Updated: May 26, 2020
The idea of a common single currency in Africa has been floated for years. The objective is that it would be a symbol of strength that would integrate the continent.
Medical doctor and activist, Dr Arikana Chihombori-Quao,recently said that Africa needs a single African army, a single African currency, a single African monetary policy and a financial institution at a continental level, like the African Stock Exchange.
“Until we can achieve some of that integration at that level it is a difficult conversation,” she said.
The process of increasing international trade in Africa and decreasing barriers that can foster growth and development, resemble the goals and policies introduced successfully in Europe with the euro.
While the prospect of a single African currency was said to be raised as a goal of the African Union, formally the Organization for African Unity (OAU), created in 1963, the project was given renewed priority in 2001 when the OAU’s 53 member states agreed to transform the intergovernmental organisation into the African Union (AU)—retaining its predecessor’s dedication to political and economic unity, while taking on a broader mandate to meet the
challenges of globalisation.
Steps towards a single currency
This year the continent has taken a big step towards tackling economic problems including a lack of intra-regional trade as the new continental free trade agreement has come into force. It’s worth looking at concerns on how an Africa-wide single currency would look like, following the 15-nation Economic Community of West African States (ECOWAS) currency model.
Who would benefit most from a single currency?
A monetary union with a single currency for the 15 member states would mean that governments would transfer national political authority to (ECOWAS) institutions.
Supporters of the African Continental Free Trade Agreement (AfCFTA) say that a single currency could potentially boost economic growth for a continent of 55 African Union nations, with a combined gross domestic product of more than USD$3 trillion. However, a recent study also suggested that net benefits from a single regional currency will accrue to Nigeria, modest benefits will accrue to Côte d’Ivoire, and the Gambia will suffer net losses.
The study further pointed out that strengthening domestic macroeconomic frameworks would yield similar improvements as monetary integration. This outcome reduces the relative attractiveness of the proposed eco initiative.
There are still a few issues that need to be resolved around rules of origin, intellectual property and dispute mechanisms in a process that could take about three years. The hope is that AfCFTA will eliminate 90 percent of tariffs and create a single market with free movement of goods and services.
These steps are similar to the process of European integration and the agreements that were made decades ago when a number of countries joined the European Union, and the link between the economies was strengthened by creating a common currency – the euro. However, over the years, even with strong institutions of governance, the euro experiment continues to face serious challenges—both at an economic level as well as a political level.
With the recent coronavirus pandemic, the fall in the world GDP will without a doubt cause a dramatic fall in the exports for African products due to the decline in global demand.
Given the outlook of African economies, the negative impact would be more than relative. In addition, the economic impact will be higher, meaning, the more trade between Africa and the rest of the world is important. AfCFTA will therefore have the advantage of boosting intra-African trade, that may contribute to slowing down the rapid decline in African GDP.
The global pandemic is both a supply shock and demand shock.Given the potential for AfCFTA to serve as a real economic engine at a continental level, policymakers will need to maintain momentum toward its implementation. If this is implemented effectively, AfCFTA will in turn empower the continent and allow it to successfully target and support economies that have been hit hard by the pandemic.
Heed the mistakes and lessons of the European Union
While the idea of a single currency and a more united Africa seems like a practical solution to some of the continents deep-seated issues, it goes without saying, that the euro initially united Europe’s leaders, who praised a new era of integration, easier trade and faster growth, with the hope that they were creating a currency that was more stable and that would compete with the dollar.
Nonetheless, the euro divided economists, some of whom warned that binding Europe’s heterogeneous economies to a single monetary policy was misguided. Furthermore, with the economic downturn globally from 2008 and further trouble in 2010 was made worse when the EU failed to recognise that Greece could not pay its debts and that its investors inevitably had to accept losses. Greece has endured a prolonged recession and its economy is almost a quarter smaller than it was more than a decade ago.
The euro is also an issue for African countries tied to the Communauté Financière d'Afrique (CFA), a colonial-era currency that is still used in Francophone countries as well as in Guinea Bissau and Equatorial Guinea.
The CFA franc is now used by around 150 million people in fourteen African countries, most of which are former French colonies. However, the eco differs from the CFA franc in three crucial ways: The CFA franc is currently fixed to the euro, which reduces the autonomy of national central banks to conduct monetary policy. This colonial rule has protected most of these economies from inflation but they have no independence with regard to the monetary policy and are not essentially part of the eurozone.
In contrast, the eco is expected to be managed by a single central bank with capacity to make monetary-policy decisions under an inflation-targeting regime.
There are many potential advantages to the new monetary union. It is worth noting that the eurozone countries have to an extent found that a shared currency led by an autonomous central bank tends to keep inflation under control. In the twenty years prior to joining the euro, Spain’s inflation rate averaged 8.5 per cent as opposed to 2 per cent between 1999 and 2018.
While the eco will be the single currency of fifteen countries that will bring together 380 million citizens under a common monetary framework, it will need to ensure that the structural reforms that it implements are robust and create a business-friendly atmosphere that allows entrepreneurs to develop their potential. This will be a clear indication as to whether the system of fast economic growth that has worked so well for Asian countries, pulls African countries out of the poverty trap they have been in for decades.
While trade under a common currency could be more efficient as exchange-rate-related costs disappear and boost commercial transactions among members, a common currency will also need the same economic development level for each of the participants or it will fall apart with the first crisis, particularly now when economies are very fragile. Moreso, with the high levels of unemployment among the youth and the increasing numbers of the poor.
The lessons from the eurozone highlight ongoing challenges among a group of highly developed countries with very strong institutions. ECOWAS will need to learn from the EU’s own mistakes if a single currency is to ever work in parts of Africa, or on the continent as a whole.