understanding monetary policy series no. 37 … monetary policy... · understanding monetary policy...
TRANSCRIPT
CENTRAL BANK OF NIGERIA
UNDERSTANDING MONETARY POLICY SERIES
NO. 37
c 2014 Central Bank of Nigeria
MONETARY INTEGRATION IN THE ECOWAS
Mwanji P. Fwangkwal Mwanji P. Fwangkwal Mwanji P. Fwangkwal
10TH
ICYL DO EP PY AR RA TT ME EN NO TM
AnniversaryCommemorative
Edition
Central Bank of Nigeria33 Tafawa Balewa WayCentral Business DistrictsP.M.B. 0187Garki, AbujaPhone: +234(0)946236011Fax: +234(0)946236012Website: E-mail:
www.cbn.gov.ng [email protected]
ISBN:
© Central Bank of Nigeria
978-978-52863-2-8
iii
Central Bank of NigeriaUnderstanding Monetary PolicySeries 37, January 2014
EDITORIAL TEAM
EDITOR-IN-CHIEF
MANAGING EDITOR
EDITOR
ASSOCIATE EDITORS
Aims and Scope
Subscription and Copyright
Correspondence
Email:[email protected]
Moses K. Tule
Ademola Bamidele
Charles C. Ezema
Victor U. ObohDavid E. Omoregie
Umar B. Ndako Agwu S. Okoro
Adegoke I. Adeleke
Sunday Oladunni
Understanding Monetary Policy Series are designed to improve monetary policy communication as well as economic literacy. The series attempt to bring the technical aspects of monetary policy closer to the critical stakeholders who may not have had formal training in Monetary Management. The contents of the publication are therefore, intended for general information only. While necessary care was taken to ensure the inclusion of information in the publication to aid proper understanding of the monetary policy process and concepts, the Bank would not be liable for the interpretation or application of any piece of information contained herein.
Subscription to Understanding Monetary Policy Series is available to the general public free of charge. The copyright of this publication is vested in the Central Bank of Nigeria. However, contents may be cited, reproduced, stored or transmitted without permission. Nonetheless, due credit must be given to the Central Bank of Nigeria.
Enquiries concerning this publication should be forwarded to: Director, Monetary Policy Department, Central Bank of Nigeria, P.M.B. 0187, Garki, Abuja, Nigeria,
Oluwafemi I. Ajayi
iv
Central Bank of Nigeria
Mandate
Vision
Mission Statement
Core Values
§Ensure monetary and price stability
§Issue legal tender currency in Nigeria
§Maintain external reserves to safeguard the international
value of the legal tender currency
§Promote a sound financial system in Nigeria
§Act as banker and provide economic and financial
advice to the Federal Government
“By 2015, be the model Central Bank delivering
Price and Financial System Stability and promoting
Sustainable Economic Development”
“To be proactive in providing a stable framework for the
economic development of Nigeria through the
effective, efficient and transparent implementation
of monetary and exchange rate policy and
management of the financial sector”
§Meritocracy
§Leadership
§Learning
§Customer-Focus
v
MONETARY POLICY DEPARTMENT
Mandate
To Facilitate the Conceptualization and Design of
Monetary Policy of the Central Bank of Nigeria
Vision
To be Efficient and Effective in Promoting the
Attainment and Sustenance of Monetary and
Price Stability Objective of the
Central Bank of Nigeria
Mission
To Provide a Dynamic Evidence-based
Analytical Framework for the Formulation and
Implementation of Monetary Policy for
Optimal Economic Growth
The understanding monetary policy series is designed to support the communication of monetary policy by the Central Bank of Nigeria (CBN). The series therefore, provides a platform for explaining the basic concepts/operations, required to effectively understand the monetary policy of the Bank.
Monetary policy remains a very vague subject area to the vast majority of people; in spite of the abundance of literature available on the subject matter, most of which tend to adopt a formal and rigorous professional approach, typical of macroeconomic analysis. However, most public analysts tend to pontificate on what direction monetary policy should be, and are quick to identify when in their opinion, the Central Bank has taken a wrong turn in its monetary policy, often however, wrongly because they do not have the data for such back of the envelope analysis.
In this series, public policy makers, policy analysts, businessmen, politicians, public sector administrators and other professionals, who are keen to learn the basic concepts of monetary policy and some technical aspects of central banking and their applications, would be treated to a menu of key monetary policy subject areas and may also have an opportunity to enrich their knowledge base of the key issues. In order to achieve the primary objective of the series therefore, our target audience include people with little or no knowledge of macroeconomics and the science of central banking and yet are keen to follow the debate on monetary policy issues, and have a vision to extract beneficial information from the process, and the audience for whom decisions of the central bank makes them crucial stakeholders. The series will therefore, be useful not only to policy makers, businessmen, academicians and investors, but to a wide range of people from all walks of life.
As a central bank, we hope that this series will help improve the level of literacy in monetary policy as well as demystify the general idea surrounding monetary policy formulation. We welcome insights from the public as we look forward to delivering content that directly address the requirements of our readers and to ensure that the series are constantly updated as well as being widely and readily available to the stakeholders.
Moses K. TuleDirector, Monetary Policy DepartmentCentral Bank of Nigeria
FOREWORD
CONTENTS
vii
Section One:
Section Two: Conceptual Issues
Section Three: Overview of Monetary Integration in ECOWAS
Section Four: Experiences of other Monetary Unions
Section Five: Challenges and Benefits of Monetary Integration in West Africa
Section Six: Conclusion
Bibliography
Introduction .. .. .. .. .. .. 1
.. .. .. .. .. 3
.. .. .. .. .. .. .. ..
2.1 The Concept of Monetary Integration .. .. .. 32.2 Benefits and Costs of Monetary Integration .. .. .. 3
2.2.1 Benefits .. .. .. .. .. .. 32.3 Costs .. .. .. .. .. .. .. .. 4
.. 53.1 Policy Framework for Monetary Integration in ECOWAS .. 6
3.1.1 ECOWAS Monetary Cooperation Programme (EMCP) 63.1.2 Programmes under the EMCP.. .. .. .. 7
3.2 Institutional Arrangement for Monetary Integration in ECOWAS 103.3 The West African Monetary Agency (WAMA) .. .. .. 113.4 The West African Monetary Institute (WAMI) .. .. 12
.. .. .. 134.1 The European Monetary Union (EMU) .. .. .. .. 134.2 The CFA Zone .. .. .. .. .. .. .. 144.3 The Gulf Cooperation Council (GCC) .. .. .. 15
.. .. .. .. .. .. 175.1 Challenges of Economic Integration in West Africa.. .. .. 17
5.1.1 Political Will .. .. .. .. .. .. 175.1.2 Over-ambitious Targets/Goals.. .. .. .. 175.1.3 Low Level of Intra-ECOWAS Trade .. .. .. 185.1.4 Differential in Natural Resource Endowment and
Asymmetric Shocks .. .. .. .. .. 185.1.5 Inadequate Infrastructure .. .. .. .. 18
5.2 The Benefits of Monetary Integration in West Africa .. .. 19
.. .. .. .. .. .. 21
23
viii
MONETARY INTEGRATION IN THE ECOWAS
1
M O N E T A R Y I N T E G R A T I O N I N T H E E C O W A S 1
Mwanji P. Fwangkwal 2
SECTION ONE
Introduction
Monetary integration involves the harmonization of policies among different
countries through a total or partial removal of tariff and non-tariff restrictions on
trade, which was existing among member countries before they integrated. The
integration process is meant to create a larger and competitive market place for
producers, distributors and consumers, thereby lowering the prices of goods and
services. Comparatively, a monetary union may exist where two or more
countries agree to share a single currency or decide to fix their currency with that
of another country, or a basket of currencies. Thus, the advantages of a
monetary union for member states may include reduced cost of transaction,
price transparency and increased efficiency, among others. However, the major
disadvantage for member states is the loss of a certain degree of sovereignty.
Hence, forming a monetary union implies that member countries must give up
the right to set their own independent policy which, they consider as conducive
for their domestic economy alone, and must be bound to agree with a common
policy that is suitable for member states.
Consequently, the success of a monetary union is derived from the commitment
of member states to tackle a number of challenges confronting them, including
inadequate infrastructure, insufficient commodity diversification, trade barriers,
high transaction cost, large informal sector among others.
Monetary integration was part of the agenda of the Economic Community of
West African States (ECOWAS) at its creation in 1975. However, the drive towards
economic integration in the sub-region was intensified from 1987, when the
ECOWAS Monetary Co-operation Programme (EMCP), was adopted and
1This publication is not a product of vigorous empirical research. It is designed specifically
as an educational material for enlightenment on the monetary policy of the Bank.
Consequently, the Central Bank of Nigeria (CBN) does not take responsibility for the
accuracy of the contents of this publication as it does not represent the official views or
position of the Bank on the subject matter.
2Mwanji P. Fwangkwal is an Economist in the Monetary Policy Department, Central Bank of
Nigeria.
MONETARY INTEGRATION IN THE ECOWAS
2
included in the core mandate of the ECOWAS. The EMCP was adopted on the
backdrop of a number of challenges confronted by member states, including the
low level of trade among countries, lack of payments system infrastructure,
underdeveloped financial system and diverse financial, fiscal and monetary
policies. The EMCP contains various targets, and policy framework that would
lead to the establishment of a single currency and common market in the sub-
region. It outlines a set of macroeconomic convergence criteria, which member-
countries must achieve prior to the introduction of a single currency in the sub-
region. The EMCP also contains a policy framework for the harmonization of
monetary policies, statistics, development of a payments system, trade
liberalization among others.
This paper is divided into five sections. Following the introduction, section 2
discusses conceptual issues about monetary integration and monetary union
alongside their costs and benefits. Section 3 is an overview of the monetary
integration efforts in ECOWAS and Section 4 reviews the experiences of other
monetary unions, while section 5 is the conclusion.
MONETARY INTEGRATION IN THE ECOWAS
3
SECTION TWO
Conceptual Issues
2.1 The Concept of Monetary Integration
Monetary integration could be viewed from several perspectives, however, it is
generally conceived as a process whereby two or more countries come
together, and subject themselves to a single monetary authority or central bank.
The monetary authority or central bank is responsible for the issuance of legal
tender currency and formulates financial policies on behalf of member countries.
The countries that accept the occurrence of this process or arrangement are said
to be in a monetary union. A monetary union could also be viewed as a process
whereby member-states use several currencies, which are fully convertible at a
fixed exchange rate.
Therefore, a monetary union is a process of monetary integration, whereby the
monetary policy and exchange rates of member-countries is managed in such a
way as to achieve common economic objectives.
2.2 Benefits and costs of Monetary Integration
2.2.1 Benefits
Monetary integration has enormous benefits as well as costs to member-
countries. The most important benefit of monetary integration is that member-
countries enjoy the economies of scale in production and trade, which accrue
from specialization. This benefit eventually leads to increased trade in goods and
services among the member-states. As trade increases, it would lead to high
growth rate and improve per capita income as well as minimize transaction cost
among member states. These transaction costs are in the form of exchange rate
losses, which may arise from currency fluctuations and there would be no
commissions paid to banks.
Monetary integration also ensures that member-countries benefit from currency
convertibility. This ensures that trade is carried out seamlessly. Also, business
operators are interested in the stability of the exchange rate because it reduces
their risk. In the absence of multiple currencies and exchange rate adjustment,
there would be increased trade and foreign direct investment, which would
invariably reduce capital flight to member-states.
Also, member countries could benefit from using a common currency by pooling
together their foreign reserves for their common use. Since it is unlikely that all
MONETARY INTEGRATION IN THE ECOWAS
4
member states’ external position would be at a deficit at the same time, the
pooling of the reserve would economize reserve usage, thereby keeping the
reserve position buoyant which would boost the value and stability of the
exchange rate. The stability of the exchange rate would encourage investment,
and ultimately stimulate economic growth.
Monetary integration brings about a centralized and independent monetary
authority at the regional level, which insulates policy formulation from the
influence of national politics. The autonomy of the monetary authority is critical,
as it could help to curb inflation and ensure stable prices. This is because of the
strict regulations hindering or discouraging national central banks from funding
huge government budget deficits, thereby providing an avenue for maintaining
macroeconomic stability.
Additional benefits accrue from the free movement of factors of production
across the zone as well as seignorage gains, which arise as a result of the issuance
of a single currency in the region.
2.3 Costs
Although monetary integration has tremendous benefits, it also has some costs.
Such costs include loss of monetary policy autonomy to an independent and
single central bank, constraints in fiscal policies, loss of revenue accruing from the
implementation of a common external tariff from member countries that are
heavily reliant on customs duties, prevalence of asymmetric shocks arising from
the differences in commodity exports among member countries. Also, exchange
rate shocks, natural disasters, terms of trade shocks and other shocks to the real
economy may affect various economies in different ways.
Although monetary integration has some costs associated with it, it also has
tremendous benefits, which far out-weigh the cost.
MONETARY INTEGRATION IN THE ECOWAS
5
SECTION THREE
Overview of Monetary Integration in ECOWAS
The monetary integration efforts of ECOWAS member-states commenced with
the introduction of the ECOWAS Monetary Cooperation Programme (EMCP) in
July 1987. The programme contained the roadmap for monetary integration in
ECOWAS and was formally launched by the Authority of the Heads of States and
Government of member countries. This programme was adopted on the
backdrop of growing challenges among member states, and the need for
cooperation, in order to establish a common market to address identified
challenges. The challenges ranged from inadequate infrastructure, multiplicity of
currencies and their lack of convertibility, underdeveloped financial market and
system, weak macroeconomic fundamentals, diverse monetary and fiscal
policies, and weak institutions.
Thus, the primary objective of the EMCP is to address the above challenges
through the introduction of a single currency among member-states, as well as
adoption of appropriate and harmonized policy framework to attain
macroeconomic convergence under a unified management system. In a bid to
realize the objectives of the EMCP, member-states were required to achieve
prescribed targets that would assist in addressing the difficulties confronting their
respective domestic economies. Mechanisms were also put in place to
harmonize member-countries statistics, payments system, banking rules and
regulations, monetary and fiscal policy operations and capital market operations.
In addition, member-countries were expected to embark on a trade liberalization
scheme through the elimination of tariffs on export and import goods between
member countries, adoption of a common external tariff (CET), liberalization of
the capital and financial accounts and maintenance of a clearing and
settlement payment system. These were considered as essential requirements for
the establishment of a credible monetary union.
The programme was designed to achieve a single currency in the sub-region in
the year 2000. However, prior to the launch date, a review of the performance of
member-countries revealed that the status of implementation of the prescribed
programmes was inadequate to meet set benchmarks. Consequently, the
timeframe for the establishment of the single currency was extended from 2000 to
2004. In this regard, member-countries were urged to adopt a fast-track
approach to monetary integration by accelerating the process of attaining
macroeconomic convergence.
MONETARY INTEGRATION IN THE ECOWAS
6
The fast-track approach involves the creation of a second monetary zone called
the West African Monetary Zone (WAMZ). The WAMZ comprises English speaking
ECOWAS countries namely; The Gambia, Ghana, Liberia, Nigeria, Sierra Leone
and Guinea (French speaking). The Francophone countries already have a
monetary union, known as UEMOA and have adopted a common currency
called the CFA Franc. The objective of this approach was to merge the two
zones (WAMZ and UEMOA) to create an ECOWAS single monetary zone.
In furtherance of the objective of the WAMZ, the West African Monetary Institute
(WAMI) was established in January 2001 to coordinate and supervise the
implementation of the WAMZ programme. The single currency in the WAMZ was
initially scheduled to commence in January 2003, after member countries must
have satisfied the convergence criteria. However, the launch of the monetary
union was postponed to July 1, 2005, due to member-states inability to attain
macroeconomic and structural convergence.
Following the postponement, member-countries made considerable effort to
improve upon their macroeconomic performance. However, in spite of their
efforts, the level of macroeconomic convergence was not sufficient for the
launch of the single currency in the WAMZ. Therefore, the date was postponed to
December 1, 2009, and an expanded work programme was adopted. Again,
member countries strived towards achieving macroeconomic convergence but
the impact of the global financial crisis, once again forced another
postponement to January 1, 2015, and the Abuja Action Plan (AAP) 2009 was
adopted, to enable macroeconomic convergence and realization of set targets.
The inability of the WAMZ member countries to meet the set targets, thus,
prompting several postponements, led the ECOWAS Heads of State to decide to
adopt the Modified Gradualised Approach to monetary integration by 2020.
3.1 Policy Framework for Monetary Integration in ECOWAS
3.1.1 ECOWAS Monetary Cooperation Programme (EMCP)
The introduction of the EMCP in 1987 was aimed at accelerating the monetary
integration efforts in the sub-region. The EMCP serves as the blueprint towards the
introduction of a single currency in West Africa. This blueprint contained the
roadmap and policy framework, and prescribed the benchmarks for achieving
macroeconomic convergence as well as harmonization of policies among
member-countries, prior to the launch of the single currency. To achieve the
objectives outlined in the EMCP, some prescribed benchmarks were set, with
which member countries were required to comply, in order to address certain
macroeconomic imbalances in their domestic economy. Member countries were
MONETARY INTEGRATION IN THE ECOWAS
7
also required to harmonize their domestic policies and establish strong institutions,
which are expected to form the pillar of the integration process.
Several other requirements were contained in the EMCP, including the
harmonization of statistics, banking rules and regulations, payments system,
liberalization of capital and money markets and trade liberalization. It was
expected that the successful implementation of the programmes under the
EMCP, would create a conducive environment for the adoption of a single
currency and a common central bank in the sub-region.
3.1.2 Programmes under the EMCP
The programmes under the EMCP are macroeconomic convergence, policy
harmonization issues, institutional arrangements and other policy decisions.
a. Macroeconomic Convergence
Macroeconomic convergence is considered as a core component of the EMCP.
It requires member-countries to comply with a set of primary and secondary
convergence criteria to ensure a stable macroeconomic environment. Under this
programme, there are four (4) primary criteria and six (6) secondary criteria, the
satisfaction of which is a necessary condition for a successful monetary union. The
assessment of the primary and secondary convergence criteria is carried out on
a half yearly basis, through multilateral surveillance visits to member-countries,
where macroeconomic data is collated and member-countries performance is
assessed against the prescribed targets. At the end of the surveillance visit, an
aide-memoire is produced highlighting the major findings, observations and
recommendations. In this regard, member countries are able to assess their
performance in achieving the set targets.
ECOWAS MACROECONOMIC CONVERGENCE CRITERIA
There are ten macroeconomic convergence criteria under the EMCP. It contains
four primary and six secondary criteria. These include:
Primary Criteria
1. Budget Deficit/GDP ratio (excluding grants) ≤ 4 per cent;
2. Inflation rate ≤ 5 per cent;
3. Central Bank Financing of Budget Deficit ≤ 10 per cent of previous year’s
Tax Revenue;
4. Gross External Reserves ≥ 6 months of imports cover;
Secondary Criteria
1. Prohibition of new arrears and liquidation of all outstanding ones;
2. Tax Receipts/GDP ratio ≥ 20 per cent;
MONETARY INTEGRATION IN THE ECOWAS
8
3. Salary Mass/Total Tax Receipts ratio ≤ 35 per cent;
4. Public Investments financed from internal resources/Tax Receipts ratio ≥ 20
per cent;
5. Positive Real Interest Rates; and
6. Real Exchange Rate Stability.
Status of Macroeconomic Convergence
Since the implementation of the EMCP, no member-country has been able to
satisfy all the convergence criteria. An analysis of member-states performance
showed that Senegal and Niger recorded the best performance by achieving
ten (10) targets each as at end December 2013. The worst performance was
Ghana, which met only two (2) convergence criteria as at December 2013.
Nigeria met six (6) criteria during the review period (see Table 1 below).
b. Policy Harmonization
Policy harmonization is another important phase in the roadmap of the EMCP
and was adopted in May 2009. It is crucial for the introduction of the ECOWAS
single currency. It includes those policies that will facilitate trade integration,
payments system development, financial sector integration, and statistical
harmonization.
c. Trade Integration
Trade integration is another important pillar in the ECOWAS monetary
integration agenda. It is intended to provide a common market for trade in
goods and services among member countries. It is also based on the fact
that as countries increase trade among themselves, the benefit derived from
adopting a single currency would be greater as it reduces risk for traders and
investors. Trade integration in ECOWAS is an important activity aimed at
facilitating the introduction of the single currency in the sub-region. Therefore,
in a bid to deepen the integration process, member states have continued to
implement the ECOWAS trade integration Protocols and Conventions within a
unified framework. Essentially, the framework is intended to create a common
market among member-states. However, despite the efforts by member
states, the level of trade among them still remains low, thereby slowing down
the integration process. Higher level of trade amongst member-states would
more likely accelerate the integration process, as goods and services would
be more easily accessible across borders. Some of the policy protocols and
conventions adopted by ECOWAs to accelerate the integration process
include the ECOWAS Trade Liberalization Scheme (ETLS) and Common
External Tariff (CET).
MONETARY INTEGRATION IN THE ECOWAS
9
Degree of Intra-Regional Trade
2009 2010 2011 2012 Ave
Degree of Intra-WAMZ Trade 0.62 0.98 1.74 1.52 1.21
Degree of Intra-ECOWAS Trade
8.50 7.26 10.06
8.76
8.64
Source: WAMI staff and WAMZ Authorities
d. ECOWAS Trade Liberalization Scheme (ETLS)
The ETLS was established with the aim of creating a free trade area among
member-states, through the liberalization of trade by the abolition of tariff and
non-tariff barriers. Such barriers include customs duties on imports and exports.
This is in line with the objective of creating a common market, as well as
promoting integration and cooperation among member-countries. The scheme
started with trade in agricultural products, crude and handicrafts in 1979. It was
later extended to include industrial products in 1990.
The ETLS aims to achieve a common market area through removal of all barriers
to trade, formulation and adoption of a common trade policy as well common
external tariff; the abolition of all obstacles to trade including the right to
residency and settlement.
e. Payments System Development
The development of a safe, sound and efficient payments, clearing and
settlement system is critical for the establishment of a credible monetary union.
An efficient payments, clearing and settlement system eliminates the risks
associated with payments and facilitates the exchange and settlement of funds
and securities as well as improves convenience, service and security for users.
Usually, member central banks play a major role in designing and formulating, a
single framework and developing a common platform for the integration and
interfacing of the existing systems in member countries. During the early stages of
the integration process, measures are usually put in place by central banks to
ease the movement of economic agents and the settlement of transactions,
through the use of traveler cheques.
f. Financial Sector Integration
The financial sector in ECOWAS consists of banks and non-bank financial
institutions including, insurance companies, pension funds, finance houses, micro-
finance institutions and the capital market. The financial sector in member states
is at various stages of development and therefore, it is imperative to harmonize
the respective financial policies, in order to deepen the integration process.
MONETARY INTEGRATION IN THE ECOWAS
10
Financial sector integration is a key requirement under the EMCP that is expected
to address the limitations associated with market fragmentation. This is to be
achieved through the liberalization of the banking sector and the harmonization
of regulatory framework. This is expected to broaden the investment markets
within the sub-region beyond national boundaries, thereby providing a pool of
funds for investment across countries in the ECOWAS. This would ultimately
increase competition, enhance efficiency in resource allocation, as well as
generate greater productivity arising from the benefits of economies of scale and
improved performance. Financial sector integration under the EMCP involves full
harmonization of banking supervision and regulatory frameworks, capital
account liberalization, cross-listing of stocks, regional currency convertibility,
quoting and trading in member states currencies, and cross-border payments
systems.
3.2 Institutional Arrangement for Monetary Integration in ECOWAS.
There exists an institutional arrangement in place for the coordination of the
activities of member countries under the EMCP. These institutions are responsible
for the continuous monitoring of member states’ performance against the
prescribed benchmarks. They also monitor the status of implementation of the
other requirements under the EMCP. Monitoring is done by conducting
multilateral surveillance visits to member countries, and a report is prepared on a
bi-annual basis showing member countries’ compliance. They also provide a
platform through which relevant stakeholders in the integration process meet to
discuss issues of mutual interest, as well as conduct in-depth research studies on
strategies for regional integration.
Consequently, the West African Monetary Agency (WAMA) and the West African
Monetary Institute (WAMI), were established to anchor the programme of
facilitating the introduction of the single currency, and the establishment of a
common central bank in the sub-region. These institutions are at the core of the
monetary integration process in ECOWAS. While WAMA is responsible for setting
out measures for introduction of a single currency in ECOWAS, WAMI is involved in
driving the single currency programme in the WAMZ. The institutional framework is
based on the following organs:
I. The Convergence Council: This council comprises Ministers of Finance and
the Governors of Central Banks of member states. The responsibility of the
council is to oversee the general policies, and monitor the performance of
member states towards achieving macroeconomic convergence.
II. Technical Monitoring Committee: This committee consists of the Directors
of Research or Monetary Policy of the central banks of member states as
MONETARY INTEGRATION IN THE ECOWAS
11
well as representatives from the Ministries of Finance. The committee’s
responsibility is to monitor the convergence procedure and ensure that
the convergence programmes are in line with the objectives contained in
the EMCP. They monitor the convergence process, usually on half-yearly
basis and advise the convergence council.
III. The Joint Secretariat: This secretariat comprises the ECOWAS Executive
Secretariat, WAMA and WAMI. Their responsibility is to conduct
macroeconomic surveillance and prepare half-yearly reports on their
findings for the consideration of the Technical Monitoring Committee and
subsequently the Convergence Council.
IV. The National Coordinating Committee (NCC): The NCC is an inter-
ministerial committee domiciled in each member country with the
responsibility of assisting the ECOWAS Secretariat and WAMA in data
collation, processing and analysis at the national level.
3.3 The West African Monetary Agency (WAMA)
The WAMA is a specialised and independent body of the Economic Community
of West African States (ECOWAS) established in 1996, and has its headquarters in
Freetown, Sierra Leone. The agency was given the responsibility of coordinating
the implementation of the activities in the EMCP. Such activities include
conducting multilateral surveillance, monitoring member countries performance
on the macroeconomic convergence criteria, harmonization of policies of
member countries and other functions required for the introduction of a single
currency and common central bank in the sub-region. The major objectives
assigned to WAMA were the promotion of trade and non-trade transactions in
the sub-region through the utilization of national currencies; ensuring the conduct
of a common monetary policy in the sub-region, thus facilitating the creation of a
single monetary zone as well as a single currency; coordinating and monitoring
the implementation of the EMCP, among others.
In order to achieve these objectives, WAMA designs the policy framework and
coordinates programmes aimed at promoting monetary and fiscal policy
coordination and harmonisation. It also embarks on studies relating to economic
issues (both domestic and international) that affect member states, and collates
data and statistical information for monitoring member countries’ performance in
achieving the objectives of the EMCP.
The Agency has the following administrative organs: Committee of Governors
(COG); Economic and Monetary Affairs Committee (EMAC); Operations and
Administration Committee (OAC) and the Directorate of the Agency.
MONETARY INTEGRATION IN THE ECOWAS
12
3.4 The West African Monetary Institute (WAMI)
The West African Monetary Institute (WAMI) was established in January 2001 but
did not commence operations until March 2001. The Institute has its headquarters
in Accra, Ghana. The Institute was established in order to pave way for the
creation of a single currency for the second monetary zone called the West
African Monetary Zone (WAMZ). This is in line with the decisions of the ECOWAS
Authority of Heads of States, who adopted this approach in order to fast track the
monetary integration process in the ECOWAS. WAMI performs similar functions
with WAMA, except that it is responsible for facilitating the introduction of a single
currency in the WAMZ while WAMA was set up to oversee the introduction of a
single currency in the ECOWAS. A timeframe was adopted for the WAMZ to have
a single currency, after which it would later merge to form a single monetary bloc
in ECOWAS. WAMI also conducts regular joint surveillance for the countries in the
WAMZ and monitors member states performance to achieve the convergence
criteria. It also monitors the implementation of the EMCP in the WAMZ.
MONETARY INTEGRATION IN THE ECOWAS
13
SECTION FOUR
Experiences of other Monetary Unions
4.1 The European Monetary Union (EMU)
The European Monetary Union (EMU) came into existence on 1st January 1999,
based on an agreement among the participating member states to adopt a
single currency and monetary system. The experience of the EMU highlights a
number of steps that were taken well before the euro was launched. The EMU
followed a lengthy and high degree of policy and institutional preparedness, and
the introduction of the euro was the product of over 40 years of remarkable
cooperation among sovereign states with great diversity of economic, social and
political interests.
Following the failure to create an economic and monetary union through the
snake in the tunnel approach in the early 1970s, the process of economic and
monetary integration was revamped in the late 1970s and carried out in two
stages. The first stage involved the establishment of the European Monetary
System (EMS), which was aimed at regulating the changes in parities and
reducing the impact of significant exchange rate devaluations. The EMS
contained basic elements which include: the European currency unit (ECU)
defined as a basket of currencies; Exchange Rate Mechanism (ERM) defined
along the principle of a fixed exchange rate margin, but with variable exchange
rates within those margins; and lastly as a form of loan reserves or credit held to
assist member countries stabilize their currencies during periods of crisis.
The second stage, which was based on the Delors Report (1988), proposed a
credible path leading to the EMU and the euro. In the report, the EMU was
charged with the sole responsibility of managing the economic and monetary
policies of member states to achieve the overall macroeconomic goals. Also, the
report highlighted three prerequisites for the establishment of the EMU to include,
complete and irreversible convertibility of currencies; irrevocable locking of
exchange rates and total liberalization of the capital account as well as
harmonization and integration of the financial sector. It also recommended the
establishment of a European System of Central Banks (ESCB) and the adoption of
a single European currency. The report laid the foundation for the Maastricht
Treaty and formed a three phased roadmap for the establishment of a credible
monetary union.
MONETARY INTEGRATION IN THE ECOWAS
14
4.2 The CFA Zone
The CFA Zone comprises French speaking member countries in West and Central
Africa. It is a product of a merger between two separate monetary unions of the
former French colony in Africa. The two monetary unions existed independently
with each having its own central bank and currency. The two monetary unions
are the West African Economic and Monetary Union (WAEMU or UEMOA) and the
Central African Economic and Monetary Community (CEMAC). The WAEMU
comprises eight countries namely; Benin, Burkina Faso, Cote d'Ivoire, Guinea-
Bissau, Mali, Niger, Senegal, and Togo. CEMAC consists of six countries namely;
Gabon, Cameroon, the Central African Republic (CAR), Chad, the Republic of
the Congo and Equatorial Guinea. The former uses currency issued by the
Central Bank of West African States (BCEAO), while the later uses currency issued
by the Bank of Central African States (BEAC).
The CFA zone officially signed an agreement signaling the commencement of
operations in 1973 and introduced a set of criteria for its implementation by both
groups. The currency called the CFA franc is fully convertible into the French
franc (now the euro), although it is not traded on the foreign exchange market.
The French authorities participate in monetary policy formulation for the CFA
zone, and the two CFA zone central banks are required to maintain a share of
their foreign exchange reserves in their operations accounts at the Banque de
France (Dearden, 1999). The two zones are expected to prepare separately, an
annual monetary programme that would determine the threshold of government
credit with their central bank. Accordingly, the central bank is empowered to limit
the refinancing window that would be made available to commercial banks to
give credit to the private sector in each state. However, there are no limits
whatsoever, between France and the member states.
In a drive to further deepen the integration process, the West African Economic
and Monetary Union (WAEMU/UEMOA) was established in 1994, and made up of
member states that already shared a single currency-CFA franc. The UEMOA
Treaty, was inspired by the EU’s Maastricht Treaty, which made provision for a set
of convergence criteria, mainly in the area of public finance. In December 1999,
the Authority of Heads of State and Government of UEMOA adopted a Stability,
Growth and Solidarity Pact to reinforce macroeconomic stability, accelerate
economic growth and strengthen convergence of their economies. The pact
established some macroeconomic convergence benchmarks that consists of a
set of primary and secondary targets, which member countries are supposed to
comply with. It also introduced a multilateral surveillance system aimed at
strengthening compliance with the benchmarks, in order to ensure greater
economic policy cohesiveness within the zone. The creation of UEMOA
accelerated the implementation of a number of significant programmes,
MONETARY INTEGRATION IN THE ECOWAS
15
including the establishment of a Customs Union in 2000, a common trade policy,
Regional Securities Exchange, and strengthening of macroeconomic surveillance
and competition, among others.
4.3 The Gulf Cooperation Council (GCC)
The Gulf Cooperation Council (GCC) comprises six countries namely: Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirate (UAE). It was
established in 1981, with the objective to strengthening economic relations,
coordinating financial and monetary policies towards the attainment of a
monetary union. The GCC States have several socio-economic characteristics
that make them homogenous and less likely to suffer asymmetric shocks. Saudi
Arabia remained the largest economy, which continued to play a central role in
strengthening regional cooperation among the GCC states.
In the build up to the creation of the monetary union in the GCC, member states
were required to officially peg their national currencies to the US dollar, which
materialized in 2002. They also formed a customs union in 2005. In order to ensure
full compliance with the integration process in 2007, the GCC countries agreed to
a set of five macroeconomic convergence criteria. The integration process
migrated to an advanced stage in 2008, when the common market was
launched. However, national interests and bureaucratic capacity have delayed
the enactment of various national statutes, necessary to allow the free
movement of goods, services, capital, and labour.
In spite of more than 30 years of cooperative efforts, following the signing of the
GCC Charter in 1981, the goal of monetary union targeted for 2010 was not
achieved. Key challenges that still hinder the region’s drive towards the
establishment of a monetary union include the unwillingness by Member States of
the GCC unlike the EU, to surrender sovereignty to regional institutions.
Furthermore, the GCC has no regional decision-making body; hence decision-
making authority rests solely with the six monarchs, where the rule of unanimity
applies.
MONETARY INTEGRATION IN THE ECOWAS
16
MONETARY INTEGRATION IN THE ECOWAS
17
SECTION FIVE
Challenges and Benefits of Monetary Integration in West Africa
5.1 Challenges of Economic Integration in West Africa
Over the years, progress has been made towards the achievement of the
benchmarks set for the establishment of the monetary union in the ECOWAS,
however, the sub-region has continued to face some challenges. These include:
5.1.1 Political Will
A monetary union in ECOWAS has been endorsed by the Authority of Heads of
Governments of Member States, but there is no political commitment to achieve
the set targets. For example, while some member countries have ratified the legal
instruments such as the Statute, others are yet to ratify and domesticate some of
the legal instruments which are pre-requisites for monetary integration in the sub-
region. The results from the surveillance mechanisms carried out by ECOWAS
have further shown that there is little progress by member countries to ratify these
legal instruments. Further, despite signing the regional trade integration
obligations, some Member States are yet to ratify and domesticate regional
trade-related Protocols and Conventions to allow for effective implementation of
these commitments. Therefore, there is no full compliance and enforcement on
the signed protocols and conventions. The political will to ensure compliance with
agreed protocols and conventions would no doubt accelerate the monetary
integration process in ECOWAS.
5.1.2 Over-ambitious Targets/Goals
ECOWAS member countries are expected to satisfy four (4) primary convergence
criteria and seven (7) Secondary Convergence criteria. However, these criteria
seem to be overambitious, given the fact that most member countries are yet to
be fully developed in terms of infrastructure, payments systems etc. An
assessment of member countries performance, has shown that no member
country has been able to satisfy all the convergence criteria since its introduction.
The achievement of the convergence criteria on a sustainable basis continued to
pose serious challenge for Member States. The failure to achieve the
convergence criteria on a sustainable basis may undermine the conduct and
effectiveness of monetary policy, and also create macroeconomic imbalances
amongst the countries.
The fiscal deficit to GDP and inflation criteria remained the most challenging for
member states, especially in the WAMZ. The prevalence of fiscal dominance,
characterized by large budget deficit (due to inadequate revenues and/or
MONETARY INTEGRATION IN THE ECOWAS
18
unsustainable expenditures), continued to pose significant challenge for member
states. Financing of the deficit through credit creation, hike in food and fuel
prices as well as excessive depreciation of national currencies continued to
exacerbate inflationary pressure in member states in the WAMZ. These
developments suggest that the targets seem to be overambitious, as it does not
reflect the diversities prevalent in the economies of member states in the sub-
region.
5.1.3 Low Level of Intra-ECOWAS Trade
The level of intra-ECOWAS trade remained low, partly due to poor transport
network, unstable power and water supply, as well as poor compliance with
ECOWAS trade related protocols. The continued existence of non-tariff barriers
and road blocks, as well as the high transport costs of imports continued to
increase the cost of domestic production. Activities of institutions and agencies
responsible for trade facilitation and promotion are not well coordinated in some
member states. This results in cumbersome administrative procedures and
bureaucratic delays, making it costly for economic agents to effectively
participate in intra-regional trade.
5.1.4 Differential in Natural Resource Endowment and Asymmetric Shocks
The economies of member countries are prone to asymmetric shocks. These
shocks arise from the differences in commodity exports among ECOWAS member
countries, undiversified economies which are dominated by mostly primary
products. For example, in the WAMZ, Nigeria and Ghana are net oil-exporting
countries, while the other countries are oil- importers. Terms of trade shocks,
exchange rate shocks, and other shocks to the real economy can affect
countries differently at any particular point in time. The prevalence of asymmetric
shock may make it difficult for the conduct and effectiveness of monetary policy.
5.1.5 Inadequate Infrastructure
Inadequate infrastructure in member countries is one of the challenges in the
monetary integration process. The region has inadequate transport infrastructure,
energy and ICT, constituting a major hindrance to regional integration and
economic growth. Therefore, the free movement of goods and persons is
cumbersome as the sub-region lacks quality roads and there exist poor railway
system to transport goods. In the aviation sector, for instance the region is lacking
well equipped airlines to adequately navigate through the sub-region, hence,
making it difficult for people to travel with ease. The industrial and manufacturing
sectors are also not vibrant to create the needed employments that will propel
economic growth and development in the sub-region.
MONETARY INTEGRATION IN THE ECOWAS
19
5.2 The Benefits of Monetary Integration in West Africa
One of the major goals of monetary integration in ECOWAS is to create a larger
and common economic space among the member countries. Its benefits accrue
to members through increased inflow of trade and investment, which may arise
from the stability of the exchange rate. Exchange rate volatility does not
encourage investment because it increases the cost of international transactions
and thus, discourages trade. The formation of a monetary union in West Africa is
expected to eliminate exchange rate variability and uncertainty among member
states, thereby increasing trade and investment.
In addition, a single monetary policy run by an independent central bank in the
sub-region is expected to promote price stability. By unifying monetary and
coordinating fiscal policies, the sub-region would experience fewer distortions,
thereby promoting economic growth and stable macroeconomic performance.
Regional integration would lead to greater development, because there would
be a large pool of investment funds from the integration of capital markets and
the unification of bond and equity markets. It would also strengthen the
payments system and improve the general efficiency and accessibility of
financial services. Enormous benefits would also be derived from greater cross-
border investment, greater fiscal discipline from strict regulations and economic
diversification among member states.
Operating a monetary union will give the sub-region a stronger unified voice in
their external relationships. In this arrangement, member countries would discuss
issues of mutual interest as a bloc, rather than on individual basis, and are able to
address challenges confronting them, especially the adoption of a common
framework towards the protection of regional public goods.
MONETARY INTEGRATION IN THE ECOWAS
20
MONETARY INTEGRATION IN THE ECOWAS
21
SECTION SIX
Conclusion
There has been visible drive towards economic integration in West Africa began
with the adoption of the EMCP in 1987. The objective of the EMCP was to foster
the creation of a single currency and a central bank in ECOWAS. The EMCP
outlined the roadmap towards facilitating the achievement of the objective of
the integration process. The roadmap contains a set of primary and secondary
macroeconomic convergence criteria, which member countries are expected to
satisfy for the establishment of a single currency in the sub-region. It showed that
member countries performance to the primary and secondary convergence
criteria was to be assessed through a multilateral surveillance system. Other
policies adopted in the EMCP include the harmonization of policies such as
banking rules and regulations, statistical harmonization, financial sector
integration, payment system framework and trade liberalization.
There are a number of benefits and costs of monetary integration to ECOWAS
member countries. The benefits derived include lower transaction cost,
convertibility of exchange rate, increased trade arising from free movement of
goods and persons. However, the benefit of monetary integration comes with
some costs and challenges. In the case of the ECOWAS, some of the challenges
include the lack of political will, inadequate infrastructure and overambitious
targets.
MONETARY INTEGRATION IN THE ECOWAS
22
MONETARY INTEGRATION IN THE ECOWAS
23
Bibliography
Afxentiou Panos C. (2000). “Convergence, the Maastricht Criteria and their
Benefits”, University of Calgary, Winter/Spring 2000- Volume VII, issue I 245
COMESA Secretariat (2009). “Establishing an Effective Multilateral Fiscal
Surveillance Fiscal Surveillance Framework for COMESA Monetary Union”,
Background Paper Series, 16-17 December 2009, Port of Prince Mauritius
Central Bank of Egypt (2011). A Currency Union in Africa: Lessons to be Learned
from Other Experiences Staff Working Paper, August, 2011
Committee for the Study of Economic and Monetary Union, (1989). “Economic
and monetary union in the European Community” April 14, 1989
Draft Memorandum on the Status of Implementation of the ECOWAS Monetary
Cooperation Programme (2005)
Harvard International Review, Monetary Integration http://hir.harvard.edu/
rethinking-finance/monetary-integration?page=0,0
Isah A. M. and Odonye J. (2012). A Monetary Union in West Africa: Lessons to be
learned from other Experiences
Nnanna O. J. (2006). Economic and Monetary Integration in Africa, Paper
Presented at the G24 meeting in Singapore, on September 14, 2006
West African Monetary Agency (2013). ECOWAS Monetary Cooperation
Programme for the First Half of 2013
West African Monetary Agency: Creation of a Single Currency in ECOWAS
(2009)
West African Monetary Institute (2013). State of Preparedness of the WAMZ
Countries for Monetary Union
West African Monetary Institute: Single Currency for the ECOWAS: Options and
Prospects (Working Paper: 12/08)
MONETARY INTEGRATION IN THE ECOWAS
24