1. THE WEST ARICAN MONETARY ZONE(WAMZ): Challenges and Prospects By The West African Monetary Institute (WAMI) Presentation at the Ghana Armed Forces Command and Staff College. April 14, 2014

2. 2 Outline of Presentation  Introduction Definition Benefits and Costs of MU Preconditions for Successful MU Stages of Monetary Integration  Monetary Union in West Africa History ECOWAS Monetary Integration  The WAMZ Programme  Conclusion

3. Introduction 3

4. Definition of Monetary Union  “A monetary union is a zone where a single monetary policy prevails and inside which a single currency or group of currencies which are perfect substitute circulate freely”.(Masson and Portillo(2001) 4

5. Benefits of Monetary Union  Eliminate exchange rate risk - encourage increased intra-regional trade and investment  Reduction in transactions costs  More disciplined macroeconomic policy - reduce interest rates and inflation, promote faster growth and employment  Increase bargaining power of Member States to negotiate as a bloc- e.g. WTO  Effective approach towards conflict prevention establishing ties with economic partners in a region.  Benefits of scale economies, stronger competition, FDI 5

6. Potential costs  Loss of monetary policy independence  Loss of the exchange rate as an instrument to deal with asymmetric shocks  Loss of seigniorage  Possibility of breakup – at high cost 6

7. Preconditions for a Successful Monetary Union  Optimum Currency Area (OCA)- addresses the central question: under what conditions a monetary union is ideal?  The pre-conditions include: 1.Free mobility of factors of production (labour) 2.High level of trade openness- trade integration 3.High diversification in production and consumption 4.Similarity of economic structures and synchronization of economic cycles. 5.Flexible markets, wages and prices 6.Similarity of inflation rates 7.Fiscal federalism 8.Financial market integration 7

8. Stages of economic and monetary Integration  Preferential Trade Agreements (PTAs) - member states charge lower tariffs on imports produced by fellow member countries than they do for non-members.  Free Trade Areas (FTAs): member countries eliminate internal tariffs and non-tariff barriers among themselves but have different external tariffs for non-members. E.g.- LAFTA.  Customs Unions: all the conditions of an FTA hold, with the addition of a common external tariff (CET) on imports from non- members of the union.  Common Markets: apply the same conditions as a customs union, plus the free movement of capital and labour within the economic group.  Monetary Unions: involve all the conditions of a common market, as well as the harmonization of financial, economic, and legal policies. Specifically, member countries accept a common currency 8

9.  Monetary Union in West Africa 9

10. History of Monetary Unions in West Africa  ECOWAS established in 1975- goal of monetary and economic integration in West Africa; ECOWAS Monetary Cooperation Programme (EMCP) in 1987 – roadmap for common currency.  Two main blocs in ECOWAS (Francophone and Anglophone): The Francophone established (WAEMU) - CFA franc tied to the French franc (now Euro) at fixed parity, which was altered only once in 1994. (WAMZ) countries – the second monetary zone 10

11. ECOWAS Monetary Integration Strategy  ECOWAS strategy is to move progressively toward a form of deep integration  Monetary cooperation a key element of the ECOWAS Strategy-  a gradual progression towards the establishment of a single monetary area involving: -the use of a common convertible currency -the establishment of a common central bank, and -the pooling of foreign exchange reserves 11

12. The WAMZ project 12

13. 13 The WAMZ project  A ‘Fast Track’ initiative: to allow non UEMOA zone countries form a second monetary union  Decision of ECOWAS Heads of State Lome, Dec 1999 as a Second Monetary Zone.  the WAMZ and UMEOA to eventually merge into a single ECOWAS monetary zone

14. The WAMZ (Cont,d)  WAMZ Agreement :Bamako, 2000 by 5 Non UEMOA Countries: The Gambia, Ghana, Guinea, Sierra Leone, Nigeria- Liberia and Cape Verde opted for observer status.  WAMI established in March 2001 in Accra Ghana as preparatory agency. 14

15. WAMZ Institutions Authority of Heads of State and Government Convergence Council of Ministers and Governors of Central Banks Committee of Governors of Central Banks Technical Committee 15 Ministries of Finance, Economic Planning, Trade, Justice, Foreign Affairs CBG, BoG, BCRG, BoL, CBN, and BSL Statistics offices, Customs, Immigration, National Revenue Authority., central banks, MoF

16. WAMI’s Mandate  Monitor and evaluate performance of the WAMZ Member States on the prescribed convergence criteria  Technical and institutional preparations for establishment of a common central bank and the introduction of a single currency in the WAMZ  Periodically assess the state of readiness of the WAMZ Member States for monetary union 16

17. WAMZ Programme Expected Outcomes of the WAMZ Programme  Introduce Single Currency (eco) and establish:  A Common Central Bank – The West African Central Bank (WACB)  A Centralized Financial Supervisory Authority – The West African Financial Supervisory Authority (WAFSA)  The WAMZ Secretariat  A Stabilization and Cooperation Fund (SCF) 17

18. Strategic Plan for the WAMZ Programme  WAMI’s Strategic Plan’- (2010-2015) has Five (5) pillars to address current and future challenges facing the Zone : 1.Macroeconomic Convergence, and Statistical Harmonisation 2.Trade and Regional Integration 3.Financial Sector Integration 4.Payments Systems Infrastructure 5.Institutional and Capacity Building 18

19. The WAMZ (Cont,d) MULTILATERAL SURVEILLANCE  Monitoring macroeconomic performance and movement towards convergence of member countries: Primary Convergence Criteria:  Inflation- Single Digit  Fiscal Deficit excluding grants of not more than 4.0 percent of GDP.  Central Bank Financing of Budget Deficit of not more than 10.0 percent of previous year Tax Revenue  Gross Official Reserves of at Least 3 Months of imports Secondary Criteria:  Tax Revenue /GDP > 20 % of GDP  Wage Bill / Domestic Revenue < 35%  Public Investment Expenditure/ Domestic Revenue> 20%  Positive Real Interest Rate  Exchange Rate Depreciation (Luc/US$) +/-15% (W-ERM)  Domestic Arrears - No Accumulation and Settlement of Existing Stock 19

20. 20 The WAMZ (Cont,d)  Peer Review Mechanism.  WAMI Regularly Prepares Convergence and Other Reports on the Integration Programme:  The Findings Deliberated upon by the Technical Committee, Convergence Council, the Authority of Heads of State and Government of the WAMZ.

21. The WAMZ: The journey thus far……….  Since 2001 1 st Postponement in 2003 2 nd Postponement in 2005 3 rd Postponement in 2009 Next Scheduled Date : January 2015 21

22. The Journey so far (cont’d) 22 Number of Primary Criteria Satisfied by Member States 200520062007200820092010201120122013 Member StatesJune The Gambia344432332 Ghana222023432 Guinea212110222 Liberian.an.a.1344333 Nigeria344332334 Sierra Leone222211123 WAMZ022111101

23. The Journey so far (cont’d) 23 INFLATION (Target = Single Digit) 1 st Half Member States1999 to 2003 2004 to 2008 2009 to 2012 20092010201120122013 Gambia8.14.64.52.75.84.44.95.8 Ghana22.913.510.516.08.6 8.811.2 Guinea7.124.515.17.920.819.012.812.0 Liberian/a 8.39.76.611.55.57.0 Nigeria15.010.412.014.011.810.312.08.4 Sierra Leone8.612.214.612.217.816.911.410.8 WAMZ12.213.512.411.211.6 No. of Countries meeting criterion 33233

24. The Journey so far (cont’d) 24 FISCAL DEFICIT (Excluding Grants)/GDP ≤ 4 1 st Half Member States 1999 to 2003 2004 to 2008 2009 to 2012 20092010201120122013 Gambia7.04.69.17.26.79.013.58.1 Ghana9.112.46.47.08.23.07.45.4 Guinea7.02.17.96.814.44.75.56.5 Liberia-- -1.6-2.0-6.40.21.8-3.1 Nigeria3.90.83.53.35.03.12.51.8 Sierra Leone 13.97.99.38.610.610.08.10.8 WAMZ3.86.33.2 No. of Countries meeting criterion 21323

25. The Journey so far (cont’d) 25 CENTRAL BANK FINANCING ( % of Previous Year’s Tax Revenue) 1 st Half Member States1999 to 2003 2004 to 2008 2009 to 2012 20092010201120122013 Gambia33.20.06.9027.300.417.1 Ghana40.47.04.6008.89.48.6 Guinea15.522.030.840.182.9001.0 Liberia--0.00000 Nigeria35.90.0 0000 Sierra Leone21.53.622.321.266.71.105.9 WAMZ No. of Countries meeting criterion 43665

26. The Journey so far (cont’d) 26 GROSS RESERVES (Months of Import-Cover) 1 st Half Member States1999 to 2003 2004 to 2008 2009 to 2012 20092010201120122013 Gambia6.05.35.64.76.86.14.84.6 Ghana3.63.84.04.44.83.23.43.2 Guinea2.90.72.92.21.94.33.13.9 Liberia--3.43.64.33.32.32.5 Nigeria8.014.210.116.67.96.39.59.6 Sierra Leone2.44.3 6.25.42.43.13.0 WAMZ8.413.97.05.77.0 No. of Countries meeting criterion 3455555

27. Milestones achieved  Strengthened commitment and heightened confidence level resulting in the increase of the membership of WAMZ from five to six member states in 2010  Gradual progress towards macroeconomic convergence  AfDB funded Payments system development project for The Gambia, Guinea, Liberia and Sierra Leone (US$ 30 million).  ACBF Funded Project for Institutional Strengthening of WAMI (US$ 2 million)  A Model Fiscal Responsibility Act Developed 27

28. Milestones achieved (cont’d)  Establishment of the College of Supervisors of the central banks of the WAMZ (CSWAMZ)  Steps taken towards capital markets integration with a Charter signed between existing stock markets in ECOWAS (January, 2013)  National Trade Policies for The Gambia, Guinea, Liberia and Sierra Leone- African Development Fund  Establishment of WAMI and ECOWAS joint Task Force  Institutionalized a WAMZ Trade Ministers’ Forum on the implementation of trade obligations 28

29. Challenges  Slow progress towards macroeconomic Convergence  Susceptibility to exogenous and endogenous (policy) shocks  Weak Integration of Convergence Criteria and other WAMZ benchmarks in national development frameworks and plans  Inadequate Resources and high dependence on aid inflows  Weak sensitization of stakeholders at Country level 29

30. Challenges (cont’d)  Low level of intra- WAZM trade- (poor transport network, unstable power supply, poor compliance with ECOWAS trade and trade related protocols  Financial integration- (quoting and trading, capital account liberalization  Uneven stages of economic performance/institutions  Institutional and legal issues. 30

31. PROSPECTS  The Journey may have been slow and long but careful preparations are essential to the ultimate objectives  Though the Focus has been on economic aspects – Political and Cultural considerations are significant  Strengthening Political Will  “Leadership” Role 31

32. 32 Thank you for your kind attention