The Implication of Common Currency for West African Countries

THE IMPLICATION OF COMMON CURRENCY FOR WEST AFRICAN COUNTRIES

In the words of Oyewumi (2001), confrontational posture of the relentless onslaughts of global capitalism, unfavourable term of trade and a heavy debt burden, the economic plight of poorest members of the international community has been more desperate despite the countries means of achieving economic growth. By pooling their resources, they hoped to benefit from economic of scale, speed up development, and reduce external dependence. Nowhere is the need for regional integration more urgent than in Africa, the continuant at the bottom of the international economic pecking order.      

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According to Ogwuma (1998; 3 – 4) in recent years initiations for monetary co-operations have been steeped up on the African continuant union in West Africa, the ultimate objective of the Economic Community of West Africa States (ECOWAS) established in 1975 is to establish a monetary union. Similarly, the Eastern and Southern Africa and the Southern African development co-ordintion committee (SADCC) for the same purpose. In the northern part, the Arab Maghreb union hold sway as a veritable regional economic group.

Before the establishment of ECOWAS however, the union Monetarie L’Ouest Africana (UMOA) came into existence in 1961. The UMOA countries consisting of the French speaking West Africa countires of Benin, Togo, Cote divorce, Niger, Mauritian, Senegal, Burkina Faso, and Mali ahs a common Central Bank known as the Benque Central designation Estas del Africa de I’Quest (BECEAO) to meet the challenges of the monetary union. The need to create a large sub – regional economic union with greater prospects informed by establishment of the ECOWAS as a common market. Its membership is made up of 16 states both the Anglo-phone and the Franco – phone countries to achieve the progressively into a monetary operation in 1976. It is a multi lateral pay arrangement involving the central banks of member states in collaboration with their commercial and merchant banks to facilitate the free flow of trade. In order to make payment system more efficient, improve on the performance of West Africa clearing House and works towards the evolvement of a single monetary zone. The West Africa Clearing House transformed into the West Africa Monetary Agency (WAMA) in 1995. The WAMA is expected to ensue the achievement of convergence criteria in respect of Macro economic aggregates and evolved an ECOWAS Exchange Rate Mechanism (EERM) that will eventually serve as the basis for  which a momentary system would evolve.

 

  • WEST AFRICA COUNTRIES

The West Africa countries is made up of the Anglo phone and Franco – phone speaking countries which makes up the Economic Community of West Africa States.

 

  • ECONOMIC COMMUNITY OF WEST AFRICA STATES (ECOWAS)

Anyaele (1991:350), opined that the birth of ECOWAAS was on the historic date of 28th may, 1975, Heads of States and governments of 15 independent states of West Africa converged in Lagos, where they signed the treaty, formally establishing of ECOWAS. That day was the adorable day in the post independence history of West Africa, aimed purposely at liberating West Africa countries economically from the shackles of imperialism. ECOWAS has its headquarters in Lagos (now in Abuja) where the main administrative and executive functions of the community and other services are performed. The seat of operations of the funds of co-operation, compensations and development is in Lome, with the inclusion of Cape Verde, the community now has 16 member states made up of 5 Anglo – phone and 11 Franco – phone members. The Anglo – Phone members are;

  • Nigeria
  • Ghana
  • Sierra Leone
  • Gambia
  • Liberia

Franco – phone members are

  • Togo
  • Guinea
  • Mail
  • Senegal
  • Upper volta (now Burkina Faso)
  • Ivory coast (cote d’ivore)
  • Dahomey (now Benin republic)
  • Guinea Bissau
  • Niger republic
  • Mauritania
  • Cape Verde

 

  • INSTITUTIONS OR ORGANS OF ECOWAS

The treaty formerly establishing ECOWAS provides for the following institutions or organs.

  1. The authority of heads of states and government, composed of all the 16 leaders of the members states, is the supreme authority.
  2. The council of ministers – made up of two minister or representatives from each member states. It monitors the functioning and development of the community and makes recommendations to the authority.
  • The executive secretariat in Abuja, which perform the functions of administering the community.
  1. The tribunal of the community, whose main functions are the interpretation of the treaty and ensuing the observance of law and justice.
  2. Five technical and special commission.

 

  • THE AIMS AND OBJECTIVES OF ECOWAS

The aims and objectives of ECOWAS as were set out under article 2 of the treaty are as follows:

  • Promotion of co-operation and development in all field s of industry, transport, telecommunications, energy, agriculture, natural resources, commerce, monetary and financial questions, and social and cultural matters for the purpose of raising the standard of living of its peoples of fostering to the progress and development of the African continent.
  • Elimination of customs duties and other charges in respect of the importation and exportation of goods between members countries.
  • Abolition of trade restrictions in the areas of quantitative and administrative restrictions on trade among member states.
  • Establishment of common tariff for the established common third world counties.
  • Harmonization of agricultural policies and the promotion of common projects in the member state notably in the fields of making research and agro-industrial enterprise.
  • Harmonization of monetary policies as required, for the proper functioning of the community and of the community and of the monetary polices of the members states.
  • Establishment of a common fund for co-operation, compensation and development among member states.

 

  • PROBLEMS OF ECOWAS

The following problems were encountered by ECOWAS:

  • Problems posed by the immigrant. The aetide 27 of the freedom of movement and residence within the community has created and escalated the volume of illegal aliens.
  • Currency differences: This problem has warranted difficulties in the common payment system among the member states and had contributed to the near failure of the community.
  • Problem of language: Differences in language has greatly militated against the efficient functioning of this community.
  • Fear of domination and unequal development: the poorer members states were afraid of that as a result of unequal distribution of natural resources both in human and material endowment, the little they have will be taken away from them and given to those who have more.
  • Political instability: As a result of this, many leaders that show great interest in ECOWAS do not stay in office for a long time to help in the achievement of the aims and objectives of the community.
  • Non-policy implementations: this problems led to the non-achievement of anything by the community in the first decade
  • Lack of enough infrastructures: This has contributed immensely to the failure of the community.
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2.4      WEST AFRICAN CURRENCY BOARD (WACB)         

ORTIH (1996:31) explained that the introduction of the international trade and the expansion in the scope of internal trade, there became the need for a monetary control authority. A committee was set up (Lord Emmot Committee) to investigate on desirability of introducing the West African

Currency Board. This committee was equally charged to work out modality for West Africa silver coinage and joint issues of the currency in British West Africa countries made up of Nigeria, Ghana, sierra Leone, and the Gambia.

The committees recommendations were as follows ;

  • A currency board be set up in London to buy billions and to mint coins, to be issued on face vale on behalf of British Africa terrifies
  • Seignoirage derived to accumulate in a fund set up to guarantee the convertibility of the new currency.

Following the recommendation of Lord Emmot committee, West Africa Currency Board (WACB) was set up to issue currency for British West African colonies as mentioned above. The board issued money called the West Africa pound which was used in the four colonies.

In the words of Adebayo, (1985;215), the objectives of the WACB are:

  1. To issue a common West African currency
  2. To ensure a speedy convertibility of this currency with the old silver currency.
  • To provide a means whereby the colonial government might share in the projects of the currency issue –seignoirage.

 

  • WEST AFRICA CURRENCY BOARD OPERATION

Eyo, (1979: 93 – 100) opined that WACB was not monetary authority, as it was not designed to exercise discretionary control over the money stock. Its essence was the convertibility of West Africa currency on demand to steeling. The currency it issued was only in economic for the pound stealing. Thus, the WACB was at best in only a passive money exchange. The issuance and redemption was automatic, so the reduction or increase of the money supply was strictly determined by the balance of payment. The board initially not allowed to hold government securities, but later was allowed to do so. The board although was allowed to distribute its income among the four (4) countries but practically, its income was kept in a currency reserve fund in London which was always at a level greater than the currency in circulation.

Anyanwokoro, (1999:79) pointed out that the factors militating against the operation of the WACB are:

  1. The WACB could not engage in monetary management because the currency it issued was tied to the British pounds, and the steeling reserves were invested only in Britain.
  2. The WACB could not train Nigerians in the act of financial management as its management comprised mainly foreigners.
  • It was operationally rigid because of the fixed party between the local currency and the British pound steeling.
  1. Investment of its reserves oversees helped to hinder the development of the community’s financial system and the capital market in particular.

There are other factors that led to the establishment of a central bank while agitating for Nigeria independence and in the other three (3) colonies.

 

  • THE CONCEPT OF COMMON CURRENCY

Udofia, (2001: 10) opined that common currency is the integration of international regional or sub – regional currencies as a single currency with the unifying countries withdrawing their national notes and coins from circulation to enhance trade and other cross boarder transactions.

According to Apea, (2001: 25) “Monetary integration entails a fixed examination rate regime and convertibility of the currencies involved”. He went further to stress that the theory of money union suggests that an optimum currency area must exist to enable a common currency work. an optimum currency area must have the following characteristics.

  1. Mobility of factors of production especially capital and labour across borders.
  2. Flexibility of prices including wages
  • Openness of trade
  1. Diversity of production.

In the words of Mundell, (2001), common currency simply means the globalization of national currencies of different countries as one. Mndell’s analysis of optimal currency areas, based on a trade off between essentially two factors: the benefits of a single currency and in teams of reduced transaction costs, reduces uncertainty, network of externalities and so on, and the ability of region to adjust to idiosyncratic shocks that might occur with exchange rate flexibility.

 

 

  • GLOBAL COMMON CURRENCY

As the world is geared toward globalization, it because imperative for a common currency globally. A global, currency is any currency that is internationally acceptable for the settlement of international transactions amongst countries of the world, for example, the Eurodollar, US dollar, Japanese you.

 

  • THE EURODOLLAR

According to Delisensberg, (1999: 5) “the Euro made its debut on the national financial markets at the start of 1999. Its successful launch in the eleven (11) countries which formed the so called Euro area constitutes a milestone in the process of European integration. The introduction of the Euro has created a single currency area in which approximately matches the United States in teams of economic size, is the world’s largest with respect to its share in total world experts and ranks second in terms of the size of its capital markets.

Thus, the Euro has an will continue to have, in the years to come, a profound impact upon the Euro area and the world economy. The launch of the Euro has raised questions concerning the relationship between the exchange rate,, the monetary policy of the European Central Bank (ECB) and the room for manoerre of national policy. These will be address:

 

  1. I) THE ROLE OF THE EXCHANGE RATE IN THE MONETARY POLICY F EURO SYSTEM    

          The introduction of the Euro implies a change in the role and the importance of the exchange rate in Europe. Considered individually, most European countries are exceptionally open economics. In 1997, the sum of their exports, plus imports as a share of their combined GDP was 53%. By contrast, for the Euro area as a whole, trade in goods measured as exports and imports combined, is around 26% of GDP and only somewhat higher than that of the United States and Japan. Hence the importance of a certain movement in the Euro exchange rate for domestic economic development has become less compared with the same movement of the exchange, rates of a national currency in the past. Nevertheless, through its effect on economic activity and prices, the exchange rate affects the outlook for prices stability and thus undoubtedly plays an important role in the monetary policy of the Euro system.

The primary objectives of the single monetary policy is the maintenance of price stability. Monetary policy will always be geared to this objective. Consequently the monetary policy strategy of the Euro system does not embody on implicit or explicit exchange rate target or objective, since gearing monetary decision to maintaining such as exchange rate target may, at times, conflict with the goal of price stability. Consequently, the European Central Bank subscribes to the view expected monetary, fiscal and policies as well as cyclical and other economic developments, rather than objective or target of monetary polices. Exchange rate misalignment and excessive volatility often reflect macro economic imbalances and market uncertainties.

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Accordingly, stability oriented macro economic policies pursed in transparent manner are the best contribution that can be made by policy. Markets to festering exchange rate stability. In other words, misalignments and excess volatility should be contained by addressing their underlying causes. The Euro system’s stability oriented monetary policy strategy ensures that the single monetary policy makes he best possible contribution in this regard. By contrast, attempts to suppress, by themselves, the underlying cause of misalignments.

 

  1. II) THE EUROPEAN CENTRAL BANK’S VIEW ON THE DOLLAR EXCHANGE RATE

The weakening of the Euro vis – a-vis the dollar during January and February, 1999 was mainly attributable to a series of economic data released area this period, which were mostly, relatively, favourable as far as the U.S. economy was concerned. The U.S economy surprised commentators with very positive data on employment and output. Over the same period, dat released for the Euro area are more united.

It appears therefore, that the recent development of the Euro exchange rate primarily reflect the previously unexpected strength for the U.S. economy. The recent fluctuation of he Euro exchange rate should not be considered overtly dramatic. The exchange rate of the Euro against the dollar is no comparable with the level at which the so – called synthetic Euro was quoted against the dollar prior to September, 1998. Moreover, long term government bond yields of Euro area member states continue to be lower than in the United States, also suggesting that investors believe in the stability of the Euro.

The current Euro exchange rate, therefore does no unit at a misalignment or at a structural weakness of he Euro. Moreover, there is no indication that financial markets doubt the credibility of the monetary policy of a currency is a precious but likewise fragile asset. The possibility cannot be excused that increased uncertainty about the political support for a stability oriented monetary and fiscal policy has contributed to the wakening of the Euro. Through pursuing a stability oriented monetary policy, the Euro system under – sources the confidence that the world has in the young currency.

III)    WHAT FLEXIBILITY IS LET TO NATIONAL GOVERNMENTS

          It is clear that Euro area governments will continue to need flexibility in national polices to address countries specific development. For example, they will need to be able to respond to a symmetric shocks, that by their nature, do not affect all Euro area countries equally, and to more deep seated economic problem related to the structure of their economics. Clearly, following the introduction of the Euro, the instruments of monetary policy and the exchange rate are no longer available to national governments for addressing countries specific developments.

Therefore, the need for flexibility in other policies at the national level is even more apparent that before. Such national flexibility will be necessary both to address short term imbalances in demand and to deeper structural reform efforts with a view to improving the supply conditions of the individual Euro area economics. National governments retain the principal ability to address both objectives as the capacity to undertake structural reform.

 

2.6     THE NEED FOR GLOBAL COMMON CURRENCY                

The need for global common currency arises due to the world globalization. Globalization is said to be the integration of national, regional, sub-regional and international economics through trade, finance, export and human resources as one.

According to Ojo, (2001:19), the need for global common currency include:

  • Regional economy: The global common currency promotes zonal contiguous market for trade and investments, thereby enhancing regional economic integration for sustainable growth and development.
  • Government: It makes the government of member states or countries to maintain price stability and reduce inflationary tined and good foreign exchange reserve positions.
  • Workers: The purchasing power of workers wages improves with stable strong global common currency, convertible and acceptable throughout the world. Als, there will be easy accessibility and provision of goods and services to other countries of the world.
  • Businessmen: The need for global common currency plays a significant role in the life of the businessmen in the sense that prices are to be quoted in a known currency, no commission, no exchange rate loss or currency exchange commission fees. There will be a single currency foreign exchange needed for business in the world, which will encourage trade liberalization and confidence in building among member states and countries.
  • Travellers: Travellers require are single currency any international travel hence no commission will be charged nor foes to be paid. Also there will be no BTA (basic Travel Allowance) for trips internationally.

According to Ojo, the global currency when it comes into being, will enhance trade and other international transactions.

In the words of Mandell, (2000), the need for common currency in Europe arises as a result of the need to tackle inflation in the region. Considering inflation in the Euro zone members, which is actually diverging, compared to the position of the Euro, and it is interested to note that you can think of the inflation divergence in terms of the Maastricht inflation cities. Take the average of the invest inflation rates and ask whether member countries in the Euro zone who now have the single currency, would still quality entry on the basis of the Maastricht criteria. And it turns out that Ireland, in way of, it inflation rate is edging for percentage points above the average of the lowest it is ironic that having to some extent, certainly in the Irish case, relied on some policy independence to get down to the level of consequences in inflation. And of course, this reflects the fact aht there are idiosyncratic developments that the single currency is not going to produce the same inflation rate in the regions, or the same rate of output growth, or the same situation with respect to employment and unemployment.

 

2.7     MANAGEMENT, HEADQUARTERS AND MODE OF OPERATIONS OF WEST AFRICAN COMMON CURRENCY

          In the words of Ogunleye (1998:15), the need to create a large suggestion-regional economic union with greater prospects, informed the  establishment of the (ECOWAS) as a common market. As membership is up to 16 states, both the Anglo – phone and the Franco-phone countries. To achieve the object  of transforming progressively into a monetary union, the West African Clearing house (WACH) commenced operations in 1976. It is a multilateral payments management involving Central banks of member states in collaboration with their commercial and merchant banks to facilitate the free flow of trade in order to make the payment system more towards the evolvement of single monetary zone, the WACH was transformed into the West African Monetary Agency (WAMA) in 1995. The WAMA is expected to ensue  the achievement of convergence critieria in respect of macro economic aggregates and evolve the ECOWAS exchange rate mechanism (EERM) that will eventually serve as the basis for which monetary system would evolve.

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Consequently, ECOWAS in its December 2000 meeting, approved the establishment of a West African Monetary Institute (WAMI) with headquarters in Accra, Ghana. WAMI, which commercial operation on January 2, 2001, with a two – year budget of $5.4 million is headed Michael Ojo of Nigeria, a retired CBN director of research. The summit also established a regional compensation and stabilization fund with a capital base of $100 million to accommodate shocks that the monetary agreement will entail.

The main objectives of WAMI is to undertake all the preparation activities necessary for the West African Central Bank (WACB) within two years, policy harmonization co-ordination and assessment of convergence criteria as well the stockholders to expand the spirit of ownership and the acceptability of the forth coming common currency in 2003.

 

MODE OF OPERATION                 

In the words of Ojo, (2001:25), the operation for the take off the common currency for West Africa is as follows:

For 2001 operation, January – March

  1. Installation of WAMI
  2. Recruitment of core staff

 

  • THE PROSPECTS OF COMMON CURRENCY FOR WEST AFRICA

The prospects of the common currency for West Africa comes in the following steps:

The establishment of a single currency in West Africa will play a curial role in fostering the economic integration of the sub-region (Uduebo, 1990:7).

It will provide some form of limited convertibility among the currencies to facilitate intra-regional trade and payments transactions by offering debit and credit payment and setting only the balance left at the end of each period. (Bundu, 1990; 2).

Agu, (1990:10), there is no doubt that a successful monetary integration in the West African sub-region will engender far reaching benefit to the member states of the sub-region. The dismantling of the barriers to trade and free movement of person and capital will give room for allocative efficiency within the sub-region. The year of polarization with the big economic reaping the benefits while the peripheral economics are marginalized and may not be genuine.

He went further to steer that, besides, a common currency zone with common borders and common tariff which is better policed, will protect the industries within the sub-region and also save the sub-regional economic from such economic conies as dumping. In addition, the sub-region will be better equipped to get improved terms of trade for its products.

Finally, the creation of a large market facilitated by the monetary union promotes entrepreneurship and attraction of foreign investments that will lead to an increase in gross domestic products (GDP) for the sub-region.

 

2.9     THE PROBLEMS FACING THE ESTABLISHMENT OF COMMON CURRENCY FOR WEST AFRICA

Unduma, (2001:29), said that what helped Euro to work was good economy and political stability but we lack all these things. He went further to state that the strength of the economics of these West African countries vary, and these goes to show that there is no common relationship between their monies.

For example, naira’s equivalent to dollar is N40 whereas CFAS equivalent to dollar runs in thousands.

Also in Afric, we have tendency to sabotage or take short cut, for example, we pay custom tariff in Nigeria when we import vehicles but we go to continuo to import and we still pay custom tariff to them.

Another problem that hinders the establishment of the common currency is the movement of people within the ECOWAS countries. This is so be people are still been harassed while traveling within ECOWAS countries over the issue of transport. Also the issue of the usual distrust between Franco-phone and Anglo-phone countires. In this case, Franco-Phone countries might not accept one single currency and secondly Britain might not back us up like the Paris backed up the Franco – phone single currency because we have been independent of Britain and it is too late to file up our currency with that of the British. Stressing further, the fear of dominations of smaller countries by the bigger countries will as well bring a problem in the establishment of a currency for West Africa (Olajide, B. 2001: 29 – 31).

In the words of Obia, O. S. (2001;1), he reiterated that the time frame is too short and that a lot things need to be put in place before it could be considered a possibility. Also the unequal strength of national economics, divergent tariff structure among member countries needs to be put in place.

Apar from the problem of infrastructure for easy movement, the recently introduced ECOWAS travelers cheques has not fully gotten right, so the common currency issue should be left aside for now. Coupled with the political instability in some of the countries of the sub-region also militates against the realization of a single currency.

According to Idika (1999: 10), the problem of common currency is traced to the fact of some, very small economics within the sub-region to cope with the demand of the monetary zone. Also, the disturbance by some inter-governmental organisations within the sub-region.

 

2.10   INFERENCE

          In this chapter, it is meant to understand that due to the onslaught on political stability and not having a good economy in the sub region in addition to time frame for the establishment of a common currency that the programme will not be a success. so many analysts have given their analysis on the doubt of the possibility for the programme despite all the prospects some people in the banking industry and some economists have  put in place as the benefits it will bring to the entire sub-region of West Africa countries.

For this to be a success the Anglo-Phone and Franco – Phone countries needs to bring themselves together and make a common relationship between their movies in terms of the dollar and also we the sub-region counties should stop the accountancy of sabotaging among ourselves.

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