US embassy cable - 05ACCRA400

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 
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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. 
 
 
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