USAID/WARP DISCUSSION OF A SECOND COMMON CURRENCY FOR

UNCLAS SECTION 01 OF 02 ACCRA 000406

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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 t[rw2]he 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
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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
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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. [rw3]The 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. [rw4] [rw5]

COMMON CURRENCY DEBATE
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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.