Download Proposed Architecture for an ECOWAS Common Currency

Diery Seck
ACRIA 4, Abidjan, 4 June 2013
What is the right design for an
ECOWAS Common Currency Union ?
Precursors for idea of regional
currency
◦ Kwame Nkrumah (Ghana)
◦ Cheikh Anta Diop (Senegal)
 UEMOA & CEMAC
 Lagos Plan of Action
 NEPAD

UEMOA/CEMAC
 Eastern Caribbean Currency Area (ECCA)
 European Monetary Union (EMU)
 A few bilateral adoptions of foreign
currencies:
 Euro by Cape Verde
 US Dollar by Bahamas, Bermuda,
Panama, Ecuador and El Salvador
 Swiss Franc by Liechtenstein



Create the West Africa Monetary Zone: WAMZ
(Non-CFA countries minus Cape Verde):
=> Currency: The ECO
Later merge WAMZ and UEMOA
=> New Single Currency
BUT CONSIDERABLE DELAY IN CREATING The ECO
(April 2000 to July 2013: 13 years, No significant progress)

Countries with fixed peg with EURO
- UEMOA: 8 (Benin, Burkina Faso, Côte
Ivoire, G. Bissau, Mali, Niger, Senegal, Togo
- Non-UEMOA: 1 Cape Verde
=> 9 countries pegged to Euro, same
monetary target: maintain stability of fixed
exchange rate with Euro

Countries with flexible exchange rates: 6=WAMZ
- Gambia, Ghana, Guinea, Liberia, Nigeria,
Sierra Leone
Basic Statistics of ECOWAS Countries (IC # 2)
#
Country
GDP, Mln US $
Area (Sq. KM)
Population
% of total
GDP
Cumulated
%
1
Nigeria
91,957.59
923,770
162,470,737
62.7
62.7
2
C. d'Ivoire
11,048.45
322,460
20,152,894
7.5
70.3
3
Ghana
10,053.62
238,540
24,965,816
6.9
77.1
4
Senegal
7,149.43
196,720
12,767,556
4.9
82.0
5
B. Faso
4,849.46
274,220
16,967,845
3.3
85.3
6
Mali
4,313.25
1,240,190
15,839,538
2.9
88.3
7
Guinea
4,028.57
245,860
10,221,808
2.7
91.0
8
Benin
3,440.24
112,620
9,099,922
2.3
93.4
9
Niger
2,845.16
1,267,000
16,068,994
1.9
95.3
10 Togo
1,680.93
56,790
6,154,813
1.1
96.5
11 S. Leone
1,668.76
71,740
5,997,486
1.1
97.6
12 Liberia
1,152.78
111,370
4,128,572
0.8
98.4
“Inertia” in switching UEMOA countries
to ECOWAS CCU (UEMOA works!)
 Different country sizes and economic
structures may mean different
transmission mechanisms of monetary
policy
 High degree of political instability:
Mali, Côte d’Ivoire, Guinea Bissau, etc.
 CB autonomy: Financing of fiscal deficit

Table 3. Fiscal Deficit Financed by Central Bank as Percentage of Fiscal Revenues of Previous Year
2005
2006
2007
2008
2009
2010*
2011**
Benin
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Burkina Faso
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Cape Verde
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Côte d’Ivoire
0.0
0.0
0.0
0.0
0.0
0.0
0.0
The Gambia
0.0
0.0
0.0
35.9
13.7
54.6
54.6
Ghana
0.0
0.0
0.0
17.3
0.0
34.9
0.0
Guinea
-8.8
54.0
0.0
5.8
38.7
91.0
4.3
Guinea Bissau
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Liberia
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Mali
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Niger
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Nigeria
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Senegal
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Sierra Leone
0.0
13.3
0.8
0.3
18.6
37.6
37.6
Togo
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Volatility of Prices, Exports and GDP of ECOWAS Countries (2000 - 20
(Standard deviation of variables)
Country
Benin
Burkina Faso
Cote d'Ivoire
Guinea Bissau
Mali
Niger
Senegal
Togo
Average UEMOA
Gambia
Ghana
Guinea
Liberia
Nigeria
Sierra Leone
Average WAMZ
Cape Verde
Inflation (GDP
deflator)
2.4
3.3
2.5
27.2
4.5
2.5
2.2
6.2
6.4
4.9
18.7
10.7
9.3
12.4
6.4
10.4
2.3
Annual change of
Exports in Constant
US Dollars
14.8
22.3
13.0
28.2
15.8
13.8
11.1
13.9
16.6
26.6
19.9
16.1
27.9
44.6
27.0
25.4
Annual change o
Growth in Const
Dollars
2.5
4.8
2.7
3.9
3.6
3.4
4.8
2.8
3.6
5.3
5.1
11.4
16.8
7.6
9.0
9.2
3.9

Architecture of the
Monetary Union: 6
tasks

Architecture of the
Central Bank: 10+
tasks
1.
2.
3.
4.
Is ECOWAS an Optimal Currency Area
(OCA)? What are the welfare gains?
What type of union is suitable given
context?
What criteria to use for selection of
members and what is the right sequencing
of admission?
Which countries should be admitted
initially?


Role and status of non-members
Level and management of reserves
1.
2.
3.
4.
5.
Choice of Anchor
Choice of Target
Choice of
Instruments
Exchange rate
regime
Nominal Exchange
rate at entry
1.
2.
3.
4.
5.
Governance &
Independence of CB
Supervision &
Regulatory powers
Fiscal prerogatives
Dual currency
transition period
Existence and
strength of secondary
CB objectives

Methodology of Lee and Barro (2011)
- Strong trade and financial integration
- High level of inflation
- High co-movement of prices and
output among member countries
- Speedy adjustment to shocks
- Political proximity among members
- Welfare gains from monetary union
OPTION 1: Extended UEMOA
PROS:
- Well functioning design
- Pre-existing Guarantee and Anchor
- Reliable Anchor: EURO
CONS:
- New entrants unlikely to accept
terms
- European CB may not approve it
- France and Portugal may not
extend guarantee of convertibility
to new members
- UEMOA countries may not accept
welfare costs of CCU  Reject it
OPTION 2: Merger of WAMZ and UEMOA
PROS: - Fast track agenda
- Two unions of comparable sizes to negotiate
CONS: - WAMZ does not exist after 13 years
- High transactions costs (WAMZ,
UEMOA merger negotiations)
- Perception of high cost for UEMOA (Nigerian
monetary union with tiny members)
- What happens to WAMZ if merger talks fail?

OPTION 3: Immediate creation of new currency
PROS:
CONS:
-
Clean slate = free design w/o inertia
Fast track, low transactions costs
Reduce dependence on fate of EURO
UEMOA & Cape Verde may lose
EURO guarantee of convertibility
- How to cope with price, output and
export volatility of WAMZ countries
- Lack of gradualism of process
( Probability of error, failure)





REASON:1) Most obstacles are institutional,
2) Immediate creation: All countries on
same side (political will)
METHOD: Selection of some member
countries (not all)
Based on ECOWAS nominal convergence
criteria (WAMA)
Need to minimize negotiations and
transactions costs
Maximize the % of ECOWAS economy and
population in first phase of CCU (CCU
representative from start)
Fiscal deficit (w/o grants) / GDP ≤ 4%
 Inflation rate ≤ 5%
 Fiscal deficit financed by CB / Fiscal
revenues of previous year ≤ 10%
(Does not apply to UEMOA)
 Gross reserves ≥ 6 months of imports
(Does not apply to UEMOA countries)







Domestic and Foreign arrears = 0
Fiscal revenues / GDP ≥ 20%
Government payroll / Fiscal revenues ≤ 35%
Public investments / Fiscal revenues ≥ 20%
Real interest rates > 0%
Stability of real exchange rates: ± 5%
AVERAGE NOMINAL CONVERGENCE INDICATORS FOR ECOWAS
COUNTRIES
ACTUAL VALUES (Mean 2008-2010)
Fisc.
Def/GDP Inflation rate
BENIN
BURKINA FASO
CAPE VERDE
COTE D'IVOIRE
THE GAMBIA
GHANA
GUINEA
GUINEA BISSAU
LIBERIA
MALI
NIGER
NIGERIA
SENEGAL
SIERRA LEONE
TOGO
UEMOA
WAMZ
ECOWAS
4.4
12.3
12.9
2.3
5.9
11.8
7.6
16.5
1.5
7.4
8.7
2.4
7.3
10.2
4.0
5.9
3.3
4.2
3.7
3.1
3.3
4.6
5.1
14.2
14.1
3.2
8.6
3.7
3.8
13.6
1.6
14.0
3.4
3.8
13.7
10.3
Fisc. Rev. /
GDP
16.0
15.3
23.1
16.8
13.3
18.2
14.8
6.8
20.1
14.3
12.9
13.0
18.4
9.1
15.4
16.6
13.4
14.5
Gov. Pay / Pub. Inv. /
Rev. Revenue
42.1
44.8
45.7
41.5
36.3
52.5
33.2
83.6
35.2
34.6
28.7
34.2
32.8
60.2
35.8
38.0
35.9
36.6
28.0
49.3
2.1
13.2
14.5
23.7
35.3
6.3
11.3
22.1
34.9
31.0
33.1
22.4
16.0
24.8
30.4
28.3
AVERAGE NOMINAL CONVERGENCE INDICATORS (2008-10) FOR
ECOWAS COUNTRIES
RANKING OF ECOWAS COUNTRIES: NOMINAL CONVERGENCE CRITERIA
Fisc.
Fisc. Rev. / Gov. Pay / Pub. Inv. /
Def/GDP Inflation rate
GDP
Rev.
Reve.
BENIN
B. FASO
C. VERDE
C. D'IVOIRE
GAMBIA
GHANA
GUINEA
GUINEA
BISSAU
LIBERIA
MALI
NIGER
NIGERIA
SENEGAL
S. LEONE
TOGO
TOTAL
RANKS
Country
total
Overall
Ranking
5
13
14
2
6
12
9
6
2
4
9
10
15
14
6
8
1
5
11
4
9
10
11
12
9
8
13
3
6
1
15
12
11
7
2
33
35
46
37
46
51
37
2
5
11
8
11
13
8
15
1
8
10
3
7
11
4
3
11
7
8
12
1
13
5
15
2
10
13
12
3
14
7
15
6
5
1
4
2
14
7
14
13
9
3
5
4
8
10
62
33
39
35
36
17
60
33
15
2
10
5
7
1
14
2
120
120
120
120
120
600
UEMOA members (8)
 Cape Verde (virtual UEMOA member)
 Liberia
 Nigeria

88.3% of ECOWAS GDP (2011)
 86.1% of ECOWAS population






Status of members-in-waiting
Informal monetary arrangement with variable
nominal exchange rate around equilibrium
rate with CCU Currency  “Snake”
Strong cooperation with CCU authorities
Over time the Band within the Snake is
narrower
Finally we have a fixed exchange rate and
membership into the CCU.
Pooling of foreign reserves: UEMOA
model of “Compte d‘opérations”
 Avoidance of moral hazard and
control of Nigeria size factor (NRIF)
 Solidarity reserves from non-members


UEMOA model of “Compte d’opérations”:
- All national reserves pooled into one
joint CB account
- National contributions recorded
separately; free access to one’s own
reserves
- Possibility for a country to “borrow” from
the joint account (stepped up
interest rates)




No CB monetization of national government
fiscal deficits (use debt market instead)
National sovereign borrowing and sovereign
foreign debt guarantee are capped
Mandatory level of national reserves varies
and is function of volatility of each national
economy (see Table on volatility)
Creation of the Nigeria Reserve Insurance
Fund (NRIF) in addition to regular reserves

STRUCTURAL (LONG TERM)
Solidarity reserves from non-members :Issuance by
CB of non-interest bearing, Long Term Bonds in
Foreign denomination
TEMPORARY RELIEF MECHANISM
Foreign reserve swaps and other facilities to
discourage speculative attacks and stockpile of
foreign reserves


Design & operations with first members:
 5 years
Completion of CCU and full membership:
 10 years