Currency Convertibility in the Economic Community of West African States

Saleh Nsouli, John McLenaghan, and Klaus-Walter Riechel

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1982
• eBook ISBN: 9781557750594

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Contents

Prefatory Note

I. Introduction

II. Concepts of Convertibility and Stages of Monetary Integration

Meaning of Convertibility

Preconditions for Convertibility and Gradations of Monetary Cooperation

A Convertibility Agreement

A Partial Monetary Union

A Full Monetary Union

III. Institutional Arrangements in the Member Countries of the Community

Basic Data and Economic Policy Environment

General Orientation of Economic Policy

Monetary Policy

Fiscal Policy

Financial Sector Size and Claims on Government

Money and Capital Markets

Exchange and Trade Arrangements

Tariff Liberalization

IV. Trade Patterns in the Community

Direction of Intraregional Recorded Trade

Composition of Recorded Trade

Factors Affecting Intraregional Trade

Unrecorded Trade

Potential for Trade

V. Payments Arrangements for Intraregional Trade

Clearing at the Level of Banks

Arrangements Among Central Banks

Arrangements Among Commercial Banks

The West African Clearing House

General Features of the System

Problems of the Clearing System

VI. Currency Convertibility, Monetary Integration, and Intraregional Trade: Views in Member Countries of the Community

Convertibility and Intraregional Trade

Approaches to Monetary Integration

Preconditions for Convertibility

Convertibility and Investment Flows

Role of the West African Clearing House

VII. Summary and Conclusions

APPENDIX

Exchange and Trade Arrangements in the Community

Exchange Rate Arrangements

Exchange Systems

Prescription of Currency

Imports and Import Payments

Exports and Export Proceeds

Payments for and Proceeds from Invisibles

Capital Transfers

TABLES

Chapter

II. 1. Degrees of Currency Convertibility and the Effect on Transactions

2. Compatibility of Exchange Arrangements in Individual Countries and Under a Monetary Union

III. 3. ECOWAS: Comparative Basic Data

4. ECOWAS: Government Revenue, Expenditure, and Deficit Finance

5. ECOWAS: Relative Size of the Central Bank and Importance of Its Net Claims on Government

6. ECOWAS: Reliance on Indirect Taxation

IV. 7. ECOWAS: Trade Patterns

8. ECOWAS: Direction of Regional Exports

9. ECOWAS: Direction of Imports

V. 10. Operations of the West African Clearing House

Appendix

11. ECOWAS: Exchange Rate Arrangements

12. ECOWAS: Prescription of Currency

13. ECOWAS: Regime of Imports and Import Payments

14. ECOWAS: Regime of Exports and Export Proceeds

15. ECOWAS: Treatment of Invisibles

16. ECOWAS: Controls on Capital Flows

CHARTS

Chapter

V. 1. West African Clearing House: Clearing Procedure for All Payments Except Those Under Letters of Credit

2. West African Clearing House: Clearing Procedure for Payments Under Letters of Credit

REFERENCES

Appendix Exchange and Trade Arrangements in the Community

Exchange Rate Arrangements

The exchange arrangements maintained by member countries of the Economic Community of West African States (ECOWAS) as of December 31, 1980 are shown in Table 11. Of the 16 member countries, all except Ghana and Nigeria have opted to peg their currencies within relatively narrow margins to a single currency or to a basket of currencies. Ghana and Nigeria have informed the Fund that they are maintaining flexible exchange arrangements. Of the 14 countries with a currency peg, 9 exchange arrangements involve a peg to a single currency and 5 to a composite of currencies, of which 3 are pegged to the SDR.

Table 11. ECOWAS: Exchange Rate Arrangements

(As of December 31, 1980)

Sources: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, 1981 and International Financial Statistics.

¹ Trade-weighted basket of currencies.

² The exchange rate of the cedi is expressed in U.S. dollars but is periodically adjusted.

³ The official middle rate for the U.S. dollar (the intervention currency) is determined on the basis of a basket of currencies.

Only one member country of the Community maintains multiple currency practices. Ghana’s exchange rates differ from the official rate because of the imposition of cash margin deposits against import letters of credit, a 75 per cent surcharge on exchange allocations for foreign travel, and a 10 per cent bonus on all exports except cocoa. These exchange practices are applied for balance of payments reasons, and they are intended to discourage imports and foreign travel and to encourage exports.

The French franc and the U.S. dollar are the most frequently used intervention currencies. The French franc serves as the intervention currency in all seven countries that peg their currencies to the French franc, while the U.S. dollar is used as the intervention currency in Cape Verde, Ghana, Guinea, Guinea-Bissau, Mauritania, and Nigeria. The U.S. dollar is legal tender in Liberia. The Gambia and Sierra Leone use the pound sterling as their intervention currency.

Exchange Systems

To date, none of the member countries of the Community has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement. Thus, they all continue to avail themselves of the transitional arrangements under Article XIV.

Prescription of Currency

As indicated in Table 12, all member countries of the Community, with the exception of Liberia, have prescription of currency requirements. Currencies authorized for use in international settlements are generally convertible currencies or other selected currencies quoted by the central bank of the respective country. For the Operations Account countries²⁰ within the Community (i.e., the member countries of the West African Monetary Union plus Mali), settlements with France (and its Overseas Departments and Territories), Monaco, and other Operations Account countries are made in CFA francs, French francs, or the currency of any other Operations Account country. Among the member countries of the Community that have prescription of currency requirements, The Gambia has the least restrictions on settlements, which may be made in any foreign currency. By contrast, settlements in Guinea may be made only in specifically designated convertible currencies.

Table 12. ECOWAS: Prescription of Currency

(As of December 31, 1980)

Sources: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, 1981; and data provided by the national authorities.

1 West African Clearing House.

2 Cape Verde is not a member of the West African Clearing House.

3 Practice does not exist in Liberia.

4 The bilateral payments agreement between Niger and Nigeria lapsed at the end of 1977. Certain settlements, however, are still effected through special accounts.

The only operative bilateral payments agreement in the Community is the one maintained between Cape Verde and Guinea-Bissau. Payments between these two countries are settled through clearing accounts in their respective central banks. A bilateral payments agreement between Niger and Nigeria lapsed at the end of 1977, but certain settlements between these two countries are still effected through special accounts of the Banque Internationale pour l’Afrique de l’Ouest (BIAO). Settlements under bilateral arrangements between a Community member and a nonmember are generally made in the currency or currencies agreed between the two countries.

Payments for intra-Community current account transactions are channeled by some member countries through the West African Clearing House. Settlements are commonly effected in selected convertible currencies.²¹ Column 4 of Table 12 indicates the use of the Clearing House by banks in member countries of the Community for clearing of regional trade.

Imports and Import Payments

Table 13 presents an overview of the regime of imports and import payments as of the end of December 1980. With the exception of Liberia, all member countries of the Community impose quantitative and/or cost restrictions on imports. In a number of cases, these restrictions reflect priorities contained in formal foreign exchange and/or import plans. Only Cape Verde, The Gambia, and Liberia do not formulate such plans. In the member countries of the West African Monetary Union, some broad foreign exchange forecasting and planning takes place in the context of overall monetary planning by the Council of Ministers and the Executive Board of the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO). More explicit import programs are found in Benin and Upper Volta. Mali’s annual import program distinguishes between clearing countries (countries with which Mali maintains bilateral payments arrangements) and convertible area countries (all other countries). An allocation commission establishes import quotas for each private importer on the basis of his turnover. The most stringent import programs are those in Ghana, Guinea, and Guinea-Bissau, where a rigid system of exchange allocation is linked to an import licensing system based on the import program. A detailed annual foreign exchange budget is the basis for the import programs in Nigeria and Sierra Leone.

Table 13. ECOWAS: Regime of Imports and Import Payments

(As of December 31, 1980)

Sources: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, 1981; and data provided by the national authorities.

1 Applies to specific commodities only.

2 Overall planning of foreign exchange needs within the framework of monetary planning of the West African Monetary Union (WAMU).

3 Special annual program with global quotas for imports from all nonmember countries of the European Community outside the former French franc area.

The comprehensive coverage of the import licensing systems in Ghana, Guinea, and Guinea-Bissau is underscored by the fact that all imports require a specific license, while in Mali all imports except those originating in member countries of the Community require an individual license...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Prefatory Note
• I. Introduction
• II. Concepts of Convertibility and Stages of Monetary Integration
• III. Institutional Arrangements in the Member Countries of the Community
• IV. Trade Patterns in the Community
• V. Payments Arrangements for Intraregional Trade
• VI. Currency Convertibility, Monetary Integration, and Intraregional Trade: Views in Member Countries of the Community
• VII. Summary and Conclusions
• Appendix
• References
• Footnotes