Transcript State Of Preparedness Of The WAMZ Countries For Monetary

Monetary Unions among Developing and
Emerging Markets
By
Temitope W. Oshikoya, PhD, FCIB
Director General, West African Monetary Institute, Accra, Ghana
1
Outline

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Introduction
Optimal Currency Area
WAMZ VS GCC
-Structural Convergence
-Nominal Convergence
-Economic Distance
Common Market
Financial Integration
Conclusion
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Introduction
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While the world has been fixated on the global financial meltdown, the
WAMZ and the GCC will soon decide on the merits and timing of a
single currency each for their respective countries and regions.
The WAMZ was formally launched by the Heads of State and
Government of The Gambia, Ghana, Guinea, Nigeria and Sierra Leone, in
December 2000, with the objective of establishing a common central bank
and introducing a single currency by 2003 later postponed to 2005 and
2009
The authorities of the GCC countries comprising Bahrain, Oman, Qatar,
Saudi Arabia, Kuwait and United Arab Emirate decided in 2001 to
establish a monetary union by 2010.
The GCC had a long term horizon for monetary union while WAMZ had
a short term
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Monetary Union and OCA
. Benefits

Allows exchange rates (ER) to be fixed and therefore reduces ER
uncertainty that hampers trade and investment.

Reduces transaction costs associated with multiple exchange rates.

Allows economies of scale

Reduces the ability of speculators to affect prices and disrupt the conduct
of monetary policy and economize on reserves

Reinforces discipline and credibility of monetary policy especially in
inflation-prone countries.
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Expands bilateral trade among the countries of the Union
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Monetary Union and OCA
Costs

Loss of independence of monetary and
exchange rate policies

The cost of policy autonomy could be very high in countries relying on
seigniorage revenues

Cost of coordinating policies and those associated with the possible break
down of the currency union
5
Monetary Union and OCA
Requirements
 Openness
 Factor Mobility
 Degree of Commodity Diversification
 Similarity of Production Structure
 Price and Wage Flexibility
 Similarity of Inflation Rates
 Degree of Policy Integration
 Homogeneity
 Political Factors
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WAMZ VS GCC-Structural Convergence
Structural Convergence
Relative size
WAMZ Countries: Population, GDP Growth and Size of Economies (2008)
8
Bubble size: scaled to population
Real GDP Growth (%)
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Gambia
6
Sierra Leone
Ghana
Nigeria
5
Guinea
4
3
2
1
0
-100
-50
0
50
100
150
200
250
300
350
400
Size of Economy (US $'bil) PPP
8
Sources: The World Factbook, CIA, April 2009 edition, World Development Indicators: 2008
WAMZ VS GCC-Structural Convergence
GCC and WAMZ Comparison
 In WAMZ the
structure of production
is static, the GCC
achieved massive
progress in the past
three decades resulted
in a 30 to 35 percent
decline in oil's
contribution to GDP,
compared to 65 to 70
percent in the mid1970s.
 Saudi Arabia
constitutes about half
of GDP of GCC,
Nigeria, represents
about four-fifths of the
GDP of WAMZ.
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GCC and WAMZ Comparison
 GCC are wealthier
than WAMZ
countries.
 With the largest
oil and gas reserves,
and very small
populations average
per capita income for
the GCC is
US$23,548.2 against
WAMZ of
US$1,286.8
 In WAMZ there is
only one major oilproducer, all GCC
countries are oilproducing.
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Economic Distance
Economic Distance Output Growth: Nigeria as target
Country
0.80
0.60
Gambia 2001-2008
Sierra Leone
Gambia 1993-2000
0.40
1993-2000
Ghana 2001-2008
Correlation Coefficient
0.20
Ghana 1993-2000
Guinea 1993-2000
Sierra Leone
0.00
Nigeria
0.00
-2.00
2.00
2001-2008
4.00
6.00
8.00
10.00
12.00
-0.20
-0.40
-0.60
-0.80
Guinea 2001-2008
-1.00
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Standard deviation
Economic distance
Economic Distance Output Growth: Saudi Arabia as target
Correlation Coefficient
country
1.00
UAE 2001-2008
Kuwait 2001-2008
0.80
Bahrain 2001-2008
0.60
UAE 1993-2000
Qatar 1993-2000
0.40
Qatar 2001-2008
Oman 1993-2000
0.20
-1.00
0.00
Saudi Arabia
0.00
1.00
2.00
3.00
4.00
5.00
Bahrain 1993-2000
-0.20
Oman 2001-2008
Kuwait 1993-2008
-0.40
Standard Deviation
6.00
Economic Distance
Economic Distance Inflation:Nigeria is the Target
Economic distance
reduces with
integration process
Country
1.20
1.00
Ghana 2001-2008
Ghana 1993-2000
0.80
Gambia 2001-2008
Correlation Coefficient
Gambia 1993-2000
0.60
0.40
Sierra Leone
0.20
1993-2000
0.00
-1.50
-1.00
-0.50
Guinea 1993-2000
Nigeria
0.00
-0.20
0.50
Sierra Leone
1.00
1.50
2001-2008
-0.40
Guinea 2001-2008
-0.60
Standard Deviation
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Economic Distance
Economic Distance Inflation: Saudi Arabia as target
Correlation Coefficient
Country
1.20
1.00
Oman 2001-2008
Kuwait 2001-2008
0.80
UAE 2001-2008
Qatar 2001-2008
Bahrain 2001-2008
0.60
UAE 1993-2000
Bahrain 1993-2000
0.40
Kuwait 1993-2000
0.20
Qatar 1993-2000
-0.80
-0.60
-0.40
-0.20
0.00
Saudi Arabia
0.00
-0.20
Oman 1993-2000
-0.40
Standard Deviation
0.20
0.40
0.60
0.80
Common Market
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Financial Integration
WAMZ
Financial integration - important element of any regional integration
process, especially for a monetary union.
The financial sector must be adequately prepared to promote financial
inclusion and sustain a changeover to a new currency.
Some countries in the WAMZ have established stock exchanges but they
operate within the confines of the national boundaries and few linkages to
other member countries
Interbank and money market dominated by banks
Institutional investors participation limited
Capital market requirements differ significantly
Cross listing of stocks is limited.
Most countries of the WAMZ are reforming their capital accounts to attain
full liberalization
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Financial Integration
GCC
Liberal capital flows and pegged exchange rate
 Well capitalised banking system
GCC stock markets outperformed emerging and developed markets
Rise in FDI
Currency - currently pegged to the US dollar
No clear plan for establishing common capital market
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Financial Integration
WAMZ
Financial integration is an important element of any regional integration
process, especially for a monetary union.
Cross-border retail payments are generally non-existent
Interest rates are however converging
Insurance market growing but penetration low
Banking sector integration on the rise- Nigerian banks driving the process
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Financial Integration
Bank Density in the WAMZ
•Low bank density indicate high degree of concentration for both WAMZ and GCC,
•Weak cross border branch activity a challenge for the efficient use of funds
WAMZ VS GCC-Nominal Convergence
Convergence Criteria
WAMZ
GCC
Inflation
Single digit
Weighted average of the six
countries plus 2 percentage
points
Fiscal Deficit/GDP Ratio
≤ -4%
≤ -3% although some
flexibility allowed to
account for wild
fluctuations in states
revenue
Central Bank Financing of
Fiscal Deficit
≤ 10%
Not applicable
Gross External Reserves
(months of import cover)
≥ 3months
Not applicable
Primary Criteria
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WAMZ VS GCC-Inflation Convergence
WAMZ VS GCC-Fiscal Convergence
•GCC
Countries
Operated
Fiscal
Surpluses
While the
WAMZ
ran Fiscal
Deficits
WAMZ VS GCC-External Sector Convergence
GCC Gross Foreign Reserves (monthsof imports)
Exchange
Rate for
the GCC
is pegged
to the
US$WAMZ
to a
basket
of
currencies
WAMZ Gross Foreign Reserves (months of imports)
16.00
14
14.00
12
12.00
10
10.00
8
8.00
6
6.00
4
4.00
2
2.00
0
0.00
The Gambia Ghana
Bahrain Kuwait Oman
Qatar
KSA
gross foreign reserves (mnthsof imports)
Guinea
Nigeria
UAE
gross foreign reserves (mnthsof imports)
Sierra
Leone
WAMZ VS GCC-External Sector
Convergence
GCC Exchange rate/US$
WAMZ Exchange rate/US$
4.00
4500
3.50
4000
3.00
3500
2.50
3000
2.00
2500
1.50
2000
1500
1.00
1000
0.50
500
0.00
Bahrain
Kuwait
Oman
Qatar
KSA
UAE
0
The Gambia
Ghana
Guinea
Nigeria
Sierra Leone
Necessary conditions for successful
Monetary Union
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Economic convergence
Structural convergence
Market convergence
Legal convergence
Political convergence
Summary
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GCC has longer time perspective than WAMZ
Asymmetric shocks
Similarity of production
Geographical location
Richer in terms of resources and per capita income
Stable exchange rate
Low inflation
Low fiscal deficit
More institutionally prepared
Establishment of GCC Monetary Council the equivalent
of WAMI
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Conclusion
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The journey towards a Monetary Union is a marathon and not
a sprint race
The Euro Zone took over 43 years to achieve the common
currency
The GCC countries decided in 2001 to establish a monetary
union by 2010 but a postponement is being contemplated
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THANK YOU
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