|Downloadable guide (PDF)|
Getting monetary policy right can be difficult. Many so-called mature markets struggle to create and calibrate the right monetary mechanisms. In Sub-Saharan Africa, the challenge is doubly hard, with monetary officials striving to temper inflation while stabilizing real exchange rates, as they seek to maintain a monetary policy regime that suits a sovereign’s needs.
The challenge for key central banks across the region is how to coordinate monetary policy with their peers. While the world has focused – rightly – on Sub-Saharan Africa’s growth and outstanding demographics, it’s easy to overlook the extraordinary strides sovereigns have made in synchronizing monetary policy.
Currency blocs have emerged that hold the promise that one day, all corporates will be able to trade across borders, in the same tender, boosting trade and invested capital, though serious challenges still remain.
Strength in unions
The Common Monetary Area (CAR) has long proved one of the region’s strongest regional unions. Formed in 1986, it harmonizes monetary and exchange rate policies across South Africa, Lesotho and Swaziland. Namibia pegs its local dollar at par to the South African rand. The East African Community (EAC) is another venerable union. In November 2013 all five members of the EAC - Tanzania, Uganda, Rwanda and Burundi, as well as local powerhouse Kenya - signed a protocol that pledged to put a full monetary union in place within a decade, boosting commerce and bringing all five currencies under one roof. The Kenyan shilling is also rising in importance, having become widely used in South Sudan. “It could be that the Kenyan shilling becomes the regional currency hegemon in that area,” notes Angus Downie, chief economist at pan-African lender Ecobank. “That would drive trade in the region, and increase trade flows into the EAC as well as beyond its borders.”
| There is no reason why francophone Africa would seek to get rid of its peg to the euro|
The situation in west Africa is more complex. Here, two regional francophone blocs exist: one centred around Senegal, and including Ivory Coast and Benin; the other based in Cameroon and including Democratic Republic of the Congo. Both regions have their own currencies – the western and central African CFA francs, officially and respectively called the ‘Xof’ and ‘Xaf’ - each of which is pegged to the euro, trading equally and at the same rate across all constituent member states. This is unlikely to change for the foreseeable future. “There is no reason why francophone Africa would seek to get rid of its peg to the euro, given that it affords control of monetary policy, and helps temper inflation,” says Downie. “There are some people in the region who lobby for the removal of the euro peg, but that is a minority position that no one takes too seriously.”
The remaining currency bloc-in-the-making is the West African Monetary Zone (WAMZ), a group of six largely anglophone nations including Nigeria, Ghana and Sierra Leone. Formed in 2000, the zone’s founding ambition was to introduce a single currency, the ‘eco’, by 2015, along with a unified customs union and currency union. That deadline has passed, and it remains difficult, believes Gaimin Nonyane, senior macroeconomist at Ecobank, to see the eco taking shape any time soon. “It’s been in the pipeline for so long, the chances of it happening are very low,” she says. “That’s largely because you have regional economic heavyweights such as Nigeria, who won’t want to give up or ‘share’ their currency with smaller countries. Nor will they want to lose control of their monetary policy.” This also ensures that long-held if vague plans to create a single western African currency, by blending the Xof, the Xaf and the planned eco, are unlikely to be implemented, for years if not decades to come.
On the slow burner
Creating common currencies is very much a slow-burn project in Africa, for many reasons. For one thing, there remains “a lot of mistrust politically between African countries,” notes Roosevelt Ogbonna, executive director, commercial banking, at Access Bank. Companies and institutions can operate “very well and very successfully across the region” particularly those that best understand the complexities of operating cross-border and cross-currency, he adds. Companies and institutions from Access Bank to Nigerian conglomerate Dangote Group to South African telecommunications firm MTN operate a slew of local operations, profitably and successfully, across the region.
Then there is the disastrous model provided by the single European currency, which remains a cautionary tale of the dangers of haphazardly gluing together vastly different economies, cultures and financial systems. Had the euro succeeded, few in Sub-Saharan Africa doubt that regional currencies would have moved several steps closer.
Yet the euro’s failings merely forced African sovereigns to retreat from, rather than advance toward, true currency blocs. “African countries took at look at the experience of the euro, and the lack of buy-in by several members when the project began to get seriously stressed,” notes Access Bank’s Ogbonna. “It’s easy to do things when markets are good, when things are going well, but it’s how you operate under pressure that matters. Germany loved the euro when it was sailing along smoothly, but then they were asked whether they really wanted to bail out Greece and other eurozone governments.”
Adds Adedapo Olagunju, Access Bank’s group treasurer: “It will be uncanny if Africa ignores the current problems facing the eurozone. While the pros of a single monetary zone outweigh the cons in theory, recent events show that the fundamental requirements for a single currency bloc have to be adhered to otherwise the results may be catastrophic.”
Alan Cameron, chief Africa economist at boutique investment bank Exotix, believes that currency blocs would likely struggle, were governments forced to relinquish sovereignty over fiscal matters to a central authority. “This is particularly so in East Africa, where fiscal policy has become an important tool of central government, and the discovery of natural resources - oil in Kenya and Uganda, gas in Tanzania - will make sharing all the more difficult,” Cameron says. “In our view, the best the region can hope for is the progressive elimination of tariff and non-tariff barriers to trade, along with the freer movement of labour and capital. But a central fiscal authority is out of the question at this point.”
African sovereigns face a further challenge here. The region is carpeted with economies in different stages of development. Some economies boast oil and gas; others don’t. Some speak English; others favour French. To maintain a single currency bloc effectively, each member state would have to be able to support a single currency supported by a commodity of their choice, whether oil reserves, gold, or foreign exchange reserves in the form of euros or, more likely, given the fading powers of the single currency, US dollars. They would then need continually to support these reserves via the implementation of disciplined fiscal and monetary policies. None of this would be simple. Indeed, some believe that regional single-currency blocs would struggle to survive almost as soon as they were formed. “One could literally see various reasons why the WAMZ currency bloc would have fallen apart [by now], considering the various economic peculiarities facing each member country,” says Access Bank’s Olagunju.
|If SSA was truly working toward a single currency,|
it would encourage foreign companies and investors
to take a much longer-term investment policy
Gaimin Nonyane, Ecobank
Many believe a single African currency, or even a slew of strong, regional currency blocs, to be as far away as ever. On the surface, this is a pity. While the lack of a coherent regional monetary policy has, ironically, probably kept the region bound together (on the basis that currency unions would likely have fomented painful differences between member states, and imbued bitterness among ‘stronger’ member states forced potentially to prop up resentful ‘weaker’ ones), there is no doubt that a unifying currency would benefit the whole region. “If Sub-Saharan Africa was truly working toward a single currency, it would definitely encourage foreign companies and investors to take a much longer-term investment policy in the region,” believes Ecobank’s Nonyane. The lack of a coherent position on collective currencies, she adds, is what ensures that many investments across the region, outside specific industries such as oil and gas, remain so short-term in nature.
Yet some remain hopeful, if only for the clear and undeniable reason that Sub-Saharan Africa remains the world’s great and perhaps sole remaining untapped growth market. All the commodities in the world are here, along with a fast-growing, aspiring workforce determined to build a better life for itself. As more manufacturers push into the region, and as corporates, backed by investment capital, build, process and distribute finished goods and services, the clamour for a more coherent position on a regional currency or currencies will only rise. That is what makes Access Bank’s Olagunju believe that a single-currency bloc in Sub-Saharan Africa remains a “viable project, considering all of the clear and obvious benefits with regards to free trade, market access, and economies of scale”.