By Abdoulaye GUIRASSY, economist.
From September 9 to 13, 2024, Guinea hosted the Statutory Meetings of the West African Monetary Zone (WAMZ). This event brought together economic policy decision-makers from non-WAEMU sub-regional countries, namely Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone.
This high-level meeting aimed to examine issues related to the macroeconomic convergence of member countries, trade integration, monetary cooperation, the stability of the financial sectors, payment systems and the exchange rate.
It is clear that the sub-regional meetings within the framework of the WAMZ follow one another and are similar, but the horizon for the establishment of real monetary integration is moving away day by day, due to the instability of the macro-economic framework of member countries and non-compliance with the convergence criteria, a sine qua non condition for a project of such scale.
WAMZ economies have recorded mixed progress in recent years with average real GDP growth of 1.7% between 2015 and 2019, compared to 7.2% between 2010 and 2013, and 6.0% during the period. 2005-2009. However, apart from being predominantly low-income countries, these economies have other characteristics that make them very vulnerable to external shocks. Inherent characteristics of these countries include concentration of exports on a few commodities, dependence on strategic imports, dependence on foreign sources of financing, and prevalence of civil and political instability, among others. . These characteristics weigh considerably on the economic progress of individual countries and the Zone as a whole.
Globalization, as we know, is a form of integration of economies on a global scale. It requires developing countries to form large groups in order to exist economically and reduce the effects of asymmetric shocks. Indeed, within an integration, countries carve out a place of choice for themselves through their economic influences. Economic regionalization then presents itself as an unstoppable alternative for West African states with flexible or floating exchange rate regimes like Guinea, hence the prospect of establishing the WAMZ.
As a reminder, the WAMZ has set itself the primary objective of establishing a single currency called ECOestablished on the basis of a fixed and irrevocable exchange rate between the different currencies, namely: the Guinean Franc, the Dalassigambian, the Ghanaian Cedi, the Sierra Leonean Leone and the Nigerian Naira. The final objective will be the merger of the ECO and the CFA Franc, thus allowing all West African countries to have a single and stable monetary zone for our sub-region.
To achieve these objectives, the WAMZ has set the following convergence criteria:
• A budget deficit of less than 5% of GNP;
• An inflation rate below 5%;
• A budget deficit of less than 10% of tax revenues from previous years;
• Central Bank reserves must cover three months of imports.
Originally, the leaders of the WAMZ countries had considered the implementation of the ECO (common currency) before July 2005, but given the poor economic and monetary performance in achieving the convergence criteria, it was unanimously decided by heads of state at their Conakry summit in May 2005 to postpone the launch of the ECO for 2009, while denouncing the low level of political commitment and the lack of integration of the targets of convergence to national economic programs. These factors are prohibitive to the establishment of the West African monetary union.
As an illustration, for the year 2023, the macroeconomic variables of Guinea, Sierra Leone and those of the Gambia are as follows:
Guinea
• Budget deficit: 1.6% of GDP
• Inflation: 7,8 %
• Foreign exchange reserves: 2.5 months of import
Sierra Leone
• Budget deficit: 5.8% of GDP
• Inflation: 46 %
• Foreign exchange reserves: 3 months of import
Gambia
• Budget deficit: 3% of GDP
• Inflation: 5,3 %
• Foreign exchange reserves: 4.9 months of imports.
It appears from these statistics that the WAMZ countries have rather mixed economic performances and a lame convergence process. Recent developments in commodity prices, external shocks from global markets continue to impact the economic performance of Member States due to their dependence on the export of commodities, such as agricultural raw materials and other natural resources. For example, commodity prices have been volatile in recent years, influencing supply variations versus moderate demand. In fact, growing global macroeconomic uncertainties have led to volatility in commodity prices. The global market has seen a fall in the prices of crude oil, gold and diamonds, which are among the main products exported by WAMZ countries. Between 2013 and 2019, crude oil, which is Nigeria’s main export, saw a 4.1% fall in price level; gold, the main export product of Ghana, Liberia and Guinea, recorded a price drop of 3.4%; while the price of rubber and iron ore, which constitute the main exports of Liberia and Sierra Leone, fell by 8.1% and 0.8% during the period 2013-2019. Similarly, the prices of groundnuts and logs, also major exports of The Gambia, fell by 1.8% and 3.5%. The fall during the commodity price shocks (2014-2016) was very marked for most of the Zone’s exports: crude oil (-23.5%), iron ore (-21.9%), rubber. (-15.0%), peanut (-15.4%), and gold (-3.7%). These price shocks had a negative impact on WAMZ member states, leading to the destabilization of foreign exchange earnings, collapse of foreign exchange reserves and weakening of fiscal performance of some WAMZ member countries. the Area.
To then provide a certain effectiveness in achieving its objectives, the WAMZ has acquired a management body called the West African Monetary Institute (IMAO), whose essential task is to install the future supranational Central Bank of the countries members.
However, economic literature reminds us that economic and monetary union is the completed phase of all forms of integration, after of course the stages of the preferential trade zone, the free trade zone, the customs union and the common market. From this point of view, it is imperative for member countries to rigorously follow the classic route leading to economic and monetary union.
At the end of this reminder of the history of the WAMZ, it is legitimate to question the political will of the countries with regard to the gigantism and the titanic nature of this integrative project which requires unequivocal commitments to abdicate a significant part of the economic sovereignty of member states. Generally speaking, states which renounce their monetary sovereignty by committing to the construction of a monetary zone such as that of the WAMZ, should renounce using the exchange rate as an instrument of macroeconomic stabilization.
The evaluation of the costs and benefits of a monetary union is often at the center of debates among economists. The fact remains that potential gains can be identified, in particular: saving resources through the common management of external reserves, reducing uncertainties and transaction costs, reducing speculative capital movements. As for the costs of monetary union, they essentially come from the abandonment of monetary policy and the exchange rate. The union can also exacerbate imbalances between countries or regions.
Analyzing the path somewhat devoid of proactivity and voluntarism in the implementation of the WAMZ for decades, it seems relevant to me to take a lucid look at the optimal character of the future African Monetary Zone. ‘West.
The Canadian economist Robert Mundell, who is the author of the theory of monetary zones, teaches us that the effectiveness of a monetary zone requires the mobility of production factors and a strong flexibility of prices and wages which replaces the exchange rate flexibility as a means of adjustment. However, it is obvious that within the WAMZ member countries, there is a low level of mobility of production factors. It goes without saying that asymmetric shocks can worsen inter-State imbalances. These imbalances can have varied forms from one country to another (trade deficit, economic recession in some countries, and trade surplus, expansion, inflationary tensions in others).
Thus, the framing or coordination of the economic policies of these countries can provide correctives to these imbalances, through the movement of exchange rates, the flexibility of prices and wages, as well as the mobility of production factors.
From the above, we can affirm that to date, the conditions for optimality of the WAMZ are far from being met given the weakness of the mobility of production factors, the lack of flexibility of prices and wages, and the backward path taken in this integration process. This somewhat pessimistic point of view in no way alters the inherent advantages of economic and monetary regionalization of our West African sub-region. The realization of the WAMZ therefore requires the implacable will of political leaders and economic policy decision-makers. member countries in achieving the convergence criteria and in carrying out the related economic and financial reforms.
About the author
Abdoulaye GUIRASSY is an economist and political scientist, President of the Circle of Reflection and Analysis of the Economic Conjuncture (CRACE) and corresponding Member of the Guinean Academy of Sciences.
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