Recently, ECOWAS countries announced the plan to launch a monetary union by 2020. This will represent a major step in economic integration of the sub-region if done correctly. While a monetary union can be beneficial in theory, it is a bad idea for The Gambia to join the proposed Eco monetary union at this point in time. The reasons why joining at this point in time is ill-advised is the absence of adequate preparations needed to make this monetary union function well. In addition, the promised benefits of increased intra-regional trade are over-blown, while the risks for the country are not adequately considered.
One of the first concrete steps taken with regards to the creation of the monetary union was the establishment of the West African Monetary Institute in 2001. The idea at the time was that the six non-CFA countries (Gambia, Ghana, Guinea, Liberia, Sierra Leone and Nigeria) would start out by forming a monetary union, and they would later be joined by the mostly francophone countries that use the CFA franc. After several deadlines, none of the countries have been able to meet the convergence criteria, and hence only minimal progress has been made since 2001.
Meeting the convergence criteria is quite important. The goal of having convergence criteria is to force the countries to meet conditions that the monetary union would need for it to be sustainable. It is also part of the mechanism to ensure that the currencies of the individual countries become convertible. When the six countries failed to meet the convergence criteria, they decided to make the conditions less stringent. Specifically, the requirement that the debt-to-GDP ratio not exceed 60% was removed. The narrow band within which the nominal exchange rate where allowed to fluctuate was widened from 5% to 10%. Despite these relaxations, none of the six countries were able to meet the set of convergence criteria.
On top of their failure to meet these convergence criteria, the process of creating this monetary union has now been hastened. While initially it was supposed to be only the six non-CFA countries that would be part of the Eco monetary union, that intermediate step would now be completely skipped. In other words, 15 ECOWAS countries are all expected to be part of the 2020 launch date. This is simply incredible. In other words, these countries attempted to crawl, they couldn’t. They attempted to walk, they couldn’t. Now, they are telling their citizens that they will instead fly on their first attempt in less than a year.
Even if the needed preparations for the monetary union were in place, the benefits are over-sold. The argument that creating a monetary union would increase intra-regional trade and therefore economic growth in the ECOWAS region is not based on evidence or sound analysis. Intra-regional trade in West Africa is very low. It is less than 10% of their total trade. There are two main reasons why this is the case. Most countries in the sub-region trade mainly primary commodities, whether it is agricultural goods, oil or gold. The main markets for those kinds of primary products are Europe and Asia. This is why the largest trading partners of West African countries are located in those regions of the world. In other words, most of trade for ECOWAS members is extra-regional. The second reason is related to the first. The intra-regional trade in Africa is highly correlated with the share of manufacturing in the economy. Unfortunately, manufacturing share of GDP is low for all ECOWAS countries – The Gambia included. It is actually in single digits, with the average being around 5%.
Both of these realities on the ground would not be affected in the least bit as to whether or not ECOWAS launches the Eco. Or whether or not the Gambia joins. Beyond these two points, we should also recall that ECOWAS members have signed all sorts of protocols for free movement of goods but they have not been implemented well. There would be much greater effect on trade if countries implemented those accords than launching the Eco.
We also have strong evidence on the ground that a monetary union by itself does not improve intra-regional trade. Consider the CFA countries that have been in a monetary union for almost sixty years. Despite that long period of being in a monetary union, the CFA countries have similar rates of intra-regional trade as their non-CFA neighbors. If it were really the case that a monetary union would increase trade among its members, we should observe far higher intra-regional trade among the CFA countries. But that is not the case.
In addition to this low likelihood of benefits, there is high risk of prolonged economic downturns for The Gambia if we join the monetary union. This is because the monetary policy of such a union would be determined by Nigeria since that country accounts for 65% of ECOWAS’s GDP. This would be a problem for the Gambia for the following reason: The Gambia’s business cycle is not synchronized with the Nigerian economy, and this would have implications for the optimal monetary policy for the Eco countries. Nigeria is an oil-dependent country. Oil accounts for 92% of its exports, 90% of foreign exchange earnings and 75% government budget. In other words, oil price is almost the sole determinant of how well the Nigerian economy does. On the other hand, The Gambia is an oil-importing country with a business cycle determined mainly by rainfall and tourism arrivals, both of which are not correlated with oil prices.
Consider that monetary policy enables policymakers to boost an economy if needed or put the brakes on if an economy appears to be over-heating. Now suppose there is a sudden increase in the price of oil. This would mean a big boost for the Nigerian economy in almost every single way. The appropriate monetary policy in such an environment is to tighten things a bit whereby the Central Bank would increase interest rate.
But for The Gambia, a sudden and high increase in oil prices would be a shock for our economy, almost similar to having a drought. If a recession occurs, a loose monetary policy would be more appropriate. But instead, Eco monetary union would have a tight monetary policy since it would be determined by the Nigerian economy. So, in such a situation, we would be far worse off than if we had our own currency and our own independent monetary policy.
Some may argue that there would be fiscal transfers in place to mitigate the effects of such misalignment of business cycles. Unfortunately, expecting such mechanisms to be in place is to allow wishful thinking in place of reality. Given that the ECOWAS member states have not been able to meet the prerequisites for the monetary union, how likely is it that the same set of countries would have all the systems in place for the smooth functioning of the monetary union?
It is possible that at some point in the future, the time may be right for a monetary union and would be beneficial for The Gambia to join. For instance, if greater intra-regional trade in West Africa ends up becoming a reality, the benefits of forming a monetary union would be substantial by reducing trade costs through the removal of multiple currencies within the zone. Or the countries could get their economic acts together and make it possible to easily reach the convergence criteria. But we are not in such an environment today, and no amount of wishful thinking can make it so.
It is important to stress that refusing to join the Eco monetary union is not a repudiation of ECOWAS as an institution. The importance of ECOWAS transcends more than individual initiatives that are occasionally passed or debated. The institution’s resilience will depend on member states adhering to agreements or declarations that are self-enforcing due to being beneficial for all its members most of the time. Implementing policies that are unfavorable to one’s economy would not only be foolish, but it would likely undermine ECOWAS’s future credibility.
It is disappointing that neither the Central Bank of The Gambia nor the Ministry of Finance has taken it upon themselves to inform the public about the implications of a decision as momentous as joining a monetary union. After all, this is a decision that will have profound economic effects on all aspects of society. At the very least, these government units should give us the official justification of signing up the country for this agreement.
Ousman Gajigo is an economist. He has held positions with the African Development Bank, the UN, the World Bank and Columbia University. He holds a PhD in development economics. He is currently an international consultant and also runs a farm in The Gambia.