The Mirage of Monetary Unity: A Hypothetical Examination of an African Currency Union
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The Mirage of Monetary Unity: A Hypothetical Examination of an African Currency Union
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By Tito Mbathi
April, 2024
In the realm of economic integration, the idea of a common currency is often heralded as a pinnacle achievement. Yet, the path towards such unity is fraught with obstacles that often render these efforts fruitless. In July 2020, the Secretary General of the AfCFTA Secretariat, Wamkele Mene, predicted that the promises of the AfCFTA would lead to the realization of a common currency for Africa—a project that has been in the works since 1991. This article provides a hypothetical exploration into an African monetary union, reveals the potential pitfalls and underscores why alternative financial mechanisms might better serve the continent's diverse economic landscape.
Imagine the year 2035. The African Monetary Union (AMU) has been operational for a decade, embracing a common currency—the Afro. Initially, the Umoja promised to streamline trade and bolster economic stability across its member states. Its creation was hailed as a transformative leap towards economic integration. However, despite these high hopes, the union has struggled significantly.
What Might a Common Currency in Africa Look Like?
The AMU in 2035 encompasses diverse economies; from Nigeria’s $4 trillion dollar oil-rich economy to Malawi’s $20 billion agriculture-centric market. The 3 leading economies, including Nigeria, Egypt and South Africa, combine to create nearly half of the AMU’s GDP, with their economic dominance over the continent remaining unchanged over the decades. Their size has inadvertently led to their priorities dominating the union's monetary policy decisions. Smaller economies find their respective needs sidelined, exacerbating regional inequalities and fueling discontent.
As the Umoja rolled out, initial enthusiasm waned, giving way to stark economic truths. The one-size-fits-all monetary policy failed to address the member states' diverse economic needs, leading to policy mismatches ill-suited to their domestic requirements. The disparities in economic structures mean that while some countries benefited from the fixed exchange rate the Umoja provides, others have found themselves strapped by stringent policies. Countries entered the union with vastly different economic foundations, which hindered effective policy implementation across the AMU. Inflation rates have diverged, investment has stalled, and the promised economic boom has morphed into sporadic bursts for a select few countries.
The union's downfall begins with the Umoja's instability against global currencies due to inconsistent economic policies among member states, followed by discontent members pulling out. Larger economies dominated decision-making processes, overshadowing the interests of smaller or less developed states. The Umoja also did not resolve underlying disparities in trade competitiveness, instead worsening economic imbalances across the union. The economic disparities on the continent pose substantial governance challenges for a unified currency, where different production and economic structures make a one-size-fits-all monetary policy ineffective.
The Hypothetical Dilemma of Wamile
Consider Wamile, a fictional country within the AMU, heavily reliant on agricultural exports. The fixed exchange rate of the Umoja, beneficial to industrial giants, has proved disastrous for Wamile.
The inability to adjust the Umoja's value in response to global agricultural price shifts means that local farmers and exporters suffer losses when their goods become too expensive on the international market. In an alternate scenario, Wamile’s low-cost production and relatively cheap currency would have given it an edge in the international market. The fixed exchange rate system also hampers Wamile's government from deploying effective monetary tools such as interest rate manipulation or quantitative easing to stimulate economic activity or provide a cushion for economic shocks.
Lessons from Existing Models and Alternative Strategies
Drawing from the West African Economic and Monetary Union’s (WAEMU) experiences, the pitfalls of a one-size-fits-all currency policy are evident. Despite the stability and low inflation the CFA franc provides, the inflexibility of policy response to crisis and periodic overvaluation of the currency hurt both local industries and exports. Internal trade remains low, at only 9% of all CFA countries’ total external trade, and despite having a common currency, economic integration and international competitiveness have stagnated.
Instead of pursuing a complex and challenging monetary union, Africa might look to models like Asia's Chiang Mai Initiative (CMI). This initiative does not bind countries to a common currency, but instead focuses on regional risk-sharing and financial cooperation to manage economic shocks and foster trade. This is done through multilateral currency swaps, which enhances financial stability without the need for a single currency. For Africa, this could mean establishing a similar system where countries pool resources without surrendering monetary autonomy. Such a system would require the removal of non-economic impediments to trade such as the economic volatility brought forth by geopolitical tensions and continent-wide infrastructural inadequacies. The complexities of the African market underscore the need for more than just a straightforward monetary solution.
Charting a Path Forward
The story of the Umoja serves as a cautionary tale, underscoring the need for a tailored approach to economic integration. Rather than pursuing the mirage of monetary unity, African nations could benefit more from focusing on enhancing trade facilitation, improving infrastructural links, and creating flexible economic policies that respect the continent's diversity.
This hypothetical exploration into the Umoja and the lessons from existing monetary unions illustrate the complexities of economic integration. Africa's path forward might lie not in a universal monetary solution but in adaptive, resilient economic strategies that embrace the continent's unique challenges and opportunities.
Tito Mbathi is an Associate at Botho Emerging Markets Group