UNDERSTANDING MONETARY POLICY SERIES NO. 37 … monetary policy... · understanding monetary policy...

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


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.


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.


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


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.


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.


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


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;


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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).


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.


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


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.


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.


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.

http://en.wikipedia.org/wiki/Snake_in_the_tunnel


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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,


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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.


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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


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.


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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.


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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.


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Bibliography

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Benefits”, University of Calgary, Winter/Spring 2000- Volume VII, issue I 245

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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

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rethinking-finance/monetary-integration?page=0,0

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http://hir.harvard.edu/%20rethinking-finance/monetary-integration?page=0,0


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