FOREX Africa Editorial: Currency Union Fever Hits West Africa Again

Written by Jeffrey Cavanaugh

As frontier markets, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk. 

A 2020 date for the eco?

In between dodging car bombs and demonstrators protesting the mass abduction of schoolgirls by Islamist insurgents, Economic Community Of West African States parliamentarians met in the Nigerian capital.

There they passed toothless measures to boost cross-border trade and investment between the West African international organization’s constituent members.

To help move this along the chairman of the ECOWAS Commission, Kadré Désiré Ouedraogo, announced that a long-mooted idea to form a West African currency union might, once again, be moving forward and could be in place by 2020.

The idea to create the eco – the proposed name for the West African currency – dates back to the formation of the organization itself in 1970s.

Various plans for the single currency have been bandied about from time to time with the most recent being a scheme in 2009 to enact a two-tiered membership structure.

The first would be comprised of the eight West African Economic and Monetary Union (UEMOA) member countries – Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo.

The second, consisting of the remaining ECOWAS members with their own currencies, would be grouped into a currency area called the West African Monetary Zone.

In theory the two blocks would converge upon agreed monetary and fiscal benchmarks that would allow the two zones’ prices, interest rates, and other macroeconomic indicators to be stabilized before final adoption of the new currency. At no time, however, has more  than one country ever met these benchmarks and, in fact, only one country — Ghana —   has ever met them over the course of an entire fiscal year.

This is not necessarily a disqualifying state of affairs for a currency union, as the European Union’s loose interpretation of its own rules surrounding the euro attest to, but it is nonetheless is worrisome. What’s more concerning, however, is the degree to which a currency union would be overwhelmingly dominated by Nigeria. Nigeria of course has always been and is always going to be West Africa’s leading state, but being a leading or even dominant state in a region is a very different thing from being a leader of a currency union.

The center cannot hold

That’s because leadership requires credibility and Nigeria, at every level, has none. Germany, for instance, spent years building up the strength and reputation of the Deutsche mark and the central banking institution in charge of it, the Bundesbank. Nigeria, instead of building credibility, has all but arrested the man who brought stability to the naira for revealing staggering levels of corruption at the country’s state-owned oil company. Full faith and credit necessarily implies honesty and probity – which is distinctly lacking here.

What’s more, a country that cannot keep armed Islamists from snatching up hundreds of school children whenever they want or prevent car bombs from exploding willy-nilly in the streets of its capital city also does not instill much in the way of confidence. How can Nigeria govern an economic union when it cannot govern itself without recourse to the army occupying, albeit incompetently, wide swathes of the country?

Third, unlike Germany – whose economic heart consists of manufacturing – Nigeria is overwhelmingly an oil economy totally dependent on oil and gas exports to the rest of the world. While the export revenue and foreign currency earnings create conditions for a relatively strong currency for both countries, Nigeria’s case for a strong currency rests on quicksand compared to the rock-solid granite that Germany, and by extension the euro, is based upon.

That’s because while no one doubts Germany will continue to be a top exporter of high-quality, high-tech manufactured goods greatly desired by the rest of the world, Nigeria’s oil could run out. The country’s petroleum ministry announced recently that reserves had dropped 5 percent (or 12.5 percent depending upon who is doing the counting) to 35 billion barrels.

With little in the way of investment flowing into the country’s oil sector and with insecurity, widespread oil theft, and political unrest threatening its onshore infrastructure, needed maintenance and improvements aren’t being done to boost reserves and thus prolong production into the future. That bodes ill for Nigeria’s ability to earn foreign currency and thus maintain a strong currency into the future.

Finally, it is not clear that the other countries of West Africa would necessarily benefit from such a union. They already benefit from Nigeria’s huge economy and trade extensively with their giant neighbor. Monetary union would, at best, increase that marginally. Furthermore, tying weaker economies like Liberia, Sierra Leone, and others to a stronger currency would only hurt exports and thus growth. Similarly countries with relatively strong exports – such as Ghana – really have no need for monetary union with Nigeria.

So, it would seem that the eco, grand political project that it is, is probably something best left on the drawing board for now. Nigeria, the natural leader of a West African currency union, has too many problems to make such a union work and lacks the credibility needed to assure global markets that the eco would be more valuable than the naira.

Nigeria – no matter how big an economy it claims to be – simply is not ready for prime time.

Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.