– Thorvaldur Gylfason is Professor of Economics, University of Iceland.
This article was received from Project Syndicate, an international not-for-profit association of newspapers dedicated to hosting a global debate on the key issues shaping our world.
By Thorvaldur Gylfason
REYKJAVIK – If African countries were to adopt only one policy to boost economic growth and improve macroeconomic stability, they should reduce the number of currencies in circulation across the continent as quickly as possible. Doing so would most likely encourage trade, as happened in Europe with the arrival of the euro, and could help contain inflation – which is always good for growth – by imposing international discipline on monetary policy.
The African Union is now aiming at pooling all the continent’s currencies into a single currency by 2028. In the meantime, several regional monetary unions are on the drawing board, in addition to the two monetary unions that already exist, one de jure and the other de facto.
The premier and oldest of these unions is composed of the fourteen countries that belong to the Economic and Monetary Community of Central Africa and the West African Economic and Monetary Union, which both use the CFA franc. The second of these unions is composed of Lesotho, Namibia, Swaziland, and now Zimbabwe, all of which use the South African rand. Disregarding Zimbabwe, a recent and incomplete convert, the 18 countries of the two existing monetary unions have, as intended, benefited from lower inflation than much of the rest of Africa.
To see why, consider Nigeria. Before independence, Nigeria’s legal tender was the British pound. With the establishment of the Central Bank of Nigeria in 1959, the Nigerian pound was introduced. Back then, one Nigerian pound was equivalent to one British pound. This arrangement remained intact until 1973, when Nigeria adopted a new currency, the naira. The exchange rate remained unchanged: one naira was equivalent to one British pound.
The naira was intended to bolster the country‘s independence by making it possible for the central bank to pursue its own monetary policy. It was also a matter of national pride. The thinking behind the new arrangement was that an independent and flexible monetary policy would serve the nation‘s interest better than a fixed exchange rate that tied the naira to the pound.
But the naira’s introduction quickly put an end to parity with the British pound. Government expenditure exceeded federal revenue, despite rapidly rising foreign-exchange earnings from oil exports after 1970. The federal government’s budget deficits were financed through foreign and domestic borrowing, and by printing money, which led to inflation and depreciation of the new currency. Today, it costs 220 naira to buy one British pound, which implies 15% annual average depreciation since 1973.
This depreciation would perhaps be justifiable had Nigeria managed to use easy money to narrow the gap between ordinary Nigerians’ standard of living and that of people living in Britain. But that did not happen. The purchasing power of national income per person in Nigeria is now 50% lower relative to Britain than in 1980.
In view of this experience, Nigeria now plans to abolish the naira in favour of joining a monetary union with four or five other West African countries (The Gambia, Ghana, Guinea, Sierra Leone, and perhaps Liberia). But that planned monetary union, until recently envisaged to be launched in 2009, has now been put on ice.
Why? The smallest countries show no signs of fear of being swamped by Nigeria, by far the most populous country in the group (accounting for 155 million of the six countries’ 200 million people), especially as the new West African Central Bank is to be located in Accra, the capital of Ghana (24 million). Others, though, may fear the dilution of their sovereignty when the new Central Bank of the West African Monetary Zone takes over some of the policymaking responsibilities of national central banks. But that, of course, is the chief purpose of a monetary union.
When the West African Monetary Zone finally is established, the number of currencies in Africa will equal about half the number of countries. And when the East African Community with its five members (Burundi, Kenya, Rwanda, Tanzania, and Uganda) re-emerges as scheduled, the number of currencies will be reduced by another four.
The belief that sovereign national currencies, by enabling independent and flexible monetary policies, are the best way to foster economic and social development – the vision of Nigeria’s post-colonial leaders – is gradually falling by the wayside. Efficiency dictates the use of fewer and larger currencies (and foreign investors, understandably wary of weak and volatile currencies, demand it).
Indeed, the success of the European Union and of the euro since its launch in 1999 has made a strong impression in Africa. Currencies, to paraphrase Winston Churchill, are like democracies: the best way to preserve their integrity is to share them.