USAID/WARP DISCUSSION OF A SECOND COMMON CURRENCY

UNCLAS ACCRA 000400

SIPDIS

STATE FOR EB/IFD/OMA
EB/IFD/ODF
AF/EPS
TREASURY FOR ALEX SEVERENS
MCC FOR ROD NORMAN
PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: ECON EFIN GH
SUBJECT: USAID/WARP DISCUSSION OF A SECOND COMMON CURRENCY
FOR WEST AFRICA JANUARY 28, 2005.



1. Summary: USAID/West Africa Regional Program (WARP) hosted
a January 28 meeting in Accra, Ghana, to discuss the
establishment of a common currency (the "Eco") for the West
African Monetary Zone (WAMZ) --which consists of Ghana, The
Gambia, Guinea, Nigeria and Sierra Leone-- and the work of
the West Africa Monetary Institute (WAMI). WAMI, an advisor
to t2he GoG, and a USAID funded consultant presented Pro and
Con arguments on the establishment of a second common
currency for WAMZ. End summary.

WARP SUPPORT FOR THE WEST AFRICA MONETARY INSTITUTE
-------------- --------------

2. Since 2002 USAID/WARP has provided technical assistance
to the WAMI concerning the preliminary steps required for
the establishment of the Eco currency. As of March 2005,
WARP must decide whether or not to continue supporting this
effort. The occasion of the meeting was the completion of
consultant David King's study, "Currency Unification in the
West African Monetary Zone: Economic and Implementation
Policy," commissioned by WARP. Dr. King's presentation of
his study was followed by a panel discussion, including
representatives of the WAMI and an Advisor to the Central
Bank of Ghana. Government of Ghana officials and
representatives from a number of donor countries and
international organizations attended and participated in the
discussion.

OVERVIEW OF THE STUDY
--------------

3. Dr. King's study outlined the advantages and
disadvantages of monetary union. Advantages include lower
transactions costs, faster private sector development and
job growth due to larger market size, and greater access to
financing, and price stability. Disadvantages include the
loss of monetary autonomy by the countries joining the
union. Furthermore, the study outlined areas of concern
such as the impact of Nigerian oil shocks and the state of
macroeconomic convergence of Union members. The study views
with skepticism the effectiveness of using monetary policy
to improve the competitiveness of countries in the WAMZ
because markets respond quickly to such machinations. The
impact of monetary policy as a temporary short term stimulus
depends on the lag between expanded monetary supply and the
ensuing effect on inflation expectations. 3The study noted
that significant progress has occurred in several areas in
macroeconomic convergence among the WAMZ countries, but that
further progress in fiscal convergence is needed, and that
Nigeria's passage of an oil price-based "fiscal rule" is an
important practical precondition for monetary union. The
numerous operational requirements for implementing the
common currency were also reviewed. Dr. King contended that
the advantages of rapid monetary union outweighed the
disadvantages, and advocated the adoption of a common
currency before macroeconomic convergence. The study and
presentation are available by contacting USAID/WARP. 4 5

COMMON CURRENCY DEBATE
--------------

4. Following the presentation, there was a debate on the
benefits of a common currency. WAMI Director Dr. M.O. Ojo
unsurprisingly defended the adoption of the common currency
but voiced concerns about the significant steps that must
take place before this is possible. These include greater
macroeconomic convergence, statistical harmonization,
training for monetary policy and exchange rate management,
and such concrete operating issues as printing the currency
itself. He called for greater commitment from the member
countries. Dr. Mahamadu Bawumia, a USAID/Ghana financed
advisor to the Governor of Ghana's Central Bank, raised
arguments against rapid common currency adoption. He argued
that monetary policy can be an effective and necessary tool
for facilitating economic growth. He also noted the slow
pace of reaching milestones necessary for adoption. During
the following discussion session, most in attendance were
supportive of eventual monetary union, but there was a
general consensus that adoption will require considerable
more time, effort, and funding before it is a viable option.

There was general agreement that despite progress in
macroeconomic convergence there are real risks to rapid
monetary union, and therefore the recent decision by WAMZ
governors to postpone the July 2005 target date for
launching the Eco was appropriate. There was also a
consensus that in order to move the process forward more
effectively, WAMI needs to take a more forceful role both
within WAMZ and in public as the champion of the new
currency.


5. Comment: Officially, there is still strong support from
West African governments for the adoption of a common
currency in the WAMZ, and the system that has contributed to
macroeconomic convergence. But skepticism remains
concerning the will and ability of West African monetary
zone countries to undertake the necessary steps for making
it a reality. End Comment.

6
7
_______________________________
1Chris says this isn't the right tag
2It's my understanding that Bawumia is a AID-financed
consultant (Adviser) to GoG. He doesn't speak for the GoG.
We need to find out Bawumia's real title.
3Chris's Note: I don't understand this sentence. Needs
context/elaboration or cut).3
4Ryan: My take on Chris's comment below is that, yes, it's
all true, but we want this to be a short cable and those
interested in the details to contact us for the paper.
5Chis's Note: David has also argued in the past that there
are also a number of side benefits, including statistical
harmonization and improved communication among the countries
on monetary policy. Also, the fact that the countries
themselves are driving this gives it some added credence. I
don't know if he mentioned these during the meeting. Maybe
they could be worked into comment below)
6Chris: What about adding a sentence to comment: There are
also concerns regarding Nigeria's stability and the de facto
risk of ceding substantial control over regional monetary
policy to Nigeria. During past meetings with Econoffs, Dr.
Bawumia has raised this as a serious concern within Ghana's
Central Bank. However, there are a number of side benefits
to the process that add merit, including statistical
harmonization and improved communication among the countries
on monetary policy. Also, the fact that the countries
themselves are driving the process gives it some added
validity.
7Ryan - my take is to avoid a controversial comment section.


NNNN