A Less-is-More Growth Strategy for Africa

REYKJAVIK – If African countries were to adopt only one policy to boost economic growth and improve macroeconomic stability, they should reduce the number of currencies in circulation across the continent as quickly as possible. Doing so would most likely encourage trade, as happened in Europe with the arrival of the euro, and could help contain inflation – which is always good for growth – by imposing international discipline on monetary policy.

The African Union is now aiming at pooling all the continent’s currencies into a single currency by 2028. In the meantime, several regional monetary unions are on the drawing board, in addition to the two monetary unions that already exist, one de jure and the other de facto.

The premier and oldest of these unions is composed of the fourteen countries that belong to the Economic and Monetary Community of Central Africa and the West African Economic and Monetary Union, which both use the CFA franc. The second of these unions is composed of Lesotho, Namibia, Swaziland, and now Zimbabwe, all of which use the South African rand. Disregarding Zimbabwe, a recent and incomplete convert, the 18 countries of the two existing monetary unions have, as intended, benefited from lower inflation than much of the rest of Africa.

To see why, consider Nigeria. Before independence, Nigeria’s legal tender was the British pound. With the establishment of the Central Bank of Nigeria in 1959, the Nigerian pound was introduced. Back then, one Nigerian pound was equivalent to one British pound. This arrangement remained intact until 1973, when Nigeria adopted a new currency, the naira. The exchange rate remained unchanged: one naira was equivalent to one British pound.