The Dollar, the Euro, the Yen — and Now the West African Eco
By Tope Alake and Alonso Soto August 6, 2019, 6:00 AM GMT+2 Updated on August 6, 2019, 7:50 AM GMT+2
Nigerian trade consultant Bamidele Ayemibo says it’s easier to sell his bean cake snacks to China than to neighboring Benin.
Trading with any of the other members of the Economic Community of West African States requires him to find expensive money changers to convert local currencies, adding to costs that are already high due to dilapidated roads. He prefers selling to customers who hold hard currencies in London or New York. Even business with China is more straightforward after the Nigerian government signed a currency-swap deal with Beijing last year.
His transactions would get a lot easier if the 15 countries of Ecowas, as it’s called, follow through on their plan to create a single currency. The area, which stretches from Cape Verde in the Atlantic Ocean to Nigeria in the east, is as populous as the U.S. but only 13% of its trade is with other countries in the region. The nascent currency will be called the “Eco.”
“Through Eco, people can have more formal trade, because they can export and know they will get their payment,” said Ayemibo, whose Lagos-based firm also exports corn meal and liquid soap.
After nearly two decades of failed attempts, Ecowas leaders agreed in June to gradually adopt the Eco starting in 2020. The sheer differences in the size of their economies and exchange regimes make that deadline highly problematic. The euro, now the single currency of 19 countries, took six years of planning followed by three years of full currency integration before euro cash arrived. Moreover, member countries of the future Eco don’t all agree about how the new money should work.
On the plus side, eight Ecowas members already have a single currency: the CFA franc. Established after World War II to help France import goods from its colonies, the tender is pegged to the euro and its convertibility is guaranteed by the French Treasury. Former British colonies Nigeria and Ghana, the two biggest economies in the region, have their own currencies.
Common currencies aren’t unusual in Africa. In addition to the West African CFA franc, six countries in central Africa also use a CFA franc. In southern Africa, Namibia, Lesotho and eSwatini are part of a monetary union with South Africa; all their currencies are pegged to the rand.
To join the Eco, union members have to meet economic convergence criteria that include keeping public debt below 70% of GDP and single-digit inflation. Last year, no single member met all the criteria, according to Ecowas’ latest macroeconomic convergence report. Inflation in Sierra Leone averaged 16.9% in 2018 and general government debt in Cape Verde surged to 121% of GDP, according to estimates by the International Monetary Fund.
Still, even if the Eco takes much longer than expected, the renewed commitment to integration and improved economic indicators could give a boost to African leaders’ efforts to create the world’s largest free-trade zone, said Ronak Gopaldas, director of Cape Town-based consultancy Signal Risk.
“The value of this is that it provides the right behavioral nudges for countries to aspire to a certain goal, but realistically 2020 is never going to happen,” Gopaldas said. “This could be a precursor to the African Continental Free Trade Agreement and create sufficient momentum that they complement each other nicely.”
A stable Eco could help development industries and bolster investment to more than double intra-regional trade in Ecowas, said Kofi Apraku, Ecowas commissioner for macroeconomic policy who is leading preparations to launch the common tender.
The plan is for the Eco to be backed by the international reserves of union members under the management of a new regional, independent central bank that will target inflation.
However, the amount of reserves each member pledges will determine whether the Eco will be a free-floating or managed exchange within a band, Apraku said. Countries have yet to decide if reserve contributions will be based on the size of their economies or a percentage of foreign earnings, he said.
“We are doing this to be independent and have a stronger currency that allows us to play better in the international front,” Apraku said.
While Ecowas members have agreed on the name for the common currency, disagreements over the true independence of the Eco highlight the difficulties in creating a single tender.
Ivory Coast President Alassane Ouattara said last month that the CFA franc could be the new Eco and that the rest of the region should join in because the euro peg has helped to contain inflation. Consumer prices in the cocoa producer rose 1.2% in June from a year earlier.
That’s in contrast to West African activists who have over the years tried to get rid of the CFA franc.
Nigeria’s central bank, which has kept tight control of the naira even after the removal of a peg in 2016, said it wants the country to maximize the benefits of monetary integration and made no mention of the CFA franc in a July statement.
Instead of rushing into a single currency, Ecowas should prioritize more basic measures to tear down trade barriers, including improving infrastructure, fighting corruption and setting up currency-swap arrangements, according to Andrew S. Nevin, partner and chief economist with PwC West Africa in Lagos. “It is more important that they focus on trade in African currencies than on creating a common currency,” he said.
— With assistance by Leanne de Bassompierre, and Samuel Dodge