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A Single Monetary Union in Africa: Gainers and Losers

Samuel O. Onyuma*


Of recent, there has been a proposal for the creation of a single currency for Africa, following the gains made in Europe after the implementation of the Euro, and in US with its dollar currency. A proposal with widespread economic and political consequences throughout the continent such as this deserves careful examination. However, there exists scanty literature on the desirability and feasibility of having a monetary union with single currency in Africa. This paper evaluates the desirability and feasibility of a single currency in Africa, and argues that the creation of a regional central bank may not be a vehicle for solving credibility problems that bedevil existing central banks. The overlapping membership in the different regional grouping, and hence overlapping commitment, amounts to duplication of efforts and inconsistent aims in African regional integration initiatives. Given the widespread lack of both fiscal discipline and stable macroeconomic policies, it is vital to use the goal of regional monetary union to encourage greater discipline and better governance. These regional monetary unions could be strengthened, and ultimately merged, creating a common African central bank and single currency. Moving straight to a single African currency may not be feasible, but selective expansion of existing monetary unions, and employing NEPAD’s peer pressure mechanism could be used to induce countries to improve their fiscal and monetary policies, stimulating growth and fostering good governance in Africa.


The value of having a single currency, the optimal size of currency unions, and the cost of forming such unions is an unresolved debate (Forstater et al. 1999; Kenen et al. 1997). An important aspect of this debate is the empirical success claimed for currency unions such as the dollar in the US and the Euro in Europe. The fact that otherwise-sovereign states within the US are not legally allowed to issue their own currency, thus creating a single currency zone for the whole US based on the dollar, is commonly used as an example for emulation and as justification for policy choices, such as the current move towards an African currency union. Recently, some scholars (Forstater et al. 1999; Rockoff 2000) have challenged the notion that the continents really achieved an optimal currency zone with a constitutionally mandated currency union.

In Africa, the goal of a common African monetary union has long been a pillar of African unity and a symbol of the strength that its backers hope will emerge from efforts to integrate the continent. Although the prospect of a single African currency had been mooted as a goal of the Organization of African Unity (OAU), the African Union (AU) has retained its predecessor’s dedication to political and economic unity while taking on a broader mandate to meet the challenges of globalization. In August 2003, the Association of African Central Bank Governors announced that it would work for a single currency and common central bank by 2021 in Africa. Such a proposal is expected to have widespread economic and political consequences throughout the continent, and therefore deserves careful evaluation. However, to date, there exist scanty literature on the desirability and feasibility of having a single currency for Africa. This article aims at examining the desirability and the feasibility of having an African single currency. It is motivated by the asymmetrical shocks that impact a country differently from other countries in a monetary union - absence of institutions, weak governance, ability to insulate a central bank from pressures to finance deficits and produce over-expansionary monetary policies, and the problems that the existing monetary unions in Africa are facing.

The AU’s plan for an African monetary union relies on the earlier creation of monetary unions in five existing regional economic communities. There is the Arab Monetary Union (AMU) made up of Algeria, Libya, Mauritania, Morocco, and Tunisia; the Common Market for Eastern and Southern Africa (COMESA) with member states including Angola, Burundi, Comoros, DRC, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe, the Economic Community of Central African States (ECCAS) membership includes Burundi, Cameroon, Central African Republic, Chad, Democratic Republic of Congo, Equatorial Guinea, Gabon, Rwanda, and São Tomé and Príncipe; and the Economic Community of West African States (ECOWAS) that constitutes Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, the Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo.

There is also the Southern African Development Community (SADC) that has Angola, Botswana, DRC, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe as its members. Of the small island nations, Cape Verde is a member of ECOWAS, whereas Comoros is a member of COMESA. Both Mauritius and the Seychelles are members of both COMESA and SADC, while São Tomé and Príncipe belong to ECCAS. These regional monetary unions can be the starting point, an intermediate stage leading ultimately to their merger and creating a single African central bank and currency. These regional groupings could help Africa in negotiating favourable trading arrangements, either globally in the WTO or bilaterally with the EU and US. While the objective of regional integration seems well founded, it is unclear whether forming a monetary union would contribute greatly to it. A currency that is ill-managed and subject to continual depreciation is not likely to stimulate pride in Africa or strengthen the members’ image in the world marketplace.

Why a Single Monetary Union in Africa?

A critical look at most treaties for regional economic blocs in Africa reveals the eminence of a single currency for Africa. There are currently two main reasons for the enthusiasm for an African monetary union, both of which transcend the conventional economic aims of higher growth and lower inflation. The Euro’s successful launch has stimulated interest in monetary unions in other regions. But it is sometimes forgotten just how long the road actually was for Europe. In Africa, fiscal problems are much more severe and the credibility of central banks is more fragile. If the process of creating appropriate institutions was so difficult for a set of developed and rich countries with highly competent bureaucracies that had cooperated closely for more than sixty years, then, realistically, the challenge for African countries must be considered as enormous and more challenging. African monetary union has been motivated by the desire to counteract perceived economic and political weaknesses.

According to Mundell’s (1961; 1973) theory of optimum currency areas, a common currency can save on various types of transaction costs, but a country abandoning its own currency gives up the ability to use national monetary policy to respond to asymmetric shocks. These costs can be minimized by greater flexibility of the economy, since as a country relinquishing its national monetary sovereignty, it may be able to adapt to these shocks mainly through labour mobility, wage and price flexibility, and fiscal transfers. The probability of a country experiencing asymmetric shocks depends on how similar its production and export structures are relative to its partners in the monetary union. The dollar and Euro countries have much better communication and transportation links (Alonso-Gamo et al. 1997) than African countries; so Africa may not expect the same gains from economies of scale and reduction of transaction costs, even in proportion to its economic size, that are expected to result from a monetary union. African countries suffer large terms of trade shocks which often do not involve the same commodities, and hence do not move together. Neither structural features of the economy nor available policy tools hold much promise for facilitating adjustment to these shocks. Labour mobility in some African regions is higher than in AU but is still limited and politically sensitive. Currently little scope exists for intra-African fiscal transfers and, commodity and capital trade because of poor economic and financial integration among African states (Onyuma 2005).

In analyzing Africa, the assumption is that institutional design issues have largely been resolved. In particular, the central bank can be insulated by statute from having to finance government spending like in countries from US and Europe. In Africa, this is not the case and there is lack of no-bailout provision preventing the central bank from lending to governments, buttressed by a history of lack of central bank independence. The main danger is that fiscal policy may indirectly put pressures on monetary policy, although the single currency may be aimed at minimizing that danger. Considerable controversy surrounds the effectiveness of a single currency in Africa, in part because several governments have breached the deficit ceiling, and the immediate concern that an African Central Bank’s independence may be in peril.

However, the institutional challenges in Africa are much greater as the existing national central banks generally are not independent, and countries with their own currencies have often suffered periods of high inflation because the central banks were forced to finance public deficits or other quasifiscal activities. A critical question for Africa is whether the creation of a regional central bank can be a vehicle for solving credibility problems that bedevil existing central banks. If so, establishing a central bank that is more independent and exerts greater discipline over fiscal policies than national central banks do may enable it to become an agency of restraint (Collier 1991). However, such an agency of restraint requires other institutional buttresses and does not emerge directly from monetary union alone, but also from sound fiscal and monetary policies.

There are notably three existing regional monetary unions in Africa. First, the Common Monetary Area (CMA) which includes as members, Lesotho, Namibia, South Africa, and Swaziland; second, the Economic and Monetary Community for Central Africa (CAEMC) composed of Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea and Gabon; and lastly, the West African Economic and Monetary Union (WAEMU) with members including Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. But, the CAEMC and WAEMU are two subzones within the CFA franc zone.

The experiences of Africa’s two long-standing monetary or formal exchange rate unions, the CFA franc zone (consisting WAEMU and CAEMC) and the CMA, based on South Africa’s Rand, do not suggest that the existence of a monetary union per se is associated with a dramatic increase in regional trade and policy coordination. The extent of intra-regional trade is greater than predicted by the basic gravity model in the WAEMU and the CMA, while this is not the case for the CAEMC. In the CFA franc zone, it took the severe crisis of the late 1980s/1990s to spur a major effort at policy coordination, leading to new supranational institutions. In the CMA, asymmetry in size gives South Africa the power to set monetary policy for the region, thus bulldozing others. Explicit macroeconomic coordination is less necessary as the smaller CMA countries, Lesotho, Namibia, and Swaziland do not have access to monetary financing from the Reserve Bank of South Africa.

Although the CFA franc zone has delivered lower inflation than other currency regimes in Africa, the evidence on growth is mixed, depending on the period under consideration. This success and endurance of the zone is also partially due to the special circumstances of French support through the French Treasury’s guarantee of convertibility embodied in the operations account. The CMA countries have also benefited from low inflation and there is evidence of per capita income convergence in the union.

Evaluating the Proposal for Monetary Union for Africa

In evaluating African monetary union projects, it is important to consider the available optimum currency area literature and without ignoring the political distortions affecting fiscal policy decisions (Maisonneuve et al 2004). The monetary impact of country-specific differences in government financing needs and differences in distortions affecting fiscal policy must be looked into. A regional central bank should be assumed not to be fully independent, but to set monetary policy to reflect average conditions, including financing needs in the region. Thus, countries that are very different with respect to fiscal distortions would be unattractive partners for a monetary union, because the central bank would produce undesirable outcomes for some, or all of them. Such evaluation should include (Debrun and Pattillo 2002): the international spill-overs from neighbours’ monetary policies; the government’s budget constraint; and an assumed objective function for the government that depends linearly on higher output, and negatively on squared deviations of inflation from a target that reflects supply shocks, of government spending from its target, and of tax rates.

Governments exert control over the central bank and, in a monetary union, the central bank is assumed to maximize GDP of the member countries’ objectives while each government chooses its own fiscal policy. In each case, governments satisfy a one-period budget constraint that forces spending to be financed either by taxes or by the country’s share of monetary financing (Masson and Pattillo 2004a). Thus the spending targets should influence inflation and taxes, since higher spending needs to be financed. Countries with higher per capita incomes can generally afford to offer more government services, as both revenues and spending rise in tandem and this component causes no problem for inflation. The attempt by governments in power to reward their supporters, a symptom of cronyism or corruption, may increase spending targets. However, including indices of corruption and institutional development, measures of diversion of spending away from health and education toward less crucial uses can take care of this problem. Considering African countries’ government revenue, spending, and inflation can provide some insights to the monetary union predicament. The comparison of outcomes for these variables across countries with independent currencies and those in monetary unions may help pin down the disciplining effect of a common currency.

African literature in this regard (Masson and Pattillo 2004a; 2004b) points to the fact that inflation depends positively and significantly on the size of financing needs, and negatively on the extent of trade that is internal to the monetary union. Although monetary unions do reduce somewhat the bias toward monetary expansion because fixing the exchange rate between monetary union members reduces the scope for any one member to employ beg-your-neighbour monetary policies, their composition is crucial. A country would not want to join a monetary union with another country facing very different external shocks, like in trade. It may also not want a monetary union with a country that had much less disciplined fiscal and monetary policies, as this would cause the common central bank to produce higher inflation with welfare effects. Such evaluation may capture fiscal discipline through measures of institutional development and the absence of corruption. African countries with their own monetary policies tend to suffer from higher inflation the lower they score on measures that proxy for diversion of spending and taxes to purposes that do not reflect social needs (Neumeyer 1998). These diverted funds may just serve the private objectives of the government in power, which may tolerate corruption as a way of rewarding its supporters. When used to dissect historical information, such evaluation may shed some light on the economic advantages of monetary union projects in Africa. This is because if all countries in the region are identical, and subject to the same shocks, then a single currency would be desirable. In fact, the loss of monetary autonomy would not be costly and all countries would benefit from lower inflation because the common central bank would not try to stimulate output in any one country through monetary expansion at the expense of others. Furthermore, differences in governments’ financing needs mean the incentives to participate in a monetary union will differ across countries. Large spenders will benefit from the extra discipline afforded by the regional central bank, which partly offsets the inflation bias of their national central bank, and small spenders will incur additional losses for monetary financing that originates from the excessive demands of the large spenders (Kenen et al. 1997).

Moreover, the monetary zone’s inflation target of the common central bank will accommodate only the common component of supply disturbances identified with terms of trade disturbances, and this makes abandoning an independent monetary policy in the face of very different country-specific shocks costly. In practice, the asymmetry of terms of trade shocks makes a relatively small contribution to the net gains or losses of the various monetary union projects, which are dominated by differences in government spending targets (Masson and Pattillo 2004b). Thus, the problems with the ECOWAS common currency project relates mainly to inadequate fiscal discipline of some of the potential members, like Nigeria. As such, a proposal for an all-inclusive monetary union among SADC countries would founder on the unwillingness of fiscally disciplined countries like South Africa or Botswana to admit countries that are not. The fiscal differences among regions may make an African currency unappealing for some potential members.

Building on Regional Monetary Unions

It is worth considering whether the AU’s strategy of building on regional economic blocs to create a single currency is rational. The prospective members to an economic bloc must view the union as desirable and, if a monetary union already exists, then existing members must see it in their self-interest to admit new members. These two factors may be quite limiting unless the general benefits are very great or there is great political enthusiasm in favour of monetary union, although monetary unions formed in a period of exuberance may not endure if they do not deliver real economic benefits to members. Countries that are part of the SADC intend to form a monetary union, although this is a much vaguer and more distant project. Many SADC members are very far from macroeconomic stability. The financial systems of most SADC countries are generally much less developed than those of the southernmost countries of South Africa and its immediate neighbours; and the shares of manufactures in production and exports are low. The correlation of terms of trade shocks is also quite low. Therefore, a monetary union of all SADC countries would be undesirable for the countries already in a currency union, like the CMA, centred on the South African Rand. However, a selective expansion of the CMA might be mutually desirable for existing members and some potential entrants.

Still, another economic bloc, COMESA, cuts across two geographical regions, southern and eastern Africa. It is also developing a monetary union project. Disparities among COMESA economies are similar to those affecting SADC. There is a considerable overlap in membership of these two blocs. Another problem is that South Africa, the greatest pole of monetary stability in the region, is not a COMESA member. Therefore, full monetary union among COMESA would also not be desirable. In east Africa, Kenya, Uganda, and Tanzania, which form the East African Community (EAC), plan to revive the EAC’s common currency area (EAC 2000). This monetary union would seem to have greater chances of success. However, there seems to be some danger of asymmetry among the countries, with gains likely to accrue mainly to Kenya. Historically, terms of trade shocks for the three countries seem to be moderately correlated (Collier 1991) and do not have much effect on the net benefits of a monetary union. Moreover, this project illustrates the pervasive problem in Africa of overlapping commitments that are not necessarily consistent. In fact, Tanzania, a member of SADC, and both Kenya and Uganda, members of COMESA, are all members of the EAC.

In western Africa, a West African Monetary Zone (WAMZ) was to be created by July 2005 and was expected to lead to a merger with the west African part of the CFA franc zone (WAEMU) to produce a single currency for the ECOWAS. Nigeria will make a difficult partner for the rest of west Africa, given its much greater size, large budget deficit and lack of evidence of fiscal policy discipline. Being a major oil exporter, its economy differs greatly from its neighbours’ which export other primary commodities and are, therefore, subject to different shocks. There seems to exist a lower correlation of terms of trade shocks (Debrun et al. 2002) between WAEMU and WAMZ countries, and among WAMZ countries than they are among the WAEMU countries. Nigeria has the potential to influence monetary policies in ways that its potential partners would find it undesirable. Therefore, a monetary union among either WAMZ or ECOWAS countries would be undesirable for most potential members. For the CFA franc countries in ECOWAS, the expansion of their long-standing monetary union to include Nigeria would be inferior to their current situation, unless such a union could be accompanied by effective fiscal and monetary discipline in Nigeria.

It should be noted that the overlapping memberships in the different regional economic and monetary blocs, and hence overlapping commitments, have resulted in duplication of effort, and occasionally inconsistent aims in African regional integration initiatives (Onyuma 2005). Within the five main regional economic blocs associated with the African Union, ten countries belong to more than one regional bloc, with the DRC belonging to three blocs. It is true that some countries are likely to gain, while others lose from the proposed African regional and subregional monetary unions. A monetary union among either WAMZ or ECOWAS members would be undesirable for most members. By their nature, only the COMESA and ECOWAS are likely to gain on average from a single African currency because these are the regions with the largest financing needs in proportion to their GDP.

In contrast, regional economic blocs with more disciplined fiscal policies, such as AMU, ECCAS, and the SADC, are likely to suffer net welfare losses. In fact, South Africa, with its large share of the SADC’s GDP, would face a significant welfare loss (Debrun et al. 2002). If this is so, then monetary union among the AU members would lead to a small overall net welfare loss. Since trade for all the regions with the rest of the AU is only a small fraction of GDP (less than 1 percent (IMF 2005)), the gains from a common currency resulting from a reduction in the temptation for beg-your-neighbour depreciations would be very limited. Moreover, without better fiscal and monetary discipline that would make the common central bank less subject to pressures to monetize deficits, the single African currency would not deliver low inflation or a stable exchange rate. This would make it inferior to some existing currencies, like the Rand, the CFA franc, or the Pula.

Conclusion and Policy Recommendations

African policy makers are proposing having a single currency for Africa. However, greatest impediment to the achievement of the goal of a single African currency by first creating new monetary unions in particular regions is that, either not all countries would be willing to join, or the countries in each region may have little incentive to adapt their policies to some standard of best practice because it is taken for granted that no country shall be denied entry. There is a strong likelihood that an unstable and unattractive monetary union would be created. This does not mean that there is no hope for better policies and institutional structures in Africa. The article suggests alternatives that are more promising and worth pursuing. Although the discussion has questioned the feasibility and desirability of an African monetary union, selective expansion of existing regional monetary unions, CMA, CAEMC, and WAEMU, could be used as a tool for inducing countries to improve their fiscal and monetary policies.

The limited expansion of existing monetary unions seems feasible since it would give strong incentives for existing members to scrutinize the policies of potential members. Given the widespread lack of both fiscal discipline and stable macroeconomic policies, it is important to use the goal of monetary union to encourage greater discipline and better governance. Moreover, as the monetary union grows by adding countries with stable macroeconomic policies, it becomes more attractive for others to join in. Africa’s two existing monetary unions, the CFA franc zone and the CMA in Southern Africa, should be selectively expanded, as neighbouring countries achieve greater convergence with the countries that already share a common monetary policy and currency. This would build on the credibility of these existing monetary unions by adding countries that have demonstrated their commitment and ability to deliver sound economic and fiscal policies by satisfying convergence criteria over time. These monetary unions have generally contributed to regional stability. Since not all potential members would be able to demonstrate sufficient convergence, the scope for expanding the CFA franc zone and the CMA would likely be limited.

Applying the AU’s NEPAD initiative of peer pressure within Africa can also help in improving economic growth, good governance and fiscal and monetary policies in Africa. Although it is early to determine whether NEPAD would be effective, it certainly holds the potential to tackle the most important causes for the failings of African policymaking. Fostering good governance and domestic monetary and fiscal policies would in turn facilitate regional economic and monetary integration. Lack of progress on these issues would lead to the failure of an African monetary union, thereby scattering the proposal for a single currency in Africa.


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* Department of Business Studies, Egerton University, Laikipia Campus, P. O. Box 1100, Nyahururu-Kenya, E-mail:


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