January 10, 2020 / 12:14 PM / OpEd by Ade Adeniji*
/ Header Image Credit: EcoGraphics
About 20 years ago, while working for a multinational, I sat with West African colleagues in Accra to do a sub-regional business plan for the next 5-10 years. We took it for granted that the planned West African currency, ECO, would be in use, at the latest, by year 2005. Our hopes were wrongly based on President Obasanjo's return to power in Nigeria and his enthusiasm for an ECOWAS revival. Obasanjo's appointment of a Minister for regional integration and his call for other African countries to reciprocate, was encouraging, as was his drive for the creation of a 'Nigeria-Benin-Togo-Ghana' corridor or sub group within ECOWAS to fast track matters.
Within our team we agreed that not only would monetary policy harmony happen, so would fiscal policies align across West Africa. Consequently, our debates centered on the nature of duty and tax regimes that will come into force across the region and how we should respond as a business with interests in several countries within the sub region.
Thankfully, 15years from our forecasted date, the ECO is finally emerging from the woodwork. Key players, i.e. France and Francophone West Africa have finally agreed terms that will see the CFA franc transform into the ECO by mid-2020 or thereabouts. While this is not what was intended, it is at the minimum, some form of progress because getting the francophone countries to sign up to the currency was the biggest obstacle in the ECO's path. What it also means is that the 8 Francophone countries have secured automatic membership as a premium for deeper economic ties with their West African neighbours. The remaining ECOWAS 7, including Nigeria will now have to qualify and join the currency union over time. The implications of this development is crystal clear to the discerning.
To put this into context, we need to be reminded that ECOWAS is an economic "project" with a 380m population spread across 1.97m sq. km and a $668b GDP, which is $38b lower than Turkey's GDP. It has a 33%+ debt to GDP ratio and foreign reserves of about US$58b. It is in need of a single currency to drive greater economic growth through integration. The ECO is designed to remove trade and monetary barriers within West Africa, reduce transaction costs while boosting sub-regional economic activity, thereby raising our collective standard of living. It should also significantly reduce the West African grey trade. The West African Monetary Institute in Accra, along with the West African Monetary Agency in Freetown are already in place to mid-wife the ECO's arrival and the emergence of a new West African Central Bank. Nigeria is the dominant player in the sub-region as it accounts for 67% of the ECOWAS economy.
Originally, joining the ECO was not designed to be automatic, but conditioned on attaining 4 primary and 6 secondary criteria. It was well known that only Togo out of the 15 countries seemed anywhere near meeting the 4 principal demands of a single digit inflation rate, Gross FX reserves cover of 3 months imports, fiscal deficit not exceeding 3% of GDP and Central Bank deficit financing of not more than 10% of prior year's tax revenues.
As things stand now, it is a fait accompli that Francophone West Africa have ambushed their way into the ECO, in clear disregard of the joining criteria. It also means that diluted, as against rigorous, entry standards will now apply to the other 7 countries including Nigeria. As regrettable as the "ambush" may be and with Nigeria already wrong footed in the journey, i suggest that joining the currency union is a far better option than remaining on the outside. This is because the ECO automatically inherits the low inflation regime that obtains in the CFA countries along with its "Euro convertibility", which in turn implies exchange rate stability leading to long term single digit interest rates. In so much as the ECO's joining criteria transforms into its "operating standards", a stable economic environment can be safely expected to prevail into the near future.
While intra ECOWAS politics and the ECO's start-up issues will be very topical and significant in the next 3-5 years, I am primarily concerned about Nigeria's preparedness for the changes that are about to overtake her economy. Early in 2019, Nigeria announced its decision to adopt the ECO come January 2020. By now, it is obvious to all and sundry that no such thing will happen as specified, because the fundamental building blocks of such a move are not yet in place.
In the first place, no legislation has been enacted to enable a change to the new currency nor is the CBN act amended to transfer its powers to a sub-regional body. At the same time there is no sign-off yet on an ECOWAS treaty to create the ECO and a Central bank, to manage the currency. A harmonized banking legislation must necessarily come into force across the sub-region to accompany the newly created central bank to support cross border lending and enable banking supervision. All this can however be achieved in record time if the political will to do so exists.
Concerns have arisen on the possibility of Nigeria ever adopting the ECO, to replace the Naira, because of our economic size relative to our West African neighbours, and the fact that it constitutes a surrender of our monetary sovereignty. A popular writer rightly wondered why we could simply not impose the Naira on West Africa rather than adopt the ECO, after all we successfully imposed Nollywood and Naija hip-hop music on them.
Frankly, no right thinking neighbour will commit economic suicide by adopting a non-floating, unstable currency like the Naira with its poor management, double digit inflation, crude oil and Dollar dependency. This is not to mention the low productivity of our economy which fundamentally weakens the currency and our random trade policies that suddenly shuts down borders indefinitely in an effort to fight criminals!!
More importantly, our so- called monetary sovereignty remains a sentimental notion, which has for the past 30 years, delivered nothing but continued economic hardship. In 1989 our GDP per capita exceeded China's, but now, we are positioned as the poverty capital of the world with a GDP 5 times lower than China's. Our currency is tied to the US Dollar, with minimal relationship to our local production of goods and services. Will anyone really miss the Naira or will anyone really care? Perhaps Obafemi Awolowo and Clement Isong, its departed founders would. Maybe General Gowon as well.
John Maynard Keynes certainly had Nigerians in mind when he wrote that "by a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of its citizens wealth". Any currency providing stability, minimal inflation and low interest rates, such as the planned ECO will be happily welcomed by Nigerians. Such a currency will facilitate a revival of lending to the housing, infrastructure and manufacturing sectors of the economy. Increased investments (local and foreign), in these sectors will translate into will reduced unemployment in the long term.
Nigeria's federal and state governments will however be forced into an economic "straitjacket", which is probably why the Federal Government will not be in a hurry sign up to the ECO. Our "money printing" capacity will be taken away and we will be compelled to pursue a disciplined and sane economic arrangement, which means living within our means, a strange concept to our ruling class.
The issue however is that we are neither inspired nor sufficiently motivated to adopt the discipline required to live within the ECO's parameters. For instance, CBN's lending to state governments to settle salary backlogs, as decreed by the Buhari government, can no longer happen when we adopt the ECO. Remember that this very deed, according to Sahara reporters, almost forced external auditors to declare the CBN insolvent. Worst still, can petrol subsidies continue with the ECO as our currency? This will be ridiculous, as a single currency with open borders automatically extends or causes such subsidies to flow across West Africa. The same will apply to any foreign government subsidy available anywhere in West Africa. Product pricing differentials across West Africa will reflect logistics costs only.
Most importantly our ability and power to devalue our currency at will, as was done in 2016 will be taken away. In other countries, devaluation is primarily used to boost exports and economic performance. For instance, China recently devalued her currency in order to nullify the impact of Trump's duties imposed on her exports to the United States. In Nigeria we have used it to maintain our foreign reserves at a certain level, and inflate our way out of our local financial obligations. This has been to the detriment of our overall population. The ECO will only be devalued by a decision of the West African Central bank, which will be constrained by the inflation targets it has to achieve. While our clueless ruling class will lament the loss of their power to devalue, the Nigerian masses will be the better off for it.
With regards to the private sector, the incoming fiscal and monetary policies will be crucial to their continued survival. Multinational businesses are better prepared while others can, and will, play catch up. The unfolding opportunities are immense and so will the challenges be. For instance, Nigerian importers will no longer be spoon-fed FX by the CBN after the ECO comes into force, they will have to source their FX all by themselves, the way it is done across West Africa. The ECO's euro convertibility will be helpful. Exporting concerns will boom!
However, before we join the ECO, we need to learn from the European Union's difficulties in dealing with its Brexit and PIGS (Portugal, Italy, Greece, Spain) dilemma, as the same scenario is likely to repeat within ECOWAS. UK did not join the currency union, but its exit from the trading community has triggered a major crises. The PIGS bloc are the next crises hotspot as all four economies are rooting for a devalued Euro, and may still decide to exit the union, so as to re-create devalued national currencies in in order to boost their weakened national economies. A key lesson here is that stronger economies (Germany, France) reap the highest returns from a currency union while weaker economies suffer from it. Nigeria, with all its imperfections and its institutional weaknesses, has little to fear, as it is double the size of all the other economies combined together and stands to gain the most from a fully functional ECOWAS.
Many years ago, Mauritania exited ECOWAS with little or no consequences but a Ghanaian or French bloc exit will be traumatic. A future Nigerian exit or a Nigerian refusal to join, diminishes ECOWAS by 2/3rds of its true capacity. This suggests that exit terms and conditions must be pre-agreed before joining the currency group. Interestingly, Mauritania is now renegotiating its way back in, while Morocco has applied for membership and Algeria is considering doing same. The above issues raised are by no means exhaustive. It is merely to provoke a debate, thoughts and ideas around an emerging situation that could prove hugely beneficial or catastrophic to us, depending on how we manage it. Finally, i believe Nigeria's economic priority now should be to use every route possible, including the ECO, as a means of exiting our current status as the worlds poverty capital.
About The Author
*Ade Adeniji, is a Lagos based Chartered Accountant. He can be reached vide firstname.lastname@example.org
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