‘Don’t rush to replace cedi with ECO’

Ghana should strive to meet a set of economic prescriptions necessary for the adoption of the ECOWAS-backed currency, ECO, but hasten slowly in swapping the cedi with the new currency, some economists have cautioned.

They said it was important for Ghana to build strong economic buffers in the form of sustained fiscal discipline to be able to withstand the shocks that the use of a common currency presented.

With Ghana being inconsistent in maintaining fiscal discipline and consequently failing to meet the criteria needed for the adoption of the common currency, Professor Peter Quartey of the Institute of Statistical, Social and Economic Research (ISSER) and Dr Said Boakye of the Institute for Fiscal Studies (IFS) agreed in separate interviews that adopting the ECO anytime in the short-term would mean that the country was doing so on weak economic fundamentals.

Suffering the ripples of mismanagement of a member country’s economy could be one of the negative impacts.

2020 Dateline

The two economists spoke to the Daily Graphic following the adoption of the ECO as a common currency for the region by the Authority of Heads of States and Governments of the Economic Community of West Africa States (ECOWAS) on June 29, 2019 in Abuja, Nigeria after an ECOWAS summit.

 The currency is to start circulation in member countries that have met a criteria in January 2020.

The criteria are fiscal deficit of not more than three per cent of Gross Domestic Product (GDP), average annual inflation of not more than 10 per cent and gross international reserves of not less than three months of import cover which have eluded the 15-member countries since 2000.

Postponements

Conceived in 2000, the ECO was planned to be operational in Anglophone West Africa in 2003 but suffered four postponements in 2005, 2010, 2014 and 2015 due to sustained fiscal slippages in the region and little political commitment to the cause.  

At the ECOWAS summit on June 29, this year, the leaders agreed that the earlier plan to adopt the ECO in all member countries in 2020 would remain and that they would further roll out a plan to help members meet the required criteria.

But the new date is also likely to suffer a hitch, according to experts.

In a 2016 report on the ECO, the African Development Bank (AfDB) said it was “likely that the 2020” timeline would also be postponed.

Anchor economy

Professor Quartey noted that the lack of an “anchor economy” in the region could be the cause of the delay in adopting the common currency.

Citing the euro used by member countries of the European Union (EU) as an example, Prof. Quartey said Germany used its strong economy and clout at the time to serve as “the big brother and class prefect” in the lead up to the adoption of that currency in 1999.

When asked if Ghana should aspire to play the ‘class prefect’ role, the professor of economics said the country should rather be interested in being consistent with meeting the criteria.

“We should strive to achieve that and if afterwards we are the anchor, that is fine,” he said.

On Ghana joining the ECO in 2021, Prof. Quartey said “one cannot say a yes or a no. “When we meet and assess the macroeconomic structures of other countries and they are good and stable, then we can join.

 But come 2021, if majority of them are struggling with their macros, then I do not think we should join.”

He added that while the benefits of a common currency were enormous, “they are not automatic; they come when certain conditions are met and that is why the convergence criteria were set.”

Speculative attacks

Dr Boakye, who is a Senior Researcher at IFS, a fiscal policy think tank, said Ghana should strive to join the ECO to benefit from increased trade and currency stability.

“Because different countries are bringing their GDPs to play, speculative attacks in individual countries may not be so useful,” he added.

Dr Boakye said that the ECO criteria were superior to Ghana’s fiscal targets, hence the need for the country to work hard to become compliant.

The Fiscal Responsibility Act caps fiscal deficit at five per cent of GDP, higher than the ECO requirement of not more than three per cent of GDP for member countries.

Dr Boakye also advised the government to look out for ‘bad actors’ in member countries that mismanaged their economies before adopting the ECO.

Such countries, he said, had the tendency to mute the gains of a currency union.