Economist Kako Nubukpo believes that “when someone pretends to die, we have to pretend to bury them” and envisions four possible scenarios of how the Eco’s replacement of the CFA franc could play out.
Buhari and Ouattara make Eco heart of regional power struggle
When the West African Economic and Monetary Union (UEMOA) announced out of the blue that it would adopt a currency with the same name as the future single currency of the Economic Community of West African States (ECOWAS), the organisation’s decision was seen as divisive and set off a full-fledged leadership war in the region.
The single currency project is supposed to symbolise greater regional integration, encourage the development of a vast market of some 400 million consumers and facilitate trade between West African countries while enabling them to strengthen their cultural ties.
Instead, the creation of the region’s single currency has become a bone of contention, setting off a full-fledged leadership war.
Monetary policy debate
To better understand the monetary policy debate that has been dividing ECOWAS for several weeks now, we have to go back to 29 June 2019.
On that day in Nigeria’s capital, Abuja, the heads of state and government of the regional organisation finally reached an agreement – after 30 years of procrastination – on a certain number of technical aspects ahead of the introduction of the single currency.
At that time, they decided to name the currency the “Eco” and that it would have a flexible exchange rate regime governed by inflation targeting.
They also established that the ECOWAS Central Bank, tasked with managing the Eco, would be modelled on a federal system, with an umbrella institution overseeing member states’ central banks. They opted for a gradual implementation process: countries already meeting the convergence criteria could start using the currency and other member states would progressively join them. Announced for the first time in 1983, the ECOWAS single currency has never been so close to becoming a reality.
Then, on 21 December 2019, Ivorian President Alassane Ouattara, alongside French President Emmanuel Macron, announced in Abidjan that the eight UEMOA member states – also members of ECOWAS – had decided to reform the highly contested CFA franc and change its name to the “Eco” by 2020.
This would make them the first countries to adopt the new single currency, or at least one with the same name.
Why re-appropriate the “Eco”? The region’s leaders and their French partners assert that it would have been needlessly expensive to use a different name since the future of the CFA franc they are currently using is no different from that of the ECOWAS project.
The announcement took everyone aback.
Up until then, in the minds of the West African people, the ECOWAS currency could not be built around anything other than Nigeria and its naira currency. The demographic giant, with a population of 200 million, drives the region’s economy, accounting for nearly 70% of GDP.
In the 1970s, Nigeria was behind the creation of ECOWAS, which was led by Gen. Yakubu Gowon, Nigeria’s then-president, and Togo’s former president Gnassingbé Eyadéma.
Already hegemonistic back then and sustained by the financial windfall of an oil boom, Nigeria championed the principle of a region free of any obstacles to greater economic integration and to prosperity for all member states.
Despite Nigeria’s struggles with controlling inflation and the fact that its economic growth remains too dependent on oil revenues, the country has maintained its status as the most economically sound member of the 15 ECOWAS states. Its level of foreign exchange reserves allows it to cover the full amount of its external debt while its net debt-to-equity ratio is by far the lowest of all member states (around 22% of GDP).
Based on the collective understanding, Nigeria’s role in the West African single currency project was meant to be akin to that of Germany, as the leading economic power within the EU, when the euro was created.
Pegged to the euro
So this was how the script was flipped by a decision of the UEMOA heads of state, with Ouattara at the head of the pack. According to their plan, the Eco must be built around a core comprised of the eight CFA franc member states.
The announcement was all the more unsettling given that the new currency will not be governed by a flexible exchange rate regime, as had been provided for at the Abuja summit in June 2019, although it will be absent of the most criticised aspects of the CFA franc, such as a French representative serving on the currency union’s board and the continued existence of an operations account with the French Treasury.
On the contrary, like the CFA franc, the UEMOA’s Eco will be pegged to the euro at a fixed exchange rate and guaranteed by France.
Clearly, for the other ECOWAS member states – especially Nigeria – the decision was viewed as a serious affront. At the end of December 2019 in Abuja, the ECOWAS heads of state released a communiqué in which they commended the “major developments” being undertaken in the UEMOA region, affirming that the reforms would facilitate the integration of these countries into the future ECOWAS monetary zone. However, according to a West African minister, “the Anglophone ECOWAS members did not grasp that our transitional CFA franc was set to gradually become the Eco of ECOWAS.”
Non-CFA franc countries were slow to respond to the decision, but finally on 16 January the West African Monetary Zone (WAMZ) released a communiqué on behalf of the Ministers of Finance and Central Bank Governors in which representatives from Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone condemned the UEMOA’s unilateral decision.
As Togolese economist Kako Nubukpo commented, “It’s unheard of for a council of ministers to criticise a head of state’s pronouncements. It’s a serious breach of the most basic rules of diplomacy. Undoubtedly, he should have been supported by these countries’ presidents.”
According to our information, the ministers planned to meet again on 14 February in Freetown, Sierra Leone, to follow up their challenge of the decision. For non-CFA franc countries, it is out of the question that the “Eco” be associated, even if temporarily, with a currency that does not meet the criteria established by all nations in Abuja in June 2019. “Alassane Ouattara and his fellow UEMOA peers are trying to get France involved in a purely African project that must absolutely remain as such,” said an analyst from a Ghana-based think tank.
Why then did the eight UEMOA countries not comply with the Abuja criteria? Above all, why didn’t they adopt, as it had been agreed upon in Abuja, a flexible exchange rate regime or permanently cut ties with what the other ECOWAS member states consider to be a form of French tutelage? The fact of the matter is that they are hardly reassured by the experience of neighbouring countries that use a flexible regime. Nigeria, which had to devalue the naira by half in 2016, struggles to manage its foreign exchange market.
As for Ghana’s cedi, it has continued to plummet.
During a meeting held on the margins of the UK-Africa Investment Summit of 20 January at the London-based think tank Chatham House, President Ouattara explained: “Our countries are primarily agricultural and we trade mostly with the EU. Our currency needs to be in line with our foreign trade. We decided to continue to peg our currency to the euro because it’s in our interest to do so.” In addition, the Ivorian leader has insisted on numerous occasions that the decision was made by Africa and not France.
What’s more, as a minister from the West Africa region pointed out, going directly from a fixed exchange rate to a flexible exchange rate could give rise to “a significant risk of violent fluctuations which would damage our economies.”
According to Amadou Kane, former head of Africa at BNP and former minister of the economy of Senegal, “We know that the Eco adopted by all is based on a flexible exchange rate, but we have to proceed gradually. For example, we could agree on setting a fixed-rate period at the end of which we would change exchange rate regimes. We’re learning as we go.” Nubukpo approves of this suggestion, but thinks that “in this case the announcement of the CFA franc reform should have been made during an ECOWAS summit and a timeline for the transition should have been released the same day.”
The problem is, over the course of creating a new single currency for their region, the UEMOA countries seem to have made sure to keep their strategy under wraps from the other ECOWAS member states.
One thing is certain: they were able to keep the solidarity that they have managed to build over the years intact by consolidating their foreign exchange reserves into one common basket. Adopting the Eco across the board, like a single country, allows them to maintain their common central bank in the federal system provided for by the ECOWAS single currency. “It’s vital that we don’t lose this asset,” Kane said.
Until this disagreement between UEMOA countries and the other ECOWAS member states over the Eco’s exchange rate regime is resolved, it’s absolutely certain that the CFA franc will remain in circulation. Nigeria, which has not commented on the matter since the end of December 2019, is currently prioritising its industrialisation and the strengthening of its production capacity. Since August 2019, it has kept its borders with neighbouring countries, including Benin, closed in an effort to protect its domestic market. This is a necessary step in the eyes of President Muhammadu Buhari, who has always maintained that the single currency should not be adopted in a hurry.
In the meantime, there is reason to believe that President Ouattara and his fellow UEMOA peers, faced with the rejection of the CFA franc within their union, have figured out how to bypass Nigeria’s interference.
Immediately after Abidjan’s Eco announcement, Ghana affirmed that it was “determined to do whatever we can to enable us [to] join the member states of UEMOA, soon, in the use of the Eco, as, we believe, it will help remove trade and monetary barriers,” while also reiterating its adhesion to the other requirements that were approved during the Abuja meeting, i.e., “adopting a flexible exchange rate regime, instituting a federal system for the ECOWAS Central Bank, and other related agreed convergence criteria.”
What it comes down to is that the Ivorian president saw an opportunity to tilt the balance more in favour of UEMOA countries. At the end of January, in London, he affirmed that the eight members of the zone – which he assured already comply with convergence criteria – could be joined by Ghana as well as by Cape Verde, whose currency is already pegged to the euro at a fixed exchange rate and guaranteed by Portugal.
Ouattara further explained: “We could start using the Eco as a group of 10 or 11 countries with a common central bank. Since Accra also exports oil, it would be totally conceivable that instead of being pegged only to the euro, the Eco could be pegged to both the euro and the US dollar.” During this speech, none other than Ghanaian President Nana Akufo-Addo was sitting in the front row of the audience. According to Kane, Ghana and Cape Verde could fulfil the role “of third-party auditor given that the UEMOA zone isn’t under any tutelage.” Most importantly, their arrival – and particularly that of Ghana – in the monetary union would help to form a new bloc that would have more economic weight in terms of GDP than Nigeria.
Ultimately, the war over the Eco is also about the hegemonic position President Buhari’s country wields over the rest of the zone. Due to its economic weight and as the main contributor to the ECOWAS budget, the giant that is Nigeria tends to want to control everything.
In addition to housing the headquarters of the ECOWAS Commission and Parliament, Abuja would like to be the site of the future federal central bank, despite the fact that several countries prefer it to be located in Ghana.
Will Ouattara and his allies manage to tip, even the slightest bit, the scale of the balance of power in the region? And will Nigeria, which is economically dependent on the rest of the region since its private sector has expanded considerably there over the past years, be able to make some concessions? The power struggle is far from over.
Additional reporting by Diawo Barry