By J. Yanqui Zaza
As the year 2020 comes closer for the fifteen-countries of the Economic Community Of West African States (ECOWAS) to form a single currency (ECO), proponents and pessimists are expressing their views.
From Liberians, I have yet to read any serious debate. Or if they are debating ECO, the Central Bank of Liberia (CBL), our monetary institution, has limited information. On page # 70 of the CBL’s 2018 Annual Report, officials stated that “…the bank remains committed to the full implementation of the ECOWAS Single Currency Roadmap.” What would be the exchange rate between the Liberian currency and ECOWAS single currency, for example?
Also, the administration should outline benefits and/or costs, if any. For instance, will Liberians lose if they use ECO and not the United States currency to import goods and services? Liberians import only 7% of their goods and services from Africa, while they import 93% from outside Africa. More so, is it realistic for Liberia to cut deficit spending from 41% (US $222 million deficit divided by US $530 million projected revenue) to 4%, ECOWAS deficit spending rate? The CBL reported that Liberia’s deficit spending of US $222 million in 2018, or a rate at 41% (deficit of $222 million/$530 million total revenue), was unprecedented.
Here are the four primary requirements, according to ECOWAS:.
• A single-digit inflation rate at the end of each year
• A fiscal deficit of no more than 4% of the GDP
• A central bank deficit-financing of no more than 10% of the previous year’s tax revenues
• Gross external reserves that can provide import cover for a minimum of three months.
The six secondary criteria to be achieved by each member country are:
• Prohibition of new domestic default payments and liquidation of existing ones.
• Tax revenue should be equal to or greater than 20 percent of the GDP.
• Wage bill to tax revenue equal to or less than 35 percent.
• Public investment to tax revenue equal to or greater than 20 percent.
• A stable real exchange rate.
• A positive real interest rate
If the administration can’t provide reliable revenue and expenditure projections, how will it fight to reduce its 27% inflationary rate to the 4% rate set by ECOWAS? If the administration is deficient in publishing annual reports, how would it encourage stakeholders such as the Liberian Electricity Company, National Port Authority, cell phone companies (Lone Star and Orange) to publish needed financial statements as required? The stability and soundness of any currency require trust, which is based on transparency and accountability of stakeholders.
If Liberian stakeholders are far from being transparent and accountable, is the picture in other members of ECOWAS better? And, if negative economic conditions indicate that it is premature for these countries to adopt a single currency, what factors are encouraging authorities of ECOWAS to believe that their 385 million people will be better off when they adopt the single currency?
Proponents hope that a single currency might reduce the impact of exchange rate fluctuation, impact of currency devaluations, might reduce the possibility of civil and religious conflicts, terrorism and could address the root cause of structural unemployment problems.
The Economic Community Of West African States (ECOWAS) “…is a regional group of fifteen countries founded in 1975. Its mission is to promote economic integration in all fields of economic activity, particularly industry, transport, telecommunications, energy, agriculture, natural resources, commerce, monetary and financial questions, social and cultural matters…”
Why is the management of “natural resources” not the focus of ECOWAS’ economic policy? Would a reasonable revenue intake generated from natural resources not help to reduce the budgetary shortfalls that West African countries face every year? Many African countries generate about 3% to 7% from natural resources, while monies collected from their citizens and businesses (i.e., excise tax, custom tax, import tax, real estate tax, income tax, value-added tax, etc.) represent about 60% of government revenue. (See IMF Reports of Sierra Leone, Ghana, Cote d’Ivoire, and Guinea). It is only Nigeria that generates about 40% of government revenue from oil and gas. (See IMF Report).
Aside from generating minuscule revenue from natural resources, they also are unwisely spending money collected from the pockets of their poor citizens. For example, the June 22, 2019 Economist Magazine reported that the number of Ghanaian government ministers has soared by 42% to 125, each with a car, guards and a taxpayer-funded home since Nana Akufo-Addo took office as President in January 2017.
If true, this is the type of unnecessary spending that is now forcing Ghana to spend about 24% of government revenue on interest payment.
On page # 30 of the IMF Report on Ghana, average interest payment from 2017 through 2021, was $5.7 paid from an average revenue of $18.2. Interest payment increased because debt increased. Ironically, Ghana has increased its debt from US$5 billion in 2005 to US$30 billion in 2018 even after it benefited from the Debt Cancellation Program called the “Heavily Indebted Poor Countries (HIPC).
Note, 33 countries including Ghana met HIPC item #3 and item #4, because they had established sound financial reform and promised to spend a significant portion of their revenue on reducing poverty.
If the numbers provided by the IMF Reports are correct, African governments will continue to pay high interest on debt because governments continue to generate low revenue from natural resources and continue to spend unwisely.
Therefore, whether ECO is adopted now or in the future, none of these countries will meet and/or sustain ECO since the governments are relying on monies from pockets of their citizens. Implicitly, IMF reports indicate that total revenue will be less than total expenditure, and authorities will continue to cut social spending (i.e., for example, salary harmonization, downsize, right-size).
Anytime a country or countries fail to obtain adequate cash because they are using, for example, 24% of their government revenue, to pay for the cost of borrowing, the currency rate becomes unstable, and citizens, investors, and third parties loose trust in the economy, a recipe for chaos, demonstrations or violence, etc.
Yes, I welcome ECO. In addition, African countries should unite and generate reasonable/adequate revenue from their natural resources.
Criteria to join the ECO (ECOWAS Single Currency)
Sierra Leone 2019 National Budget
IMF Report on Ghana National Budget
IMF Report on Cote d’Ivoire National Budget
Nigeria: Selected Issues; IMF Country Report No. 19/93
IMF Report on Guinea National Budget
The Economist Magazine