The Expert Explains: Is it time for an African currency union to emerge?
A currency union is very much on the agenda of African political leaders, and it was discussed at the 25th African Union Summit held in Johannesburg on 11 June, as part of the Agenda 2063 Roadmap. The African Union Commissioner for Economic Affairs, Anthony Mothae Maruping, claims that a single currency in Africa would help to foster regional trade within the continent. Is it time for an African currency union to emerge? For those who wish to dig deeper, here’s the explanation, straight from the desk of our expert guest contributor, Samantha Seewoosurrun, a reputed professional consultant in the financial services sector:
Is it time for an African currency union to emerge?
If you stopped a man in the street in Greece or Germany and asked him if a currency union was a good idea, he might just think it was a bad joke. However, a currency union is very much on the agenda of African political leaders, and it was discussed at the 25th African Union Summit held in Johannesburg on 11 June, as part of the Agenda 2063 Roadmap. The African Union Commissioner for Economic Affairs, Anthony Mothae Maruping, claims that a single currency in Africa would help to foster regional trade within the continent.
A currency union is not new to Africa but, for the time being, it only works on a regional basis, with the West Africa CFA Franc and the Central Africa CFA Franc. Furthermore, there is a Common Monetary Area which already links several currencies in Southern Africa to the South African rand. Plans to introduce a single currency in West Africa by ECOWAS (which is intended eventually to merge with the West Africa CFA Franc) have recently stalled because of “non-fulfilment of financial responsibilities” by Member Countries. The East African Community is also committed to introducing a single currency within ten years.
The real question, therefore, is how far should the African currency go? Should it stick with the regional currency unions it already has, and, possibly, go ahead with some new ones, in order to foster intra-African trade with reduced transaction costs? Should it proceed, full steam ahead, in the direction of the “Afro”, to stand with its head held high on the international stage? Which countries would be the winners and which would be the losers?
The key questions to be answered before a sound currency union is formed, are as follows:
1. Are decisions being taken on the basis of sound and consistent economic data? Greece would clearly have failed this test, since news emerged in 2004 – two years after the launch of the Euro notes and coins – that the Greek government had falsified its budget deficit figures, as many people had suspected at the time. In Africa, GDP figures for certain countries may vary considerably even on a quarterly basis, particularly in view of commodity export prices, so it could be difficult to judge if the fundamentals are right, without adding possible corruption into the mix.
2.Are the economies in the currency zone sufficiently similar in size and in their state of development? It is vital that growth, inflation and unemployment rates are broadly similar. The Eurozone crisis has brutally highlighted the economic differences between northern and southern countries and the dangers of fudging currency convergence criteria. If anything, there may be even greater differentials at work when comparing African nations and their current levels of economic development, with some manifesting a distinctly chequered history of inflationary pressures and consequences.
3. Is there a risk of exposure from asymmetric external economic shocks? For Africa, this could be the most troubling issue of all, since many economies lack diversity in their industrial output. If global oil prices were unexpectedly to collapse but gold and diamond prices suddenly surged, some countries would be cashing in and others would suffer a major crisis. A single monetary policy would not necessarily be the most appropriate way to deal with either scenario. The inclusion of Nigeria in any African currency union would, in addition, place a serious strain on the system in view of its vast size when compared to its neighbours, and its heavy dependency on oil.
Who would be the winners and losers of an African currency union? The winners would be those with the ‘average’ African economy. But does, in practice, such a thing exist? The IMF has commented in the past that Mauritius could be the big loser because the fiscal policies of other African countries are less rigorous, their budgetary problems more serious, and the credibility of their sovereign monetary institutions more fragile than Mauritius’.
So what does the future hold? Christine Lagarde of the IMF has warned the Kenyan private sector against rushing to implement the East African Community Monetary Union. “As a member of the Monetary Union of Europe, I have to tell you that it is very exciting and ambitious project, but one where as Aristotle would put it: hasten slowly. Don’t rush.” Wise words, which leaders across Africa should reflect on carefully.