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It was reported this week that ECOWAS has plans for adopting a new currency - The ECO. Here is a thread explaining what it means #TheECO
The ECO currency is part of a plan by ECOWAS to build a monetary union, initially between six West African countries 🇬🇭 🇳🇬 🇸🇱 🇱🇷 🇬🇳 🇬🇲
A monetary union where countries share one currency has a number of potential advantages ✅ and disadvantages ❌
✅ Exchange rate costs and risks are eliminated, which can improve regional trade in goods and services.
✅ With lower costs to trade, members of the monetary union are more able to specialise at what they are good at, and exchange it for other goods that other countries in the bloc produce more efficiently.
✅ The currency union will have one central bank independent of any member state government. This would improve the region’s poor central bank independence and improve price stability.
❌ By not having a country specific central bank, member states lose their sovereignty in monetary policy decisions.
❌ Union-wide monetary policy is very difficult to implement. For example, if Liberia has high inflation while Nigeria is growing slowly. Nigeria needs lower interest rates but Liberia needs higher interest rates. The ECOWAS central bank can’t solve both problems sufficiently.
The European Union’s Euro 🇪🇺 is an example of a currency union. While adopting the Euro has had advantages, adopting a uniform monetary policy for different countries has proven difficult.
Given the current economic challenges in West Africa, the ECOWAS ECO is likely to be an even greater challenge.
The ECO was originally planned in 2000 and has been postponed four times since. A currency union requires a lot of work and sufficient economic integration of member countries. Progress has been slow and it is unlikely that the ECO happens in 2020 or anytime soon.
