Economic Community of West African States member countries flags on world map with national borders
Having announced the retirement of French colonial currency the CFA franc, the eight countries of the West African Economic and Monetary Union (WAEMU) are hoping to see a new common currency in place this year.
However, a speedy launch of the “eco” has stoked divisions with the six anglophone countries in the 15-member Economic Community of West African States (ECOWAS) who want to adopt the new currency on a slower timetable and as a new currency for the whole region, not just as a replacement for the CFA franc.
Following a meeting in Abuja on Thursday, the anglophone nations of Nigeria, Gambia, Ghana, Liberia and Sierra Leone, along with Guinea, issued a communique condemning the WAEMU decision to unilaterally rename the CFA franc as the eco.
The WAEMU consists of Benin, Burkina Faso, Guinea-Bissau, Côte d’Ivoire, Mali, Niger, Senegal and Togo, all of which are former French colonies except for Guinea-Bissau, which gained independence from Portugal in 1973.
WAEMU and Côte d’Ivoire President Alassane Ouattara and French President Emmanuel Macron announced last month that the CFA franc, which had been in place since 1945, would be renamed and subjected to a host of reforms.
Regional currency and independent monetary union is a long-standing ambition of the wider ECOWAS bloc, and when its leaders met in June 2019 there was an agreement to adopt the common currency in principle. However, Ouattara’s sudden announcement that the former French colonies and Guinea-Bissau had already drafted details of the deal and set a timescale appears to have caught counterparts off guard.
The last colonial currency to fall
Facing elections this October, the transition to the eco will likely be politically expedient for Ouattara.
“Jettisoning the only colonial currency arrangement still in existence in the world should garner him quite a bit of popularity ahead of the election, especially as the economic consequences of a fundamental change to the arrangement will only be realized over the intermediate term,” Marshall Stocker, vice president and head of country research at investment firm Eaton Vance, told CNBC.
The agreement between the WAEMU and France, along with renaming the CFA franc as the eco, would scrap obligations for WAEMU members to park 50% of their foreign reserves with the French Treasury and strip French representatives from any decision-making and management capacity relating to the West African Monetary Union, comprising the same eight countries.
The CFA franc is the most used currency in some African countries of West and Central Africa in the CFA franc zone, as here in Mali.
John Images | Getty Images
However, the CFA franc is pegged at a fixed exchange rate to the euro, and the existing agreement maintains this arrangement for the eco, with the Banque de France continuing to guarantee the new currency’s convertibility.
Stocker highlighted that the CFA franc arrangement, despite its political unpalatability, has yielded desirable results, such as lower inflation, reduced fiscal deficits and lower unemployment than the majority of African nations with monetary policy independence.
“At best, ceteris paribus, borrowing costs for eco countries will remain unchanged. More likely they will increase given the lessened oversight which results from the absence of French bureaucrats,” Stocker told CNBC via email.
Anglophone giants weigh in
The five anglophone ECOWAS nations and Guinea, comprising the West African Monetary Zone (WAMZ), met in Abuja for crunch talks over the adoption of the eco on Thursday to establish a common position.
Owing to concerns over the peg to the euro and the Banque de France’s guaranteed convertibility of the currency, which requires collective pooling of foreign reserves, larger economies such as Nigeria and Ghana have been reticent to go all in on the eco in the short term.
The joint communique issued by the WAMZ Convergence Council, minus Portuguese-speaking Cape Verde, condemned the unilateral WAEMU decision to launch the eco as a rebrand of the CFA franc.
In a statement following the meeting, Nigerian Finance Minster Zainab Ahmed said the action was “inconsistent with the decision of the Authority of the Heads of State and Government of ECOWAS for the adoption of the eco as the name of an independent ECOWAS single currency.”
“WAMZ Convergence Council wishes to reiterate the need for all ECOWAS member countries to implement the decision of the Authority of the Heads of State and Government towards the implementation of the revised roadmap of the ECOWAS single currency programme,” the communique added.
The six nations also recommended convening an “extraordinary summit” of WAMZ member states to discuss the issue further.
Nigeria, the continent’s largest economy, has become notorious for its reluctance to engage in intra-African cooperation in recent years.
Nana Akufo-Addo, president of Ghana, speaks at a press conference during the Commonwealth Heads of Government Meeting in London, England, on April 20, 2018.
Dominika Zarzycka | NurPhoto | Getty Images
Ghana had been the largest economy to signal its desire to join the eco, and President Nana Akufo-Addo’s office said in a statement last month that it hoped the common currency would “help remove trade and monetary barriers, reduce transaction costs, boost economic activity and raise the living standards of our people.”
However, Accra voiced staunch opposition to the retention of the euro peg and instead urged regional authorities to adopt a “flexible exchange rate regime,” a demand likely to hinder its assimilation.
Sanyade Okoli, CEO of Lagos-based Alpha African Advisory, told CNBC Thursday that the decision was “unsurprising” as the eco was agreed last summer by the ECOWAS member states as the name of their collective regional currency.
“It is therefore difficult to understand why one sub-group would unilaterally adopt the name for their existing currency. The move seems much more political than economic. From an economic standpoint it is more symbolic than anything but may end up having significant implications,” Okoli said.
“The question now is whether the two groups will be able to repair the breach and work together to drive forward the single currency project.”
Economic risk and opportunity
In order to adopt a new common currency, the WAEMU member states must all satisfy a set of convergence criteria under ECOWAS rules.
These include maintaining a budget deficit of less than 3% of GDP, a public debt ratio of less than 70% of GDP, an annual inflation rate below 10% and a minimum of three months of import cover.
Most WAEMU countries will be able to attain these metrics or will be able to adopt the new currency progressively as and when they can fulfill them.
Stocker suggested that problems may arise with financial data reporting and reserve pooling at the Central Bank of West African States (BCEAO), which oversees the CFA franc currency bloc.
Lomé, Togo: The Central Bank of West African States tower, located on Avenue Abdoulaye Fadiga, serves the eight west African countries which comprise the West African Economic and Monetary Union.
Curado | Getty Images
Instead of depositing half of their foreign exchange reserves in France, WAEMU nations will now place them entirely with the BCEAO, another source of skepticism among other ECOWAS states. In order for France to provide a convertibility guarantee, these reserves must be pooled.
Data frequency from the BCEAO is only annual and comes with a 12-month lag, and Eaton Vance researchers have suggested the need for improved transparency and frequency of balance of payments reporting for WAEMU nations.
“With respect to reserve pooling, economic slowdowns and recessions place great pressure on politicians,” Stocker said.
“The urge to conduct independent monetary policy, policies which may not altogether be in the simultaneous benefit of every ECO state, could be the most likely source of the ECO’s demise. Independent monetary policy is just oh so enticing to politicians.”