III. REVIEW OF MAJOR ECOWAS COMMON SECTORAL POLICIES
10. MACROECONOMIC POLICY AND RESEARCH
10.1. Macroeconomic Policy Convergence and Establishment of a Monetary Union and a Single Currency
and a Single Currency
10.1.1. Policies implemented
The idea of creating a single currency within ECOWAS was launched in May 1983 by the Conference
of Heads of State and Government (Decision A/
DEC./6/5/83 relating to the proposal to establish a single ECOWAS Monetary Zone). In 1987, the Heads of State and Government of the Community Member States, by Decision A/DEC.2/7/87 relating to the adoption of an ECOWAS monetary cooperation programme (EMCP), expressed their desire to create a single monetary zone within ECOWAS.
In the light of the mixed results achieved in the implementation of the EMCP, the Conference adopted a new approach to accelerate monetary integration. Decision A/DEC.7/12/99, relating to the adoption of the ECOWAS Macroeconomic Convergence Criteria, was adopted in Lome.
This instrument comprises ten macroeconomic convergence criteria, four of which are primary criteria and six secondary criteria that Member States were to comply with prior to the institution of the ECOWAS single currency in 2004.
As part of this new accelerated procedure, the Heads of State and Government of The Gambia, Ghana, Guinea, Nigeria and Sierra Leone signed, in December 2000 in Bamako, the agreement to establish the West African Monetary Zone (WAMZ), with a currency scheduled for January 2003.
However, the launch date for the second regional currency has been postponed four times, from January 2003 to December 2005, then to December 2009, to 1 January 2015 and finally from 2015 to the 2020 deadline.
Delays in implementation of the second regional currency prompted the Conference of Heads of State of ECOWAS, in Abuja on 15 June 2007 to request the ECOWAS Commission to review the monetary integration process with a view to accelerating the launch of the regional monetary union. This ultimately led to the adoption by the ECOWAS Convergence Council, in May 2009, of the roadmap for the ECOWAS single currency in 2020.
The adoption of the roadmap for the ECOWAS single currency seeks, through the implementation of planned activities, to transform the ECOWAS region into an optimum currency area, one in which it would be beneficial to establish a single currency. Such an area can group several countries or may involve a few regions of a larger country. Defining an optimum currency area requires identifying the conditions under which the benefits of participation in a monetary union will outweigh the associated costs.
In accordance with the programme of activities set out in the roadmap, the ECOWAS monetary union is scheduled to be launched in 2020 with the creation of the ECOWAS Central Bank and the institution of a common currency. To achieve this, a series of activities have been planned to make the ECOWAS region fit the criteria of an optimum currency area.
Before the ECOWAS single currency, the WAMZ monetary union initially planned for 2015 could not be attained.
In order to ensure implementation of this roadmap in a timely and effective manner, the ECOWAS Commission was mandated to continue to coordinate the inter-agency work and to collaborate with the other regional institutions and Member States involved in the ECOWAS Monetary Cooperation Programme. Similarly, Member States were urged to continue the implementation of the monetary, fiscal and structural policies.
53
Section iii: ReVieW oF MAJoR ecoWAS coMMon SectoRAL PoLicieS
ECOWAS AT 40 AN ASSESSMENT OF PROGRESS TOWARDS REGIONAL INTEGRATION IN WEST AFRICA
The roadmap required a review of certain instruments and the adoption of others to take account of changes occurring in the implementation process. In June 2012, the Assembly of Heads of State and Government adopted Supplementary Act A/SA.3/06/12 to amend Decision A/DEC.17/12/01 relating to the establishment of a multilateral surveillance mechanism for economic and financial policies of ECOWAS Member States. Similarly, a Macroeconomic Stability and Convergence Pact among ECOWAS Member States (Supplementary Act A/SA.4/06/12) was adopted.
10.1.2. Achievements and constraints in
implementing the roadmap on the ECOWAS single currency programme
Status of implementation of activities of the roadmap on the ECOWAS single currency programme
The report of the 26th Ordinary Meeting of the ECOWAS Committee for Economic and Monetary Affairs and the WAMA Operations and Administration Committee (held in Banjul in January 2014) noted significant progress in policy harmonisation programmes set out in the roadmap, particularly in relation to monetary policy frameworks, legislation and supervision of banks and other financial institutions, accounting and reporting framework for banks and financial institutions, statistics on the balance of payments, and development of payment systems and the liberalization of the capital account.
However, it concluded that further effort was needed in the context of the interconnection of payment systems and the liberalization of the capital account.
On public finance, common rules have been adopted but not yet applied on public procurement and public debt management. Studies are also underway on public accounts and public finance statistics.
There has been progress in the harmonisation of national accounts (all countries having migrated to the SNA 1993 system and some partially to the new version SNA 2008) and price statistics (compilation of
the Consumer Price Index in all Member States based on the COICOP system).
Main challenges/constraints in the implementation of the roadmap
The assessment report on the implementation of activities of the roadmap on the ECOWAS single currency programme, adopted in Lagos in October 2013, identified the following constraints:
•
Inadequate financial resources to support some key activities;•
Inadequate human resources (in quantity and quality) to ensure the timely and efficient implementation of certain activities at both regional and national levels;•
Low capacity in some Member States to produce timely and reliable statistics for multilateral surveillance activities;•
Insufficient political will to speed up theratification, domestication and implementation of legal instruments (conventions and protocols);
•
Low participation levels by Ministers of Finance and Governors of Central Banks in meetings of the ECOWAS Convergence Council;•
Lack of awareness of the effectiveimplementation of the ECOWAS Single Currency Programme among the populations as well as among targeted actors and specific groups, such as the authorities in charge of immigration, parliamentarians, customs officials, and others;
•
Frequency of external shocks affecting the fiscal and external performance of Member States and, consequently, performance in terms of macroeconomic convergence; and•
Structurally weak taxation base within a context of high incompressible expenditures.10.1.3. Progress in meeting the convergence criteria within ECOWAS
a) Established rules
In order to closely coordinate Member State economic policies for the convergence of national economies, Decision A/DEC.17/12/01 on the creation
of a Multilateral Surveillance Mechanism of Economic and Financial Policies of ECOWAS Member States was adopted by the Conference of Heads of State and Government in December 2001.
Member States were invited to develop and submit multi-year convergence programmes to ECOWAS and the West African Monetary Agency (WAMA).
Since then, the ECOWAS Commission has undertaken several actions to operationalize the multilateral surveillance mechanism within ECOWAS Member States in collaboration with other regional institutions. These actions include, among others, a study for the harmonisation of the ECOWAS convergence criteria, the launch of the ECOWAS Multilateral Surveillance Database (ECOMAC) by the Council of Ministers in August 2011, the establishment of NCCs in Member States, and the building of stakeholders’ capacities to operationalize the multilateral surveillance mechanism of ECOWAS.
To overcome the lack of a formal framework describing the form and content of the
convergence programmes, as well as their adoption procedures, specific transmission and evaluation arrangements and a clear convergence time horizon, Supplementary Act A/SA.4/06/12 on the Macroeconomic Stability and Convergence Pact among ECOWAS Member States was adopted by the 41st Ordinary Session of Heads of State and Government in Yamoussoukro in June 2012. It sets out and marks the formal commitment made by the ECOWAS Member States towards achieving the ECOWAS monetary union with a single currency.
The Pact is being implemented in two phases:
•
The Convergence Phase, which extends from 1 January 2012 to 31 December 2016. Within this time frame, all Member States are bound to comply with all the primary criteria;•
Stability and Performance Consolidation, from 1 January 2017. During this period, States will strengthen their achievements and implement macroeconomic policies to enable sound and sustainable growth.b) Results obtained
Despite the goodwill expressed at Summits and ministerial conferences, as well as the achievement of economic growth rates above 5 percent in the ECOWAS region between 2005 and 2012, little progress has been made in compliance with the convergence criteria.
A 2013 assessment of the Technical Committee responsible for macroeconomic policies in ECOWAS showed that Member State compliance with the criteria fell in 2012, with the exception of criteria relating to the wage bill ratio and the real interest rate.
For the period 2000-2009, UEMOA was more
compliant than WAMZ on the convergence criteria (J.
Lama, 2011). For the period 2008-2013, Niger, Nigeria and Senegal met most criteria (eight of 11) while The Gambia, Ghana and Sierra Leone fare worst with only four, three and four criteria met, respectively.
Concerning the primary criteria, only six countries reached the budget deficit target in 2012. Although grants were included, performance for this indicator did not improve. It should be noted that budget deficits continue to be part of a trend that began in 2009 when governments were widely requested to curb the effects of the international financial crisis.
In relation to price developments, eight countries in the region met the standard in 2012, that is, one country less than in 2011. With regard to foreign exchange reserves, only Nigeria has met the standard of six months imports in 2012 against 10 countries in 2011.
Budget deficit financing by the Central Bank is the only primary criterion that improved compared to 2011. Indeed, 14 countries have met this criterion in 2012 against 13 in 2011.
With regard to the performance of individual countries, it appears that no country has met all primary criteria in 2012 against four countries in 2011. Only three countries, Guinea Bissau, Niger and
55
Section iii: ReVieW oF MAJoR ecoWAS coMMon SectoRAL PoLicieS
ECOWAS AT 40 AN ASSESSMENT OF PROGRESS TOWARDS REGIONAL INTEGRATION IN WEST AFRICA
Nigeria met three of the four criteria. It is important to note that UEMOA countries show more inclination to respect the primary convergence criteria.
With regard to the secondary criteria, the best performance relate to public debt, the stability of the nominal exchange rate and the real interest rate. In contrast, countries face difficulties in relation to the tax burden and the level of staff salaries.
10.1.8. Proposed reforms concerning the convergence criteria and the roadmap towards the single currency and monetary union
Having observed the slow pace of creating a single currency in the ECOWAS zone, notably the repeated non-compliance with the various deadlines, the Heads of State and Government decided to give
a new impetus to the process of creating a single currency in the region. To this end, the Heads of State and Government, during an extraordinary session in October 2013, decided to entrust the supervision of the creation of the ECOWAS single currency to the Presidents of Ghana and Niger.
A Task Force, composed of representatives of the Presidents of Niger and Ghana, the Ministers of Finance of Niger and Ghana, the Chairpersons of the ECOWAS and UEMOA Commissions, the Governors of ECOWAS Central Banks as well as the Directors General of the West African Monetary Agency and the West African Monetary Institute, has been set up to advise and support the two Heads of State.
The recommendation emerged from their first meeting to streamline the macroeconomic Table 6: Convergence criteria for the economies of West Africa
UEMOA (UEMOA) WAMZ ECOWAS
BENIN, BURKINA FASO, COTE D’IVOIRE, GUINEA BISSAU, MALI, NIGER, SENEGAL, TOGO
THE GAMBIA, GHANA, GUINEA, LIBERIA, NIGERIA, SIERRA LEONE
UEMOA + WAMZ + CABO VERDE Primary criteria
• Ratio basic budget balance over nominal GDP (key criteria) ≥ 0%;
• Average rate of annual inflation: ≤ 3% per year;
• Ratio of exceptional domestic and foreign debt in relation to nominal GDP ≤ 70%;
• Payment arrears:
Domestic arrears: non-accumulation of arrears during the current functioning period External arrears: non-accumulation of arrears during the current functioning period.
• Budget deficit, excluding grants in % nominal GDP ≤ 4%
• Inflation rate (end of period) <10%
• Funding by the central bank of the budget deficit in relation to the fiscal revenues of the previous year ≤ 10%
• Gross reserves (in months of imports) ≥ 3 months
• Inflation rate (annual average) ≤ 5%
• Budget deficit in % of nominal GDP (including grants) ≤ 3%
• Funding by the central bank of the budget deficit in relation to the fiscal revenues of the previous year ≤ 10%
• Gross external reserves ≥ 6 months
Secondary criteria
• Ratio wage bill over fiscal revenues ≤ 35%;
• Ratio of public investments financed on internal resources in relation to fiscal revenues
≥ 20%;
• Ratio of the current account deficit in relation to nominal GDP ≤ 5%;
• Rate of fiscal pressure ≥ 17%.
• Fiscal revenues in percentage of GDP ≥ 20%;
• Wage bill in % of nominal GDP ≤ 35%;
• Public investments financed at national level in % of fiscal revenues ≥ 20%;
• Real interest rate > 0%;
• Nominal exchange rate +/- 15 %;
• Non-accumulation of arrears.
• Non-accumulation of domestic and external arrears under current management.
• Ratio of wage bill over fiscal revenues ≤ 35%;
• Ratio of public investments s financed on internal resources in relation to fiscal revenues
≥ 20%;
• Rate of fiscal pressure ≥ 20%;
• Real interest rate > 0%;
• Stability of the nominal exchange rate (+/- 10%);
convergence criteria as well as the institutions responsible for creating the single regional currency.
During the second meeting, held in July 2014 in Accra, the Task Force successfully proposed reducing the convergence criteria from 11 to six, with four being primary and two secondary. A draft supplementary act to amend Supplementary Act A/
SA/4/06/12 to this effect was to be submitted for adoption to the Assembly of Heads of State in Abuja in May 2015.
Macroeconomic convergence is progressing haltingly. Stronger political will would yield greater compliance with the convergence criteria, since several of the indicators are controlled by governments (such as the level of public debt, advances from the central bank and budget
allocations for investment or wage bill). Other indicators, such as the budget deficit, tax burden, real interest rates and inflation, could be better controlled through innovative action in the global governance of economic, monetary and financial affairs. Lastly, institutional measures for harmonising policies depend purely on the willingness of Member States.