Despite the leaders of the Economic Community of West African States (ECOWAS) declaring last month that they will push ahead with a single currency by 2020, a report from Renaissance Capital, an emerging and frontier markets-focused investment bank, has described it as an effort in futility.
A single currency for ECOWAS has been on the agenda for at least a generation. Over a decade ago, the target was a single currency for the West African countries not already in the CFA franc zone, to be established in 2015, and then integrated with the West African Economic and Monetary Union (WAEMU) countries by 2020.
The report said, “in a bid to enact this single currency, the West African Monetary Institute was set up – and still exists. Its last annual report was for 2015 and the latest statistical data on its website is for 2011-2012. Nothing we can find suggests the “by 2020” date is realistic”.
Significantly, the report added that Nigeria’s critique that a single currency is unwise at this time is valid and that an East African single currency by 2024 is also unlikely.
But the report said Ghana is keen for a single ECOWAS currency by 2020, even without Nigeria.
The market has entirely ignored the leaders of ECOWAS who on 21 February reaffirmed their commitment to a single currency for up to 15 ECOWAS member states, to be enacted by 2020.
This is partly explicable because Nigeria has made clear its lack of interest in joining the single currency at this stage.
The report said while ECOWAS had a GDP of $566 billion in 2017 (IMF estimate) or 25 percent of Africa’s and 37 percent of SSA’s GDP, without Nigeria, the figures are less significant at $171 billion and 8 percent and 11 percent, respectively, of which half would be accounted for by Ivory Coast and Ghana alone.
“But more important for the market is that 2020 looks impossible to achieve, in our view, which raises the question as to why the target was reiterated and whether it is, in fact, a good idea”, the report said.
The push for the single currency by Ghana at this time, according to the report, was because the Bank of Ghana policy rate is 20 percent, while WAEMU short rates are around 2-3 percent as the 10-year bond yields at 15.7 percent in Ghana would halve if they could converge at WAEMU borrowing costs.
It added that Ghana could enjoy a boom as its local debt servicing costs would plunge by 50-90 per cent, and the cost of private sector borrowing could fall sharply too.
Going forward, the report said, “encouraging an extreme boom-and-bust cycle is not our primary concern though with the ECOWAS plan. Our core worry is that Ghana, in particular, is well placed to pull ahead of WAEMU countries in a dramatic fashion in the coming decade. Literacy data imply it can industrialise now, and grow at a sustainable 6-9 percent annually, while WAEMU countries cannot do so for another generation, and Nigeria is unlikely to do so for a decade.
“This would lead to very significant structural differences within ECOWAS, which will be highly challenging for any central bank to manage. Meanwhile, we struggle to see why WAEMU countries would drop the CFA which seems to be working well, for an untested new currency regime”.