1. 1 Monetary Unions among Developing and Emerging Markets By Temitope W. Oshikoya, PhD, FCIB Director General, West African Monetary Institute, Accra, Ghana

2. 2 Outline  Introduction  Optimal Currency Area  WAMZ VS GCC -Structural Convergence -Nominal Convergence -Economic Distance  Common Market  Financial Integration  Conclusion

3. 3 Introduction  While the world has been fixated on the global financial meltdown, the WAMZ and the GCC will soon decide on the merits and timing of a single currency each for their respective countries and regions.  The WAMZ was formally launched by the Heads of State and Government of The Gambia, Ghana, Guinea, Nigeria and Sierra Leone, in December 2000, with the objective of establishing a common central bank and introducing a single currency by 2003 later postponed to 2005 and 2009  The authorities of the GCC countries comprising Bahrain, Oman, Qatar, Saudi Arabia, Kuwait and United Arab Emirate decided in 2001 to establish a monetary union by 2010.  The GCC had a long term horizon for monetary union while WAMZ had a short term

4. Monetary Union and OCA. Benefits  Allows exchange rates (ER) to be fixed and therefore reduces ER uncertainty that hampers trade and investment.  Reduces transaction costs associated with multiple exchange rates.  Allows economies of scale  Reduces the ability of speculators to affect prices and disrupt the conduct of monetary policy and economize on reserves  Reinforces discipline and credibility of monetary policy especially in inflation-prone countries.  Expands bilateral trade among the countries of the Union 4

5. Monetary Union and OCA Costs  Loss of independence of monetary and exchange rate policies  The cost of policy autonomy could be very high in countries relying on seigniorage revenues  Cost of coordinating policies and those associated with the possible break down of the currency union 5

6. Monetary Union and OCA Requirements  Openness  Factor Mobility  Degree of Commodity Diversification  Similarity of Production Structure  Price and Wage Flexibility  Similarity of Inflation Rates  Degree of Policy Integration  Homogeneity  Political Factors 6

7. WAMZ VS GCC-Structural Convergence

8. Structural Convergence Relative size 8 WAMZ Countries: Population, GDP Growth and Size of Economies (2008) Sources: The World Factbook, CIA, April 2009 edition, World Development Indicators: 2008 0 1 2 3 4 5 6 7 8 -100-50050100150200250300350400 Size of Economy (US $'bil) PPP Real GDP Growth (%) Bubble size: scaled to population Nigeria Ghana Guinea Sierra Leone Gambia

9. WAMZ VS GCC-Structural Convergence

10. 10 GCC and WAMZ Comparison  In WAMZ the structure of production is static, the GCC achieved massive progress in the past three decades resulted in a 30 to 35 percent decline in oil's contribution to GDP, compared to 65 to 70 percent in the mid- 1970s.  Saudi Arabia constitutes about half of GDP of GCC, Nigeria, represents about four-fifths of the GDP of WAMZ.

11. 11 GCC and WAMZ Comparison  GCC are wealthier than WAMZ countries.  With the largest oil and gas reserves, and very small populations average per capita income for the GCC is US$23,548.2 against WAMZ of US$1,286.8  In WAMZ there is only one major oil- producer, all GCC countries are oil- producing.

12. Economic Distance 12 Economic Distance Output Growth: Nigeria as target Country Nigeria Guinea 1993-2000 Ghana 1993-2000 Ghana 2001-2008 Gambia 2001-2008 Guinea 2001-2008 Sierra Leone 2001-2008 Gambia 1993-2000 Sierra Leone 1993-2000 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 -2.000.002.004.006.008.0010.0012.00 Standard deviation Correlation Coefficient

13. Economic distance Economic Distance Output Growth: Saudi Arabia as target country Saudi Arabia UAE 1993-2000 UAE 2001-2008 Qatar 1993-2000 Qatar 2001-2008 Oman 1993-2000 Oman 2001-2008 Kuwait 1993-2008 Kuwait 2001-2008 Bahrain 1993-2000 Bahrain 2001-2008 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 0.001.002.003.004.005.006.00 Standard Deviation Correlation Coefficient

14. Economic Distance 14 Economic Distance Inflation:Nigeria is the Target Country Guinea 2001-2008 Nigeria Ghana 2001-2008 Gambia 2001-2008 Ghana 1993-2000 Gambia 1993-2000 Sierra Leone 1993-2000 Guinea 1993-2000 Sierra Leone 2001-2008 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20 -1.50-0.500.000.501.001.50 Standard Deviation Correlation Coefficient Economic distance reduces with integration process

15. Economic Distance Economic Distance Inflation: Saudi Arabia as target Country Saudi Arabia UAE 1993-2000 UAE 2001-2008 Qatar 1993-2000 Qatar 2001-2008 Oman 1993-2000 Oman 2001-2008 Kuwait 1993-2000 Kuwait 2001-2008 Bahrain 1993-2000 Bahrain 2001-2008 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20 -0.80-0.60-0.40-0.200.000.200.400.600.80 Standard Deviation Correlation Coefficient

16. Common Market 16

17. 17 Financial Integration WAMZ  Financial integration - important element of any regional integration process, especially for a monetary union.  The financial sector must be adequately prepared to promote financial inclusion and sustain a changeover to a new currency.  Some countries in the WAMZ have established stock exchanges but they operate within the confines of the national boundaries and few linkages to other member countries  Interbank and money market dominated by banks  Institutional investors participation limited  Capital market requirements differ significantly  Cross listing of stocks is limited.  Most countries of the WAMZ are reforming their capital accounts to attain full liberalization

18. 18 Financial Integration GCC  Liberal capital flows and pegged exchange rate  Well capitalised banking system  GCC stock markets outperformed emerging and developed markets  Rise in FDI  Currency - currently pegged to the US dollar  No clear plan for establishing common capital market

19. 19 Financial Integration WAMZ  Financial integration is an important element of any regional integration process, especially for a monetary union.  Cross-border retail payments are generally non-existent  Interest rates are however converging  Insurance market growing but penetration low  Banking sector integration on the rise- Nigerian banks driving the process

20. Financial Integration Low bank density indicate high degree of concentration for both WAMZ and GCC, Weak cross border branch activity a challenge for the efficient use of funds Bank Density in the WAMZ

21. WAMZ VS GCC-Nominal Convergence Convergence CriteriaWAMZGCC Primary Criteria InflationSingle digitWeighted average of the six countries plus 2 percentage points Fiscal Deficit/GDP Ratio≤ -4%≤ -3% although some flexibility allowed to account for wild fluctuations in states revenue Central Bank Financing of Fiscal Deficit ≤ 10%Not applicable Gross External Reserves (months of import cover) ≥ 3monthsNot applicable 21

22. WAMZ VS GCC-Inflation Convergence

23. WAMZ VS GCC-Fiscal Convergence GCC Countries Operated Fiscal Surpluses While the WAMZ ran Fiscal Deficits

24. WAMZ VS GCC-External Sector Convergence Exchange Rate for the GCC is pegged to the US$- WAMZ to a basket of currencies

25. WAMZ VS GCC-External Sector Convergence

26. Necessary conditions for successful Monetary Union  Economic convergence  Structural convergence  Market convergence  Legal convergence  Political convergence

27. 27 Summary  GCC has longer time perspective than WAMZ  Asymmetric shocks  Similarity of production  Geographical location  Richer in terms of resources and per capita income  Stable exchange rate  Low inflation  Low fiscal deficit  More institutionally prepared  Establishment of GCC Monetary Council the equivalent of WAMI

28. 28 Conclusion  The journey towards a Monetary Union is a marathon and not a sprint race  The Euro Zone took over 43 years to achieve the common currency  The GCC countries decided in 2001 to establish a monetary union by 2010 but a postponement is being contemplated

29. 29 THANK YOU