US embassy cable - 05ACCRA406

UNCLAS SECTION 01 OF 02 ACCRA 000406 
 
SIPDIS 
 
 
C O R R E C T E D  C O P Y ( DELETED UNNECESSARY TEXT) 
 
STATE FOR EB/IFD/OMA 
EB/IFD/ODF 
AF/EPS 
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MCC FOR ROD NORMAN 
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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 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 
--------------------------------------------- ------ 
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. [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 
---------------------- 
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.