1

Monetary Unions among Developing and Emerging Markets

By

Temitope W. Oshikoya, PhD, FCIB

Director General, West African Monetary Institute, Accra, Ghana

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Outline Introduction Optimal Currency Area WAMZ VS GCC

-Structural Convergence-Nominal Convergence-Economic Distance

Common Market Financial Integration Conclusion

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Introduction 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

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. 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

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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

West African Monetary Zone: Selected IndicatorsThe Gambia Ghana Guinea Nigeria Sierra-Leone

Nominal GDP (US$ bn) 2.30 34.00 10.40 338.10 4.30Real GDP growth rate 6.1 5.5 2.9 6.3 11.9Population (mn) 1.80 23.90 10.10 149.00 6.40Per capita income (PPP in US$) 1,300 1,500 1,100 2,300 700 Gross foreign reserves (mnthsof imports) 5.30 3.80 0.70 14.20 4.30Fiscal balance (% of GDP) 4.6 12.4 2.1 0.8 7.9Exchange rate/US$ 25.80 0.90 3465.00 127.00 2710.00

Structural ConvergenceRelative size

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WAMZ Countries: Population, GDP Growth and Size of Economies (2008)

Sources: The World Factbook, CIA, April 2009 edition, World Development Indicators: 2008

0

1

2

3

4

5

6

7

8

-100 -50 0 50 100 150 200 250 300 350 400

Size of Economy (US $'bil) PPP

Rea

l GD

P G

row

th (

%)

Bubble size: scaled to population

Nigeria

Ghana

Guinea

Sierra Leone

Gambia

WAMZ VS GCC-Structural Convergence

Gulf Cooperation Council: Selected IndicatorsBahrain Kuwait Oman Qatar KSA

Nominal GDP (US$ bn) 19.80 111.40 42.40 65.80 375.30Real GDP growth rate 6.6 4.6 6.9 14.2 4.1Population (mn) 0.80 2.60 2.70 0.90 24.30Per capita income (PPP in US$) 23,604 19,909 18,841 33,049 16,744 Gross foreign reserves (mnthsof imports) 3.60 13.70 5.40 6.50 5.60Fiscal balance (% of GDP) 1.6 33.2 17.7 12.1 20.2Exchange rate/US$ 0.38 0.29 0.38 3.64 3.75

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GCC and WAMZ Comparison

GCC Nominal GDP (US$ bn)

Bahrain, 19.80

Kuw ait, 111.40

Oman, 42.40

Qatar, 65.80

KSA, 375.30

UAE, 159.70

WAMZ Nominal GDP (US$bn)

Nigeria, 193.29

Ghana, 14.4The Gambia, 0.75

Guinea, 4.13

Sierra Leone, 1.95

GCC Nominal GDP (%)

Bahrain, 2.556818182

Kuw ait, 14.38533058

Oman, 5.475206612

Qatar, 8.496900826

KSA, 48.46332645

UAE, 20.62241736

WAMZ Nominal GDP (%)

Nigeria, 86.09799292

The Gambia, 0.619834711

Ghana, 9.238488784

Guinea, 2.863046045

Sierra Leone, 1.180637544

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 mid-1970s. 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

WAMZ Per capita income (PPP in US$)

0

500

1000

1500

2000

2500

The Gambia Ghana Guinea Nigeria SierraLeone

GCC Per capita income (PPP in US$)

0

5000

10000

15000

20000

25000

30000

35000

Bahrain Kuw ait Oman Qatar KSA UAE

GCC Population (mn)

Bahrain, 0.80

Kuw ait, 2.60

Oman, 2.70

Qatar, 0.90

KSA, 24.30

UAE, 5.20

WAMZ Population (mn)

Ghana, 23

Guinea, 10.2

Nigeria, 148

The Gambia, 1.7

Sierra Leone, 6.3

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 oil-producer, all GCC countries are oil-producing.

Economic Distance

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Economic Distance Output Growth: Nigeria as target

Country

Nigeria

Guinea 1993-2000

Ghana 1993-2000

Ghana 2001-2008

Gambia 2001-2008

Guinea 2001-2008

Sierra Leone

2001-2008

Gambia 1993-2000 Sierra Leone

1993-2000

-1.00

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

-2.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00

Standard deviation

Co

rre

lati

on

Co

eff

icie

nt

Economic distanceEconomic Distance Output Growth: Saudi Arabia as target

country

Saudi Arabia

UAE 1993-2000

UAE 2001-2008

Qatar 1993-2000

Qatar 2001-2008

Oman 1993-2000

Oman 2001-2008 Kuwait 1993-2008

Kuwait 2001-2008

Bahrain 1993-2000

Bahrain 2001-2008

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

-1.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00

Standard Deviation

Co

rrel

atio

n C

oef

fici

ent

Economic Distance

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Economic Distance Inflation:Nigeria is the Target

Country

Guinea 2001-2008

Nigeria

Ghana 2001-2008

Gambia 2001-2008Ghana 1993-2000

Gambia 1993-2000

Sierra Leone

1993-2000

Guinea 1993-2000Sierra Leone

2001-2008

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

-1.50 -1.00 -0.50 0.00 0.50 1.00 1.50

Standard Deviation

Co

rre

lati

on

Co

eff

icie

nt

Economic distance reduces with integration process

Economic Distance Economic Distance Inflation: Saudi Arabia as target

Country

Saudi Arabia

UAE 1993-2000

UAE 2001-2008

Qatar 1993-2000

Qatar 2001-2008

Oman 1993-2000

Oman 2001-2008

Kuwait 1993-2000

Kuwait 2001-2008

Bahrain 1993-2000

Bahrain 2001-2008

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

-0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80

Standard Deviation

Co

rrel

atio

n C

oef

fici

ent

Common Market

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Direction of Trade with the World in US$ 2003 – 2007 G H ANA

7,522,669,091.02 (86%) (WORLD)

837,364,816.97 (10%)

(ECOWAS)

372,966,092.01 (4%)

(WAMZ)

G UINE E

1,589,629,533.51 (91%) (WORLD)

161,523,304.41 (9%)

(ECOWAS)

6,667,162.09 (0%)

(WAMZ)

NIG E R IA

2,607,279,823.47 (4%)

(ECOWAS)

896,493,071.75 (1%)

(WAMZ)

68,621,327,104.79 (95%) (WORLD)

S IE R R A L E ONE

5,015,782.38 (1%) (WAMZ)

398,111,013.33 (75%)

(ECOWAS)

126,913,204.29 (24%) (WORLD)

G AMB IA

32,432,507.16 (9%)

(ECOWAS)

309,756,515.76 90%

(WORLD)

2,050,977.09, (1%) (WAMZ)

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Financial Integration

WAMZFinancial 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 countriesInterbank and money market dominated by banksInstitutional investors participation limitedCapital market requirements differ significantlyCross 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

GCCLiberal 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

WAMZFinancial 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

Financial Integration

•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

2.13 2.31

0.46

2.87

0.72

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Gambia, The Ghana Guinea Nigeria Sierra Leone

Bank Density in the WAMZ Bank Density in GCC

0.6 0.4

1.6

0.1

1.1

9.5

0

2

4

6

8

10

Barhain Kuwait Oman Qatar SaudiArabia

UnitedArab

WAMZ VS GCC-Nominal Convergence

Convergence Criteria WAMZ GCC

Primary Criteria

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

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WAMZ VS GCC-Inflation Convergence

100

WAMZ Inflation Rate (%)

0

2

4

6

8

10

12

14

The Gambia Ghana Guinea Nigeria Sierra Leoneinflation rate

GCC Inflation Rate (%)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Bahrain Kuwait Oman Qatar KSA UAE

WAMZ VS GCC-Fiscal ConvergenceGCC Fiscal balance (% of GDP)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Bahrain Kuwait Oman Qatar KSA UAE

WAMZ Fiscal balance (% of GDP)

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

The Gambia Ghana Guinea Nigeria Sierra Leone

•GCC CountriesOperatedFiscalSurpluses While theWAMZran Fiscal Deficits

WAMZ VS GCC-External Sector ConvergenceGCC Gross Foreign Reserves (monthsof imports)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Bahrain Kuwait Oman Qatar KSA UAEgross foreign reserves (mnthsof imports)

WAMZ Gross Foreign Reserves (months of imports)

0

2

4

6

8

10

12

14

The Gambia Ghana Guinea Nigeria SierraLeone

gross foreign reserves (mnthsof imports)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Bahrain Kuwait Oman Qatar KSA UAE-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

The Gambia Ghana Guinea Nigeria Sierra Leone

ExchangeRate forthe GCC is peggedto theUS$-WAMZto a basketof currencies

WAMZ VS GCC-External Sector Convergence

GCC Exchange rate/US$

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Bahrain Kuwait Oman Qatar KSA UAE

WAMZ Exchange rate/US$

0

500

1000

1500

2000

2500

3000

3500

4000

4500

The Gambia Ghana Guinea Nigeria Sierra Leone

Necessary conditions for successful Monetary Union Economic convergence Structural convergence Market convergence Legal convergence Political convergence

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Summary 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

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