Why The ECOWAS "ECO" Will Not Work, For Now


Sunday, December 08, 2019/  7:00PM / By Teslim Shitta-Bey, Managing Editor/ Image Header Credit: FreedomNewspaper


Nigeria's temporary closure of its land borders with neighboring West African counterparts signifies more than just a brief difficulty in meeting the terms of the Africa Continental Free Trade Area (AfCFTA) agreement; it equally underscores why the Sub regional Economic arrangement called ECOWAS, will miss its sub-regional single currency target by 2020. 

Not only does the sudden border closure reveal the weak underbelly of the Nigerian Economy, it also exposes the fragility of the Economic integration of the sub region. In early 2019 the 15 member nations of ECOWAS agreed to create a regional currency called "Eco" but as the year 2019 closes, prospects of the Eco being a regional unit of account any time soon appears dim.


The single currency agenda was designed to improve intra-regional trade and lock-in monetary policy stability on the basis of a flexible exchange rate regime, but on review of the state of Economies across the sub region only the Republic of Togo met the minimal criteria for the adoption of the Eco currency.


The Eco Criteria


To adopt Eco, countries must meet three primary and three secondary criteria:


Primary Criteria:

1.      A budget deficit of not more than 3 percent;

2.     Average annual inflation of less than 10 percent with a long-term goal of not more than 5 percent; and

3.     Gross reserves that could finance at least three months of imports.


Secondary Criteria:


1.      Public debt/Gross Domestic Product of not more than 70 percent;

2.     Central Bank financing of budget deficit should not be more than 10 percent of

      previous year's tax revenue; and

3.     Nominal exchange rate variation of plus or minus 10 percent.



Big Brother's Burden


Nigeria is the largest Economy in Africa (GDP of US$397.3bn, 2018), but it is also one of the most fragile. In the last two years GDP growth has been less than its average population growth of +2.6% (see chart 1 below) and inflation has remained above +11.02% (see chart 2 below) while public sector deficit as a per cent of gross domestic product (GDP) has stayed above -0.9% in 2014, the last four years in particular have seen as worsening in the fiscal position (see chart 3 below).




Chart 2 Nigeria's GDP Growth Rate Q1 2018-Q3 2019

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Source: National Bureau of Statistics (NBS)




Chart 2 Nigeria's inflation rate and forecast

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Source: National Bureau of Statistics (NBS), Proshare Research




Chart 3 Nigeria's Budget Deficit as % of GDP 2009-2018


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Source: National Bureau of Statistics (NBS)



Weakening Reserves


To create stability for the proposed Eco currency, Nigeria needs to have a healthy US dollar reserve situation to provide a liquidity 'anchor' for regional currency flows but Nigeria's present external reserve situation has weakened over the 2019 fiscal cycle with external reserve rising from US$43.1bn in January 2019 to US$45.12bn in July but tumbling back to US$39.97bn in November 2019 (see chart 4 below). 


Chart 4 Nigeria's Foreign Reserve (US$) January-November 2019

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Source: National Bureau of Statistics (NBS)


External Debt Worries


Perhaps of greatest concern to observers of the Nigerian Economy is its sharp rise in external debt. Nigeria's external debt has increased from US$5.66bn in 2011 to US$10.72bn in 2015, or what represents an +89.39% rise in five years. The situation does not improve over the next five years as external debt now stands at US$27.16bn as of June 2019, representing a further +153.5% five year increase. On a compound annual basis between 2011 and 2019 Nigeria's external debt has increased by +20.2% annually (see chart 5 below).


Chart 5 Nigeria's External Debt 2011 -2019 (US$)


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Source: National Bureau of Statistics (NBS)




Stable Exchange Rate; Temporary Peace of Mind


Nigeria's exchange rate relative to the US$ has been stable, mainly because the central bank has adopted a heterogenous strategy of keeping the rate at N307/US$ at the official window and N360/US$ at the importers and exporters (I&E FM) window. This has involved regular Bank intervention at times of potential shock to the international crude oil price. The intervention has been mirrored by the steady decline in the country's foreign reserves.

In contrast to the foreign exchange stability of Nigeria, faster growing West African Economies have seen greater volatility in their exchange rate including Ghana and the Francophone Economies of West Africa (see chart 6 and 7 below)




Chart 6 The Cedi to USD Dollar Exchange Rate 2016-2019

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Source: Investing.com



Chart 7 The CFA/XoF to USD Dollar Exchange Rate 2016-2019

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Source: Investing.com 




Knowing The Truth; Setting New Agendas


Aside the great photo ops that ECOWAS meetings give continental leaders, so far, a lot of the heavy agenda-setting lack tangible and implementable outcomes. The reality of the weakness of the sub region's Economies, particularly that of Nigeria was admitted by the Nigerian Minister of Finance, Budget and National Planning, Zainab Ahmed, while speaking at the opening session of the meeting of ECOWAS Committee of Ministers of Finance and Governors of Central Banks, the Nigerian Finance boss noted that, in the last two years, with the exception of Togo who met the set target for Eco adoption, it would be difficult to see any other country meet the single-currency goal by 2020.


The Nigerian Minister told her regional compatriots that "We need to address in an optimal way the challenges ahead of us. This meeting is important because we are at a crossroads. The recommendations we make will have significant implications on the monetary policies we undertake".


Ahmed observed that the inability of most West African countries to achieve the desired fiscal and monetary criteria would make the adoption of the "Eco" in 2020 unfeasible



The best approach to resolving the challenge would appear to be the following:

  1. Setting a new five year agenda for the Eco with staggered targets
  2. Set annual fiscal goals for "anchor" regional economies such as Ghana, Nigeria, Cote d'Ivoire, Niger, Togo, and Burkina Faso.
  3. Set annual external reserve goals for anchor economies over a period of five years
  4. Set annual external debt targets as a proportion of GDP targets over a period of 5 years
  5. Set annual budget deficit to Revenue ratio targets for anchor economies over a period of five years
  6. Set up a joint economy monitoring committee with responsibility to research and review sub regional basis with the mandate to provide position papers to the ECOWAS Headquarters and make available data for peer review and collective policy decisions towards meeting a 2025 target for the Eco currency to commence


Kicking the "Eco" can down the road may be unpleasant but in the face of the current economic realities of West African economies it seems the most sensible thing to do, at least for now.



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