Eco progressive evaluation

Title: Eco – progressive evaluation

Abstract:

Using the historical inflation rate (CPI) data of the would be ‘In-countries' as a criterion for determining countries within the West African region that would qualify to join the forth coming West African common currency (Eco). The recommended nations are; The Gambia, Nigeria and Ghana. Further, the planned introduction of the Eco come December 2009 be deferred to year 2013 and the inflation rate criterion be re-defined as ranging between 1.8% and 5.8%.

ECO – PROGRESSIVE EVALUATION

It is imperative that independent organisations and scholarly reports be carried out periodically on the viability of the concept of the West African Common Currency (Eco). The broader the perspectives on the new concept by employing varying scientific tools to regularly assess the pre- and-post-Eco era the better it is for the region in particular and the world at large.

The five (5) West African countries that have agreed to kick start the Eco are; The Gambia, Ghana, Guinea, Nigeria and Sierra-Leon. Eco has experienced two deferments in its inception, and the major reason being the inability of all proposed ‘in-countries' to meet the WAMI (West African Monetary Institution) criteria. Forging a common currency zone comes with some inherent advantages as; creating a common and larger market, working with common fiscal policies, improving the economic health of the region and gaining from comparative advantage in the global marketplace, stability, growth, job creation amongst others.

In the face of the current downturn of the global economy, in particular the steep negative gradient of the Western and Asian economies, it would only be prudent for academics, politicians and other stakeholders to take a second, in-depth and strategic assessment of the Eco to be launched as planned in December 2009. Care must be taken not to allow political expediency to overrule the economic indicators of which the common currency concept hinges on. To buttress the economic crust of the Eco, it is obvious that Africa has moved on from the political struggle and into the economic phase, of which the common currency is one of the laudable proposals to drive the continent out of its current slow growth state to an accelerated pace of which it has all the resources and knowhow for.

Also, it is one of the intentions of ECOWAS (Economic Commission for West African States) to merge WAMZ (West African Monetary Zone) with the existing UEMOA (Union économique et monétaire ouest-africaine) resulting in a larger economic block spanning from the West to Central African region in the very near future. Therefore the introduction of the Eco requires divergent assessments in other to place WAMZ on the appropriate path and lessons from near and afar, pre and post UEMOA and Euro respective developmental processes could of value.

Xinhua News agency did confirm the scheduled introductory date of the Eco as: ‘The second common currency for the Economic Community of the West African States (ECOWAS) would take off by December 1, 2009, Governor of the Central Bank of Nigeria (CBN) and Chairman of West African Monetary Agency (WAMA), Chukwuma Soludo has said. WAMA, which ended its 36th Meeting in Nigerian capital Abuja on Saturday after reviewing the preparedness of its members for the monetary integration, was satisfied with the progress so far and decided that the introduction of the common currency should go ahead as planned, according to Lagos-based Punch newspaper on Monday'. (2008)

Six (6) point convergence criteria

The Six (6) point litmus test as earlier suggested by Afaglo H.K. (2006) as the common barometer as the convergence criteria are well spelt out below. Secondary economic data from International Financial Statistics, International Monetary Fund and ERS Baseline Regional Aggregation were employed in this write up in other to gain a better understanding of the economies of the West Africa region from the international business view point.

Ø Growth – FDI inflows, job creation and growth of the financial sector.

Ø Inflation rate (consumer price index)

Ø Budget deficit as a percentage of GDP - excluding of foreign donation towards budget funding.

Ø Central banks financing of budget.

Ø Exchange rate - inter-currency exchange rates with the US dollar as the standard.

Ø Currency stability.

Due to time constraint, this paper focuses on inflation (consumer price index) as its litmus test, whiles subsequent write-ups would take care of other criteria.

Inflation

With the current economic crisis (global recession – 2007 and ongoing) and the growing emphases on the use of inflation and interest rate as the sensitive macro-economic tools which forms part of the solution, it is worth taking a further look at the Consumer Price Index (CPI) of the would be in-countries of Eco.

WAMI did set a less than 10 per cent CPI as its criterion for qualification into the West African Monetary Zone.

In the author's dissertation he did strongly propose a re-look at the inflation rate criterion as: ‘Average inflation rate being 3.8 per cent of the ECOWAS region as ….. with a tolerance limit of ± 2.0 per cent. {The inflation rate reference year is 2005} Mathematically the proposed criterion could be represented as, [1.8% ≤ Inflation Rate ≤ 5.8%]' (2006)

It is understandable that a realistic CPI be one of the determining factors of gaining membership into the economic block formation within the proposed pre-introduction era. However, would the realizable WAMI inflation rate criterion within the short term with its subsequent backlash to the block be more prudent than a rather difficult, long term and yet achievable lower inflation rate criterion with fewer distortions to the primary aim of the union be preferred? In other words, which of the two proposed inflation rate criterion is prudent or preferred, is it the achievable and high inflation rate within the short term with foreseeable problems possibly leading to a deformation or a difficulty, low, and acceptable inflation rate criterion that can only be achieved in the long term with minor glitches.

Data mined from International Financial Statistics, International Monetary Fund and ERS Baseline Regional Aggregation over a reasonable period of time does portray a clearer and long term view of the CPI of various ‘in-countries'. By and large, it would point the region in a defined direction than just political rhetoric. A tabular and graphical representations would aid in the determining the macro-economic convergence criterion.

Consumer Price Index (%) of Eco member countries

Year →

Country ↓

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Gambia, The

2.50

4.34

3.66

15.13

16.10

27.29

14.23

4.28

1.40

5.20

5.70

Ghana

17.05

13.96

27.10

35.06

22.69

28.75

14.35

14.96

10.91

10.73

16.84

Guinea

1.90

5.10

4.60

5.26

3.03

12.92

17.51

31.40

34.70

22.90

18.60

Nigeria

10.32

4.76

8.79

18.79

13.01

14.05

19.42

13.51

8.24

5.38

8.93

Sierra-Leone

35.53

34.09

- 0.83

2.09

- 3.29

7.60

14.18

12.05

9.54

11.70

12.30

Sourced from IFS, IMF & ERS Baseline Regional aggregation Dec – 2008

Five (5) Year CPI Graph of Eco – In countries

Gui 20 N Gui Gh 16 SL 12 SL Gam % 8 Gh N 4 Gam 2004 2005 2006 2007 2008 Years

Key Meaning Sign

Gam Gambia, The

Gh Ghana

Gui Guinea

N Nigeria

SL Sierra Leone

The Three proposed ‘In-countries' of Eco

Country

Equation

Meeting point (year)

Meeting point (CPI)

Comment

Gambia, The

Y = 12.8 – 1.5x

Gambia to Ghana

12.8 – 1.5x = 18.8 – 2.15x

(9.231 years)

4.8395%

(based on average)

Acceptable CPI

Ghana

Y = 18.8 – 2.15x

Ghana to Nigeria

18.8 – 2.15x = 21 – 3.25x

(2 years)

7.38995%

(based on average)

Acceptable but on the margin of the high side of CPI.

Nigeria

Y = 21 – 3.25x

Nigeria to Gambia

21 – 3.25x = 12.8 – 1.5x

(4.69 years)

5.327%

(based on average)

Acceptable CPI

Average

5.307 years

5.327%

Recommendations

A critical look at the last five years consumer price index (CPI) data and graph serve as the bases for the following recommendations;

* The decline in CPIs of Sierra Leone and Guinea are gentle. Implying it would take longer duration to meet the earlier mentioned three nations.

* Although Sierra Leone and Guinea be temporary excluded from the birth of the Eco as planned, Sierra Leone be advised to implement drastic economic measures hence forth in order to meet the CPI convergence criterion.

* Gambia, Nigeria and Ghana are experiencing an appreciable decline in inflation.

* The proposed inflation rate (CPI) criterion to be adapted must range between 1.5% and 5.8%.

* The Gambia, Nigeria and Ghana are the most likely ‘In-countries' to meet the inflation rate criterion as proposed in this write up.

* The anticipated time for the introduction of the Eco should be in the year 2013, which is five (5) years from 2008.

* It is also clear that Ghana be advised to intensify its fiscal policies so as to improve on its inflation rate, since her anticipated CPI would be on the margin during the introduction of the common currency.

* Should any of The Three would be ‘in-countries' (The Gambia, Nigeria and Ghana) and in particular Ghana not able to maintain the economic momentum prior to the introduction of the Eco, it must be excluded. Else, the immediate post-Eco era would experience an imbalance and rendering the monetary zone not able to achieve stability and continuous growth.

Reference

Afaglo, H.K. (2007) Assessing the Economic Indicators for the Introduction of the West African Common currency (Eco) (A case study of perceptual reasoning and empirical evidence in adducing the Ghanaian Economy into the Eco). Available from http://www.stclements.edu/grad/gradafag.htm [Accessed on 25 January 2009]

Shaw M. (2009) International Macroeconomic Data Set Available from http://www.ers.usda.gov/Data/Macroeconomics/ [Accessed on 15th February 2009]

Status of Convergence, (2009) Available from http://www.wami-imao.org/ecomac/ [Accessed on 25 January 2009] ECOMAC wami

The World Factbook (2008) Available from https://www.cia.gov/library/publications/the-world-factbook/ [Accessed 25 January 2009], USA

World Factbook (2009) Available from https://www.cia.gov/library/publications/the-world-factbook/geos/ga.html#Econ [Accessed on 15th February 2009]

Xinghua News Agency, Available from http://www.highbeam.com/doc/1P2-19564048.html [Accessed on 25 January 2009]

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