West African currency, ECO, will Not Improve Intra-Trade in West Africa Without Foundational Infrastructures

Comment: The single West African currency, ECO, will reduce transaction costs. Businesses wouldn’t need to exchange currencies for cross-border trade, saving time and money.

My Response: Between currency transaction and transportation distribution costs, the currency cost is insignificant. The currency transaction cost of importing a container from China to Lagos port is insignificant compared to the infrastructure distribution cost between Lagos port and Sokoto. Similarly, the Port of Lome is now the busiest  port in West Africa, and many Nigerian importers import from China to Togo, and then to Nigeria, even though they have to deal with three currencies and absorbing currency transaction costs of Yuan, CFA franc and Naira. Those currency costs are  way cheaper than the extra distribution costs they experience in Nigerian ports where containers could be stuck for weeks.

Togo is a country of less than 10 million people but its port is busier than Nigeria’s with about 220 million people because many Nigerians import via Togo, and enjoy the free right of way within ECOWAS. The extra currency cost of moving across CFA Franc is nothing compared to the challenges in Nigerian ports. I ran some of the numbers for the Africa Union on this paper. .

As I noted in the earlier post, currency will not fix the infrastructure challenges in West Africa, and the gains are going to be marginal. Those infrastructures are foundational, and the ECO, the rumoured currency, will not leapfrog those. To deliver welfare gain to the West African people, West Africa needs to integrate infrastructure wise, as Europe did, and that will help it to trade more closely. Then, the single currency will come later.

Finally, the reason Jumia and Konga do not deliver to Ovim, my great village in Abia, is not because of currency friction. Jumia and Konga do not because of unbounded distribution costs of moving things from Lagos to a village. My village uses Naira just as Lagos does! lol. Yet, Jumia cannot ship to that destination. Why? It is not due to currency transaction cost, it is the distribution cost which is the bigger part of the marginal cost. So, even if you make West Africa to have the same currency, as my village and Lagos enjoy on Naira, if that distribution cost is not addressed, intra-trade will not happen.

What do I propose? I support using technology to make different currencies “disappear”, making it possible that a man in Lagos, with Naira, and  buying a hat in Ghana, and paying in Cedi, will not even know that he is paying across the border. Yes, the seamless experience would be like he is paying someone in another part of Lagos! But using convergence of currency to achieve that will be a mistake for Africa.

Why The West African ECO Currency Is An Illusion

In 2015, 1 CFA franc in Cotonou would have given you N0.25 (or 25 kobo); today, you will get N2.50. If you run the numbers, that is a 10X appreciation over the Naira in less than ten years!  They have even done better than the US dollars against the Naira.

If any person tells you that Togo, Benin Republic, etc, will abandon their currency and join together with Nigeria on ECO, tell him to test for malaria. It is like asking the United States dollars to co-join with the Naira for a new currency.  For what?

For most of these West African countries, ECO will deliver one thing: massive welfare losses. And that is why ECO will not happen for a really long time, until the elephant in the room (Nigeria) improves its fiscal governance. Nigeria’s economy is asymmetrically huge in West Africa that Nigeria will set the direction of the currency more than 90% of the time. Those Togolese, Ivorians, etc will not like that game of chess. And that is why ECO is an illusion.

ECOWAS Does Not Need A Single Currency Now

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