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Why The ECOWAS "ECO" Will Not Work, For Now

Dec 08, 2019   •   by   •   Source: Proshare   •   eye-icon 2356 views

Sunday, December 08,2019/  7:00PM / By Teslim Shitta-Bey, Managing Editor/ Image Header Credit: FreedomNewspaper


 

Nigeria's temporary closure of its land borders withneighboring West African counterparts signifies more than just a briefdifficulty in meeting the terms of the Africa Continental Free Trade Area(AfCFTA) agreement; it equally underscores why the Sub regional Economicarrangement called ECOWAS, will miss its sub-regional single currency target by2020. 


Not only does the sudden border closure reveal theweak underbelly of the Nigerian Economy, it also exposes the fragility of the Economicintegration of the sub region. In early 2019 the 15 member nations of ECOWASagreed to create a regional currency called "Eco" but as the year 2019 closes,prospects of the Eco being a regional unit of account any time soon appearsdim.

 

The single currency agenda was designed to improveintra-regional trade and lock-in monetary policy stability on the basis of aflexible exchange rate regime, but on review of the state of Economies acrossthe sub region only the Republic of Togo met the minimal criteria for theadoption of the Eco currency.



 

The Eco Criteria

 

To adopt Eco, countries must meet three primary andthree secondary criteria:

 

Primary Criteria:

1.     A budget deficit of not more than 3 percent;

2.    Average annual inflation of less than 10 percent witha long-term goal of not more than 5 percent; and

3.    Gross reserves that could finance at least threemonths of imports.

 

Secondary Criteria:

 

1.     Public debt/Gross Domestic Product of not more than 70percent;

2.    Central Bank financing of budget deficit should not bemore than 10 percent of

      previousyear's tax revenue; and

3.    Nominal exchange rate variation of plus or minus 10percent.

 

 

Big Brother's Burden

 

Nigeria is the largest Economy in Africa (GDP ofUS$397.3bn, 2018), but it is also one of the most fragile. In the last twoyears GDP growth has been less than its average population growth of +2.6% (see chart 1 below) and inflation hasremained above +11.02% (see chart 2below) while public sector deficit as a per cent of gross domesticproduct (GDP) has stayed above -0.9% in 2014,the last four years in particular have seen as worsening in the fiscal position(seechart 3 below).

 

 

 

Chart 2 Nigeria's GDP Growth Rate Q1 2018-Q3 2019

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Source: National Bureau of Statistics (NBS)

 

 

 

Chart 2 Nigeria's inflation rate and forecast

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Source: National Bureau of Statistics (NBS), Proshare Research

 

 

 

Chart 3 Nigeria's Budget Deficit as % of GDP 2009-2018

 

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Source: National Bureau of Statistics (NBS)

 

 

Weakening Reserves

 

To create stability for the proposed Eco currency,Nigeria needs to have a healthy US dollar reserve situation to provide aliquidity 'anchor' for regional currency flows but Nigeria's present externalreserve situation has weakened over the 2019 fiscal cycle with external reserverising from US$43.1bn in January 2019 to US$45.12bn in July but tumbling back toUS$39.97bn in November 2019 (see chart 4 below). 


 

Chart 4 Nigeria's Foreign Reserve(US$) January-November 2019

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Source: National Bureau of Statistics (NBS)


 

External Debt Worries

 

Perhaps of greatest concern to observers of theNigerian Economy is its sharp rise in external debt. Nigeria's external debthas increased from US$5.66bn in 2011 to US$10.72bn in 2015, or what representsan +89.39% rise in five years. The situationdoes not improve over the next five years as external debt now stands atUS$27.16bn as of June 2019, representing a further +153.5%five year increase. On a compound annual basis between 2011 and 2019Nigeria's external debt has increased by +20.2% annually(seechart 5 below).


 

Chart 5 Nigeria's External Debt2011 -2019 (US$)

 

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Source: National Bureau of Statistics (NBS)

 

 

 

Stable Exchange Rate; Temporary Peaceof Mind

 

Nigeria's exchange rate relative to the US$ has beenstable, mainly because the central bank has adopted a heterogenous strategy ofkeeping the rate at N307/US$ at the official window and N360/US$ at the importersand exporters (I&E FM) window. This has involved regular Bank interventionat times of potential shock to the international crude oil price. Theintervention has been mirrored by the steady decline in the country's foreignreserves.


In contrast to the foreign exchange stability ofNigeria, faster growing West African Economies have seen greater volatility intheir exchange rate including Ghana and the Francophone Economies of WestAfrica (see chart 6 and 7 below)

 

 

 

Chart 6 The Cedi to USD DollarExchange Rate 2016-2019

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Source: Investing.com

 

 

Chart 7 The CFA/XoF to USD DollarExchange Rate 2016-2019

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Source: Investing.com 

 

 

 

Knowing The Truth; Setting New Agendas

 

Aside the great photo ops that ECOWAS meetings givecontinental leaders, so far, a lot of the heavy agenda-setting lack tangibleand implementable outcomes. The reality of the weakness of the sub region's Economies,particularly that of Nigeria was admitted by the Nigerian Minister of Finance,Budget and National Planning, Zainab Ahmed, while speaking at the openingsession of the meeting of ECOWAS Committee of Ministers of Finance andGovernors of Central Banks, the Nigerian Finance boss noted that, in the lasttwo years, with the exception of Togo who met the set target for Eco adoption,it would be difficult to see any other country meet the single-currency goal by2020.

 

The Nigerian Minister told her regional compatriotsthat "We need to address in an optimal way the challengesahead of us. This meeting is important because we are at a crossroads. The recommendationswe make will have significant implications on the monetary policies weundertake".

 

Ahmed observed that the inability of most West Africancountries to achieve the desired fiscal and monetary criteria would make theadoption of the "Eco" in 2020 unfeasible

 

 

The best approach to resolving the challenge wouldappear to be the following:

  1. Settinga new five year agenda for the Eco with staggered targets
  2. Setannual fiscal goals for "anchor" regional economies such as Ghana, Nigeria,Cote d'Ivoire, Niger, Togo, and Burkina Faso.
  3. Setannual external reserve goals for anchor economies over a period of five years
  4. Setannual external debt targets as a proportion of GDP targets over a period of 5years
  5. Setannual budget deficit to Revenue ratio targets for anchor economies over aperiod of five years
  6. Setup a joint economy monitoring committee with responsibility to research andreview sub regional basis with the mandate to provide position papers to theECOWAS Headquarters and make available data for peer review and collectivepolicy decisions towards meeting a 2025 target for the Eco currency to commence

 

Kicking the "Eco" can down the road may be unpleasantbut in the face of the current economic realities of West African economies itseems the most sensible thing to do, at least for now.

 

 

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 Proshare Nigeria Pvt. Ltd.

 

Proshare Nigeria Pvt. Ltd.

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