{
  "title": "The Promise of a West Africa Currency Union",
  "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2021/06/future-of-west-africa-currency-union-prasad-songwe",
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  "summary": "A currency union encompassing all of West Africa promises benefits but faces a multitude of obstacles, writes Eswar Prasad and Vera Songwe.",
  "sections": [
    {
      "heading": "Overview and rationale",
      "content": "- A currency union encompassing all of West Africa promises benefits but faces a multitude of obstacles.\n- Potential benefits listed:\n  - Improve trade and investment flows in the region.\n  - Bring added discipline to the macroeconomic and structural policies of member countries.\n  - Enhance stability against external shocks.\n  - A strong central bank could have helped the region better weather the economic effects of the COVID-19 pandemic.\n  - Serve as an anchor for inflation expectations and as a catalyst for labor and product market reforms.\n  - Exert external discipline on fiscal policies.\n- The COVID-19 pandemic highlighted limitations in countries’ ability to mobilize large-scale fiscal and monetary responses (African countries called for a $100 billion stimulus but lacked the tools to finance such an injection of capital)."
    },
    {
      "heading": "Current status and history",
      "content": "- ECOWAS leaders aimed to achieve a monetary and currency union by the end of 2020 but abandoned that timetable because the group was not ready.\n- The emergence of the COVID-19 pandemic pushed any proposed union to the back burner for countries in the 46-year-old ECOWAS.\n- Existing monetary arrangements within ECOWAS:\n  - Eight ECOWAS countries are already members of a currency union (WAEMU): Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo.\n  - WAEMU members share the CFA franc, which is linked to the euro."
    },
    {
      "heading": "Major impediments to unity",
      "content": "- Heterogeneity across the 15 ECOWAS countries:\n  - Six of the fifteen can be classified as middle-income countries (with annual per capita income of at least $1,000, based on market exchange rates); the others are low-income countries.\n  - Nigeria accounts for about 67 percent of the ECOWAS GDP, while the five smallest members together total less than 2 percent.\n  - Three countries—Nigeria, Ghana, and Côte d’Ivoire—constitute about 67 percent of the 350 million people in ECOWAS, while six countries, each with fewer than 10 million people, together represent 7 percent of the ECOWAS population.\n  - Structural differences: oil exporters versus oil importers; reliance on agriculture and extractive industries versus presence of manufacturing.\n- Asymmetric shocks and policy challenges:\n  - GDP growth and inflation do not move simultaneously across countries; terms-of-trade shocks are not symmetric.\n  - Example: changes in petroleum prices affect oil exporter Nigeria differently from oil importers.\n  - Loss of independent currency and monetary policy places significant burden on tax and spending policies for stabilization.\n  - COVID-19 and plunging oil prices affected Nigeria more severely than some other members.\n- Technical, operational, and political obstacles magnified by diversity of economies; challenges would be greater for a broader pan-African monetary union."
    },
    {
      "heading": "Integration progress and reinforcing mechanisms",
      "content": "- Regional trade integration developments:\n  - African Continental Free Trade Area (AfCFTA) was formally ratified by 36 of the 54 signatory countries as of February 2021; it reduces tariff and nontariff barriers and gives Africa a common voice on global trade policy issues.\n  - ECOWAS measures: ECOWAS Trade Liberalization Scheme and the common external tariff (introduced in 2015).\n  - Persistent barriers: uneven tariff application and other restrictions on trade across borders.\n- Risks from greater factor mobility:\n  - Unfettered financial flows can contribute to boom-bust cycles in property and other asset markets.\n  - Labor mobility can cause social and political tension.\n- Suggested regional mechanisms:\n  - Effective regional mechanism for gathering macroeconomic and financial data.\n  - Multilateral surveillance to cross-check policy stances of ECOWAS countries.\n  - A risk-pooling mechanism among members to deal with external shocks (commodity price shocks and unique events such as the COVID-19 pandemic)."
    },
    {
      "heading": "Alternative approaches and lessons from other regions",
      "content": "- Consideration of alternatives to full monetary union:\n  - Regional trade and financial arrangements that preserve monetary autonomy (as in Asia).\n  - Regional risk-sharing mechanisms such as the Chiang Mai Initiative, which include pooling of foreign exchange reserves.\n- Europe’s experience:\n  - Euro area benefited trade and investment flows but also experienced economic and political tension, especially from large net fiscal transfers and differing banking regulations.\n  - Caution against moving hastily toward a currency union without addressing institutional and fiscal frameworks.\n- Open question: whether trade and financial agreements can serve as precursors to a more durable and resilient ECOWAS currency union."
    },
    {
      "heading": "Institutional and policy prerequisites for a durable union",
      "content": "- Areas identified as necessary or beneficial:\n  - Macroeconomic convergence, especially similar levels of inflation and sufficiently low public-debt-to-GDP ratios.\n  - Strong institutional frameworks and harmonized regulations on current account and capital account transactions.\n  - Regional payment system integrated with domestic and global systems to expedite cross-border settlements.\n  - Harmonized banking supervision and regulation that addresses institution-specific and systemic risks.\n  - Regional financial market development and integration (government and corporate bonds, money markets).\n  - Increased financial inclusion via traditional and new technologies (such as mobile banking).\n  - Consideration of a banking union and a unified financial regulatory system as part of a broader economic union."
    },
    {
      "heading": "Policy recommendations and steps forward",
      "content": "- ECOWAS leaders must weigh significant costs, operational issues, and transitional risks of a currency union.\n- Key policy steps highlighted:\n  - Decide the appropriate level of economic union necessary to support monetary union stability.\n  - Build resilient policy and institutional frameworks that create positive benefit-risk trade-offs.\n  - Pursue regional financial market development and integration and increase financial inclusion.\n  - Consider regional risk-sharing and data-surveillance mechanisms before or alongside monetary integration.\n- Long-term view:\n  - A single ECOWAS currency would be a major and ambitious undertaking with many potential benefits if accompanied by robust institutional support.\n  - The COVID-19 pandemic has reignited discussion about monetary instruments and is likely to generate renewed interest in the African Monetary Fund.\n  - The lessons of the ECOWAS experience will be invaluable if such an agency becomes a reality.\n\nArticle by Eswar S. Prasad and Vera Songwe, F&D Magazine, June 2021.\n\n---\n\n Content in this bundle\n\n- اندماج نقدي\n  - اندماج نقدي (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - اندماج نقدي (PDF){rel=\"external\" type=\"application/pdf\"}\n- 货币融合 - 金融与发展 - 国际货币基金组织季刊 -2021年6月号·第58卷\n  - 货币融合 - 金融与发展 - 国际货币基金组织季刊 -2021年6月号·第58卷 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - 货币融合 - 金融与发展 - 国际货币基金组织季刊 -2021年6月号·第58卷 (PDF){rel=\"external\" type=\"application/pdf\"}\n- Unión monetaria ● Finanzas y Desarrollo ● Junio de 2021\n  - Unión monetaria ● Finanzas y Desarrollo ● Junio de 2021 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Unión monetaria ● Finanzas y Desarrollo ● Junio de 2021 (PDF){rel=\"external\" type=\"application/pdf\"}\n- La réussite de la Chine sur le long terme dépendra avant tout de sa capacité à surmonter ses difficultés intérieures\n  - La réussite de la Chine sur le long terme dépendra avant tout de sa capacité à surmonter ses difficultés intérieures (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - La réussite de la Chine sur le long terme dépendra avant tout de sa capacité à surmonter ses difficultés intérieures (PDF){rel=\"external\" type=\"application/pdf\"}\n- The Promise of a West Africa Currency Union – IMF F&D\n  - The Promise of a West Africa Currency Union – IMF F&D (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - The Promise of a West Africa Currency Union – IMF F&D (PDF){rel=\"external\" type=\"application/pdf\"}\n- Валютное объединение – Финансы и развитие – Формирующиеся рынки — что впереди?– июнь 2021 года\n  - Валютное объединение – Финансы и развитие – Формирующиеся рынки — что впереди?– июнь 2021 года (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Валютное объединение – Финансы и развитие – Формирующиеся рынки — что впереди?– июнь 2021 года (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2021/06/future-of-west-africa-currency-union-prasad-songwe"
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    "Authors: Eswar Prasad, VERA SONGWE",
    "Published: June 1, 2021",
    "A currency union encompassing all of West Africa promises benefits but faces a multitude of obstacles.",
    "Potential benefits listed:",
    "The COVID-19 pandemic highlighted limitations in countries’ ability to mobilize large-scale fiscal and monetary responses (African countries called for a $100 billion stimulus but lacked the tools to finance such an injection of capital).",
    "ECOWAS leaders aimed to achieve a monetary and currency union by the end of 2020 but abandoned that timetable because the group was not ready.",
    "The emergence of the COVID-19 pandemic pushed any proposed union to the back burner for countries in the 46-year-old ECOWAS.",
    "Existing monetary arrangements within ECOWAS:",
    "Heterogeneity across the 15 ECOWAS countries:",
    "Asymmetric shocks and policy challenges:",
    "Technical, operational, and political obstacles magnified by diversity of economies; challenges would be greater for a broader pan-African monetary union.",
    "Regional trade integration developments:",
    "Risks from greater factor mobility:",
    "Suggested regional mechanisms:",
    "Consideration of alternatives to full monetary union:",
    "Europe’s experience:",
    "Open question: whether trade and financial agreements can serve as precursors to a more durable and resilient ECOWAS currency union.",
    "Areas identified as necessary or beneficial:",
    "ECOWAS leaders must weigh significant costs, operational issues, and transitional risks of a currency union.",
    "Key policy steps highlighted:",
    "Long-term view:",
    "**اندماج نقدي**",
    "**货币融合 - 金融与发展 - 国际货币基金组织季刊 -2021年6月号·第58卷**",
    "**Unión monetaria ● Finanzas y Desarrollo ● Junio de 2021**",
    "**La réussite de la Chine sur le long terme dépendra avant tout de sa capacité à surmonter ses difficultés intérieures**",
    "**The Promise of a West Africa Currency Union – IMF F&D**",
    "**Валютное объединение – Финансы и развитие – Формирующиеся рынки — что впереди?– июнь 2021 года**"
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