Proposed Architecture for an ECOWAS Common Currency Union

Abstract

The present study seeks to propose architecture for an ECOWAS common currency union. It takes into account the diversity of current currency arrangements in the sub-region, the disparity of country sizes and of volatility of key macroeconomic variables. Furthermore, some central banks of members of the West African Monetary Zone (WAMZ), which includes The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone, have a history of financing their governments’ fiscal deficits which has resulted in higher inflation than in the Union Economique et Monétaire Ouest-Africaine (UEMOA). Although it seems that WAMZ countries would benefit more from the new common currency zone than their UEMOA counterparts, the strong political commitment of all key stakeholders in the sub-region favors establishment of the new currency. Three options are considered for the design of the ECOWAS common currency union namely (a) extension of UEMOA to other West African countries, (b) merger of WAMZ with UEMOA or (c) immediate creation of a new ECOWAS currency. Considering the significant institutional constraints, the long delay and slow progress in the WAMZ-UEMOA merger that was initially proposed by West African Heads of State, the best option would be to create a new currency zone that countries would join based on their performance with respect to the criteria of nominal convergence formulated by ECOWAS. Ranking of individual countries based on their record on five key criteria of nominal convergence indicates that the first members of the new zone would include all UEMOA countries, Cape Verde, Liberia and Nigeria. Four countries, namely The Gambia, Ghana, Guinea and Sierra Leone would join at a later date. During the transition period they could be members-in-waiting and have an informal exchange rate arrangement that would restrict movement of their exchange rates with the union currency, within a gradually narrowing band and ultimately lead to their inclusion in the ECOWAS monetary zone.