By - Jamel Lahiani
On June 29, 2019, the leaders of the Economic Community of West African States (ECOWAS), formally adopted the name “ECO” for their single currency project and planned to introduce the currency in January 2020. This project will be a splendid opportunity for West African countries to pool their monetary resources and work towards a common objectives, while pursuing individual goals. This project is undertaken in order to contribute to monetary integration and solving monetary problems in West African States.
A criterion of convergence was implemented for the eligibility of countries added to the “ECO Zone”. Nine conditions were introduced:
The primary criteria to be achieved by each member country are:
• A single digital inflation rate at the end of each year
• A fiscal deficit of no more than 4% of the GBP
• A central bank deficit-financing of no more than 10% of the previous year’s tax revenue
• Gross external reserves that can give import cover for a minimum of three months
The six secondary criteria to be achieved by each member country are:
• Prohibition of new domestic default payments and liquidation of existing ones
• Tax revenue should equal to or greater than 20% of the GDP
• Wage bill to tax revenue equal to or less than 35%
• Public investment to tax revenue equal to or greater than 20%
• A stable real exchange rate
• A positive real interest rate
The whole of these criteria was inspired from the Euro zone criteria and it has the possibility of establishing a stable and efficient common monetary space. But, the Euro area criteria was stronger. In fact, the fiscal deficit has to be no more than 3% of the GBP and a public debt no more than 60 % of the GBP.
The Euro zone crisis demonstrate that establishing a good and strong criteria is not sufficient because of different inflation rate between countries led to different competitiveness. Greece, Spain, Portugal, and Ireland suffered from this bad condition. These countries have a high level of inflation compared to others. This led to the Eurozone crisis in 2010. The European bank fixed an aim of 2% as inflation rate for each country to resolve the problem.
On the other side, Greece had grappled with a serious debt crisis since 2009. Most economists believe that Greece’s public debt, 180% of Greek gross domestic product (GDP), is unsustainable. This crisis is explained by a variety of structural problems: corruption, massive informal sector, high level of fiscal frauds. As a consequence the Greece economy became inefficient and not competitive. In addition, the statistical data published by the Greece government were not sure and cautioned. This country added to the Eurozone has accumulated many debts for many years. It beats anyone how this country was added to the Euro zone without respecting the Maastricht’s criteria of eligibility?
The decision to add the country was taken by politicians without respecting the Maastricht’s criteria. So, Greece has taken profit from this financial and fiscal laxness leading to a debt crisis, the weakness of the Euro currency and a negative impact to the Eurozone.
The solution for these problems is to construct strong and autonomous institutions that have the authority to take decision and obligate the countries of the zone to respect the zone currency criteria and to be transparent. In this manner we will be sure that all the countries that belong to the “ECO” area will respect the criteria. The establishment of autonomous African monetary authority is highly required to avoid crisis and instability in the region.
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