Journal of Common Market Studies Volume XVII, No. 3 March 1979

WEST AFRICAN CLEARING HOUSE, WEST AFRICAN UNIT OF ACCOUNT, AND PRESSURES FOR

MONETARY INTEGRATION BY EGHOSA OSAGIE

Department of Economics, Uniuerdy of Ibadan, Ibadan, Nigeria

THE treaty setting up the Economic Community of West African States (ECOWAS) was signed on May 28,1975, in Lagos, Nigeria. This was followed by months of negotiations on the protocols of the Community, the appointment of the Executive Secretary and the inception of formal business at the ECOWAS headquarters in Lagos. No doubt, the young Community is confronted with a number of critical problems, the resolution of which may determine its future. Among these problems are: the low level of trade among Member States, foreign control of the individual economies encouraging the extreme external orientation of the economies, inadequate transport and communications links, and a low level of monetary cooperation among the monetary zones that make up the West African sub-region.1 The policy makers of ECOWAS and a growing number of academic economists have come to the conclusion that if these problems are to be successfully tackled, a programme for eventual monetary integration must be worked out early in the life of ECOWAS.2 The first order of priority in this long-term programme is the establishment of the West African Clearing House.

THE WEST AFRICAN CLEARING HOUSE

This clearing house occupies a rather important place in the economic history of modern Africa. In the first place, it represents a follow up of the articles in the ECOWAS treaty calling for

1 For details, see: E. C. Edozien and E. Osagie (eds.), Economic Integration in Wert Africa (Ibadan : Ibadan University Press, forthcoming).

2 J . H. Frimpong-Ansah, ‘Monetary Arrangements for Accelerated Industrialisation Under ECOWAS’, paper presented at the Inaugural Conference of the West African Economic Association, Lagos, April I 3-1 1, 1978.

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monetary cooperation and the facilitation of payments procedures in the Community. It therefore stands out as one of the fruits of the integration process in West Africa. Secondly, it represents the efforts of the Committee of West African Central Banks, an exqmple of negotiated success in the arena of multilateral monetary cooperation.

Thirdly, the West African Clearing House is the first example of multilateral cooperation of its kind in the ~ub-region.~ Its performance would to a considerable extent affect the future of monetary cooperation in West Africa.

The background against which the Clearing House was established on June z 5 , I 97 5 (actual operations started July I, I 976 at its Freetown Offices) is representative of economic conditions in less developed countries which the Clearing House intends to change. The low level of intra-West African trade, represented by about 3 per cent of total trade, low levels of domestic production of manufactures, the absence of exchange markets in the sub- region, the use of foreign currencies such as the US dollar in the settlement of international obligations between West African States, and the signing of bilateral trade agreements raise problems impinging on the sovereignty and de fucto independence of West African States. More importantly, the survival of monetary systems having their origins in the colonial period linking West African currencies to others in the developed world, has been a source of division in the sub-region and of discouragement of intra-West African trade.4 For example, the francophone States with the exception of Guinea, Mali, and Mauritania, belong to the Union Mone‘tuire Ouert Africain (UMOA), issuing the cfa franc through a common central bank-Bunpe Centrale des Etutr de L’Afrique de L’Ouest (BCEAO). The cfa is closely linked to the French franc, and transactions involving payment in currencies of countries not belonging to the franc zone require transactions involving the BCEAO, the French Treasury and the Paris foreign exchange market. Although payments within the UMOA are

For details, see: ‘The West African Clearing House: Opportunities for Commercial Banks under ECOWAS’ culled from the Publication of the West African Clearing House, Freetown, Sierra Leone by D. 0. Oboh and published in Nker Bunk News, Vol. IV (Jan./March), 1977, pp. 3. 5-6.

4 A. Hazlewood, ‘Sterling Balances and the Colonial Currency System’, Economic journal, Vol. LXII (December, 195 2). pp. 94r-1 ; P. N . Van de Ven and D. J . Wolfson, ‘Problems of Budget Analysis and Treasury Management in French-Speaking Africa’, IMF Stuflpapers, Vol. XVI (March, 1969); IMF Staff, ‘The CFA Franc system’, IMF Stufpupcr~, Vol. X (Nov. 1963), pp. 341-96; Central Bank of Nigeria, ‘Trade and Monetary Relations in the West African Sub-Region’, Economic and Financial Review, Vol. 10 (June 1972), pp. j-22.

WEST AFRICAN PRESSURES FOR MONETARY INTEGRATION 2 2 9

facilitated and Member States do not experience problems of inconvertibility and exchange control that tend to bedevil the foreign trade sector of the anglophone countries, there is no doubt that they have surrendered a great deal of sovereignty over monetary matters to their former colonial masters. The situation in the anglophone countries is the exact opposite of that among the francophone, with the exception of Liberia whose currency is the US dollar, which is thus more closely linked with the US than the francophone countries are to France. Monetary sovereignty flourishes but inconvertible currencies and administratively imposed restrictions on international trade distort international commerce and encourage smuggling as well as illegal markets in foreign exchange. The r d e of the West African Clearing House is to restore monetary sovereignty to the francophone Member States, and some form of convertibility within the limits set by the Clearing House to the anglophone countries.

The original Member States of the Clearing House are twelve Central Banks of the following countries: Benin, The Gambia, Ghana, Ivory Coast, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo, and Upper V01ta.~ The membership is quite representative of the sub-region and includes the more developed countries-Nigeria, Ghana, Ivory Coast, and Senegal. It is expected that in due course the other four Member States of ECOWAS who do not now participate in the Clearing House (Guinea, Guinea Bissau, Cape Verde, and Mauritania) would join as soon as the benefits of membership become more apparent.

These benefits, closely linked to the objectives of the Clearing House, are:

( I ) Promotion of the use of the currencies of Member States for financing intra-West African trade.

( 2 ) The realization of economies in the use of foreign exchange reserves of Member States, as these reserves would be used to settle net balances with the Clearing House, rather than to pay for each transaction as the situation before the establishment of the Clearing House.

(3) Encouragement of liberalized trade among Member States, and

(4) The promotion of monetary cooperation and consultation among Members.s

5 The currencies involved are the cfa franc, the Gambian Dalasi, the Ghanaian cedi, the Liberian dollar, the Malien franc, the Nigerian naira, and the Sierra Leonean leone.

8 N4erbank News, p. 3.

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The payment mechanism devised for the Clearing House is aimed at reducing transaction costs, shortening the period it takes to effect payment, and reducing the volume of paper work required for intra-West African trade. Payment for current account transactions of Member States would normally be transacted through the Clearing House, though capital account transactions ‘may only be included by mutual agreement between the contracting parties’.’ Payment may be made through the Clearing House with telegraphic transfers, mail transfers, bank drafts, bills of exchange, and other instruments approved by the Clearing House.

The payment mechanism is rather similar to the clearing transaction by national central banks of cheques submitted by commercial banks, with the Clearing House acting like a national Central Bank and the Central Banks acting like commercial banks. In the words of the Clearing House:

. . . the arrangement envisages that all transactions will go through commercial and other banks as usual. The procedure is that the commercial bank which is effecting a customer’s payment order in favour of another individual in another country in the sub-region deli.vers the order to its central bank in its own currency. The Central Bank in question notifies the Clearing House and at the same time sends the order to the Central Bank in the beneficiary’s country. On receiving the notification, the Clearing House credits the Central Bank in the beneficiary’s country and debits that of the country in which the sender resides. Similarly, the Central Bank in the beneficiary’s country, on receiving the order, credits the beneficiary’s commercial bank which will in the final analysis effect payment to the beneficiary.*

A close examination of the payment mechanism shows that payment transactions involving individuals or firms, commercial banks, and their central banks are denominated in the local currency. This eliminates the need for the transactor to apply for foreign exchange from his domestic Central Bank to effect payment in another West African country. However, payment transactions between Central Banks and the West African Clearing House are not denominated in national currencies, but rather in an artificial currency unit known as the West African Unit of Account, which is equivalent to the IMF’s Special Drawing Rights. At monthly intervals, net balances are calculated by the Clearing House for each Member State, and debit balances may be settled with pound sterling, French francs, US dollars, Swiss francs, and the Deutsch Mark.

Ibid., p. j . Ibid, p. 5 .

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The choice of currencies for settlement of net balances has some political implications which may well be resented by future policy makers intent on protecting the sovereignty of Members in monetary matters. As Member States are not yet in a position to create a new asset to be used for settlement of net balances, the next best alternative is to fight for a revision of the rules and regulations governing the use of the SDR to allow it to be used for settlement of balances by countries belonging to a Clearing House. As the West African Unit of Account is equivalent to the SDR (Special Drawing Rights), the increased use of the latter for settlement of net balances would encourage the spirit of cooperation and coordination, bringing into more focus the West African Unit of Account in each Member State, and with the right political commitment facilitate the emergence of a monetary union in the future.

T H E WEST AFRICAN UNIT O F ACCOUNT

The numeraire or unit of account employed in monetary transactions between the West African Clearing House and member Central Banks is the artificial currency unit known as the West African Unit of Account. The introduction of the West African Unit of Account was motivated by desire to protect the value of monetary claims and payments from being seriously affected by floating exchange rates ;9 thus the possibility of Central Banks incurring capital loss resulting from fluctuations in currency values is minimized by the fact that the SDR, and by definition the West African Unit of Account, are linked to a basket of sixteen currencies.lO The thorny and politically sensitive issue of using one of the sub-region’s currencies, or one of the world’s leading currencies like the US dollar or the pound sterling for keeping accounts was tactfully avoided by creating an artificial currency unit. Furthermore, the monetary independence of the sub-region was asserted first by allowing domestic transactors to use domestic currencies in payment for imports from other Member States and second by creating the West African Unit of Account to provide the basis for keeping account of transactions between Central Banks and the Clearing House. In addition, the supporters of West African monetary integration see the

9 For a more detailed analysis of artificial currency units, see: J. Aschheim and Y. S. Park, ‘Artificial Currency Units: The Formation of Functional Currency Areas’, E s ~ q s in International Finance, No. I 14, (Princeton University, N . J.: 1976).

10 IMF, ‘Outline of Reform Supplement’, IMF Jury , (June 17, 1974). pp. 193-208.

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introduction of the West African Unit of Account as a very important development in the monetary history of West Africa, with crucial implications for the evolution of monetary union in the future.

An important aspect of the operations of the West African Clearing House is the determination of the exchange rates, on a daily basis, of the currencies of Member States. The exchange rates quoting the values of the individual currencies in terms of the West African Unit of Account would be determined at the Clearing House with information obtained from Member Central Banks and the IMF. This function of the Clearing House has a far- reaching impact on the sovereignty of Members, though this has so far escaped the attention of scholars of West African integration. Before the establishment of the Clearing House, each Central Bank worked out its own exchange rate. No doubt, most of the currencies were overvalued and inconvertible; it is to be hoped that Member States would surrender some sovereignty pertaining to the determination of exchange rates in exchange for a more efficient and optimal functioning of the sub-region’s monetary systems.

Although the introduction of the West African Unit of Account was generally welcome, the sub-region would benefit more if the new asset takes on more monetary functions than a mere numeraire. The West African Unit of Account may be held as reserves by Central Banks and used in the clearing of net balances with the Clearing House. Since all the Central Banks maintain balances of Special Drawing Rights which are equivalent to the West African Unit of Account, the Articles of Agreement establishing the Clearing House may be adjusted to empower it to issue and distribute West African Units of Account to Member Central Banks to constitute part of their international reserves. Thus, the new asset would become both a numeraire and an international store of value which would be periodically used to settle net balances. The transformation of the West Africari Unit of Account into an international medium of exchange for West Africa oversteps the bounds of a clearing house but is ideally conceivable in a monetary union.11

PRESSURES FOR WEST AFRICAN MONETARY INTEGRATION

The objective of increased West African trade has up till 1978 l1 E. Osagie, ‘Monetary Disintegration and Integration in West Africa’, Econommiu

Internqionufe, Vol. XXVIII (Agosto-Novembre, 197y), pp. 45 j-6 j.

WEST AFRICAN PRESSURES FOR MONETARY INTEGRATION 233

eluded the sub-region. The establishment of ECOWAS is expected to stimulate intra-regional trade. However, its task in this regard will be more difficult if some form of monetary integration is not put early on the agenda of ECOWAS. The experiences of the EEC, where the first initiatives for monetary integration were not taken until the Barre H a d 2 and the Werner Report13 of I 970 teach the lesson that anintegrative process which relegates to the background monetary integration while establish- ing a customs union is bound to face problems of foot dragging when it finally decides to venture into the realm of monetary integration. In West Africa, on the other hand, six of the participating states in the Clearing House, viz : Benin, Ivory Coast, Niger, Senegal, Togo, and Upper Volta have already established a monetary union, the UMOA. This monetary union has resulted in more intra-West African trade within this francophone union than between the former British territories of Nigeria, Ghana, Sierra Leone and The Gambia, whose bank of issue, the West African Currency Board, was dissolved after the attainment of inde- pendence. In the anglophone countries, the problems of incon- vertibility, foreign trade restrictions and the nuisance of smug- gling are increasingly causing disillusionment with the system of national currencies and a desire for a more regionally based system devoid of these problems. In other words, what is required is an ECOWAS monetary system cutting across lines of colonial legacies and eventually leading to monetary union after the attainment of a customs union around 1990.

Proponents of monetary integration also argue that its attainment would to some extent limit the impotence of West African States at international organizations, as they would speak more or less unanimously regarding monetary issues. Moreover, monetary integration in West Africa would help limit the influence of some metropolitan countries, particularly France, in Africa and encourage more co-operation in other fields in the sub- region.14

Opponents of monetary integration in West Africa have raised

l2 On the Barre Plan, see: Peter Coffey, ‘A Note on Monetary Co-operation’, journalof Common Market Studicr, Vol. VIII (June 1970), pp. 3.37-8.

13 Council/Commission of the European Communities, ‘Report to the Council and Commission on the Realisation by stages of Economic and Monetary Union in the Community.’ Supplement to Buletin 11-1970 of the European Communities (October 8 , 1970).

l4 Frimpong-Ansah, ‘Monetary Arrangements for Accelerated Industrialisation Under ECOWAS’, p. 10.

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the issue of ~0vereignty.l~ They argue that sovereignty over monetary affairs is probably the most important aspect of sovereignty, and that it is doubtful whether new States jealously guarding all emblems and perquisites of modern statehood would surrender sovereignty to a new sub-regional supranational institution charged with monetary affairs. However, such views tend to ignore the fact that six of the Sixteen Member States of ECOWAS have already formed a monetary union, that Liberia has little or no monetary sovereignty to talk about as she uses the US dollar as her national currency, and that probably the most important results of the exercise of sovereignty over money in the other countries are inconvertible currencies, inflation and distor- tion of international trade.

Assuming, then, that monetary integration is a long-term goal for West Africa, a number of preconditions, partly based on theoretical considerations and partly on the economic situation in West Africa, are presented below.

(a) Member States must be willing to cooperate within a wide range of affairs and coordinate their major economic policies. Ideally, there should exist similarities in the structure of the economies and the ideological preferences of members. (b) The major economic links between members and the metropolitan economies, particularly the monetary, should be loosened and made less rigid in preparation for new ones based on West African trade. (c) There must exist a viable potential for rapid and large increases in trade in manufactures, agricultural products and minerals. This potential should be transformed into reality with the elimination of customs duties on intra-West African trade. (d) A Clearing House must have been in existence for a number of years resulting in increased trade in the sub-region. In addition, correspondence relationships must be established between the commercial banks in different Member States, to further facilitate the financing of trade. (e) A mechanism for redistribution of capital must be estab- lished to compensate areas adversely affected by free mobility of capital in the sub-region. The ECOWAS Fund now located in Lomt, Togo, may be profitably directed to this objective. (f) The Member States must be politically committed to the idea of monetary integration to avoid the problems of the EEC

l5 These views emerged from discussion of my paper: ‘Relationship Between Monetary Integration and Manufacturing in ECOWAS’, at the inaugural Conference of the West African Economic Association in Lagos, April I 3 - 1 5 , 1978.

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where the identification of national mystique with national currency has led to foot dragging.

CONCLUSION

This paper has reviewed and analysed the most important developments regarding the West African Clearing House, the West African Unit of Account, and the prospects of monetary integration in the sub-region. While the Clearing House and the West African Unit of Account are likely to increase the volume of intra-West African trade, the paper however posits that more needs to be done in the monetary front to support and promote West African economic integration. This requires the West African Unit of Account to take on more monetary functions than a numeraire in transactions between the Clearing House and Member Central Banks, and some definite commitment to monetary integration in the future.