The Monetary Geography of Africa

Chapter 10. Africa's Monetary Georgraphy in the Coming Decades

162 In the more than forty years since independence, Africa’s monetary geography has been transformed. In part this is due to changes to the international environment, which make keeping fixed exchange rates against an external anchor more difficult for African nations (though the CFA franc is still rigidly fixed against the euro). In particular, the generalized move to floating currencies in the early 1970s has meant that now the major currencies (dollar, euro, and yen) fluctuate in value against each other. A peg to one of them means fluctuating against the others, which may make the peg fragile. We conclude this book by drawing some lessons from the experience since independence and by presenting our views on how Africa’s monetary geography may evolve in future decades, an exercise that is more akin to crystal ball gazing than scientific forecasting. Though the current vogue for monetary union projects in Africa has been influenced by Europe, we have argued in previous chapters that the example of Europe is of limited relevance, as are the standard analytical tools used to assess the costs and benefits of monetary union. Hence we argued that the appropriate framework for considering monetary unions in Africa was one where, in addition to the OCA criteria of symmetry of shocks and factor mobility, the extent to which countries share similar financing needs and are not subject to pressures for spending diversion and corruption makes a big difference for the sustainability of a monetary union. While institutional Africa’s Monetary Geography in the Coming Decades 10 2284-10_CH10.qxd 10/27/04 11:16 Page 162 monetary geography in the coming decades 163 design is important, it is unlikely that a newly created central bank would be able to assert its independence from fiscal policies. Instead, it would be a dependent central bank, even if not as dependent as a national central bank facing just one treasury. In these circumstances, including in a monetary union, a country with undisciplined fiscal policies (especially if that country were large) would not be attractive. We used this analytical framework to assess the costs and benefits to countries of various proposed monetary unions, including a single currency for Africa. We concluded that these projects, assuming that they went ahead, would be unlikely to achieve their stated aim of including all countries in a region (or, ultimately, the whole continent). As asserted above, countries with poor fiscal policies make unattractive partners and, if admitted to a monetary union, could threaten its continued existence. Unfortunately, in most regions there are countries that fit this description. The idea that the mere membership in a monetary union would curb such fiscal indiscipline is implausible. More promising, however, is the use of union membership as a carrot to induce countries to rein in deficits and make fundamental structural adjustments. Such a use of peer pressure is consistent with the principles of NEPAD and could augment the effectiveness of the latter process. It is, however, inconsistent with the idea that creating an inclusive monetary union will induce countries to modify their behavior and, as is said, get religion. And strong use of the carrot of membership is almost sure to mean that some countries would not qualify. If the current projects for monetary unions based on regional economic communities do not bear fruit, nor lead to a single currency by the target date of 2021, what will the monetary geography of Africa look like in twenty or so years? An important issue in this context is whether currencies (national or supranational) are fixed or float, or do something in between. This boils down to a choice between an external anchor and domestic target for monetary policy. We consider the international environment’s important influence on this choice, as well as how the domestic context for policymaking may evolve. International Environment For the past thirty years, exchange rates of the major international currencies have fluctuated with respect to each other, generally without much intervention , despite occasional periods of coordination.1 This has made it difficult for countries with trade that is diversified geographically to peg to a single international currency, since fluctuations of dollar, euro, and yen exchange rates have 1. Such as a result of the Plaza Agreement and Louvre Accord in 1985–87. 2284-10_CH10.qxd 10/27/04 11:16 Page 163 164 monetary geography in the coming decades been substantial and have produced...