HARMONISATION OF MACROECONOMIC POLICIES IN THE ECOWAS SUB-REGION
In July 1995, as part of the process towards the achievement of economic and monetary union, the ECOWAS Council of Ministers adopted proposals to harmonise macro-economic policies of the member countries. The policy areas identified as the focus for the harmonization exercise were: exchange rates, inflation rates, budgetary deficits limits and central bank financing of government budgetary deficits. It was understood that the harmonization effort will lead to stability and convergence in macro-economic aggregates in order to facilitate the achievement of the ECOWAS objective of a single monetary zone by the year 2000. This presentation will cover the following issues: the choice of the target indicators and the rationale, the comparative performance of ECOWAS member countries with respect to the selected indicators, the prospects of convergence, and the framework for policy coordination and surveillance.
II TARGET INDICATORS
Macro-economic indicators are the variables that provide a quick measure of a country’s economic policies with the commitments made for coordination. While indicators jot goals to be achieved by economic policies, it is possible sometimes for indicators serve also as target of economic policy.
A single monetary zone, which is the ECOWAS objective for monetary cooperation, can be achieved by either irrevocably fixed exchange rates between the union’s currency overvaluation be removed. Eliminating currency overvaluation in turn requires that either exchange rates are made market-determined or they are continually adjusted to maintain them at equilibrium levels. In the transition person.
PROPOSED FRAMEWORK FOR POLICY COORDINATION AND SURVELLIANCE
The process of harmonization requires a transition period during which relevant policies of the countries are coordinated and monitored to ensure the required convergence. The design of the framework for harmonization should take into consideration the special circumstances of the various member countries of the community in the transition period.
One such special situation is the existence of UEMOA, a monetary and economic union enclave within the community. UEMOA countries have had in place arrangements for macroeconomic policy coordination among themselves for many years. The union, indeed, provides a large enclave of harmonized economic and financial system within the community and reduces the area for coordination from 16 countries to its nine currency areas. The existence of UEMOA also implies that the framework for harmonization can envisage a two-step approach to the establishment of a single ECOWAS currency. As a first step, currencies can maintain the relatively stable rates being developed and move into a system of fixed exchange rate relationship. The second step would then be to design the fullfledged framework for absorbing all the national currencies in the community into a full monetary union that will circulate a single currency.
The weight and, therefore, the performance of the economy of Nigeria has a large influence on the economic situation of the community and like UEMOA, will be a significant factor determining the success of the harmonization exercise. Currently, the economic situation in the country is market by low output growth, high inflation and financial imbalances. Therefore, the framework must also require a rapid establishment and maintenance of monetary and financial stability in Nigeria for favourable impact on the rest of the community.
The diversity and structural weaknesses of the economies in the community must also be considered in the design of a framework. Most of the countries in the community have very low per capita and are small, poorly endowed with natural resources amd overburdened with external debts. For these reasons, these countries depend on external financial assistance to supplement their domestic efforts to achieve the desired level of economic and financial reforms envisaged for harmonization. Bilateral and multilateral donor (including International Monetary Fund, the World Bank and the African Development Bank) have played key roles in supporting economic and financial reforms of the countries to date. At the national levels, implementation of programmes supported by these donors and institutions appear to take priority over those of the community. Indeed, quite apart from technical support for policy formulation and finance directly provided by the IMF and the World Bank, their support also facilitates other financial flows to ECOWAS countries. Consequently, countries that fail to win the approval of these institutions for their programmes often face difficulties obtaining the necessary financial support from other donors.
The framework, therefore, must seek linkage with programmes supported by the donors and especially the multilateral financial institutions. Such a linkage would be for the mutual benefit of both the multilateral institutions and the community because the programmes do not conflict with each other but are rather mutually reinforcing. However, it would be necessary for a political decision to be taken by ECOWAS for such an arrangement to be negotiated.
It might also be necessary for a financial support facility to be put in place by ECOWAS for the proposed monetary union. Such a facility could help in the building of a desired level of credibility and confidence for the proposed ECOWAS union currency. Moreover, it could provide a necessary incentive for inducing UEMOA that already has such a facility to join an ECOWAS single currency arrangement. Since at the moment no ECOWAS country is rich enough to underwrite such facility, it may be desirable to negotiate the guarantee of the other donors, such as the European Union. This is one of the political decisions that should be considered by the community’s authority.
The community also would need an effective system for monitoring the performance regarding the selected targets to ensure compliance and evaluate member countries’ performance. Since the community does not have the financial clout of the multilateral financial institutions, surveillance could be facilitated if the implementation of the programme for harmonization are formally integrated into the SAPs being implemented by member countries. Surveillance would take the form of statutory reporting and consultation while sanctions for non-compliance would rely essentially on moral suasion, at least in the initial stages. There should be periodic submission of relevant data on the indicators to the West African Monetary Agency (WAMA) and the ECOWAS secretariat to facilitate assessment of each country’s compliance as well as progress toward convergence by the member states. The required data are however already regularly reported to the IMF and the World Bank by member states and cooperation and compliance at the regional level should not present any major problem.
In order to achieve a desired level of economic policy convergence in ECOWAS, individual member countries are urged to pay particular attention to the need to harmonize their macroeconomic policies with those of the rest of the community. in particular, countries operating floating exchange rate regimes should endeavour to stabilize their exchange rates by adopting policies to reduce the viability of nominal exchange rates to less 10 percent and 5 percent by the end of 1998 and 2000, respectively. For countries that have adopted fixed or dual exchange rate system, it is recommended that they should take the necessary actions to adjust to a system that best guarantee the elimination of exchange rate misalignment (overvaluation) in a unified rate system. Furthermore, there is also a need for ECOWAS member states to implement measures for the elimination of payment restrictions on current transactions and stabilize their exchange rates within the period of 1998-2000.
For UEMOA and other ECOWAS countries that have achieved single digit inflation rates, it is recommended that they should strive to maintain that performance. Ghana and Nigeria should make every effort to implement policies to reduce inflation to less than 30 per cent by the end of 1997 and single digit by 1998. The steady progress being made towards political stability should make it possible to pay attention to the resuscitation of the national economies of Liberia and Sierra Leone while it would be desirable for these countries also to strive to achieve single digit inflation rate by the year 2000. However, it is recognized that future macroeconomic performance in these two countries would depend on the success of their political transition programmes.
Regarding fiscal discipline, it is recognized that reducing fiscal deficit would be, in many cases, the key improving macroeconomic performance and minimizing imbalance in African countries. Thus, it has been proposed that all ECOWAS countries should reduce fiscal deficits to GDP ratio to not more than 5 percent by 1998 and 3 percent thereafter.
In the absence of punitive sanctions, the likelihood and effectiveness of coordination could be enhanced by a regular process of consultation and reporting. Moreover, if coordination and reporting get entrenched on an on-going basis, member countries would have the opportunity to submit their individual constraints and problems for group considerations flowing from the Governors of ECOWAS central banks