Africa Must Pursue Monetary Union

Published on 11th November 2008

Two obstacles prevent Africa from entering the phase of self-reliant development: irrational fragmentation from a casual tearing up of the continent into incoherent real estates of the African peoples, and dependence on donors to finance African development.

 

The first emanates from monumental historical-political crimes that saw Africa divided according to the whims of colonial powers. This demands rectification by making the boundaries innocuous to Africa’s peoples through allowing voluntary and free movement of people. The second is to create a unified African strategy and approach to dealing with the outside donor world by neutralising the poison that donor aid has come to be in Africa. Weak and fragmented states, largely unable and not often in a position to mobilise internal resources, depend on external sources of aid. Political fragmentation has created unviable economic entities. Conversely lack of success in economic development has created weak political structures and so-called failed states that fall prostrate with begging bowls.

 

Africa’s position as a donor recipient bolsters donor agencies, accentuates inter-African fragmentation and destroys the chance to evolve a unified African strategy. Donor econocentrism destroys Africa’s logocentric imagination, vision and strategy to evolve a unified and Africa-centred development. The G8 meeting in Gleneagles promised 50 billion and remains unfulfilled. The grand lesson is this: Africans must rely on Africans and must build their unity to own their mineral and agricultural wealth and manufacture that into value-added wealth.

 

Pan-African Monetary Union

 

Africa's new relationship with the rest of the world will be born when Africans learn to neutralise the harm that the unholy trinity of loans, aid and debt has done to them. One key initiative is to establish a currency system that can largely self-finance an integrated African development.The existing state currencies that are not exchanged directly with each other, and whose exchange rate is mediated with the dollar, the frank and the Euro, should give way to direct exchanges based on a fair settlement.

 

Naturally, diversities, inequalities, different levels of development, differing attitudes and interests present problems in constructing a workable unified currency system. It is precisely to deal with these varied problems that Africa needs a currency system to create liquidity.The exchange of the local to local currency via a global currency continues to fragment Africa and integrate discrete interests and regions with the world economy. The key is to find strategies for Africa to integrate with a world economy as a whole and not in parts.

 

The domestication of  the existing national currencies is necessary to make Africa re- link with the world economy on its own terms and not terms dictated by others. The move must be sensible, realistic and inclusive. If the cost and benefits for the various sections of social groups can be fairly worked out, possibilities exist even to neutralise transnational, supranational actors, who will no doubt be worked up by the suggestion for a monetary union.

 

There are innumerable informal, spontaneous and voluntary cross-border transactions in Africa. Those engaged in such transactions would prefer exchanging their goods for hard currencies such as dollars or franks. This is often related to the pegging of local currencies with the US dollar and French frank. An African currency that can serve as a sort of local dollar or frank will stimulate the domestic market and communication amongst African regions, peoples, communities, markets and states. The unified currency will assist gradually to overcome the limitation of many weak currencies with new money serving as a unit of account, a store of value, means of payment and means of circulation convertible within Africa.

 

African economies continue to import and export vertically and not horizontally. This structure reflects a largely unchanged trade pattern between Africa's primary products and manufactured products from the western world. Economic diversification is still a job waiting to be done. The weakness of African currencies is tied to the lack of a diversified economic structure. The price of foreign money is high compared to the price of local money. For example, the French frank used to be 100 times the local CFA frank in West and Central Africa. One Euro is CFA 665.957.  Now the Frank is dead in France replaced by the Euro and is alive in West and Central Africa! Tourists and real estate dealers with French franks or Euros can purchase services and local assets in Africa with a couple of thousands of these notes.

 

African exports should be cheaper but with so many tariff barriers to Africa's primary and semi-manufactured goods and worsening terms of trade, and unchanging commodity portfolios, the advantage of devalued local currencies is neutralised. Africa in the CFA zone largely loses both in its exports and imports based on the existing arrangements. Money and financial flows still occur between Africa and the west rather than within Africa itself. Inter-African integration, mobility of money, labour and capital is more difficult than the movement of money, people and capital within African states. This pattern has been reinforced by  Africa's dependence on loans, grants and debt.

 

When debt repayment becomes a priority, the political economy of the interest of the International Financial Institutions (IFIs) becomes paramount. When improvement of the standard of livelihood of the population is a priority, social spending will be necessary to bring it about. However, despite the rhetoric by the IFIs as "friends of the poor" following policies of poverty reduction, loans through such schemes as the heavily indebted poor countries schemes (HIPCs), policies of structural adjustment have been followed, in reality, at the expense of social spending for development. Africa has been confronted with a stark constraint: a policy structure that has privileged debt repayment over development. International politics and economics have forced this policy choice over a Pan-African alternative.

 

To maintain or to change this policy structure is an important issue confronting Africa in the 21st century. The Pan-African quest is to change the African situation, while the IFIs want to retain the status quo of debt- payment as a priority under the guise of the poverty-reduction rhetoric. Debt-repayment distorts African economic policy in the direction of producing the things Africa cannot consume and to consume the things it cannot produce. conditions. The advice from the international elite is to keep the capital account of African states open and unregulated. This furthers the vulnerabilities of Africa's economies to fall prey to cyclical fluctuations in the world economy. They become easy victims to fast movements of speculative finance that episodically ravishes whole economies like gales. The existing 53 state monetary arrangements in Africa are too fragmented to withstand powerful movements in world finance and business cycles.

There has to be a creative way of breaking out of this trap for Africa. We back cast to look for any past attempts to forge currency unions in order to forecast feasible alternatives to get Africa going.

 

Monetary Union is not new in Africa

 

Prior to the programmatic call by Nkrumah to set up an African monetary union in May 1963, there have been a number of attempts to set up monetary unions in different regions of Africa. The origin of the modern monetary unions is traceable to the colonial encounter between Europe and Africa. The most enduring currency union has been that managed by France.

 

France planted the roots of the CFA Frank zone in 1945. This was a result of a decision by the French colonial Government to crowd out the various local currencies and establish the ‘frank’ as the sole money legally tender throughout the French colonies of West and Central Africa. France retained its control over the monetary arrangement of its West and Central African ex-colonies in the 60s by creating two regional currencies that retained cleverly the ‘CFA frank’ designation in both regions. The exchange rate between the ‘ CFA franks’ of the West African Monetary Union and the Central African Monetary Area were made equal-both maintaining the same parity against the French Frank and capital can move freely between the two regions. Both monetary areas have since comprised what France calls the ‘African Financial Community,’ where each currency is only legal tender in its own region, despite the currencies being jointly managed by the French Treasury as integral parts of a single monetary union.

 

Though France was not a member of the CFA itself, its Ministry of Finance held the operational accounts and the foreign-exchange reserves of the Central Banks of West and Central Africa. France insured convertibility of ‘CFA frank’ at a fixed price, set and controlled rules for credit withdrawal and maintained a ratio of 50:1 between the CFA frank and the French frank for half a century. In 1994 there was a devaluation of the ‘CFA frank’ to the ‘French frank’ by a ratio of 100:1. In January 1999, the CFA was pegged to the ‘Euro’ rather than the ‘French frank’, but in all other respects the French Ministry of Finance retained substantive control over the ‘CFA frank’ zones. The Euro seems to have been introduced via France into West and Central Africa two years before twelve of its members began to use it as legal tender this year.

 

The British also had created a less successful East African Currency Board in 1919 and issued a common currency unit, the East African Shilling, as legal tender in Kenya, Tanganyika and Uganda. After independence in the 60s, the common currency area broke apart. Efforts to mend the break-up are still continuing with the re-establishment of the East African Community.

 

During the 1920s the then independent Republic of South Africa collaborated with the colonial powers to create a common monetary area. The Common Monetary Area embraced South Africa, former British colonies Botswana, Lesotho and Swaziland and the then German colony, Namibia. After decolonisation in the late 60s, the ‘Rand Monetary Area’ was formed in 1974, though diamond –rich Botswana was not in it preferring to set up the ‘ pula’ as national money. The monetary union based on the rand has gradually loosened into an exchange rate union and appears to falter as a sustainable monetary union.

 

The division of Africa into currency zones has eased largely through the demise of the sterling area. However, the frank zone is still active and the dollar has moved into hitherto sterling areas and even in the CFA frank zones. Both the dollar and the ‘frank cum Euro’ will not easily give up their control of Africa. In particular, France will not easily give up its exclusive hegemony over much of West and Central Africa comprising together some fourteen existing states. The pegging of CFA franks to the Euro has not loosened the French grip over the monetary area. Such continued French grip can affect the effort to create a big-bang evolution into an African monetary system.  

 

It is interesting to note that more efforts were made during the colonial period to create currency unions than in the period of political independence. The fact that Africa was diverted from following Pan-African directions in the post-colonial period meant that projects for currency unions to create liquidity to finance inter-African development were abandoned.

 

By Mammo Muchie

Professor at Aalborg University and member of the Network of Ethiopian Scholars (NES)


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