1. Diery Seck ACRIA 4, Abidjan, 4 June 2013

2. What is the right design for an ECOWAS Common Currency Union ?

3.  Precursors for idea of regional currency ◦ Kwame Nkrumah (Ghana) ◦ Cheikh Anta Diop (Senegal)  UEMOA & CEMAC  Lagos Plan of Action  NEPAD

4.  UEMOA/CEMAC  Eastern Caribbean Currency Area (ECCA)  European Monetary Union (EMU)  A few bilateral adoptions of foreign currencies:  Euro by Cape Verde  US Dollar by Bahamas, Bermuda, Panama, Ecuador and El Salvador  Swiss Franc by Liechtenstein

5.  Create the West Africa Monetary Zone: WAMZ (Non-CFA countries minus Cape Verde): => Currency: The ECO  Later merge WAMZ and UEMOA => New Single Currency BUT CONSIDERABLE DELAY IN CREATING The ECO (April 2000 to July 2013: 13 years, No significant progress)

7.  Countries with fixed peg with EURO - UEMOA: 8 (Benin, Burkina Faso, Côte Ivoire, G. Bissau, Mali, Niger, Senegal, Togo - Non-UEMOA: 1 Cape Verde => 9 countries pegged to Euro, same monetary target: maintain stability of fixed exchange rate with Euro  Countries with flexible exchange rates: 6=WAMZ - Gambia, Ghana, Guinea, Liberia, Nigeria, Sierra Leone

8. Basic Statistics of ECOWAS Countries (IC # 2) #CountryGDP, Mln US $ Area (Sq. KM)Population % of total GDP Cumulated % 1Nigeria 91,957.59 923,770 162,470,737 62.7 2C. d'Ivoire 11,048.45 322,460 20,152,894 7.5 70.3 3Ghana 10,053.62 238,540 24,965,816 6.9 77.1 4Senegal 7,149.43 196,720 12,767,556 4.9 82.0 5B. Faso 4,849.46 274,220 16,967,845 3.3 85.3 6Mali 4,313.25 1,240,190 15,839,538 2.9 88.3 7Guinea 4,028.57 245,860 10,221,808 2.7 91.0 8Benin 3,440.24 112,620 9,099,922 2.3 93.4 9Niger 2,845.16 1,267,000 16,068,994 1.9 95.3 10Togo 1,680.93 56,790 6,154,813 1.1 96.5 11S. Leone 1,668.76 71,740 5,997,486 1.1 97.6 12Liberia 1,152.78 111,370 4,128,572 0.8 98.4 13Gambia 1,092.15 11,300 1,776,103 0.7 99.1 14C. Verde 1,020.63 4,030 500,585 0.7 99.8 15G. Bissau 257.35 36,130 1,547,061 0.2 100.0 Total 146,558 5,112,740 308,659,730 100.0

9.  “Inertia” in switching UEMOA countries to ECOWAS CCU (UEMOA works!)  Different country sizes and economic structures may mean different transmission mechanisms of monetary policy  High degree of political instability: Mali, Côte d’Ivoire, Guinea Bissau, etc.  CB autonomy: Financing of fiscal deficit

11. Volatility of Prices, Exports and GDP of ECOWAS Countries (2000 - 2011) (Standard deviation of variables) Country Inflation (GDP deflator) Annual change of Exports in Constant US Dollars Annual change of GDP Growth in Constant US Dollars Benin2.414.82.5 Burkina Faso3.322.34.8 Cote d'Ivoire2.513.02.7 Guinea Bissau27.228.23.9 Mali4.515.83.6 Niger2.513.83.4 Senegal2.211.14.8 Togo6.213.92.8 Average UEMOA6.416.63.6 Gambia4.926.65.3 Ghana18.719.95.1 Guinea10.716.111.4 Liberia9.3 16.8 Nigeria12.427.97.6 Sierra Leone6.444.69.0 Average WAMZ10.427.09.2 Cape Verde2.325.43.9

12.  Architecture of the Monetary Union: 6 tasks  Architecture of the Central Bank: 10+ tasks

13. 1. Is ECOWAS an Optimal Currency Area (OCA)? What are the welfare gains? 2. What type of union is suitable given context? 3. What criteria to use for selection of members and what is the right sequencing of admission? 4. Which countries should be admitted initially?

14.  Role and status of non-members  Level and management of reserves

15. 1. Choice of Anchor 2. Choice of Target 3. Choice of Instruments 4. Exchange rate regime 5. Nominal Exchange rate at entry 1. Governance & Independence of CB 2. Supervision & Regulatory powers 3. Fiscal prerogatives 4. Dual currency transition period 5. Existence and strength of secondary CB objectives

16.  Methodology of Lee and Barro (2011) - Strong trade and financial integration - High level of inflation - High co-movement of prices and output among member countries - Speedy adjustment to shocks - Political proximity among members - Welfare gains from monetary union

17. OPTION 1: Extended UEMOA PROS:- Well functioning design - Pre-existing Guarantee and Anchor - Reliable Anchor: EURO CONS:- New entrants unlikely to accept terms - European CB may not approve it - France and Portugal may not extend guarantee of convertibility to new members - UEMOA countries may not accept welfare costs of CCU  Reject it

18. OPTION 2: Merger of WAMZ and UEMOA PROS:- Fast track agenda - Two unions of comparable sizes to negotiate CONS: - WAMZ does not exist after 13 years - High transactions costs (WAMZ, UEMOA merger negotiations) - Perception of high cost for UEMOA (Nigerian monetary union with tiny members) - What happens to WAMZ if merger talks fail?

19.  OPTION 3: Immediate creation of new currency PROS: - Clean slate = free design w/o inertia - Fast track, low transactions costs - Reduce dependence on fate of EURO CONS:- UEMOA & Cape Verde may lose EURO guarantee of convertibility - How to cope with price, output and export volatility of WAMZ countries - Lack of gradualism of process (  Probability of error, failure)

20.  REASON:1) Most obstacles are institutional, 2) Immediate creation: All countries on same side (political will)  METHOD: Selection of some member countries (not all)  Based on ECOWAS nominal convergence criteria (WAMA)  Need to minimize negotiations and transactions costs  Maximize the % of ECOWAS economy and population in first phase of CCU (CCU representative from start)

21.  Fiscal deficit (w/o grants) / GDP ≤ 4%  Inflation rate ≤ 5%  Fiscal deficit financed by CB / Fiscal revenues of previous year ≤ 10% (Does not apply to UEMOA)  Gross reserves ≥ 6 months of imports (Does not apply to UEMOA countries)

22.  Domestic and Foreign arrears = 0  Fiscal revenues / GDP ≥ 20%  Government payroll / Fiscal revenues ≤ 35%  Public investments / Fiscal revenues ≥ 20%  Real interest rates > 0%  Stability of real exchange rates: ± 5%

23. AVERAGE NOMINAL CONVERGENCE INDICATORS FOR ECOWAS COUNTRIES ACTUAL VALUES (Mean 2008-2010) Fisc. Def/GDPInflation rate Fisc. Rev. / GDP Gov. Pay / Rev. Pub. Inv. / Revenue BENIN4.43.716.042.128.0 BURKINA FASO12.33.115.344.849.3 CAPE VERDE12.93.323.145.72.1 COTE D'IVOIRE2.34.616.841.513.2 THE GAMBIA5.95.113.336.314.5 GHANA11.814.218.252.523.7 GUINEA7.614.114.833.235.3 GUINEA BISSAU16.53.26.883.66.3 LIBERIA1.58.620.135.211.3 MALI7.43.714.334.622.1 NIGER8.73.812.928.734.9 NIGERIA2.413.613.034.231.0 SENEGAL7.31.618.432.833.1 SIERRA LEONE10.214.09.160.222.4 TOGO4.03.415.435.816.0 UEMOA5.93.816.638.024.8 WAMZ3.313.713.435.930.4 ECOWAS4.210.314.536.628.3

24. AVERAGE NOMINAL CONVERGENCE INDICATORS (2008-10) FOR ECOWAS COUNTRIES RANKING OF ECOWAS COUNTRIES: NOMINAL CONVERGENCE CRITERIA Fisc. Def/GDPInflation rate Fisc. Rev. / GDP Gov. Pay / Rev. Pub. Inv. / Reve. Country total Overall Ranking BENIN566106332 B. FASO1328111355 C. VERDE144112154611 C. D'IVOIRE295912378 GAMBIA610118 4611 GHANA121541375113 GUINEA914932378 GUINEA BISSAU153 146215 LIBERIA1112613332 MALI8710593910 NIGER1081313355 NIGERIA312 45367 SENEGAL71324171 S. LEONE111314 86014 TOGO457710332 TOTAL RANKS120 600

25.  UEMOA members (8)  Cape Verde (virtual UEMOA member)  Liberia  Nigeria  88.3% of ECOWAS GDP (2011)  86.1% of ECOWAS population

26.  Status of members-in-waiting  Informal monetary arrangement with variable nominal exchange rate around equilibrium rate with CCU Currency  “Snake”  Strong cooperation with CCU authorities  Over time the Band within the Snake is narrower  Finally we have a fixed exchange rate and membership into the CCU.

27.  Pooling of foreign reserves: UEMOA model of “Compte d‘opérations”  Avoidance of moral hazard and control of Nigeria size factor (NRIF)  Solidarity reserves from non-members

28.  UEMOA model of “Compte d’opérations”: - All national reserves pooled into one joint CB account - National contributions recorded separately; free access to one’s own reserves - Possibility for a country to “borrow” from the joint account (stepped up interest rates)

29.  No CB monetization of national government fiscal deficits (use debt market instead)  National sovereign borrowing and sovereign foreign debt guarantee are capped  Mandatory level of national reserves varies and is function of volatility of each national economy (see Table on volatility)  Creation of the Nigeria Reserve Insurance Fund (NRIF) in addition to regular reserves

30.  STRUCTURAL (LONG TERM) Solidarity reserves from non-members :Issuance by CB of non-interest bearing, Long Term Bonds in Foreign denomination TEMPORARY RELIEF MECHANISM Foreign reserve swaps and other facilities to discourage speculative attacks and stockpile of foreign reserves

31.  Design & operations with first members:  5 years  Completion of CCU and full membership:  10 years