Currency or Monetary Union is when two or more countries relinquish their sovereign currencies to adopt a common currency as the official currency for the region. In this context, the Economic Community of West African States (ECOWAS) in the quest to form a currency union, required that member-states fulfilled prerequisite conditions termed macroeconomic convergence criteria, to warrant a similar economic outlook to equalize price across the region.
The effort of the ECOWAS
An initial ten macroeconomic convergence criteria were set out to guarantee all countries attained the level of outlook to reduce the risk associated with forming a currency union. However, the member-states were incapacitated in attaining the criteria which led to the four-consecutive postponement of the ‘Eco’ currency and other achieved targets unsustainable. Because of this, the International Monetary Fund (IMF) stipulated that the ten convergence criteria set out by integrators were over-ambitious and overboard to achieve in the shortest possible time. Given this, the ECOWAS laid out a revised six realistic macroeconomic convergence criteria in 2018. The laid down convergence criteria mandated all member states to achieve the nominal convergence targets before 2020. However, it has been derailed by the inability to satisfy the macroeconomic criteria and exacerbated by the contemporaneous Corona Virus Disease.
The essence of the Macroeconomic Convergence Criteria
The criteria were set out to ensure price stability, sound public finance, exchange rate stability, and convergence in the long-term interest rate among others. In light of this, price stability is to be achieved through inflation targeting and a sound financial system. This is to ensure countries have similar inflation rates, restrained government expenditure over accrued revenue, and an optimal level of borrowing hitherto debt stock from the international market. Additionally, the durability of the convergence is also outlined with gross reserves that can finance at least three months of imports and achieving a long-term interest rate.
The six macroeconomic convergence
The six macroeconomic convergence criteria are categorized into primary and secondary. The primary convergence criteria are as follows; average annual inflation of not more than 10% with a long-term goal of 5% by 2019, a budget deficit of not more than three percent; and Gross reserves can finance at least three months of imports. The secondary convergence criteria are as follows; public debt per GDP of not more than 70%; central bank financing of budget deficit not more than 10% of the previous year’s tax revenue; and nominal exchange rate variation of plus and minus 10%.
Why the need to achieve the criteria?
The relevance of a single-digit inflation target is underpinned in its contribution to economic stability through efficient use of resources, savings, investment, and international competitiveness to prevent arbitrary redistribution of income and wealth. In this context, firms can easily predict costs and prices, therefore, encourage investment and enhance competitiveness. Also, budget deficits adversely affect savings, interest rates, investment, exchange rates, and long-term growth therefore the need to restrain members. Statistically, the budget deficit criterion of 3% is not a realistic target since the regional average is 4%, however, it can easily be attained with a strict fiscal cap Act. Also, the Gross Reserves are the source of security for the governments in an unpredictable economic stance. In this background, countries experience volatility in the volume of reserves due to the seasonality of the primary production and the lack of microeconomic and macroeconomic restrain. Additionally, higher debt to GDP adversely affects the level of inflation, the value of the currency, foreign direct investment due to investors burdened with usurious taxes and impedes growth.
To fast-track convergence, there is the need to sign a Growth or Stability Pact as a preliminary for countries to comply with the laid down criteria. Also, the exigency to educate the populace, expose the large informal sector to ensure the effectiveness of the monetary policy, encourage savings and build mutual trust and zeal towards a political union.
Excerpt from ‘On the Computation and Essence of the Nominal convergence criteria for Africa Currency Union: ECOWAS in Perspective.’
The writer holds an MPhil in Economics
The Author – Abban Stanley
The post Macroeconomic Convergence of the ECOWAS appeared first on The Chronicle Online.
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