As the United Kingdom prepares to negotiate its exit from the European Union, the African Union (AU) continues to take steps toward regional integration with the launch of an Africa-wide passport. But experts say plans for a pan-African economic and monetary union, will prove more challenging.
At present 14 African nations – including 12 former French colonies – make use of two common currencies the West African – CFA franc and Central African CFA franc, both of which are guaranteed by the central bank of France and pegged to the euro. Six nations in the Economic Community of West African States (ECOWAS) have committed to establishing a common currency that will be merged with the West African CFA franc. In 2013, Kenya, Tanzania, Uganda, Rwanda and Burundi agreed to merge their currencies over a 10-year period. And SADC’s regional economic integration plan targets the implementation of a single currency in 2018. According to a United Nations Conference on Trade and Development (UNCTAD) paper, the various regional initiatives are expected to result in the establishment of an African economic and monetary union, as laid out in the Abuja Treaty of 1991. Officials at the 2015 AU Summit in Johannesburg said they aimed to implement a single currency and establish a single continent-wide economic union by 2025.
“A large part of the continent, except South Africa, already enjoys a common currency. It’s called the US dollar,” said Dr Martyn Davies, managing director of emerging markets and Africa at Deloitte Frontier Advisory. He said low levels of intra-African trade have more to do with dysfunctional borders and arbitrary protectionism rather than the lack of a common currency.
Pierre Wolmarans, head of corporate and investment banking for Southern Africa at Société Générale, said that a common currency is a good concept as African states would have more power and stability as a collective, especially as the US dollar is a benchmark currency without any benchmark. “The reality of the world today is that the centres of power sit in London and New York, and so a lot of small emerging markets are at a disadvantage. Look at the attacks in France, the ratings agencies didn’t say anything, it had little effect on the euro. If that had happened in South Africa, our rand would have been extremely vulnerable,” he said.
He added that a common currency would also prevent the dilution of value when it comes to intra-African trade as it would eliminate the need to convert one African currency to the dollar before converting it to another.
According to Mike Keenan, a currency strategist at Barclays Africa, a common currency would “get in the way of the law of economics” – supply and demand – as the currency wouldn’t be able to weaken as and when an individual economy needs. “Currency is a lever for economics to play out and a common currency would remove one of those critical levers,” he said.
Davies said different countries across the continent with different levels of economic activity and different levels of competitiveness as well as political and financial management would not make for an optimal currency region. He said that trying to manage the Zimbabwean economy in a currency union would make the Greek debt crisis look like a picnic. “We need to strip away the romanticism around African regional integration and come back to pragmatism,” he said.
A common currency would also create distortions in economies – as evidenced by Greece and Germany both using the euro – which, would be difficult to fix further down the line, said Keenan.
Wolmarans said an African monetary union would be able to work if each country sticks to the fundamental disciplines of the financial partnership such as the EU’s rule that no country may run a budget deficit over 3% of GDP. He said the euro, currently trading at 1.10 to the dollar, started on par with the dollar, with its intrinsic value improving as the stability offered by the common currency made the EU a more attractive investment destination. “The problem is that the EU allowed individual countries to issue bonds in a common currency without too much discipline. The EU simply allowed Greece to issue too many bonds,” he said.
“It is a big ask but with determination, hard work discipline and good policies it can be done… But each country has got to stick to the rules. If even one country goes crazy, it can collapse the entire union within a few years,” Wolmarans said of establishing a monetary union by 2025 and ensuring its success.
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