If African countries are to further integrate through t rade and investment, monetary integration or cooperation is critical, but concer n s over sovereignty hold back the desired real economic integration of the largel y poor countries.
Economists studying currency unions have found that the adoption of a common cur rency increases trade because this eliminates exchange rate volatility and reduc e s the transactions cost of trade within that group of countries.
“A common currency makes it easier for countries to trade with each other in the same way that a common language facilitates effective communication among peopl e ,” said Robert Barro, a prominent economist, who added that “also, by making it e asier to compare prices and wages across countries, it increases trade and compe t ition.”
However, Africa trades very little, both within and with the outside world.
Intra-Africa trade remains below 10 per cent, compared with 75 per cent for intr a-EU and 51 per cent for intra-Asian trade.
Africa’s position in world trade is also marginal. Its share in world exports fe ll from about 6 per cent in 1980 to 2.7 per cent in 2005 and its share of world i mports from about 4.6 per cent in 1980 to 2.1 per cent in 2005.
Significantly, Africa’s share in global export of manufactures has changed very little since 1980 and remains below one per cent.
Economists interviewed on the fringes of the 12th African Securities Exchanges A ssociation (ASEA) conference argued that monetary cooperation and integration wo u ld also allow African countries to reap economies of scale from financial integr a tion, which remains a challenge.
“In Africa, monetary integration or a currency union is an important goal,” Mich ael Mah’moud, Lead Financial Economists at the Africa Development Bank (AfDB) gr o up, asserted.
“If the continent is to make further progress with regional integration, more at tention has to be paid to monetary integration issues. A major gain from a mone t ary union is increased trade,” Mah’moud said.
Just as Africa’s share in world foreign direct investment (FDI) remains small at 4 per cent and is concentrated in natural resource of rich countries, so the si z e of capital markets, the smallest in the world, accounting for 1.3 per cent of g lobal stock market capitalisation, 0.2 per cent of global debt securities and 0. 8 per cent of global bank assets.
“A monetary union brings increased opportunities to financial institutions, make s it easier to enlarge and deepen the financial services market by lowering the c ost of capital and improving its allocation and lowers transactions and hedging c osts,” Mah’moud explains.
It is generally accepted that in Europe, the process of disinflation and fiscal consolidation in the 1990s would have been difficult to achieve without the stri c t convergence criteria that countries had to meet to become part of the monetary
“A currency union results in exchange rate stability as speculators would be det erred from attacking the currency or currencies as they have to contend with the
combined reserves of member countries,” Mah’moud pointed out.
“It may solve the policy credibility problems faced by many African countries. I n Africa, many central banks face credibility or reputational problems in that t h ey lack independence or are nominally independent.
“As such, belonging to a monetary union would remove or neutralise the control o f national governments and bring greater independence and credibility,” he said,
adding “in other words, a currency union can function as an agency of restraint t o the government.”
Belonging to a monetary union acts as a cushion against the negative impact of e xternal shocks ever since it was found that participation in the CFA zone shield e d members from the negative impact of economic shocks that affected the world ec o nomy in the 1970s.
“For small countries with thin capital markets, a fixed exchange rate within a d efined region cushions a country against exchange rate volatility that is more c o mmon with floating exchange rate regimes,” Mah’moud point out.
Some economists, however, believe that most African Regional Economic Cooperatio n (RECs), such as the EAC, COMESA, SADC, or ECOWAS are not ready for a monetary u nion, saying monetary cooperation and integration faces the same challenges as o v erall integration.
According to Mah’moud, “African countries produce and export similar products an d usually to the same markets, mainly to OECD countries. This has had the effect
of limiting the growth of intra-regional trade and reducing the incentives for t h ese countries to co-operate.”
“Second, a fully developed monetary union implies loss of sovereignty, especiall y over an independent monetary policy, as countries in the union share a common c urrency, common monetary and fiscal policies, a common pool of foreign exchange r eserves and a common monetary authority or central bank. Countries may therefore , be reluctant to subordinate their policy decision-making to sub-regional instit u tions.”
He further cited the heterogeneity of African economies as engendering asymmetri c trade creation and trade diversion, thereby undermining the effectiveness of r e gional integration on the continent.
“When one economy is relatively larger vis-a-vis the others as in the case of So uth Africa in SADC, the more competitive country gains at the expense of the les s competitive ones. This may lead to job losses and possibly, de-industrialisatio n in the long-run may occur in the weaker countries,” he warned.