LEARNING FROM THE INFORMAL ECONOMY 1:

African Continental Free Trade Area (AfCFTA) and the Common Currency Debate

 January 20, 2020

 Prepared By:

Prof. Emmanuel Kamdem, Secretary General. International Association, PAID

Prof. Uwem Essia, Technical Adviser on Projects, Programs and Fundraising, PAID

 

1. Background

The African Continental Free Trade Area (AfCFTA) agenda aims to eliminate tariffs and create a single market with free movement of goods, services and persons. The process of ironing out specific details around rules of origin, intellectual property and dispute resolution mechanisms are ongoing. It is expected that the AfCFTA will significantly boost economic growth for the member nations of the African Union (AU), with an estimated combined Gross Domestic Product (GDP) of more than USD$3 trillion, and a young and fast growing population. Some people think that a common currency can speed up realization of the AfCFTA and make Africa a formidable global bloc. It is argued that eliminating multiple currencies will reduce transaction costs, ease cross border comparing of values and price of goods and services, and support the progressive coalescing of local markets and firms of the member countries into vast African supply chains.

 

However, we argue here that a common currency is not necessary for the free flow of human and material resources across the AU member states. It is a fact that the volume of intra-African trade is growing, but much of it is unreported being informal. Evidently, the ongoing cross border trading activities do not appear to be inhibited by the absence of a common currency. Rather the main problems reported by many informal operators are undue criminalization their activities, and excessive rent seeking. What is required therefore, in our opinion, is to carefully study the pattern and content of ongoing trading activities, bring the operators to the discussion table, de-criminalize the aspects that are beneficial, and provide support for progressive formalization. Doing so will deepen trade creation and further enhance cross border exchanges, and progressively culminate to private sector led economic integration, albeit with the support of the AU, the African Regional Economic Communities (RECs), and the member states. If ultimately a common currency becomes necessary or inevitable, then well and good; achieving it will be a natural consequence of an economically converging continental economy.

 

But at the moment, a state–led (top – down) politically driven common currency agenda cannot successfully precede active networking and trust-building among trading individuals and firms across the continent. The current approach may only work if the aim was to achieve political unification, which is certainly not the case presently. Given that direct convertibility of several currencies of the AU member states is already taking place in all African countries in the informal economy, it is our strong view that the AU, the African RECs and the banking and monetary institutions of the member states will achieve the AfCFTA faster if they stoop to learn from the informal economy. This is especially so as it is established empirically that the informal market mechanisms are able to reflect the productivity and inflationary conditions in different countries much better than the official exchange mechanisms.

 

Therefore, a best fit currency convertibility mechanism suitable to the AU member states, which banking institutions in the respective countries should adopt, can be crafted with the knowledge and understanding of how the informal economy works. Except or until political unification of the member states is considered necessary and feasible, the private sector led intra-African exchanges that is ongoing in the informal economy should be supported and allowed to blossom to the eventual economic unification of the member states. But each country should exercise autonomy over its fiscal and monetary policy formulation and implementation. We argue here also that a common currency has historical not propelled any region or continent to global economic relevant. Indeed, the United States Dollar (USD) is able to sustain its global relevance because it is a national currency and not a common currency of a region or continent. The idea of a common African currency, with a continental or regional central bank that is not controlled of any national government is more likely to promote free riding and fiscal rascality, which appears to be the experience of the European Union (EU) currently.

 

2. Learning Points from the EU Experience

Supporters of the African common currency agenda often draw inspiration from the successes of EU. Like the EU, the AU member states seek to nurture a formidable economic bloc for better bargaining power in the global economy. Hence the envisaged African Monetary Union, like the EU, is a state-led (top – down) initiative. Historically, however, the EU initiative aimed to overcome half a century of depression and war through political cooperation and economic integration by the original 6 European countries in 1950. It is to be noted that even at the point of forming the EU, the six member countries were already socio-economical and politically independent. Notwithstanding, it took a period of 20 years, through a process of both legislations and litigations, for the rules and structures required to govern a continent-wide single market to be emerge. Contrariwise, majority of AU member states are poor and highly indebted, with policy making and governance structures largely dependent on foreign donations and technical assistantships. Equally, African countries regularly enter into detrimental parallel bilateral/multilateral agreements with the advanced countries due to weak capacity for negotiation and neocolonial nostalgias.

 

It is to be noted also that despite the successes of the EU project, the euro is not as self-sustaining as the USD; its survival and sustainability has depended largely on the steely commitment and sacrifices of its leading members, notably Germany and France, who seem to be carrying the main burden. It is still being debated that stripping the countries of independent monetary policies has denied them opportunity to adjust the exchange rates of their national currencies in line with the changing realities in their respective economies. For instance, Italy, Spain, Greece and Ireland are all seeking reform of the euro system. The European Central Bank (ECB) equally bears the burden of wedging the French currency zones of Central and West Africa. The CFA franc for West Africa (XOF) and Central Africa (XAF) were created by France in the late 1940s to serve as legal tenders in its then-African colonies. The CFA franc is pegged to the euro with the financial backing of the French treasury. Invariably, therefore, the decisions of the ECB influence not only Europe but also Africa, which is ridiculous. But more seriously, for the concerned African countries, while this colonial relic shields them from sundry inflationary shocks and other uncertainties, it would have been more beneficial if the opportunity it offers is utilized to grow the economy rather than remain dependent on importation of consumables. Besides these countries cannot continue to justify losing the authority over their monetary policies decades after independence.

 

3. Learning Points from Experiences the African RECs

A review of recent experiences of the member states of the Economic Community of West African States (ECOWAS) following a decision in June 26 2019 to launch a common currency eco by 2020, cast doubt on ability of the many member states to overcome the overhang of colonial nostalgias. Basically, the 15-nation ECOWAS aimed to adopt eco by 2020 after a 30 year negotiation period. Eight out of the 15 ECOWAS members already use a common currency - the CFA franc (XOF) – that is pegged to the euro and the value guaranteed by France, while the other seven have national currencies that are not (formally) freely convertible among themselves and with other external currencies.

 

The decision by ECOWAS to launch eco was further confirmed in a meeting held on December 21, 2019. Ironically, that same day the Ivorian President Alassane Ouattara announced a plan to reform the West African CFA franc and rename it eco. This parallel plan to rename the West African CFA franc clearly contradicts the ECOWAS eco agenda. However, President Quattara mentioned that the CFA – eco will no longer to be co-manage by France, the foreign exchange reserves of the countries will no longer be centralized by France, and the obligatory 50% payment of reserves to the French Treasury operating account will seize. But the Banque de France will remain the guarantor of the convertibility between the eco and the euro with which it will still keep a fixed parity.

 

President Ouattara announced renaming of the CFA franc the same day as ECOWAS confirmed its decision on eco. The next day (December 22, 2019), the Managing Director of the International Monetary Fund (IMF) welcomed the major reform of the CFA franc decided by eight West African countries and France, describing the development as an essential step in the modernization of long-standing agreements between France and its former West African colonies. But nothing was said concerning the ECOWAS eco. Again on December 28, 2019, President Nguema of Equatorial Guinea visited President Ouattara and promised to press for similar reform for the Central African CFA franc. A day after (December 29 2019), the Ghanaian President, expressed his desire to adopt the new eco which is being established to replace the West African CFA franc. But on January 16, 2020, Nigeria and several West African countries, notably English-speaking ones (including Ghana), denounced in Abuja the decision to replace the CFA franc by the eco, saying that it was "not in conformity" with the program recently adopted by the entire region to establish a single currency. The above illustrates incapacity of ECOWAS member states, and indeed the AU member states, to formulate and implement decisions independently. Note also that the EU is a generous funder of both ECOWAS and the AU.

 

4. Wide Disparity in the Development levels of the member countries

Classically, the common currency would have better chances of success if the member states had comparable levels of economic development. This is certainly not so for the ECOWAS or more generally the AU member states. There is likelihood that if hurriedly formed, the African Monetary Union may immediately disintegrate due to external shocks and or non-compliance of the member states with the prudential requirements. The ECOWAS common currency, for instance has four primary eligibility conditions, namely: budget deficit of not more than 3 percent and an average annual inflation rate of less than 10 percent; central bank financing of budget deficits that should be no more than 10 percent of the previous year’s tax revenue; and gross external reserves equal to at least three months’ worth of imports. It is unlikely that all 15 countries, including Nigeria, will conveniently meet these conditions. Moreover, critics of the ECOWAS eco agenda worry that Nigeria, the region’s biggest economy, will dominate the show and stall the projected benefits for other members.

 

5. Learning from Currency Transactions in the Informal Economy

Currency transactions in the informal economy (commonly called the black market), although criminalized in many countries, are conducted openly and patronized by millions of individuals and firms. A recent study reported by the Winton Group confirms that black market rates often provide a more accurate reflection of a country’s economic circumstances than official exchange rates. Generally, black markets come about when controls on foreign exchange restrict access to the official markets, forcing people to resort to unofficial channels. A black market may still exist along with dual or multiple exchange rates if insufficient currency is allocated to the official parallel exchange rate or if certain transactions, such as for narcotics, are excluded.

 

From which ever source that the black market emerges, it demonstrates the fact that individuals and firms can successfully and safely undertake financial transactions of any magnitude globally without directly involving governments and the different central banks. We opine therefore that rather than continue to criminalize the black market and or attempt to stop the operators, it is more expedient to carefully study how it operates and use the information gathered to craft a best fit private sector led currency convertibility framework that will eliminate triangular convertibility (through any major currency), and make it possible for intra-African currencies’ convertibility to exist. Such a program would require that representatives of the black market operators, and officials of the major Pan African commercial banks, the central banks, the AU, and the African RECs work together as stakeholders to boost intra African exchanges and speed up achievement of the AfCFTA.


 

Introduction

This Section publishes the opinions, viewpoints and commentaries for the staff and members of the International Association PAID on a wide range of local, national, regional and global issues that may affect the sustainable development of African countries, whether individually or in groups.

Disclaimer

The opinions expressed here are those of the authors and are do not present the official views of the International Association, PAID.

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