The ECOWAS Eco currency: West Africa’s response to a single currency zone.
By Kortor Kamara, USA
West African leaders have for several decades since the 1970s, intermittently discussed, without much success implementation of a single common currency - to foster economic growth and integration in the ECOWAS sub region.
A significant development in this quest for economic integration was on June 29, 2019 achieved with the adoption of the ECO as the sub region’s single currency effective in January 2020.
At their recently concluded 55th Ordinary Session summit held in Abuja, Nigeria, the 15 ECOWAS Heads of State and Government, including our president Julius Maada Bio, adopted a single currency, named the ECO, to be the legal tender in the sub region.
Currently of the 15 ECOWAS member states in the proposed single currency, 8 countries use the CFA Franc and the remaining 7, including Sierra Leone use their own currencies. Nigeria as the economic powerhouse in the sub-region controls two-thirds of the regional economy.
CRITERIA FOR MEMBERSHIP
However, a threshold roadmap for country participation and adoption of the ECO single currency requires adherence to the below 6 criteria:
1) Must have a budget deficit of not more than 3 percent.
2) Must have an average annual inflation of less than 10 percent, with a long term goal of not more than 5 percent by 2019.
3) Must have gross reserves able to finance at least 3 months of imports.
4) Must have Public Debt or GDP of not more than 70 percent.
5) Central banks financing of budget deficits should be not more than 10 percent of previous year’s tax revenue.
6) Must have a nominal exchange rate variation of plus or minus 10 percent.
Advantages of a single currency
There are several economic and socio-political reasons for the establishment and adoption of a single currency in the ECOWAS sub-region. However, it should be noted that the ECO by itself alone cannot be a panacea in bringing about economic stability and growth.
Firstly, a single currency brings to an end currency instability in the region and fosters development of a more stable economy.
Secondly, the issue of exchange rate uncertainty is mitigated. The single currency also eliminates the need to have currency exchanges for trade within the single market zone.
Thirdly, there is cost effectiveness as attendant extra currency exchange costs and risks are eliminated.
Fourthly, a single currency such as the ECO, will serve to provide protection to smaller countries, such as Sierra Leone, against financial crisis.
Moreover, another advantage of the single currency provides for expansion of business markets by entrepreneurs and enables exporters new markets with certainty.
In the fiscal and monetary arena, budgetary discipline is engendered as a single currency de facto restrains and eliminates governments use of discretionary monetary policy to inject artificial booms in the economy.
Governments will thus have very limited opportunities to use inflation as a financing mechanism for their budget deficits.
Disadvantages of a single currency
The implementation of a single currency in the ECOWAS sub-region does pose potential pitfalls and disadvantages to both the region and individual countries.
The loss of national sovereignty is a central disadvantage, as countries will lose control over economic instruments, such as ability to set their own interest rates.
Due to the centralized decision making at the hands of the ECOWAS bureaucracy, compounded by the inevitable politicization of the ECO currency to the advantage of the larger economies, smaller economies and countries will be adversely affected.
The CFA franc countries symbiotic economic relationship with France posses a potential hindrance to the full actualization of a truly ECOWAS single currency bloc. The language barrier between CFA Francophone countries and Anglophone states will impact labor mobility and may increase unemployment in economic depressed countries.
Is Sierra Leone ready for the single currency in January 2020?
Sierra Leone as a largely non industrialized economy, dependent on importation of even basic food stuffs from overseas, has never engaged on a major scale, in cross border trade with her neighbors. Our mineral resources, such as iron ore, bauxite, rutile, diamonds are largely exported to Europe, Asia and America and finished consumer goods are from mainly China.
As a small nation thus the benefits and disadvantages of membership in the single currency zone requires a thorough cost benefit assessment analysis by our policy makers - for either decision portends dangers and benefits.
A first step however in this assessment is determining compliance with the threshold adoption criteria for joining the single currency.
With an inflation rate currently pegged at 17.46 percent as at March, 2019, Sierra Leone will not now qualify for the 5 percent threshold required for adoption. We will not also pass the threshold 3 percent for budget deficit, as our nation’s fiscal deficit in 2018 was 6.6 percent of GDP. The Leone currency depreciated by 12.0 percent year-on-year in 2018.
On the plus side, Sierra Leone has over 3 months of gross reserves to finance imports. We also have a total public debt to GDP of 66.3 percent in 2018.
In conclusion, there has not been much public education of the potential single currency implementation in Sierra Leone. Very significant transition costs will be associated with the currency change, involving accounting systems, training and public education for such a currency transition.
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