019, the nations of West Africa only averaged 13.9 percent of employment in industry, compared to 20.3 percent for Latin America and 25.6 percent for East Asia, two regions with significantly greater levels of development. Successful structural transformation typically entails the movement of labor from primary commodity production to manufacturing and then from manufacturing to services. Yet many African economies have “leapfrogged” from agriculture straight to employment in low-productivity services like retail have limited potential for sustainable growth.
As the history of other currency zones demonstrates, the monetary integration of ECOWAS is not sufficient to secure sustainable growth. The eco should be accompanied by fiscal integration, currency digitalization, and industrial reforms. These policies are interdependent. By reducing exchange rate risk, a stable monetary policy promotes exports, which then fuels the growth of industry in countries with limited domestic markets. As policy makers recover from the effects of Covid-19 and look towards the implementation of the eco, they must prepare an integrated growth strategy that addresses the multifaceted challenges facing the region.
Samuel Matthews was a spring intern 2021 on the Project on Prosperity and Development at CSIS.