West African Currency (Eco) is a Tremendous Idea
There has been a lot of punditry and prognostication of the advantages and disadvantages of the West African Currency (Eco) since its announcement last month. The advantages of having a single West African currency far outweigh the disadvantages. The elimination of exchange rate costs, the ease of trade and financial transactions across borders, will put money in the vaults of businesses and pockets of individuals. When you add the savings that will be realised across the sub region, the number can be significant. The savings can be used by individuals and businesses to purchase more goods and services. As businesses flourish, governments will collect more tax revenue, which can be used to build more hospitals, schools, roads–and God knows–a myriad of other vital projects. Whatever major currency the Eco is pegged to, its exchange rate will be an improvement over the current ones (with the exception of the CFA Franc zone, Ghana, and Cape Verde). The awful exchange rates have impoverished the populations, and worsened youth migration across the region.
When the Gambian Dalasi was loosely pegged to the British Pound, the exchange rate was set at 4 dalasis to one British Pound. In fact, Senegalese coveted the Gambian dalasi; they viewed it as a valuable foreign currency. In March 1984, the Dalasi was devalued by 25%, to D5 for one British Pound. In order to stimulate the exports and restrict black market transactions in the currency, the dalasi was further devalued and floated in March 1986. The floating of the Dalasi had the desired effect of virtually eliminating the harmful unofficial (black market) currency market. Conspiracy theorists say that was the main reason for the burning of the Albert Market, in Banjul, on the night of the announcement of the floating of the Dalasi, in March 1986. I will not entertain conspiracy theories–facts and numbers are my guiding posts; however, it was an interesting coincidence.
First, let us look at the historical exchange rate of the Nigerian Naira (N) and the Gambian Dalasi (D). I chose the Nigerian Naira because the Nigerian economy is about 70% of the West African economies, and one in every four West Africans is a Nigerian. Naturally, I chose the Gambian Dalasi, given my extensive and personal experience with its fluctuations.
In 1980, the average exchange rate of 1 US dollar against the Nigerian currency was N0.530. To put it in starker terms, in 1980, on average, N1, 000 exchanged for 1,830 US dollars. In 2019, on average, N1, 000 exchanged for 5 US dollars (official) and 3 US dollars (black market). As for the Gambia, these are the average exchange rates of one US dollar to a Gambian Dalasi, over the past 40 years:
1980: $1 exchanged for D1.85, on average
1985: $1 exchanged for D4.09, on average
2005: $1 exchanged for D28.70, on average
2019: $1 exchanged for D50.00, on average
The US dollar’s recorded lowest exchange rate against the Gambian dalasi was D1.71 for 1 US dollar, in June 1980. I think the adolescents and teenagers may feel like marching every adult to the Guillotine, just as in France during the Revolution, looking at these Historical exchange rates. They have been robbed! Laugh!!!!!!!!!
For those of you who are not “Numbers” inclined, please bear with me. Second, let us breakdown the Historical numbers even further: in 1980, on average, 0.530 Nigeria Naira exchanged for 1 US Dollar; in 2019, on average 356 Nigerian Nairas exchanged for 1 US dollar. At the bare minimum, the Nigerian Naira has lost 672 fold of its value, over the course of 4 decades. That number is derived by dividing N356/N0.530. The actual erosion of wealth is more than 672 fold, if you factor in the rate of inflation (price increase) and the time value of money. I do not want to bore the readers with those calculations.
As for the Gambia, let us look deeper into the 1980 average exchange rate of D1.85 to 1 US dollar, and the average exchange rate of D50 for 1 US dollar, in 2019. At the bare minimum, the Gambian Dalasi has lost 27 fold of its value, over the course of 4 decades. That number is derived by dividing D50/D1.85. Just like in Nigeria, the actual drop in the value of the Dalasi is more than 27 fold, if you factor in the rate of inflation (price increase) and the time value of money. Again, I do not want to bore you with those calculations. For a Gambian worker who earned D200 monthly in 1985, to maintain the same standard of living in 2019, his/her monthly salary should be D5,400 (D200 x 27). Is that the case? I don’t think so! In summary, a Nigerian who has had all his/her assets denominated in Naira (over the past 40 years) has lost about 672 fold of its value; similarly, a Gambian whose assets are denominated in Dalasis has lost about 27 fold of its value, over the past 40 years.
These numbers are relevant if one uses foreign currency to buy a foreign good or service; they are less relevant if one buys local goods or services. Even for locally produced goods or services, the number is not insignificant. Numbers don’t lie—especially Historical Numbers—unless manipulated. And yet, we wonder why every Gambian, Nigerian, or West African youth wants to go overseas to earn foreign currency. This is the reason: Plain and Simple!
Obviously, going by the Historical numbers, above, the Nigerians and Gambians should be thrilled to have the Eco as their new currency. As I mentioned earlier, for simplicity, I used Nigerian and Gambian currencies as examples, but I could have used any ECOWAS nation’s currency, with the exception of the CFA Franc zone, Ghana, or Cape Verde; or outside of ECOWAS: Botswana, Namibia, Rwanda, and Mauritius, to make my point. The CFA Franc zone did not experience such fluctuations in exchange rates, as we saw in Nigeria and Gambia. The only significant devaluation of the CFA Franc was in 1999, by 50%, with the launch of the Euro currency. The pegging of CFA Franc to the French Franc was not a bad idea, after all. Similarly, with hindsight and 20/20 vision, Gambians wish the Dalasi had remained pegged to the British pound. Pegging the Eco to the Euro will not be a bad idea, either. It will bring stability to a nascent currency, as the economic principles of supply and demand take hold. When you peg your currency to another currency, you are actually outsourcing part of your Monetary Policy, in particular the setting of interest rates. That will help in taming the rampant rate of inflation (price increase). In that case, our inflation rate will reflect the inflation rate of the Euro, which is a prudent policy.
The Eco’s fortune or success will largely depend on what goes on in Abuga, Nigeria—not what goes on in Paris, France, and on the fundamental principles of Economics: Supply and Demand, more so of the latter than the former. The ECOWAS region has to be able to sell goods and services to the outside world, in order to generate demand for the Eco. For a block of countries that can deliver Nigerian crude oil, Ivorian/Ghanaian cocoa, Senegalese dried fish, Gambian groundnuts, Liberian rice/palm oil, Guinean bauxite, Nigerien uranium, or Malian cotton, generating demand for the ECO should be the least of our problems. Further, ECOWAS nations will be able to sign Trade deals with major trading blocks, on the world economic stage, to extract better prices for their goods/services, and the removal of trade barriers. Individual countries will not be able to do that.
Inter ECOWAS trade has to be encouraged, by breaking the barriers to trade, like customs duties at the borders; removal of tariffs and quotas, and the building of infrastructure, to facilitate trade and the movement of people, goods, and services. Senegal and Mali have removed most of these anti trade barriers between their countries. That is very encouraging! The ECOWAS countries should strive to maintain a healthy Balance of Trade account, which is the export and import account of goods and services. A Balance of Trade surplus means a country is exporting more than it is importing goods/services; a deficit means a country is importing more than it is exporting. A Trade surplus improves the exchange rate; a Trade deficit worsens the exchange rate.
If you look at the trade surplus or deficit from the view point of an individual, the trade surplus means your monthly salary is more than your monthly expenditure; a trade deficit means your monthly salary is less than your monthly expenses or bills. Creditors are kinder to the former than the latter. The same scenario plays for countries. The foreign exchange traders, who determine the exchange rate of floating currencies (such as the Naira or Dalasi) are kinder to the former (trade surplus) than to the latter (trade deficit). This is what partly explains the exchange rate of a floating currency, like the Naira or Dalasi.
Trade between ECOWAS countries is 10% of their total trade; meanwhile trade between EU countries is 60% of their total trade. Transportation costs within the ECOWAS countries is 40% of total costs of goods; it is 10% within the European Union. Having a good road network will ease trade among ECOWAS nations. Trade increases prosperity, standard of living, and job creation. Further, the ECOWAS governments should maintain rigid controls over public spending, and to improve revenue collection and fiscal management. West African governments should automate revenue collection. In this age of the ubiquitous internet, smartphones–for a fee–Facebook (owner of WhatSapp) and Paypal would be glad to provide that service. Automation will eliminate revenue collection in cash, which is susceptible to theft.
Countries should be encouraged to have budget surpluses, not budget deficits. If having a budget deficit is unavoidable, it should not be too high a percentage of the overall budget. The EU countries set a maximum of 3% budget deficit (difference between expenditure and revenue) at the inception of the Euro. However, only Germany and some rich northern EU countries constantly meet that threshold. The poorer southern countries of Greece, Spain, and Portugal have difficulty adhering to the 3% deficit obligation. ECOWAS nations can set the upper limit of the budget deficit between 3% and 5%, unless unforeseen circumstances arise. ECOWAS nations should strive to increase productivity through mechanized agriculture and improved technology, at all levels of production. It will augur well for the exchange rate of the Eco.
Once again, by the sheer size of the Nigerian economy and population, the ECOWAS Central Bank should be located in Abuja, Nigeria. The Central Bank should have enough foreign currency reserves on hand, at any time. Having little to no foreign currency reserves signals that you cannot pay your foreign obligations or loans. That negatively affects the exchange rate of a currency.
In summary, for the Eco to succeed, the ECOWAS nations have to generate demand for their goods and services, maintain a trade surplus, minimize budget deficits, reduce corruption, have stable political systems–which attract foreign direct investments, set competitive interest rates, to encourage reinvestments, mechanise agriculture, and automate revenue collection. There is a lot riding on the success of the Eco currency. If the Eco succeeds, it could be the harbinger for a continental currency for Africa. A single African currency will enable the continent to attain its optimum economic potential
However, the currency will not succeed if the likes of Omar Dicko, former Nigerian Transportation Secretary during the Shehu Shagari government, are able to transfer 3 billion Naira (remember, N0.530 exchanged for 1 US dollar in the early 1980s) to London; or the likes of Amadou Samba of Gambia are able to transfer nearly 900 million US dollars to a Panamanian Bank, on behalf of Yahya Jammeh. There have to be strict rules governing the transfer of money, by individuals. If you are not a business entity, transferring money beyond your annual income should set off Multiple Red Flags, at the banks of origination of the transfers. Having strong government institutions can deter those illegal transfers. The governors of the Central Banks should not fear for their jobs—if they refuse illegal wire transfers or withdrawal of cash.
Looking back at the 1980s exchange rates of the Nigerian Naira and the Gambian Dalasi, we inherited great exchange rates from Britain. What did us in—were the illegal depletion of foreign currency reserves at the Central/Commercial Banks, through illegal transfers, decline in government revenue collection, corruption, and political instability, among many others. I know that blaming our Colonisers for all our problems is a sport; it is time to stop pointing fingers at our Colonisers, as the source of all our problems. Our problems lie in Abuja, Accra, Abidjan, Banjul, and Dakar—not Paris, London, New York, or Switzerland. At the end of the day, ECOWAS nations, and Africa at large, need a heavy dose of introspection. We should be able to control our economic destiny, nearly 50 years after independence. Fifty years ago, the United Arab Emirates of Dubai and Abu Dhabi were known for Pearl fishing, a far cry from what they are known for, today.