WEST AFRICAN MONETARY INSTITUT MONETAIRE DE

INSTITUTE (WAMI) L’AFRIQUE DE L’OUEST (IMAO)

QUESTIONS AND ANSWERS ON THE

WEST AFRICAN MONETARY ZONE

WEST AFRICAN MONETARY INSTITUTE

ACCRA, GHANA

INTRODUCTION

The objective of the Economic Community of West African States (ECOWAS), established in 1975, is in accordance with articles 3 and 51-55 of its treaty on the establishment of an Economic and Monetary Union for its member countries. To expedite the ECOWAS integration programme, the Heads of State and Government of The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone, acting within the ECOWAS framework of regional integration, signed in Accra on 20^th April 2000 a Declaration on the creation of a second Monetary Zone. The Second Monetary Zone was formally launched and named the West African Monetary Zone (WAMZ) at the Bamako Mini-Summit of Heads of Stated and Government of member countries in December 2001. All the above countries except Liberia signed the statute of WAMZ. The West African Monetary Institute (WAMI) was established at that meeting to undertake all necessary tasks leading to the setting up of the West African Central Bank (WACB) and the introduction of a common currency. National authorities of The Gambia, Ghana, Guinea, Nigeria and Sierra Leone are actively supervising the programme regarding the setting up of the West African Central Bank.

The purpose of this Question and Answer booklet is to provide answers to issues frequently raised by the general public regarding the objectives and modalities of the introduction of the Second Monetary Zone.

QUESTIONS AND ANSWERS

Monetary integration is an integral component of economic integration. It is an evolutionary process that culminates in the adoption of a common monetary policy by a number of countries ceding sovereignty on monetary matters to a common monetary authority responsible for issuing a single currency. Monetary integration may evolve through a number of cooperation arrangements like, an exchange rate arrangement where limited currency convertibility exists, parallel currency union where national currencies co-exist with a common currency, and a full monetary union where a Common Central bank exists to formulate and implement a common monetary policy and issue a single currency.

The monetary integration process started with the establishment of the West African Clearing House (WACH) mechanism, as a multilateral payment arrangement. The West African Clearing House (WACH) (now transformed to West African Monetary Agency (WAMA) was established in 1975 to promote trade in the sub-region by providing a payment mechanism for clearing and settlement of intra-regional transactions, as well as to encourage the use of national currencies in transactions, that brought about savings in the use of foreign exchange. In 1978, the West African Bankers’ Association (WABA) was formed, embracing commercial and development banks as well as other credit institutions in the sub-region. In 1987, ECOWAS launched a more comprehensive programme - The ECOWAS Monetary Cooperation Programme (EMCP) that defined the process leading to the creation of a single monetary Zone and the introduction of a common currency

The objectives of the EMCP were to adopt collective policy measures to achieve a harmonised monetary system and common management institutions among the member countries in 2000. The goals were to be attained in three phases: The short-term objective was to strengthen the payment mechanism at the level of the WAMA, by introducing the ECOWAS Travellers Cheques and a Credit Guarantee Fund. The medium term objective was to achieve limited currency convertibility while the long-term objective was to achieve a single monetary zone in the sub-region, characterised by the use of a common currency, and the creation of a common central bank.

In the implementation of the short-term objectives of the EMCP a number of difficulties were encountered including, the accumulation of arrears in the clearing mechanism. A Credit Guarantee Fund, which was designed to shore-up the risk of default, did not take off on schedule. Furthermore, the new payments instrument, the ECOWAS Travellers’ Cheque, after much delay was launched in 1998 but its use has been fraught with some problems. The long-term objective was not met, due to the inability of member countries to sustain stable macroeconomic environment resulting in several postponements of the due date.

At the 22^nd Summit of the Authority of Heads of State and Government held in Lomé, Togo in December 1999, it was decided that a two-track approach to ECOWAS integration programme be adopted to accelerate the integration process in the sub-region. In this regard, Ghana and Nigeria met in Accra, December 1999 and agreed to work towards closer cooperation in trade and monetary integration

6. What was the outcome of the Accra Summit?

At the Summit of Heads of Sate and Governments of The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone held in Accra April 2000, under the auspices of the Chairman of Authority, the Accra Declaration was signed committing members to the creation of the second monetary zone and its institutions.

The Technical Committee assisted by a Task Force undertook the preparatory activities for the establishment of the Second Monetary Zone. Subsequently, the Summit of Heads of State and Government of member countries held in December 2000 in Bamako, Mali approved the documents relating to the legal and institutional framework of the sone. These include the Statutes of the West African Monetary Zone (WAMZ), West African Monetary Institute (WAMI), West African Central Bank (WACB) and Stabilisation and Cooperation Fund (SCF).

The following countries signed the Statutes establishing the WAMZ in December 2000:

Liberia indicated that the country is concentrating on rebuilding and rehabilitating the infrastructures having come from a post conflict situation. Membership of the WAMZ will be reviewed once the financial, economic and capacity situations improve.

Article 3 of the WAMZ Agreement states that “Any African state, which becomes a member of ECOWAS may become a member of WAMZ upon application to the Council and fulfilment of all eligibility criteria.”

The primary objective of the WAMZ is to establish a common Central Bank that will issue and manage a common currency with a cooperative integration framework.

that will work in concert with WAMI to ensure the effective execution of the programme of the Zone

The West African Monetary Institute - An interim Institution that will prepare

The Stabilisation and Cooperation Fund - A Fund to provide financial assistance for

The financing of the activities of the Zone is done by member states of WAMZ who contribute in accordance with the agreed ECOWAS budgetary contribution formula, which takes into account the nominal GDP, per capita income and population

The initial date for the monetary union was January 1, 2003. However an assessment of the status of preparedness by member states done in 2002 revealed that countries had not fulfilled the necessary condition of achieving macroeconomic convergence. Consequently, the decision by the Summit of Heads of State and Government of WAMZ in Conakry, Guinea, in November 2002, deferred the launching of WAMZ monetary union to July 1, 2005. This extension would give member countries more time to meet the convergence criteria..

The Convergence Council adopted ECO as the name of the WAMZ common currency in January 2003. The choice of the name reflects the spirit of Community. The work ECO is derived from “economic” or “economique”, existing words in both English and French languages, and it has been adopted by ECOWAS related insitutiions such as, ECOBANK, ECOMARINE, etc. The name would have an appeal as the name of the common currency. With the name ECO, we combine simplicity with marketability and bring to mind economic progress.

An international competition was launched in April 2001 for the selection of a suitable name. Over 1200 entries were received from within and outside the sub-region. The selection process went through six stages and the name ECO was recommended.

The West African Monetary Institute’s functions are subdivided into four areas as follows:

a. The monitoring and assessment of macro economic performance and movement towards convergence by member states;

b. The preparation of a framework for harmonisation of laws governing financial institutions in member countries with the agreement and statute of the WAMZ;

c. The design of core technical issues of the common monetary policy, exchange rate mechanism, foreign exchange, statistical harmonisation, payments system and reserves management;

The WAMI is undertaking its role through active consultations with the various decision-making bodies of the WAMZ as well as the convening of meetings of expert working Committees constituted in the following areas:

19. What are some of the highlights of WAMI’s core programme?

The WAMI work programme include: Multilateral/Country Surveillance; Development in Payments and Settlements System; Banking Supervision; Database development and Statistical Harmonisation; Currency Issues/Management; and Sensitisation of Stakeholders.

The WAMZ multilateral surveillance is a process to facilitate convergence in member countries. It involves: monitoring quarterly assessment of member countries’ macroeconomic performance, preparation of Surveillance and convergence reports; monitoring developments in trade integration; preparation of monthly; and preparation of Economic Intelligence Reports on critical developments that require urgent policy action. The organs of the WAMZ deliberate the quarterly assessment reports prepared by WAMI.

Fiscal imbalances and fiscal deficits have been identified as the primary causes of macroeconomic instability. The avoidance of fiscal dominance was necessary for the attainment of the macroeconomic convergence criteria. The Authority of Heads of State and Government of WAMZ therefore established the Forum of Finance Ministers of WAMZ in Conakry, on 7 November 2002. The decision was taken to facilitate the harmonisation of fiscal and monetary policies to usher in stable macroeconomic conditions in the WAMZ.

22. What are the macroeconomic convergence criteria to be observed by member countries of the WAMZ?

The convergence criteria are a set of macroeconomic targets that member countries of WAMZ are required to satisfy:

a. Achieve and maintain price stability by recording single digit end period inflation rate by 2003 and 5 percent by 2004;

b. Ensure sustainable government fiscal position by reducing the ratio of budget deficit (excluding grants) on commitment basis to GDP to 4 percent or less throughout the period 2003-2005;

c. Limit Central Bank financing of government budget deficit a percent of previous year’s tax revenue to 10 percent or less throughout the period 2003-2005

d. Maintain sufficient level of gross official foreign exchange reserves of at least 3 months of import cover throughout the period 2003-2005.

Payments System is defined as consisting of group of institutions, sets of instruments, laws, rules and procedures used to effect payments for transactions, in the process of ensuring the circulation of money within a geographic area, usually a country.

The institutions concerned with the fulfilment of payments system functions are financial institutions, capped by the Central Bank. The sets of instruments consist of cash and non-cash modes. Mature economies depend more on non-cash instruments.

24. Why is it necessary for WAMZ member countries to develop their Payments Systems?

The use of cash, in economic terms, is expensive. The cost of currency management is always high. A developed Payments System frees funds that would have been used to print and manage currency into productive sectors.

Loss of money due to fire, theft, floods and other natural causes are all reduced through the use of non-cash instruments, which are operated by financial institutions.

Economic activity gets hastened when payments systems are developed. The time lag for payment between transacting parties are curtailed, if not instantaneous and the float that results from long clearing cycles is removed.

There are several non-cash payment instruments options one can use. Paper modes: Cheques; Postal/Money Order; Bank drafts; Loyalty Coupons; Dividend Warrants, etc.

Electronic modes: Electronic Funds Transfer at Point of Sale (Off-line and On-line Smart Cards); Automated Teller Machines (ATM); Real Time Gross Settlement System;

The unique aspect about non-cash modes of payment is that there is the need for customers or transacting parties to have accounts with financial institutions to enable them effect payments.

26. What benefits accrue to the country through the use of non-cash modes of payment?

Credible data on financial transactions is obtained for more accurate planning. The Central Bank is able to formulate better monetary policy to contain inflation. Financial deepening improves the intermediary function of banks between depositors and borrowers. Armed robbery on individuals will drop, as robbers would have to attack banks, which can be contained by the state police.

27. What steps have WAMI taken to develop the payments system in WAMZ member countries?

After assessing the status of payments systems in member countries, which is basically cash based, WAMI has recommended the set up of National Payments Systems in member countries. Besides the National Committees, WAMI has constituted a Zonal Committee on Payments System. The main objective of these Committees is to spearhead the development of payments systems in the member countries and adopt a strategy to harmonize the systems in the member countries and adopt a strategy to harmonize the systems in the WAMZ/

WAMI has been tasked by the Convergence Council to conduct feasibility study to assess the depth of payments system development in the WAMZ.

Banking Supervision ensures financial stability and reinforces the collective monetary policy of the Zone.

Initially, the WACB will be responsible for banking supervision in the WAMZ. Subsequently, through an evolutionary progress, a commission known as West African Financial Supervisory Authority (WAFSA) would be established to undertake banking supervision in the zone.

WAMI, in collaboration with a consultant from FIRST Initiative based in England, is conducting a study. The study is aimed at assessing the progress of member countries towards meeting international standards and best practices for banking regulation and supervision in accordance with the Basel Corps Principles for effective banking supervision; developing specific advice regarding cooperation between WAMZ supervisory authorities, and harmonizing supervisory rules and practices.

The banking supervision will be external to the West African Central Bank. However, it would evolve from the current practice, which warehouses banking supervision in the Central Bank.

It is a process for ensuring uniformity in the concepts, definitions, and practices in the compilation, production and dissemination of statistics among countries.

33. What are the underlying objectives for harmonising statistics in the WAMZ?

Regarding compilation and dissemination of data among the member countries in order to ensure the comparability and yield coherent zone-wide aggregates needed to coordinate policies. In the context of monetary integration, statistics must not only be comprehensive, they must be comparable and capable of being aggregated so as to respectively ensure proper assessment of convergence and present a picture of the zone as an economic entity.

34. What framework has been developed to ensure harmonisation of statistics in the zone?

Member countries should adopt international best practice for data management by subscribing to the IMF’s General Data Dissemination System (GDDS). This system provides a standardise framework for the production and dissemination of statistics to be adopted by all countries. These include the standards on comprehensiveness, periodicity, timeliness, consistency, integrity etc.

35. Which areas and data sets are the focuses for statistical harmonisation?

The focus of harmonisation is on the production and dissemination of statistics on the major sectors of the economy, these are the real sector (i.e. the national account or measurement of the GDP and the consumer price indices), government sector (central government accounts), money and banking sector (uniformity in the balance sheets of the central bank and deposit money banks) and the external sector (the balance of payments).

On the GDDS membership, The Gambia is a full member and all countries have tendered in applications for membership to the IMF. Both the ECOWAS Secretariat and WAMI are collaborating to ensure data harmonisation. ECOWAS has in place the ECOSTAT project funded by the European Commission, which aims at harmonisation of consumer prices, the national accounts and government fiscal operations through the national statistics offices and AFRISTAT. The West African Monetary Institute is working on the harmonisation of the money and banking statistics and the balance of payments.

37. After the new currency is introduced, what will happen to the existing currencies of member

The national currencies will circulate alongside the new currency for a given period after which the old currency will be completely phased out.

There are many advantages to be derived by introducing the common currency. These include:

· The creation of a larger regional market, which will lead to increased regional cross-border trade and investment;

· Lower level of inflation and more stable price level arising from the commitment on the part of Member States to adhere to the agreed rules of monetary and financial discipline would create a more conducive environment for business activity;

· Attraction of more foreign direct investment into the region as a result of monetary stability and the larger regional market.

Units of accounts are standards of measurement that allow individuals to place value on goods and services. On the introduction of a new currency with new values, many citizens may have difficulties in adjusting to prices and values expressed in the new currency. They may loose their scale of value based on the old currency. In order to facilitate the pricing in the new currency, it would be useful to introduce a unit of account, which will be used for measurement purposes. The unit of account would allow economic agents to start pricing their good and services, in the new units.

The ECO unit of account will be an “artificial basket” of currencies, which will be used by member states of the WAMZ as their internal accounting unit. This unit would be the precursor of ECO as a currency. The Unit will allow economic agents to get used to a new measurement concept before the new common currency is introduced and will lead to a smooth transition.

An Exchange Rate Mechanism is an arrangement dealing with the setting of exchange rate parities between currencies of a zone and an anchor currency, as well as the margins of fluctuations that will be acceptable to keep macroeconomic conditions stable in the zone. The mechanism allows the exchange rates of member countries to move only in a limited distance away from the central rate.

The ERM is designed to help keep macroeconomic conditions stable in the Zone in order to promote trade within the zone and between the zone and the rest of the world. The Exchange Rate Mechanism will help to ensure that member states participating in the mechanism re-orient their policies towards stability, foster convergence and prepare them towards adopting a common currency. The ERM would also help in policy coordination between member countries of the Zone.

43. What is a virtual currency and why is it required prior to introduction of Eco currency?

A virtual currency is imaginary money designed for the denomination of transactions. It would facilitate conversion into the Eco currency and serve as the numeraire of the WAMZ currency. An Eco unit of account would be introduced in order to facilitate dual pricing during the transition to the common currency. This will serve as a standard of measurement to allow economic agents place value on goods and services and ultimately enable the public get used to the new measurement concept.

The purpose of the sensitisation programme is to ensure that all sections of the population of member countries are adequately informed about the WAMZ programme.

The sensitisation programme is to be conducted at national and regional levels. At the national level, National Sensitisation Committees (NSCs) have been in place since 2001. The Committees are made up of multi-institutional bodies drawn from the public, private and civil societies are playing a key role in sensitising the public in member countries. WAMI on the other hand has identified five target groups, (Private sector, Parliamentarians, Financial Sector, the Media and Civil Servants/ Trade Unions) that need to be reached during the sensitisation process, and would undertake activities that will be conducted regionally. The sensitisation efforts of WAMI are complementary to national programmes.

As part of the sensitisation exercise accurate and up to date information are to be communicated through the following activities:

e) Publicity materials (leaflets, pamphlets, brochures, souvenirs, handbills, posters, stickers etc.)

The WACB will issue the common currency of the Zone, formulate and implement the common monetary policy, pool and manage the reserves of member countries and undertake measures to ensure price stability.

49. What will be the role of National Central Banks after the WACB is created?

When the new common Central Bank takes off, National Central Banks will become branches and form an integral part of the common Central Bank. They will implement the monetary policy of the common Central Bank.

50. Another institution of the WAMZ is the Stabilisation and Cooperation Fund (SCF) what is the purpose of this Fund?

The SCF is a specialized mechanism to provide financial resources of a short-term nature to members states experiencing temporary balance of payments difficulties.

· Amount of loan available ranges from a minimum of $1million to a maximum of $12.5 million

Governments of member states for the following countries: The Gambia; Ghana; Republic of Guinea; Nigeria and Sierra Leone.

· Submission of signed commitment by Minister of Finance to implement relevant macro-economic policies

56. What will be the role of National Central Banks after the WACB is created?

57. What happened to the original target date of 2003 for the monetary union?

The WAMZ was to be operationalised in January 2003 but owing to lack of compliance with stipulated convergence criteria and the deteriorating trends in macro economic aggregates, the target date for the WAMZ monetary union was shifted irrevocably to July 1, 2005. During the period January 2003 – June 2005, member countries are expected to apply appropriate policy measures to ensure that they are on the path towards sustainable convergence.

A number of activities have been outlined for the period 2003 – July 1, 2005 to usher in a viable monetary union. These are:

· The drawing up of country-specific convergence programmes for implementation;

· Harmonization of existing databases of member countries to enhance the comparability of convergence indicators;

· Incorporation of the convergence criteria in the annual budgets and economic programmes of member countries;

· Provision of adequate funds to the National Sensitisation Committees for intense publicity campaigns;

· Strengthening of member countries’ efforts to adhere to international standards for sound financial systems;

· Acceleration of the programme for the elimination of tariff and non-tariff barriers in the zone and the sub-region through the implementation of the adopted protocols;

· Vigorous on-site and off-site multilateral surveillance of member countries’ by WAMI;

· Design of the currency management framework of the WAMZ. This will be accompanied by relevant frameworks such as the ECO Unit of Account and the design and introduction of a virtual currency. and

· Commencement of the monetary union on July 1, 2005 with the West African Central Bank opening for business on that day.

At the 26^th session of the Heads of State and Government of ECOWAS held in Dakar, Senegal on 31 January 2003, it was emphasized that member countries needed to enhance the convergence process in order to build up the credibility of the proposed single monetary zone. In this regard, the Authority urged member states to intensify efforts at meeting the convergence criteria, guided by the principles of good governance and, public finance reforms, as well as structural reforms for the expansion of their productive base. A firm date will be fixed in December 2005, after a detailed appraisal of the performance of the countries of the second monetary zone and the level of convergence of the economies of the sub-region as a whole.

60. What happens if a country meets the convergence criteria and commences the union but subsequently its economic performance falls below expectations?

The concept of a monetary union is that it has a cushioning effect for members. Suppose after we have started there is a problem and some countries experience shocks while they are in the monetary union? The adjustment will take place within that union. We now have a single currency, a common central bank, a single monetary policy and common reserves managed for the whole union. A shock to any country will be minimized. This is the original condition that the theory of monetary unions is built around. If there is a shock to demand or demand falls drastically in a particular segment of the union, resources will move around and resolve that problem so that a country will not now devalue or do some other things that may cause more distortions.

61. There are five countries in the zone, assuming only two counties meet the

The essence of the extension is enable member countries apply the appropriate policy measures to move towards convergence. If we start from a scenario where a country that has met three criteria, with two countries meeting only two criteria and the remaining countries meeting one each, the expectation is that by 2005, this situation will change drastically if the countries apply the right policies. It is for this reason that WAMI, in collaboration with the countries, has produced country programmes, which are being fine-tuned at the moment. The country programmes contain all the steps that each country must take to achieve convergence and sustain it afterwards. After the take-off of the Union, the issue of sustaining convergence would be simplified by the existence of the common Central Bank.

62. Who will take the final decision for the zone to be established in 2005?

63. Is anything being done to enforce compliance with the convergence criteria?

The enforcement of the criteria will come from peer pressure. We decided to do this programme together; we have some rules and have decided to apply them. When we come for a review of performance, we will know who is not performing. If for example Nigeria is not performing on a particular criterion, say inflation, all other members will bring pressure to bear on Nigeria to implement the right policies. An additional measure is to be transparent in the whole process, so that the public will know what is expected. If the programme is not being adhered to there will be criticisms. This is the type of enforcement mechanism to apply.

The idea behind the West African Monetary Zone Programme is to prepare the non-UEMOA member countries of ECOWAS to be at par with the UEMOA members, in terms of macroeconomic performance and convergence. This will enhance the effectiveness of the single monetary union of ECOWAS when it comes into being.

This booklet has attempted to answer issues that are frequently raised by the public.