REVIEW OF ECOWAS EXCHANGE RATE MECHANISM
The ECOWAS Monetary Co-operation Programme (EMCP) aims to establish a monetary union which is defined as a group of two or more countries sharing a common currency managed by an autonomous monetary authority (in the strict sense) or a mechanism whereby all domestic currencies are convertible one to the other. The desire to establish a monetary co-operation dates as far back as the very inception of the Community. The first experiment in monetary cooperation in the region was carried out with the establishment of the West African Clearing House (WACH) in 1975. The establishment of the Clearing House underscores the conviction that an efficient payment system is a necessary factor in the promotion of intra-regional trade. As a multilateral payment mechanism, the Clearing House’s objective was to promote the use of member States’ currencies in intra-community trade and financial transactions as well as reduce the demand for foreign convertible currencies in these transactions by limiting their use in the settlement of net indebtedness.
However, the inadequacies of the Clearing House system in terms of co-operation and convertibility soon became evident. It is for these reasons that in pursuance of the ECOWAS Heads of State and Government’s directive, the Secretariat of the Community (transformed into a Commission in 2007) set up in 1984 a study group to present proposals on the establishment of a single monetary zone within ECOWAS. While confirming the utmost need to harmonize monetary and tax policies as prerequisites for the economic integration of the West African region, the preliminary study proposed the creation of a single monetary zone.
In this regard, tremendous efforts must be deployed by member States for the implementation of macroeconomic reforms, especially in the area of exchange rates, budget deficit and inflation. Most of the adjustments of exchange rate recommended under the ECOWAS Monetary Cooperation Programme were made through monetary reforms. Similarly, progress has been achieved in reducing inflation and budget deficits.
Progress made so far in terms exchange rate management fairly demonstrates efforts deployed at sub-regional level geared towards the establishment of a monetary union. This explains why in 1999, a consultant was engaged to come up with an ECOWAS Exchange Rate Mechanism (ERM). This involved conducting a study and making appropriate recommendations on a suitable methodology and mode of operation as well as its duration and period of implementation within the framework of policy initiatives to establish a single currency for ECOWAS.
The report of the 1999 study was presented the Study Group of Directors of Research of ECOWAS Central Banks which met and severally between 2000 and 2002 and considered the report for approval and implementation.
At the end of their deliberations, it was observed that some prerequisites must be met by each of the national economies to guarantee a smooth and sustainable operation of the EERM. In addition, in December 2002, the Committee of Governors of ECOWAS Central Banks directed WAMA to take all the necessary measures to implement decisions taken on the EERM.
This document is on a review of the ECOWAS Exchange Rate Mechanism (EERM) in line with recommendations made by the Committee of Governors from 2002 to date. The document comprises three chapters. The first chapter provides a synthesis of findings of the study covering the period 1994 – 1999 conducted by the Agency’s Consultant and finalized in early 2001. It dwells also on the analysis of research directors’ views on the EERM. The second chapter analyses the implications of the implementation of the exchange rate mechanism before presenting the new proposed EERM. The third is a simulation of the implementation of the new EERM between 2007 and 2008.