A Single Currency won't bring the Economic Integration ECOWAS Seeks.

- By Chinedu Okoye 

 1. Eco Currency Initiative and Objectives:

Finance Ministers and Central Bank Governors of the fifteen (15) member states of the Economic Community of West African States (ECOWAS), met within the week to further facilitate a move towards a Single Currency framework the ECO. The Single Currency is meant to enhance economic integration, improve trade and bolster monetary stability across the region. The ECO is a move to deepen economic cooperation and stabilize monetary conditions (prices, interest rates and exchange rates) in a drive to stimulate trade, investments and overall output.

The proposal of a Single Currency is built in a desire for economic integration and founded on an assumption of price uniformity and an trade and investment activity from easier cross order transactions, and that it could somehow lead to monetary stability. This is the primary argument of the single currency of fifteen (15) states stronger than any individual currency of the each of them. 

But be that as it may, there are also other implications that need to be considered. For one policy coordination is bound to be complex and the fiscal and monetary authorities understand this, hence the gathering and gradual build up. There are also other factors that need to align in other for the objectives of the proposed monetary union to be successful.

Having identified trade, and monetary stability as key objectives, we present key considerations below discussing trade and investment within the bloc as well as monetary policy considerations beow.

 2. Trade and Investment within the bloc: 

A quick glance at the trade data for the West African countries showed that over half of each countries trade is done with a Non-ECOWAS country, and a great portion of each country's top imports do not match their top exports. That is to say that import demand does not match export supply capacity even though export potential may exists in many of these countries for the most sought after products. 

Nigeria for example has the latest single train Refinery and natural crude oil reserves making it a potential exporter of Refined petroleum to the bloc. But it still grapples with sufficient capacity to satisfy even the local demand. 

Trade between these countries are low because they built the required capacity to produce what's needed, nor the infrastructure (both tangible and Intangible) to enhance industrial development. A single currency will only enhance economic integration to the extent that there's sufficient industrial capacity and necessary infrastructure (transportation networks, efficient port systems border security, etc).

Data suggests that productivity is low as is economic complexity, this makes industrial development imperative in order for the bloc to be able to satisfy import demand of ECOWAS member states from the rest of the world. This brings us to the investment angle. 

 2.1. Investments:

To improve trade, the bloc needs to grow its industries and as such, ECOWAS would need an influx of capital into its individual countries to drive the development of key industries. So the focus should be on emphasizing unification in the approach of member states on industrial policies.

These are necessary to encourage long-term capital investments in key sectors. It would then expand the complexity of these economies and of the bloc as a whole giving countries more locally made options (of goods and services). 

 3. Monetary Policy Consideration and Viability of a Common or Single Currency:

A total monetary union like the Euro would require a common central bank, say; the Central Bank of West African States (CBWAS), to set uniform benchmark interest rates. These rates would serve as a reference for commercial banks in all member states, for a harmonized monetary policy across the region.

In such framework:

- The CBWAS would set the monetary policy stance, including the benchmark interest rate.

- Commercial banks in member states would use this rate as a reference for their lending and deposit rates.

- This aims to promote financial integration, stability, and a level playing field across the region. But the conditions aren't always level. 

Achieving this requires a high degree of economic convergence, political unity, and institutional harmonization among member states, which can be a challenging and complex process. The largest ECOWAS economy is saddled with exchange rate and inflationary pressures, and Ghana technically just averted a debt default with a restructuring program that would see its investors incur a 37% loss.

3.1 Contagion Risks and Challenges Policy Coordination:

The above monetary and fiscal challenges of these individual countries would have been easily spread under a single currency, heightening the risk of contagion in financial markets as a run on a particular government's securities denominated in the ECO, or associated with it might automatically mean a run on the ECO (as a single currency) and spread to the currencies of other members states (if ECO operates as a common currency). 

There are also difficulties with regards to coordination of monetary policy across the Bloc. Nigeria's inflationary scenario warrants aggressive tightening with overall inflation at above 33%, Ghana's CPI for May hit 23.1%. However there are other economies that have lower, and more stable prices and currencies. Cote d'Ivoire CPI however came in at 4.9% and Benin Republic at 2.3%.

A unified monetary policy and single currency at this time where we have such divergence in monetary conditions among ECOWAS states would mean an excessive tightening for the countries with lower inflation and more stable exchange rates to accommodate the need for tightening in the countries with higher inflation.

4.0 Zero Equilibrium Position:

4.1 A Single Currency won't Address Structural Issues:

Structural issues affect trade and investment within and across ECOWAS states, not monetary issues. It is not the complexities of currency exchange that limit trade within the Bloc but the absence of both tangible and Intangible infrastructure alluded to above.

Whilst a common or single currency could facilitate trade and overall economic cooperation, it is ineffectual and possibly detrimental if the necessary conditions of a successful economic integration is non existent. 

A joint effort towards development of trade infrastructure by member states would do more to attract investments to the Bloc than a monetary union would. It is essentially proffering a monetary solution to a fiscal and structural problem.

4.1 Focusing on the Underlying Issues:

ECOWAS Should take necessary steps in improving export capacity (industrial development) and providing the necessary infrastructure (road networks within and intra and other intagible infrastructure to ease trade. Governments policies supporting industries would in itself attract investments into the bloc.

In the event that these issues are tackled, a single Currency still has complications. If ever ECOWAS needs a monetary union, a first step should be a Common currency, instead as it reduces or limits exposure and serves the same purpose. But the groundwork for that is also complex and would require a lot of thought. 

For now these authorities should be focused on a gradual integration through cooperation on policy objectives aimed at fostering sustainable development and growth, building upon the already exisitng partnerships. Investors need homogeneous policies in the Bloc more than they need a single currency, an efficient and well capitalized financial sector than they need uniform rates. A focus on the underlying issues would do more to foster the integration than a focus on a single or common currency.