Could a Single Currency be The Answer? A case of ECOWAS and EAC
At Spurt! We are always looking to amplify solutions to critical and specific challenges in Sub-saharan Africa. This week, we reviewed an article from The Exchange on Ecowas unveiling a roadmap for its single currency. The Economic Community of West African States (ECOWAS) aims to launch a single currency for its member states. The new road map and a new convergence pact would cover the period between 2022–2026, with 2027 being the launch of the ECO, the single currency. Jean-Claude Kassi Brou Jean-Claude, the president of ECOWAS, noted that the member countries are banking on the single money to go a long way in boosting trade and economic growth. This announcement comes after the East African Community (EAC) formally announced the region’s quest for a digital currency to level cross-border transactions. With 67% of countries across the continent having submitted their African Free Continental Trade Agreement (AfCFTA) ratification instruments, there is urgency in ensuring that trading under AfCFTA is as smooth as possible, especially when it comes to cross-border transactions payments.
The EAC is not a stranger to cross border payment solutions; in 2014, the community launched the East African Payment System (EAPS), which has struggled to pick up. Kenya has been the primary user of the platform that allows EAC citizens to make transactions in regional currencies. ECOWAS, on the other hand, has been involved in extensive talks to consolidate the monetary systems of its Member States but has been facing an uphill battle navigating the immediate and future implications of uniting currencies among the Francophone and Anglophone currencies. Without additional simplification, the monetary units of different countries pose a unique and ongoing challenge when making cross border trade.
EAPS has created opportunities for new payment infrastructures to emerge. The Central Bank Digital Currency (CBDC) that will replace the EAPS aims to operate by 2024 as ECO aims for a 2027 release. Multiple currencies impede trade to a large extent by exacerbating the transaction costs associated with currency exchange and mitigating currency exchange risks. While essential to underscore the benefits of single currency systems, it is vital to note the implementation challenges. For a single currency to work seamlessly, member countries in the regional bloc need to be in the least economically and politically aligned.
The West African Monetary Institute (WAMI) set ten key demands that need to be met by each member state before ECO takes effect. The regulations include but are not limited to the following: less than 3% budget deficit, an inflation rate of less than 10%, debts worth less than 70% of GDP and budget deficits of no more than 10% of the previous year’s tax revenue. Togo and Ghana seem to be the only member states on track to meet this requirement thus far. On the other hand, the East African Monetary Union Protocol has a straightforward mandate for the single currency to work. The bloc needs to harmonise monetary and fiscal policies; financial, payment and settlement systems; financial accounting and reporting practices; policies and standards on statistical information; and establish an East African Central Bank. With fewer member states compared to ECOWAS, the implementation process is likely to be less complicated. However, with a potential Democratic Republic of Congo entry into the EAC, more work needs to be done on onboarding new countries to join the union.
While a single currency might not be the silver bullet to solve the issues faced by ECOWAS and EAC, it’s a great place to start. The immediate gains made with boosting intra-regional trade, increased foreign direct investments, and job creation can lay a strong foundation for further integration efforts. With a looming implementation date of 2024, the East African Community is an exemplar on this front and could provide some meaningful lessons for ECOWAS.
