Common currency? Well, region must first build trust and grow investment
Friday February 21 2020
With news about West Africa’s plan to introduce a regional currency, the Eco, one is reminded that the idea is also an East African Community aspiration.
The East African Currency Board issued the East African shilling as legal tender in Kenya, Tanzania and Uganda in 1919. It was replaced in 1966 after Independence ushered in national currencies. Fast forward to the 21st century and the EAC plans to launch a regional currency in 2024. Meanwhile, here are some issues to ponder.
First, the Eurozone experience. The EU experience followed the orthodox approach — economic integration started with trade and moved on to a monetary union. The euro resulted in greater financial integration and provided a boost to intra-European trade, the highest in the world.
We must not forget the political history that brought about the EU. After the First and Second world wars, Europe had the political imperative to unite “at all cost”. This overarching political agenda was uppermost on the minds of the EU’s founding fathers and drove the adoption of the euro.
Eurozone countries have robust institutions and strong macroeconomic frameworks. Nevertheless, challenges abound. The European Central Bank (ECB) has often come under intense criticism from Germany’s Bundesbank. The differences between the EU’s industrialised north and the southern periphery remain. The experience of Greece, brilliantly captured in Yanis Varoufakis’s book Adults in the Room (2017) is a stark reminder of the struggles facing countries on the periphery of a monetary union.
The EU model is favoured by Africa’s integration schemes. Is this approach relevant for Africa? To answer this question, let us look at East Asia’s experience.
These include 10 countries from the Association of South East Asian Nations (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) and three giants — China, Japan and South Korea. Until recently, many of these countries were less developed. Their policy experience is more relevant for Africa than the experience of “old Europe”.
If indeed the regional currency idea is a panacea for enhanced intra-area trade, growth and prosperity, why haven’t East Asian nations embraced it? After all, these countries have demonstrated remarkable economic, technological and social success.
Until the Asian crisis of 1997, trade and investment was heavily conducted in US dollars or currencies pegged to the dollar. The crisis left a scar in the minds of policy makers. Dollar-denominated assets fell in value due to devastating exchange rate devaluations. External debt ballooned. Settling international financial obligations was severely constrained.
In those days, there was talk about an Asian monetary union, borne out of the desire to reduce vulnerability to external shocks. Self-reliance and control over the region’s destiny was the general feeling. Surely, many Africans can relate to that.
Post-crisis, robust recovery followed as Asians embarked on structural reforms — flexible exchange rates, removal of capital controls, eliminating business regulations and liberalising trade and investments. Talk of a monetary union receded. Crisis prevention gave way to forward-looking growth, measures to boost intra-area trade and Asia’s greater integration with the world economy. East Asia boomed.
Asians are pushing the frontiers of development in the 21st century. They are investing heavily in education, health and infrastructure. They recognise that the digital revolution is a new growth engine and are determined to reap the full benefits of digitisation. They are expanding their highly successful export-led growth model, recognising that the region can serve as its own “growth engine”.
Aware of the headwinds in the global trading environment, Asians are negotiating to strengthen integration through the Regional Comprehensive Economic Partnership, covering the ASEAN + 6 (Australia, China, India, Japan, New Zealand and South Korea). These negotiations make no mention of a monetary union.
Africa’s policy makers need to reflect on the East Asian experience — a region that does not have a regional currency and yet is the world’s most dynamic. There are clear trade-offs between the benefits of an EAC currency and the cost of members losing autonomy over domestic monetary policy.
Indeed, a monetary union will mean some surrender of sovereignty. For example, Uganda will give up its right to take certain policy actions unilaterally. At the same time, it is entitled to expect that other EAC members will abstain from potentially damaging unilateral actions. This “harmony of interest” is a result of establishing a supranational body whose decisions are binding on all members.
Is there such “harmony of interest” in the EAC? In Ecowas? In the African Continental Free Trade Area? Yet it is fundamental for embarking on the herculean task of creating the equivalent of the ECB.
There are other challenges too. EAC has wide economic disparities and structures. Compare Kenya with Burundi. And no suitable anchor currency exists to play the role of the deutsche mark in the Eurozone.
Building trust and strong institutions of governance, improving business regulations and developing regional infrastructure are key. These priorities trump the pursuit of a regional currency. The case for EAC’s monetary union is not compelling.
Aloysius Uche Ordu is the managing partner, Omapu Associates LLC. He is a former vice president of AfDB and a former director of World Bank.