The new African currency

On June 11, 2019, during a meeting held in Abuja, the federal capital of Nigeria, the fifteen members of the  Economic Community of West African States (ECOWAS) decided to coin – most likely within 2020 – a new African currency, whose name has already been chosen: “ECO”.

The fifteen States of ECOWAS –  the association that  deals above all with part of the implementation of the CFA Franc – are the following: Benin, Togo, Burkina Faso, Cap-Vert, Ivory Coast, Gambia, Ghana, Guinea, Guinea-Bissau and Liberia, which founded ECOWAS in 1964. Later, with the further definition of the Lagos Treaty in 1975, also Mali, Niger, Nigeria, Senegal and Sierra Leone joined it.

It should be noted that while Mauritania withdrew from  ECOWAS in 2000, since 2017 the Alawite Kingdom of Morocco has officially requested to join.

However the “ECO” project, which has been lasting – at least programmatically -since 2015 and much echoes the “EURO” project, was born within a more restricted association of States than ECOWAS, namely the West African Monetary Zone (WAMZ), which is composed of Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone.

As can be seen, said States also belong to ECOWAS, but they intend to reach an economic and monetary union very similar to the EU’s, considering that their economies are less different than those of the whole group of countries belonging to ECOWAS.

It should be recalled that the ECO launch has been  postponed as early as 1983 and is currently expected to take place in 2020, but again only on paper.

Using an old formula of summer media jargon, France defines it as a “sea snake”, but we must always be very careful about oversimplifications and low esteem for friends and foes.

Hence, certainly eight ECOWAS countries shall abandon the CFA Franc, while the other seven countries their national currency.

As the final communiqué of the last meeting held by the fifteen Member States, a “gradual approach” is required for ECO, starting from those countries that show a more evident “level of convergence”.

As we all know, in the case of the EU and its Euro, the convergence criteria were price stability – which is seen as the only sign of inflation, although we do not know to what extent this idea is correct – and “healthy and sustainable” public finance, which means nothing but, within the EU, means a deficit not exceeding 3% of GDP and public debt not higher than 60% of GDP.

From this viewpoint, things are not going very well in Africa.

Africa’s debt has just slightly exceeded 100 billion euros, after Ghana recently taking out a 2.6 billion Euro-denominated loan, in one fell swoop.

In 2018 alone, African countries reached a total debt of  27.1 billion euros, but in 2017 Egypt, Ghana and Benin had borrowed 7.6 billion euros.

Nigeria will reach 17.6 billion euros of debt at the end of this year.

Ten African countries have already issued Eurobonds and  there will soon be 21 of them.

It is equally true, however, that the African countries’ debt-to-GDP ratio is on average 53%, while in the 1990s and in the first decade of 2000 it had reached 90-100%.

The obvious reasons underlying the recent increase in the African countries’ Euro-denominated (and dollar-denominated) debt are the following: the consequences of the global financial crisis and the structural decrease in the price of raw materials.

Moreover, considering the very low interest level in the United States and Europe, many investors have also begun to operate in Africa.

Currently Egypt is the most indebted country, with a total of 25.5 billion euros.

It is followed by South Africa (18.9 billion euros), Nigeria (11.2 billion), Ghana (7.8 billion), Ivory Coast (7.2 billion), Angola (5 billion), Kenya (4.8 billion), Morocco (4.5 billion), Senegal (4 billion) and, finally, Zambia with only 3 billion euros.

The analysts of international banks predict that, in the future, the Euro- and dollar-denominated debt will not be a problem for African countries.

Quite the reverse. According to the World Bank, the debt-to-GDP ratio is expected to fall by up to 43%, on average, in all major African countries.

The worst standard in terms of share of Eurobonds on total debt is Senegal (15.5%), while Tunisia remains the best standard, with 6.3 billion euros of debt issued through Eurobonds.

As can be easily imagined, other variables are the cost of debt service, which has doubled in two years up to reaching 10%, and the uncertainty of the barrel price on oil markets, considering that all these countries, except Nigeria, are net oil importers.

Therefore, it is certainly not possible to talk about “sustainable” finance, even though many ECOWAS countries have a debt-to-GDP ratio that currently make us envious.

As is well-know, also the exchange rate stability – required for entering the Euro area – is one of the primary “convergence” criteria.

A 6.3% average annual GDP growth is expected for the 15-member African association, considering the expansion of oil extraction in Ivory Coast, Sierra Leone, Burkina Faso and Ghana, while fiscal stability -which is, on average, about 1.7% higher in 2019 – is acceptable.

Hence, if we apply the usual Euro criteria, the new ECO currency appears very difficult, but not impossible, to be created – at least in the long run.

ECOWAS has repeatedly advocated its single currency project: it was initially theorized as early as 1983, then again in 2000 and finally in 2003. As already seen, currently there is much talk about 2020 as the possible date for its entry into force.

Certainly there is already an agreement between ECOWAS countries for the abolition of travel permits and many of the fifteen Member States are entertaining the idea of  economic and productive integration projects.

Nevertheless, as far as the budget deficit convergence is concerned, only five countries, namely Cap-Vert, Ivory Coast, Guinea, Senegal and Togo can currently comply with the single African currency project, since they record  a budget deficit not higher than 4% and an inflation rate not exceeding 5%.

Hence we cannot rule out that there will be convergence in reasonable time, but it is unlikely it will happen by the end of 2020.

Moreover, the levels of development in the fifteen Member States are very different.

It is impossible to even out the differences in the levels of debt, interest rates and public debt in the short term, considering that the share of manufacturing in Africa is decreasing and the economies that operate on raw materials have always been particularly inelastic.

Furthermore, Nigeria alone is worth 67% of the whole ECOWAS  GDP – hence  the ECO would ultimately be an enlarged Naira.

With the same problems we have in Europe, with a Euro which is actually an enlarged German Mark.

The inflation rates range from 27% in Liberia to 11% in Nigeria, with Senegal and Ivory Coast recording a 1% “European-style” inflation rate.

Certainly the CFA Franc is a “colonial” instrument, but it has anyway ensured a monetary stability and a strength in trade that the various currencies of the former French colonies could not have achieved by themselves.

It should be recalled that the mechanism of the CFA Franc, envisages that the Member States must currently deposit 50% of their external reserves into an account with the French Treasury.

However, the Euro problem must be avoided, i.e. the fact it cannot avoid asymmetric shocks.

The Euro is a currency which is above all based on a fixed exchange rate agreement.

We should also consider the adjustments made by Nigeria in 2016-and, indeed the inflation rates of the various ECOWAS countries are stable, but not homogeneous.

They range from 11% in Nigeria to 1% in Senegal.

Between 2000 and 2016, Ghana had an inflation rate fluctuating around 16.92%.

The fact is that all ECOWAS countries, as well as the other African States, are net importers.

Furthermore the West African countries do not primarily trade among themselves.

While single currencies are designed and made mainly to stimulate trade, this is certainly not the case.

The CFA Franc, however, was a way of making the former French colonies geopolitically and financially homogeneous, with a view to uniting them against Nigeria – the outpost of British (and US) interests in sub-Saharan Africa.

Furthermore, none of the ECOWAS governments wants to transfer financial or political power to Nigeria, nor is the latter interested in transferring decision-making power to  allied countries, which are much smaller and less globally important.

The region could be better integrated not with a currency -thus avoiding the dangerous rush that characterized the Euro entry into force – but with a series of common infrastructure projects or with the lifting of tariff and non-tariff barriers.

The largest trading partner of sub-Saharan Africa, namely the EU – with which the ECO would certainly work very well -currently records a level of trade with the ECOWAS region equal to 37.8%.

Nigeria exports only 2.3% to the other African partners and imports less than 0.5%.

However, if ECO is put in place, this will be made possible thanks to a possible anchorage to the Chinese yuan.

This would avoid excessive fluctuations – probable for the new currency – but would create ECOWAS African economies’ greater dependence on the Chinese finance and production systems than already recorded so far.

Certainly it would be a way of definitively anchoring Africa to the Chinese economy.

From 2005 to 2018, Chinese investment increased everywhere, but in Africa it totalled 125 billion US dollars.

Africa is currently the third global target of Chinese investment.

17% of said Chinese investment has been targeted to Nigeria and its ECOWAS “neighbours”, especially to railways and other infrastructure.

Moreover, in 1994, thanks to its liquidity injections China rescued the African wages from the CFA Franc devaluation, which had halved all incomes.

Those who govern Africa will control globalization. India is now the second major investor in Africa, after China. The EU takes upon itself the disasters of African globalization, but not the dividends.

Whoever makes mistakes has to pay. There has not been a EU policy that has “interpreted” Africa intelligently, but only as a point of arrival for ever less significant “aid”.

Therefore China will bend the African economic development to its geostrategic aims and designs.

China offers interest rates on loans that are almost seven times lower than Western markets, which never reason in geopolitical terms, as instead they should do.