Between the 16th and 18th centuries, a Spanish silver coin was a common currency for world trade. The English in the American colonies called it the “Spanish dollar” and later adopted it as their own. The Spanish dollar has done more than lead to the opening of new trade routes and security innovations. It facilitated the integration of China, the Americas and Europe into a global economy, creating a status quo that lasted until the 19th century. This silver coin then evolved into a paper currency, the “peseta”, and was finally replaced by the euro in 2002. Today, the euro is legal tender in 19 countries of the European Union ( EU). The EU created the euro to promote growth, stability and economic integration in Europe. The Euro is one of the three major currencies in today’s financial market, alongside the US Dollar and the Japanese Yen.
In 2003, shortly after the launch of the euro, leaders of the Economic Community of Fifteen West African States (ECOWAS) proposed that the region also have its single currency – the eco. Seven currencies are currently used in West Africa, with eight French-speaking countries using the CFA franc. Other countries have individual currencies, none of which are freely convertible. Among other potential benefits, the proposed eco should reduce barriers to trade in the region and improve life in general. But since then, ECOWAS has postponed the launch of this currency four times: in 2005, 2010, 2014 and 2020. Now it has set the launch date for 2027. So, for now, the eco of l West Africa is still a pipe dream.
Castles in the air?
The idea of a single currency has elicited several contradictory reactions, both from the public and from industry experts. But amid all of this, eco feasibility is a major concern. Why is that?
Implementing the eco requires member countries to meet a few criteria, most of which are unlikely to occur. They must have :
- A single digit inflation rate at the end of each year.
- A budget deficit not exceeding 4% of GDP.
- Central bank financing of deficit not exceeding 10 percent of previous year’s tax revenue.
- Gross external reserves that can cover imports for at least three months.
Most of the 15 countries are unlikely to achieve all of the above criteria in years. Only Cape Verde, Liberia, Ghana and Togo encountered some, but not systematically. Notably, the European Union used a similar method to launch the euro. But copying their model for a region with totally different realities is simply building castles in the air. The EU could set these standards because they were strategically feasible in their climates. But the ambition of ECOWAS, with which it has refused to be flexible, is technically based on the hope of improving economies. Moreover, discussions around the euro date back to the 1960s, but it was not until 1999 that the currency was finally launched. And even then, only 11 countries have adopted it. Now that number is 19; although it has been around for 20 years, the 27 EU countries have yet to fully embrace it. The problem, however, is that West Africa may not have as much time as the EU, as the world is changing faster than ever.
The future of money in Africa
It has been 31 years since the African Union conceived the idea of a single currency for Africa. Some – or perhaps too little – progress has been made in this regard, with the establishment of the Pan-African Payments and Settlement System (PAPSS), which facilitates the exchange of several African currencies. Today, the PAPSS is still in the pilot phase in 6 countries. This single currency, along with the AfCFTA, is part of the AU’s plans to one day transform Africa into a European-style economy. But it seems that African countries are gradually exceeding this ambition.
In October 2021, Nigeria launched its Digital central bank Currency (CBDC), the e-Naira, through a partnership with Bitt Inc. He made the decision shortly after Ghana partnered with a German company, Giesecke+Devrient for its e-cedi driver. Other African countries: Kenya, South Africa, Rwanda and Tanzania are also studying the launch of their digital currencies. The creation of digital currencies implies that these nations are looking for ways to make their currencies more useful. Nigeria and Ghana say they want to use these blockchain-based currencies to boost financial inclusion.
Nigeria is crucial for the creation of the eco. Not only because it is the largest country in the region, but also because it is the only country in West Africa to have a banknote printer and a mint. So, the Nigerian Security Printing and Minting Company Limited is ECOWAS’ most viable option to hit the eco except it finds an alternative.
Nigeria has spent massive resources in the development of e-Naira. However, its adoption has been slow. This action casts doubts on the possibility that West Africa will ever have a single currency. One of the reasons is that it would be difficult for these nations to abandon their currencies which are now going digital, after so much investment. The other is that if e-naira and e-cedi are successful, other countries in the region will likely follow suit.
CBDCs can facilitate cross-border payments, but only if they are designed with interoperability in mind. A paper on Cross-Border CBDCs, published by the Bank for International Settlements (BIS), in collaboration with the International Monetary Fund (IMF) and the World Bank, called for collaboration between countries in the design of CBDCs to enable cross-border payments. Outside of Africa, some countries have collaborations for cross-border CBDCs—Jasper–Ubin Project, between Canada and Singapore in 2019; Project Jura, the recent lawsuit between France and Switzerland; Inthanon–LionRock project, between Thailand and Hong Kong; mCBDC Bridge project, between Thailand, Hong Kong, China and the United Arab Emirates; and the Aber project, between the United Arab Emirates (UAE) and Saudi Arabia. The same can happen in Africa, making a single currency unnecessary. Additionally, tech companies are already building solutions to make CBDCs work at scale. For example, Visa has developed a new concept called the “Universal Payment Channel” (UPC). With UPC, people can send stablecoins like USDC to a Nigerian or a Ghanaian, and they receive their money in e-Naira and e-cedi, respectively.
Additionally, there is the option of cryptocurrencies, which Africans are already using for cross-border transactions. Their decentralized nature allows them to easily bypass the hassle of transacting in over 40 different currencies and their various corresponding financial systems. Although many African governments do not support cryptocurrencies, it is nearly impossible to promote CBDCs without publicizing cryptos, as CBDCs are essentially government-owned versions of cryptocurrencies.
Does West Africa need a single currency?
The feasibility of the eco is not the only thing that raises doubts. Theoretically, it should promote integration. But many economists wonder if money will even solve any problems. Most African nations are more interested in trading outside the continent. Intra-ECOWAS trade accounts for only 11% of the total trade of its members. It’s pretty much like that across the continent — trade between African countries is the lowest in the world. So economically they don’t have much to gain.
Moreover, history does not argue for a common currency in Africa. The fourteen countries that use the CFA franc are divided into two monetary zones: the Economic and Monetary Community of Central Africa (CEMAC) and the West African Monetary and Economic Union (UEMOA). CEMAC has been using a single currency for more than 70 years now, but intra-regional trade still lags behind by around 5%. In WAEMU, trade circulates a little more freely at 16%. But that’s still mediocre considering that their version of the CFA has been in use since 1945. If a single currency hasn’t boosted trade between countries that speak the same language, how will it break through the barriers? linguistics?
The AU and ECOWAS must accept that the future of money in Africa is digital. If they still want single currency ideas to work, they need to embrace digital methods.
Written by Oluwatosin Ogunjuyigbe