Introduction

Monetary union has been on the African political and economic agenda for a long time. It has been regarded as an important development strategy and thus considered to be crucial in attaining economic development, promoting regional stability and guaranteeing African influence in international negotiations. Essentially, it has been motivated by the desire to counteract the perceived economic and political weakness of individual countries. The small size of most of the economies in the region is often regarded as growth-retarding and thus, a combination of these countries in the context of an appropriate regional integration scheme would bring about a sufficiently large market size to generate lower production cost that might enable the integrated region to compete better with the rest of the world. In the same vein, a grouping of several small countries into a regional bloc could help Africa negotiate more effectively either bilaterally or multilaterally. Monetary union will also be a major step in the integration efforts in the West African sub-region. A single currency will offer greater economic efficiency and stronger growth in the long run. The sub-region of the West African Monetary Zone (WAMZ), comprising The Gambia, Ghana, Guinea, Nigeria and Sierra Leone, with its estimated population of about 192.6 million people (World Bank, 2009), has immense natural and mineral resources, which gives it great potential for creating a viable West African market. The adoption of a single currency by these five countries would eliminate the risk of exchange rate movements and permit the integration of their capital markets. The capital markets, which are dominated by government debt instruments, would be broadened and deepened with the participation of private corporate bonds and equities. Stronger capital markets can stimulate structural reform in the banking and financial markets, and can facilitate the restructuring of the manufacturing industries and service sector. Despite the potential benefits to be derived from a single currency, and despite the efforts of the member states to meet the benchmarks required for the commencement of the monetary union, the launch of the WAMZ monetary union has been postponed on three occasions. The target date was initially set for 1 January 2003, but was subsequently extended to 1 July 2005. The Banjul Declaration of 6 May 2005 further postponed the commencement date to 1 December 2009. The major reason for these postponements was the slow pace

of macroeconomic and policy convergence in the WAMZ. The international financial crisis, on the heels of global fuel and food crises, adversely affected macroeconomic developments in the WAMZ (WAMI, 2008) and these external shocks hampered the progress of convergence in the Zone. The financial crisis also highlighted the need for a single currency to insulate the Zone member countries from external shocks. An acceleration of the integration process could enhance the region’s resilience to future shocks. This book assesses the history, progress, challenges and potential for monetary and financial integration in the WAMZ. The book has 12 chapters, which are divided among four main parts. Economic integration is the subject of Part I, in which Chapter 2 highlights the history of monetary and economic integration and the emergence of regional economic communities in Africa, and discusses the political context of Africa-wide monetary programmes, including those of the Economic Community of West African States (ECOWAS) and the WAMZ. The Banjul Action Plan (BAP), a work programme that provided a strong focus on actions and targets essential for the objectives of the WAMZ programme, is also discussed. Chapter 3 presents an overview of the theoretical and practical underpinnings covering the Optimum Currency Area (OCA) theory (Mundell, 1961; Kenen, 1969), stages of economic integration (Holden, 2003), the experiences of the European Monetary Union (EMU) and the potential benefits and costs of a monetary union, preceding a discussion of economic integration in the WAMZ. The theoretical framework based on the OCA conditions for the establishment of a currency union is reviewed and evaluated in the context of the WAMZ countries. The stages of monetary integration, benefits and the disadvantages associated with monetary union are also assessed. The literature shows that there are potential costs and benefits inherent in the formation of a monetary union and that while those costs, including loss of independent monetary policy and asymmetric shocks, are more immediate, the benefits are long term in nature. Chapter 4 provides a review of the economies of the WAMZ countries, their structural features, including indebtedness and patterns of trade, the risk of asymmetric shocks, business cycle synchronization, exchange rate movements, monetary policy framework and inflationary trends. It also analyses issues relating to economic distance (Alesina and Grilli, 1992). The WAMZ economies have been found to be heterogeneous in terms of both GDP and population, with only Guinea and Sierra Leone sharing common national borders, while the other countries are not geographically contiguous. Nigeria is the dominant economy within the WAMZ, constituting over 78 per cent and 86 per cent of the Zone’s population and GDP, respectively. Chapter 5 provides an evaluation of the state of nominal macroeconomic convergence in the WAMZ based on a predetermined set of WAMZ criteria. The chapter underscores the economic heterogeneity as well as the asymmetric response to shocks among the member countries. An evaluation based on the BAP shows that two of the four primary criteria, namely those of inflation rates and the fiscal deficit/GDP (excluding grants)

ratio, have been the most difficult to achieve by the member countries since the launch of the WAMZ programme in 2001. The mixed performance of member countries with respect to macroeconomic convergence criteria brought to the fore the issue of whether convergence needs to be achieved ex ante or ex post (in the latter case the introduction of the common currency will force governments to speed up reforms and thus ensure convergence). The study on economic distance reveals that the cost of monetary union is relatively low for Ghana and The Gambia, but relatively high for Guinea, with Sierra Leone making progress towards reducing the cost of monetary union. Chapter 6 explores the sustainability of fiscal policy in the WAMZ member countries, using both the accounting and present value budget constraint (PVBC) approaches (Hamilton and Flavin, 1986; Hakkio and Rush, 1991). In addition, the analysis on fiscal sustainability reveals that fiscal policies in Ghana, The Gambia, Guinea and Nigeria have been imperceptibly sustainable, while that of Sierra Leone has been unsustainable. Achieving fiscal sustainability is germane to the formation of a monetary union. In Part II, the issue of market integration is addressed. Chapter 7 examines progress made towards a common market by the member countries of the WAMZ. It assesses the extent of trade integration of the member countries in the creation of a WAMZ common market and the institutional arrangements. In addition, labour mobility, infrastructure development and provision of logistics to support trade facilitation are also discussed. Chapter 8 discusses the evolution, structure and developments in the WAMZ financial sector. In addition, it presents an analysis of core issues relating to the extent of financial integration using both the benchmarks of the BAP and quantitative measures of financial integration based on the assumption of one price. The chapter also discusses the relevance of coordinated cross-border supervision in the aftermath of crisis and liquidity pressures and identifies barriers to financial integration. Chapter 9 articulates the role of payments system in a monetary union and the status of payments-system development in the Zone. Part III focuses on the operational and institutional framework for monetary and financial integration in the WAMZ. Chapter 10 gives an assessment of the monetary policy transmission mechanism in the WAMZ countries and the need for improvement in data quality as well as further harmonization, especially in respect of the required standards for the common monetary policy of the WAMZ. Chapter 11 underscores the fact that legal and institutional issues are a sine qua non to the sustainability of a monetary union. The chapter adumbrates the fundamental building blocks and instruments that catalyse the efficient operation of systems and good governance for the actualization of economic and social welfare in the WAMZ. Various other legal and institutional instruments such as a Fiscal Responsibility Act, Cross-border Banking Supervision Agreement, credit information sharing, Banking Acts and acts establishing the central banks feature among the issues discussed. Part IV highlights the way forward towards achieving lasting monetary and financial integration in the WAMZ. Chapter 12 provides a comparative analysis

between the WAMZ and other monetary unions with specific reference to the Gulf Cooperation Council (GCC) and the West African Economic and Monetary Union (WAEMU). The lessons of experience suggest that the establishment of any properly functioning monetary union is a feat requiring, above all, adequate time for full preparation. The experience of other monetary unions, especially the EMU and the GCC, vividly highlights the fact that formation and sustainability of a monetary union is a long-term process, requiring political will and a culture of regionalism. The attainment of the convergence criteria would minimize the effect of asymmetric shocks in member countries. The European Union experience indicates that it took half a century to introduce the euro in 1999, with the project encountering postponements and shifts in dates along the way. The GCC’s experience is another useful example. The Gulf countries decided in 2001 to establish a monetary union by 2010 (Sturm and Siegfried, 2005; Rutledge, 2009), about the same time the WAMZ authorities decided to have their own monetary union. However, unlike the WAMZ that envisaged its monetary union in just 18 months, the GCC set a nine-year target date, despite the fact that the member countries are more homogeneous than those in the WAMZ, thus on face value being less likely to suffer heavily from asymmetric shocks. They are also culturally and historically similar, with the same language and geographical proximity. The indications are that the GCC, in spite of the gains made in real and nominal convergence over the past years, still views the common currency as a long-term project. This brings to the fore the need to build a durable and credible union. Overall, the assessment reveals that the WAMZ does not satisfy all the OCA conditions. Nevertheless, this shortcoming does not imply that the goal of monetary integration is unattainable. The analyses demonstrate that the costs of monetary union in the WAMZ would be minimized in the long term as structural convergence takes hold. Going forward, the cost of adoption of a single currency in the WAMZ could become insignificant, especially if the establishment of a common market, financial sector integration and appropriate institutional and legal frameworks are put in place. Preparing for monetary union, therefore, involves a range of prerequisite policy reforms and institutional changes. Regardless of political considerations, the sustainability of the WAMZ monetary union depends on economic factors including the degree of nominal and real convergence, trade and financial integration, as well as institutional preparedness.