Abstract

Recent plans for monetary union come as a response to a political commitment by ECOWAS heads of state, who met on December 9–10, 1999, in Lomé, Togo, to accelerate the pace of regional integration.7 In particular, the Accra Declaration on a Second Monetary Zone, signed on April 20, 2000, by six non-WAEMU West African countries, expressed their intention to establish a second common currency in the region by 2003 and to work toward a single currency for ECOWAS by 2004. National ministers of finance, trade and commerce, foreign affairs, and integration, together with national central bank governors, sit on an ECOWAS Convergence Council, empowered to oversee implementation of the process. A Technical Committee is tasked with working out the structure and regulatory framework for a regional central bank, and other preparatory activities. The Council recently approved the Technical Committee’s recommendation to establish the West African Monetary Institute in early 2001 to serve as a transitional institution to a future, common central bank.

Recent plans for monetary union come as a response to a political commitment by ECOWAS heads of state, who met on December 9–10, 1999, in Lomé, Togo, to accelerate the pace of regional integration.7 In particular, the Accra Declaration on a Second Monetary Zone, signed on April 20, 2000, by six non-WAEMU West African countries, expressed their intention to establish a second common currency in the region by 2003 and to work toward a single currency for ECOWAS by 2004. National ministers of finance, trade and commerce, foreign affairs, and integration, together with national central bank governors, sit on an ECOWAS Convergence Council, empowered to oversee implementation of the process. A Technical Committee is tasked with working out the structure and regulatory framework for a regional central bank, and other preparatory activities. The Council recently approved the Technical Committee’s recommendation to establish the West African Monetary Institute in early 2001 to serve as a transitional institution to a future, common central bank.

Table 2.1 presents some basic statistics for the countries in the region. There is a wide range of income levels and country sizes, with Nigeria constituting by far the largest country in the region, but also one of the poorest. All of the countries face serious challenges to reduce poverty, improve health care, and invest in education. Figure 2.1 shows the overlapping membership of the CFA franc zone and ECOWAS; only one of the two regional economic and monetary groupings using the CFA franc, WAEMU, is part of ECOWAS.

Table 2.1.

ECOWAS Members: Bask Indicators

article image
Source: World Bank, African Development Indicators, 2000.
Figure 2.1.
Figure 2.1.

Membership of the CFA Franc Zone and ECOWAS

The Accra summit established convergence criteria, which the signatories committed themselves to achieve by end-2003:

  • maximum budget deficits, excluding grants, of 4 percent of GDP;

  • a rate of inflation of no more than 5 percent;

  • gross official reserves covering at least six months of imports of goods and services;

  • central bank financing of the budget deficit limited to 10 percent of the previous year’s tax revenues.

These criteria are the most important ones, although there also are some secondary criteria. Table 2.2 shows the current situation with respect to the criteria for the ECOWAS countries that are candidates to form the “second monetary union.”

Table 2.2.

ECOWAS: Position of Non-WAEMU Members vis-à-vis the Convergence Criteria 1

article image
Source: IMF staff estimates.

Cape Verde was not a signatory of the Accra Declaration on a Second Monetary Zone.

Excluding grants.

Central bank advances are as a percent of total government revenue.

The WAEMU members have carried out mutual surveillance of policies at the national level for a number of years, and they have recently revised their convergence criteria (see IMF, 2000). Although there has been an attempt to harmonize the ECOWAS convergence criteria with those of the WAEMU,8 differences remain. WAEMU targets a basic budget balance9 of at least 0 percent of GDP and an annual average inflation rate of 3 percent, as well as some additional criteria. As shown in Table 2.3, WAEMU countries are generally much closer to reaching their targets than are the non-WAEMU ECOWAS countries; undoubtedly, this is largely because regional cooperation and surveillance among WAEMU countries have a longer history.

Table 2.3.

WAEMU: Position of Members vis-à-vis the WAEMU Convergence Criteria 1

article image
Source: IMF staff estimates.

Official reserves of member countries are pooled at the regional central bank (BCEAO) and stood at 103 percent of base money at end-1999, equivalent to six months’ worth of regional imports.

Defined as total revenue (excluding grants) minus total expenditure excluding foreign-financed investment.

Two other primary criteria concern the change in the stock of domestic and external arrears, which must be negative or nil.

As a percent of tax revenue.

Excluding grants.

The Committee of ECOWAS Central Bank Governors met in Dakar, Senegal, on May 4–5, 2000, to consider the modalities of the ultimate merging of the two monetary unions.10 They agreed that to ensure the viability of any future single currency for the region, macroeconomic convergence should be achieved first. They noted that in addition to the ECOWAS convergence criteria mentioned above, exchange rate stability against the West African Unit of Account11 should be achieved. Moreover, the central bank governors set forth three phases intended to lead to monetary union among all the ECOWAS countries:

  • Phase 1. Harmonizing exchange controls; liberalizing capital markets; establishing rigorous macroeconomic management and reinforcing structural policies; meeting convergence criteria and harmonizing statistics; putting in place a regional single market; liberalizing labor markets; establishing an exchange rate mechanism in which all member countries’ currencies would participate; making widespread the use of the West African Unit of Account and revitalizing the West African Clearing House; and creating a Community Monetary Institution, as a transition institution to a single regional central bank.

  • Phase 2. Evaluating and adapting the policies implemented in Phase 1; reducing the fluctuation margins of the exchange rate mechanism; and harmonizing taxation, in particular on income from saving.

  • Phase 3. Irrevocably fixing parities and passage to a single currency managed by the single regional central bank.

Although the project has been described in some detail, it is not clear how the list of planned policy measures can be reconciled with the timetable of a monetary union of the non-WAEMU countries (the “second monetary union”) by 2003 and overall monetary union by 2004. It also is not clear how the convergence criteria are to be applied—in particular, whether failing to meet them (and by what margin) would preclude participating in either the second monetary union or the full monetary union. The evident intention of Ghana and Nigeria to proceed, although they are both quite far from achieving the convergence criteria, raises questions about the role of the convergence criteria.

Finally, details are lacking on how the two transitions—one toward the “second monetary union” and the other toward the full regional monetary union—are to fit together. For example, it is not clear how a newly created single central bank for the non-WAEMU countries would be merged with WAEMU’s longstanding central bank, the Banque Central des Etats de l’Afrique de l’Ouest. Moreover, the time horizons for this aspect of the two transitions seem unrealistic, with establishment of the non-WAEMU central bank now planned for end-2002 followed by some merger of the two institutions by 2004. A decision to maintain both banks would be wasteful, in terms of both human and financial resources.

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