Burkina Faso, Mali & Niger hint at a new west African currency: what it’ll take for it to succeed

Subject: IR

Section: Places in news

Context:

On 11 February 2024, General Abdourahmane Tiani, leader of Niger’s military junta, proposed a new common currency for Niger, Burkina Faso, and Mali during a national TV address.

Details:

This initiative is a step towards emancipation from colonial legacies, specifically from the CFA franc, a currency rooted in French colonization.
These three nations, all former French colonies recently overtaken by military regimes, have also established the Alliance of Sahel States (AES) for defense purposes.
Following military coups, the Economic Community of West African States (Ecowas) has sanctioned them, leading to their withdrawal from Ecowas, though they remain part of the West African Economic and Monetary Union (Uemoa) that uses the CFA franc.
This currency is backed by the Banque de France under specific agreements with the BCEAO.

For a multilateral currency to function effectively, several conditions are essential:

Coordination of Macroeconomic and Budgetary Policies: There must be a strict alignment of economic and budgetary policies among the participating countries. This alignment ensures currency stability and prevents trade imbalances, fostering confidence in the economy and supporting regional growth.
Establishment of Strong Monetary Management Institutions: It’s crucial to have robust institutions, such as a common central bank, with sufficient authority to conduct an independent and stable monetary policy. This ensures the currency’s value is preserved and helps manage economic fluctuations.
Creation of an Integrated Common Market: The free movement of goods, services, capital, and labor is fundamental to stimulate economic growth and enhance regional cooperation. Existing frameworks like the West African Economic and Monetary Union are beneficial in this context.
Implementation of Crisis Monitoring and Resolution Mechanisms: There should be systems in place to deal with economic shocks, including common reserve funds and currency swap arrangements. Currency swaps allow for the exchange of currency amounts between two parties under agreed terms, helping to manage exchange rate risks and support cross-border financing.

Are these conditions met in Burkina Faso, Niger and Mali?

It’s difficult to say whether these conditions have been fully met in the three countries. It would mean having a firm understanding of whether these, among other, conditions have been met:
- harmonisation of government policies
- macroeconomic stability through inflation control
- limit on public debt
- maintenance of a balanced current account.

Potential Gains:

A larger monetary zone could lead to improved trade integration and more efficient allocation of resources.
The countries might gain more flexibility in dealings with external partners, fostering independence.
The monetary union could reduce transaction costs and make the region more attractive to investors due to increased trade integration and independence.

Risks:

The creation of a new currency might be perceived as a threat by the West African Economic and Monetary Union and Ecowas, potentially leading to regional tensions and the fragmentation of existing economic blocs.
The departure of these countries could diminish the economic and political influence of West African Economic and Monetary Union and Ecowas.
There’s a risk that the new currency could depreciate against the CFA franc, negatively affecting exporters to other union countries.
Without strong formal frameworks for controlling and managing the new currency, speculation and uncertainty about its value could arise, highlighting the need for robust institutions for its management and supervision.

Source: DTE