The euro and African integration.

As we enter the fourth quarter of 1999, countless recapitulations of the past decade, century and - for the first time since the invention of the printing machine - millennium are bound to appear in every single magazine and newspaper world-wide. For our part, we will start with the past year and look at the influence that one financial event - which occurred on 1 January 1999 - has had on the African continent. That event was the decision by the 11 countries of the European Monetary Union (EMU) to fix within themselves a common currency.

Leaving Africa aside for a moment, one should record that in September last year, Professor Roelf Haan, a prominent development economist, predicted that, "For the countries of the south that have significant trade relations with Europe, the creation of the euro will most probably offer: (1) a stable price level for commodity trade; (2) access to a large, deep and well-organised capital market; and (3) a valuable anchor to relate to in their own exchange rate policies."

Pros and cons

Let's look at each prediction in turn. True, pressure to keep their budget deficits down has helped EMU members put a check on inflation. But African countries importing manufacturing goods from most OECD countries would have benefited equally from the lower inflation levels of 1999.

Next, with regard to African commodity exports, the impact of the euro has been limited by the fact that the new currency has not yet replaced the dollar and the pound sterling as the leading pricing and trading currency. Diversification into the euro would enable African exporters to benefit from more stable European prices as well as a stable new international currency. But such a change cannot be straightforward in the case of those major commodities (oil, cocoa, gold) whose export prices are typically linked to those quoted on established commodity exchanges in dollar or sterling.

New impulse to financial flows

For countries in the CFA zone whose currency is now linked to the euro, depreciation of the euro against the dollar has been a bonanza this year for many exporters. Inversely, any appreciation of the euro in the future would hurt the region by making imports from other emerging markets much cheaper. This said, an official of the Central Bank of West African States told Africa Recovery, a UN publication, earlier this year that the CFA franc-euro link "will give a new impulse to trade and financial flows" between the UEMOA (1 - see footnotes) and European countries.

So far, on the trade side the most tangible benefits for the CFA zone are lower transaction costs (commercial and currency) for their trade with Euroland. Otherwise, only if the euro leads to an economic upswing in Euroland would the African continent at large reap economic benefits such as higher exports and more inbound foreign direct investment.

The second advantage forecast by Professor Haan may already be occurring, albeit in a round about way. Professor Haan was probably expecting countries in the south to be in a position to tap more funds in the wider euro capital markets. If we look at the number of euro issues by governments from the south, this is yet to happen.

On the other hand, the flurry of euro issues by EMU members seems to have encouraged their counterparts from the CFA zone to follow suit. Already, Cote d'Ivoire and Senegal have issued government treasury bills in CFA francs. However, unlike their European partners, these countries do not have the alternative of issuing debt in a different local currency. Still, together with an earlier three-year sovereign bond launched in April by Cote d'Ivoire that raised more than 30bn CFA francs ($48m), these securities may create a turning point because of their potential to meet the short- and medium-term appetite of regional financial investors and thus help minimise capital flight.

International investors from Euroland are also increasingly likely to look at this type of issues. For instance, a bank in Euroland that is following a client recently involved in the CFA region, because of the fixed peg of its currency with the euro, may end up investing on its own account in local CFA issues. BCEAO officials told Africa Recovery that they expected the currency peg to attract more European investors to CFA financial markets, notably the regional stock market of Abidjan (2). This could lead to benefits such as greater inflows of direct investment from Euroland countries.

Since the flow of both official development assistance and foreign direct investment (save in the extraction sector) in the region is currently dwindling, one should hope that we are only seeing the beginning of this positive impact of the euro on the financial markets of the CFA zone.

Not convinced

Not entirely convinced is Theory de Longtime, treasurer of the African Development Bank, who was quoted in an article in the August issue of the Financial Times as saying, "At the moment there are a number of constraints such as the lack of a yield curve, a lack of liquidity and so on. I think it is premature to speak of a substantial bond market at this stage."

Could the sub-regional financial integration slowly taking shape in west Africa provide a model for other African groupings? Perhaps there is an appetite for more rand issues in southern Africa? Perhaps the Kenyan shilling could serve as a regional currency for Tanzanian and Ugandan issuers?

The third advantage cited by Prefessor Haan - using the euro as a valuable anchor in exchange rate policy would probably make sense to African countries that are big trading partners with Euroland. But it is unlikely that the euro has already supplanted en masse the US dollar, the French franc or the South African rand. On the other hand, it may have already been incorporated into the calculation of several currency baskets.

The CFA question

Do countries in the CFA zone whose currency is actually fixed to the euro (3) have anything to worry about? In theory, no, since France has guaranteed the free convertibility of the CFA franc into the euro. In reality, things could be different. First, the budgetary arrangement between the French treasury and the regional central banks of the CFA zone is not iron clad. Any unforeseen pressure on the CFA may prompt calls for a new devaluation of the currency. Some may even suggest terminating the 50-year-old agreement.

In addition, due to EMU regulations, the French government does not have the flexibility it once had to stretch its budget. More importantly, why should France alone carry the burden of the CFA if the region is no longer its 'private hunting ground'?

To add to the pressure, a former Finance Minister from Cameroon, Kofi Yamgnane, has condemned the fact that future decisions on the CFA are by and large out of the hands of Africans.

He suggested something that would have certainly made Professor Haan glow with joy: "Minting an independent African currency, initially restricted to the 15 member-countries of the CFA franc zone but [later open] to other regions and countries of Africa...that currency can be pegged to the euro."

Financial Intergration for Africa?

What Professor Haan apparently failed to foresee was not only that the EMU was going to have an impact on the CFA and regional financial markets but that it would also encourage regional economic integration.

If countries that have fought wars among themselves for over two millennia can build a common market (1992) and freely undertake to relinquish their currency, perhaps there is hope that regional integration can take place in Africa.

Several economists are already confidently predicting a renewed impetus for regional integration throughout Africa. In May this year, Nigerian President General Olusegun Obasanjo argued that "we must integrate [ordinary west Africans] into the formal economy and the best way to do so is to remove excessive tariffs on trans-border trade and create conditions for the free movement of goods and services in the sub-region...The so-called division between French and English-speaking Africa is artificial."

In August, the chairman of the 44th ministerial meeting of the 16-country Economic Community of West African States (ECOWAS) argued that "efforts should be stepped up towards macro-economic convergence and the creation of a single market". That same month, the UEMOA inter-parliamentary committee adopted a draft treaty on the creation of a regional parliament. This followed a long run at attempting to harmonise custom duties among its members.

Recently, JEO Mwencha, Secretary-general of the Common Market for Eastern and Southern Africa (COMESA) told Africa Recovery that "strong regional trading blocs are taking shape [throughout the world] and we see this as a call for the countries in Africa to also integrate their economies".

These are encouraging sentiments but one wonders how much is mere lip service and how much is genuine determination to forge a new future.

The most ambitious project of all, the Abuja Treaty establishing the African Economic Community, is still to be implemented. The chairman of Ecobank, West Africa's leading regional bank, argued in March this year that "two rival organisations, UEMOA and ECOWAS [a wider market shared by English- and French-speaking countries], dissipate energy and retard progress in the sub-region, encourage the multiplicity of currencies and continue to pose a challenge to regional trade, especially since the currencies are not convertible".

However, over the short term, the only tangible signs of regional integration, especially across the English-speaking French-speaking divide, will come from schemes like the West African Gas Pipeline Project designed to funnel Nigerian natural gas to Benin, Togo and Ghana. As Lansana Kouyate, Executive Secretary of ECOWAS describes it, "the project marks the beginning of new hope for the political, social and economic integration of west African countries".

Footnotes

(1) The eight countries, Benin, Burkina Faso, Cote d'Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo) of the West African Economic and Monetary Union (UEMOA) and the six countries, Cameroon, The Central African Republic, Chad, the Congo (Brazzaville), Equatorial Guinea and Gabon of the Central African Economic and Monetary Community (UMEAC), together with Comoros, form the CFA zone.

(2) The Bourse Regionale de Valeurs Mobiliares (BRVM), located in Abidjan (Cote d'Ivoire), was launched in September 1998. Its members, Benin, Burkina Faso, Cote d'Ivoire, Mali, Niger, Senegal and Togo, are all members of the UEMOA.

(3) 655.96 CFA franc per euro.