Monetary integration on the African continent

Trends in monetary unification in Africa are rooted in colonial times, when monetary regimes based on currency boards strictly tied a certain territory to the currency of the metropolis. Since then, only the CFA franc zone has remained. Diversity in monetary divergence in Africa was introduced through the processes of Southern, Western and East African integration, as well as the introduction of electronic declaration. It can be argued that interest in the formation of monetary unions has renewed precisely in the context of globalization. According to M. Oe, the formation of monetary unions in Africa is associated with the processes of globalization. He states: “The realization that sub-regional groups in Africa should be organized into functional monetary unions has emerged as a result of recent trends in globalization and regionalization, the search for ways to form the African Union and the New Partnership under the African Development Initiative.” At the same time, attitudes towards the role of monetary unions on the continent in terms of stimulating trade are changing. If early studies noted an extremely low structurally determined level of intraregional exchange, now the position is being revised towards the realization that monetary integration on the continent is associated with the effects of trade creation.

Thus, in 1945, a system of issuing colonial francs (CFA franc) was introduced in West and Central Africa, and in 1951, the monetary system of African territories controlled by France was institutionalized as a currency board with the convertibility of CFA francs into French guaranteed by the French government franc. The creation of the franc zone provided for the founding of two central banks, whose competence extended to countries that, accordingly, formed two monetary unions on the African continent: the West African Monetary Union (which includes: Benin, Burkina Faso, Guinea-Bissau, Cote -D’Ivoire, Mali, Niger, Senegal, Togo) and the Central African Monetary Union (Gabon, Cameroon, Congo, Central African Republic, Chad, Equatorial Guinea).

The functioning of both monetary unions is based on common principles: issuing functions and the implementation of monetary policy are delegated to the respective central banks; fixing the exchange rate of the CFA franc to the French franc (now to the euro); convertibility into the French franc (free flow of capital); centralization of 70% of foreign exchange reserves as an asset in the accounts of the French Treasury, which function like transaction accounts for international settlements of the franc zone with the rest of the world and, in fact, are an element of balancing the balance of payments. It is no coincidence that these currency unions have the most stable inflation records, becoming a model for succession on the continent.

In 1975, the Economic Community of West African Countries (ECOWAS, or ECCWA, which includes Capo Verde, Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone) was created, within the framework of which it was planned to unite with the West African Monetary union and the introduction of a single currency into circulation. However, the process of regional integration began most effectively in 1999 after the victory of democratic forces in the elections in Nigeria, which made it possible to declare intentions to accelerate this process at the meeting of the leaders of member countries in Lome. As for the monetary aspects of the founding of the ESSWA, in the same 1975 the West African Clearing House was formed, which was designed to optimize international settlements between business entities of the participating countries in order to create incentives for the development of intraregional trade and cooperation

To create real monetary prerequisites for the development of regional integration, the Monetary Cooperation Program was founded in 1987, which was designed to harmonize the monetary systems of the participating countries and increase macroeconomic stability in the region, which would create favorable conditions for the formation of a monetary union and the transition to the implementation of a single monetary politicians. In accordance with this Program, the Clearing House was transformed into a special agency for monetary integration, which would encourage the development of payment systems and intraregional trade. At the same time, initiatives were founded to develop and implement convergence criteria.

Note that the transition to a single currency in the ESMZA countries non-members of the CFA franc zone was postponed four times (in 1992, 1994, 2000 and 2004) due to fiscal problems and the unresolved nature of many technical aspects related to transformation of macroeconomic policy in accordance with the criteria of convergence and the ability to participate in a monetary union. In 1999, the formalization of convergence criteria was announced and a new strategy for monetary cooperation in the ESSWA was announced, the content of which is defined as follows: not to wait until individual countries achieve the set requirements, but to move through monetary unification according to the “fast track” model. And in 2000, at a meeting in Acre, the creation of another monetary union was announced, which should integrate with the West African Monetary Union, forming a single economic and monetary space. At the same time, by the end of 2002, according to the Acre Declaration, a single central bank was to be created for countries non-members of the Western European Union; by the end of 2003, the formation of a monetary union on the territory of these countries should have been completed, and in 2004, integration with to the central banks of the Western European Union. As for the integration processes of the ZEMU itself, the process of creating a customs and economic union began in 1994, the transition to a single external customs tariff was completed in 2000, and the Convergence Policy Pact was adopted in 2001.

In East Africa, in 1999, Tanzania, Kenya and Uganda signed an agreement to form an economic bloc, which should lay the groundwork for the formation of a monetary union. It is worth noting that the East African Monetary Council functioned on the territory of these countries during colonial times, which until 1966 ensured the monetary unity of these territories. The establishment of central banks in these countries and hyper-expansionary macroeconomic policies during the first years after independence made it impossible to comply with the strict restrictions that were imposed on the money supply through the mechanism of the currency board. The return to the idea of establishing a monetary union in this case reflects an attempt to accelerate the processes of regional integration, which, as in the case of the West African monetary unions, embodies the idea of proactive adaptation to the challenges of globalization.

Monetary integration in South Africa is somewhat different, as it reflects the desire of some very small economies (Namibia, Swaziland, Lesotho) to take advantage of joining the South African rand area. However, the functioning of the Common Monetary Area in Southern Africa grouping has demonstrated ample opportunities for increasing monetary stability and creating healthy preconditions for economic growth. It is no coincidence that joining the rent circulation zone is considered as a possible alternative by other Southern African countries

In a broader context, under the auspices of the African Union, which is a continuation of the Organization of African Unity, the ideas of forming a monetary union on the continent with a common African currency, approximately until 2021, were considered. The implementation of this project in practice, despite all the difficulties associated with political problems, different political systems and macroeconomic courses of individual states, will embody almost all the determinants of the formation of monetary unions in the context of globalization: the creation of a capacious domestic market based on the formation of a geo-economic structure on a global scale; weakening dependence on external shocks, in particular global market imperfections; weakening vulnerability to exchange rate fluctuations, the risk of macroeconomic destabilization caused by the erosion of exchange rate regimes oriented to support fixed parities; increasing the possibilities for implementing monetary policy with a focus on internal balance; improving the institutional framework of monetary policy and leveling out fiscal challenges to the implementation of the price stability policy, on the basis of which favorable allocative prerequisites for economic growth will be created.

Sent by: saturn13 (Oleg)