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Monetary Unions among Developing and Emerging Markets
By
Temitope W. Oshikoya, PhD, FCIB
Director General, West African Monetary Institute, Accra, Ghana
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Outline Introduction Optimal Currency Area WAMZ VS GCC
-Structural Convergence-Nominal Convergence-Economic Distance
Common Market Financial Integration Conclusion
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Introduction While the world has been fixated on the global financial meltdown, the
WAMZ and the GCC will soon decide on the merits and timing of a single currency each for their respective countries and regions.
The WAMZ was formally launched by the Heads of State and Government of The Gambia, Ghana, Guinea, Nigeria and Sierra Leone, in December 2000, with the objective of establishing a common central bank and introducing a single currency by 2003 later postponed to 2005 and 2009
The authorities of the GCC countries comprising Bahrain, Oman, Qatar, Saudi Arabia, Kuwait and United Arab Emirate decided in 2001 to establish a monetary union by 2010.
The GCC had a long term horizon for monetary union while WAMZ had a short term
Monetary Union and OCA
. Benefits Allows exchange rates (ER) to be fixed and therefore reduces ER
uncertainty that hampers trade and investment. Reduces transaction costs associated with multiple exchange rates. Allows economies of scale Reduces the ability of speculators to affect prices and disrupt the conduct
of monetary policy and economize on reserves Reinforces discipline and credibility of monetary policy especially in
inflation-prone countries. Expands bilateral trade among the countries of the Union
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Monetary Union and OCA
Costs Loss of independence of monetary and
exchange rate policies The cost of policy autonomy could be very high in countries relying on
seigniorage revenues Cost of coordinating policies and those associated with the possible break
down of the currency union
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Monetary Union and OCA
Requirements Openness Factor Mobility Degree of Commodity Diversification Similarity of Production Structure Price and Wage Flexibility Similarity of Inflation Rates Degree of Policy Integration Homogeneity Political Factors
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WAMZ VS GCC-Structural Convergence
West African Monetary Zone: Selected IndicatorsThe Gambia Ghana Guinea Nigeria Sierra-Leone
Nominal GDP (US$ bn) 2.30 34.00 10.40 338.10 4.30Real GDP growth rate 6.1 5.5 2.9 6.3 11.9Population (mn) 1.80 23.90 10.10 149.00 6.40Per capita income (PPP in US$) 1,300 1,500 1,100 2,300 700 Gross foreign reserves (mnthsof imports) 5.30 3.80 0.70 14.20 4.30Fiscal balance (% of GDP) 4.6 12.4 2.1 0.8 7.9Exchange rate/US$ 25.80 0.90 3465.00 127.00 2710.00
Structural ConvergenceRelative size
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WAMZ Countries: Population, GDP Growth and Size of Economies (2008)
Sources: The World Factbook, CIA, April 2009 edition, World Development Indicators: 2008
0
1
2
3
4
5
6
7
8
-100 -50 0 50 100 150 200 250 300 350 400
Size of Economy (US $'bil) PPP
Rea
l GD
P G
row
th (
%)
Bubble size: scaled to population
Nigeria
Ghana
Guinea
Sierra Leone
Gambia
WAMZ VS GCC-Structural Convergence
Gulf Cooperation Council: Selected IndicatorsBahrain Kuwait Oman Qatar KSA
Nominal GDP (US$ bn) 19.80 111.40 42.40 65.80 375.30Real GDP growth rate 6.6 4.6 6.9 14.2 4.1Population (mn) 0.80 2.60 2.70 0.90 24.30Per capita income (PPP in US$) 23,604 19,909 18,841 33,049 16,744 Gross foreign reserves (mnthsof imports) 3.60 13.70 5.40 6.50 5.60Fiscal balance (% of GDP) 1.6 33.2 17.7 12.1 20.2Exchange rate/US$ 0.38 0.29 0.38 3.64 3.75
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GCC and WAMZ Comparison
GCC Nominal GDP (US$ bn)
Bahrain, 19.80
Kuw ait, 111.40
Oman, 42.40
Qatar, 65.80
KSA, 375.30
UAE, 159.70
WAMZ Nominal GDP (US$bn)
Nigeria, 193.29
Ghana, 14.4The Gambia, 0.75
Guinea, 4.13
Sierra Leone, 1.95
GCC Nominal GDP (%)
Bahrain, 2.556818182
Kuw ait, 14.38533058
Oman, 5.475206612
Qatar, 8.496900826
KSA, 48.46332645
UAE, 20.62241736
WAMZ Nominal GDP (%)
Nigeria, 86.09799292
The Gambia, 0.619834711
Ghana, 9.238488784
Guinea, 2.863046045
Sierra Leone, 1.180637544
In WAMZ the structure of production is static, the GCC achieved massive progress in the past three decades resulted in a 30 to 35 percent decline in oil's contribution to GDP, compared to 65 to 70 percent in the mid-1970s. Saudi Arabia constitutes about half of GDP of GCC, Nigeria, represents about four-fifths of the GDP of WAMZ.
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GCC and WAMZ Comparison
WAMZ Per capita income (PPP in US$)
0
500
1000
1500
2000
2500
The Gambia Ghana Guinea Nigeria SierraLeone
GCC Per capita income (PPP in US$)
0
5000
10000
15000
20000
25000
30000
35000
Bahrain Kuw ait Oman Qatar KSA UAE
GCC Population (mn)
Bahrain, 0.80
Kuw ait, 2.60
Oman, 2.70
Qatar, 0.90
KSA, 24.30
UAE, 5.20
WAMZ Population (mn)
Ghana, 23
Guinea, 10.2
Nigeria, 148
The Gambia, 1.7
Sierra Leone, 6.3
GCC are wealthier than WAMZ countries. With the largest oil and gas reserves, and very small populations average per capita income for the GCC is US$23,548.2 against WAMZ of US$1,286.8 In WAMZ there is only one major oil-producer, all GCC countries are oil-producing.
Economic Distance
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Economic Distance Output Growth: Nigeria as target
Country
Nigeria
Guinea 1993-2000
Ghana 1993-2000
Ghana 2001-2008
Gambia 2001-2008
Guinea 2001-2008
Sierra Leone
2001-2008
Gambia 1993-2000 Sierra Leone
1993-2000
-1.00
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
-2.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00
Standard deviation
Co
rre
lati
on
Co
eff
icie
nt
Economic distanceEconomic Distance Output Growth: Saudi Arabia as target
country
Saudi Arabia
UAE 1993-2000
UAE 2001-2008
Qatar 1993-2000
Qatar 2001-2008
Oman 1993-2000
Oman 2001-2008 Kuwait 1993-2008
Kuwait 2001-2008
Bahrain 1993-2000
Bahrain 2001-2008
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
-1.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00
Standard Deviation
Co
rrel
atio
n C
oef
fici
ent
Economic Distance
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Economic Distance Inflation:Nigeria is the Target
Country
Guinea 2001-2008
Nigeria
Ghana 2001-2008
Gambia 2001-2008Ghana 1993-2000
Gambia 1993-2000
Sierra Leone
1993-2000
Guinea 1993-2000Sierra Leone
2001-2008
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
-1.50 -1.00 -0.50 0.00 0.50 1.00 1.50
Standard Deviation
Co
rre
lati
on
Co
eff
icie
nt
Economic distance reduces with integration process
Economic Distance Economic Distance Inflation: Saudi Arabia as target
Country
Saudi Arabia
UAE 1993-2000
UAE 2001-2008
Qatar 1993-2000
Qatar 2001-2008
Oman 1993-2000
Oman 2001-2008
Kuwait 1993-2000
Kuwait 2001-2008
Bahrain 1993-2000
Bahrain 2001-2008
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
-0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80
Standard Deviation
Co
rrel
atio
n C
oef
fici
ent
Common Market
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Direction of Trade with the World in US$ 2003 – 2007 G H ANA
7,522,669,091.02 (86%) (WORLD)
837,364,816.97 (10%)
(ECOWAS)
372,966,092.01 (4%)
(WAMZ)
G UINE E
1,589,629,533.51 (91%) (WORLD)
161,523,304.41 (9%)
(ECOWAS)
6,667,162.09 (0%)
(WAMZ)
NIG E R IA
2,607,279,823.47 (4%)
(ECOWAS)
896,493,071.75 (1%)
(WAMZ)
68,621,327,104.79 (95%) (WORLD)
S IE R R A L E ONE
5,015,782.38 (1%) (WAMZ)
398,111,013.33 (75%)
(ECOWAS)
126,913,204.29 (24%) (WORLD)
G AMB IA
32,432,507.16 (9%)
(ECOWAS)
309,756,515.76 90%
(WORLD)
2,050,977.09, (1%) (WAMZ)
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Financial Integration
WAMZFinancial integration - important element of any regional integration process, especially for a monetary union. The financial sector must be adequately prepared to promote financial inclusion and sustain a changeover to a new currency. Some countries in the WAMZ have established stock exchanges but they operate within the confines of the national boundaries and few linkages to other member countriesInterbank and money market dominated by banksInstitutional investors participation limitedCapital market requirements differ significantlyCross listing of stocks is limited.Most countries of the WAMZ are reforming their capital accounts to attain full liberalization
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Financial Integration
GCCLiberal capital flows and pegged exchange rate
Well capitalised banking system
GCC stock markets outperformed emerging and developed markets
Rise in FDI
Currency - currently pegged to the US dollar
No clear plan for establishing common capital market
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Financial Integration
WAMZFinancial integration is an important element of any regional integration process, especially for a monetary union.
Cross-border retail payments are generally non-existent
Interest rates are however converging
Insurance market growing but penetration low
Banking sector integration on the rise- Nigerian banks driving the process
Financial Integration
•Low bank density indicate high degree of concentration for both WAMZ and GCC, •Weak cross border branch activity a challenge for the efficient use of funds
2.13 2.31
0.46
2.87
0.72
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Gambia, The Ghana Guinea Nigeria Sierra Leone
Bank Density in the WAMZ Bank Density in GCC
0.6 0.4
1.6
0.1
1.1
9.5
0
2
4
6
8
10
Barhain Kuwait Oman Qatar SaudiArabia
UnitedArab
WAMZ VS GCC-Nominal Convergence
Convergence Criteria WAMZ GCC
Primary Criteria
Inflation Single digit Weighted average of the six countries plus 2 percentage points
Fiscal Deficit/GDP Ratio ≤ -4% ≤ -3% although some flexibility allowed to account for wild fluctuations in states revenue
Central Bank Financing of Fiscal Deficit
≤ 10% Not applicable
Gross External Reserves (months of import cover)
≥ 3months Not applicable
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WAMZ VS GCC-Inflation Convergence
100
WAMZ Inflation Rate (%)
0
2
4
6
8
10
12
14
The Gambia Ghana Guinea Nigeria Sierra Leoneinflation rate
GCC Inflation Rate (%)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Bahrain Kuwait Oman Qatar KSA UAE
WAMZ VS GCC-Fiscal ConvergenceGCC Fiscal balance (% of GDP)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Bahrain Kuwait Oman Qatar KSA UAE
WAMZ Fiscal balance (% of GDP)
-16.0
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
The Gambia Ghana Guinea Nigeria Sierra Leone
•GCC CountriesOperatedFiscalSurpluses While theWAMZran Fiscal Deficits
WAMZ VS GCC-External Sector ConvergenceGCC Gross Foreign Reserves (monthsof imports)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Bahrain Kuwait Oman Qatar KSA UAEgross foreign reserves (mnthsof imports)
WAMZ Gross Foreign Reserves (months of imports)
0
2
4
6
8
10
12
14
The Gambia Ghana Guinea Nigeria SierraLeone
gross foreign reserves (mnthsof imports)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Bahrain Kuwait Oman Qatar KSA UAE-16.0
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
The Gambia Ghana Guinea Nigeria Sierra Leone
ExchangeRate forthe GCC is peggedto theUS$-WAMZto a basketof currencies
WAMZ VS GCC-External Sector Convergence
GCC Exchange rate/US$
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Bahrain Kuwait Oman Qatar KSA UAE
WAMZ Exchange rate/US$
0
500
1000
1500
2000
2500
3000
3500
4000
4500
The Gambia Ghana Guinea Nigeria Sierra Leone
Necessary conditions for successful Monetary Union Economic convergence Structural convergence Market convergence Legal convergence Political convergence
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Summary GCC has longer time perspective than WAMZ Asymmetric shocks Similarity of production Geographical location Richer in terms of resources and per capita income Stable exchange rate Low inflation Low fiscal deficit More institutionally prepared Establishment of GCC Monetary Council the equivalent
of WAMI
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Conclusion
The journey towards a Monetary Union is a marathon and not a sprint race
The Euro Zone took over 43 years to achieve the common currency
The GCC countries decided in 2001 to establish a monetary union by 2010 but a postponement is being contemplated
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THANK YOU
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