Dollarisation:High inflation and exchange rate depreciation at the root
High inflation and exchange rate depreciation are the two major driving forces behind ‘dollarisation’ of local economies in the West African Monetary Zone (WAMZ), a new study has found.
The study, which was presented at the 38th Technical Committee Meeting of the West African Monetary Zone (WAMZ), has recommended the pursuit of strong and prudent macroeconomic policies to check inflation and stabilise the local currencies in the six-member zone.
“Currency depreciation is one major challenge affecting WAMZ countries. This is affecting their balance sheet and net worth,” the Director of Financial Integration at WAMI, Mr Abdulai Bari, told the GRAPHIC BUSINESS on the sidelines of the WAMZ Technical meetings in Accra.
A stable currency in the region which is seeking to accelerate processes required for introducing a single currency is important for the attainment of their ultimate objectives.
The countries have set themselves primary and secondary convergence criteria which achievement would facilitate a monetary integration and the introduction of a common currency.
However, high inflation rate and fiscal deficits, which have consistently eluded the zone, had rendered the implementation of the programme numb, and bogged with inconsistent performance on the self-imposed criteria.
The College of Supervisors, which are also meeting as a technical committee, commissioned the study and will disseminate the findings and recommendations to their respective countries.
Dollarisation levels differ
Mr Bari said although the study generally found dollarisation in the WAMZ economies, it was higher in some countries than in others.
Ghana and Nigeria are the leaders of dollarisation and this phenomenon has forced their governments there to introduce sweeping measures, some of them inimical to businesses, to stem the free fall of their currencies in order to boost confidence in them.
Until a couple of years ago, many fees for goods and services in Ghana were quoted in the United States dollar, with bulk of the payments made with the greenback.
The situation is not different in Nigeria where the use of the United States dollar makes it appear a legal tender in that country. Since the last quarter of last year, Nigeria has also issued stiffer rules against the local use of the dollar, setting limits, defining dollar eligible transactions and restricting its use as legal tender.
Inflation and exchange rates
The Ghana cedi saw about 22 per cent cumulative depreciation for last year, but has remained relatively stable over the past four months. A cedi currently exchanges of 5.245856 West Africa Unit of Account (WAUA) and GH¢3.80 to the dollar.
Dollar Lib123, 508.2 and 89,5 exchange for one WAUA and US$ respectively, while Naira 271,1661 is settling for WAUA1 or N196.5 to the dollar. In Sierra Leone, Le 7,810.659 for one WAUA, with Le5, 659.98 pegged to a dollar; as Dalasi 58.8252 exchanged for WAUA and Dalasi 42.62757 going for a dollar.
Guinean Franc (GNF) 10,415.61 exchanges for one WAUA and GNF7, 548 for a dollar.
Inflation rates in the region have come down significantly in recent times except in Ghana where the situation is not improving.
While inflation rates in Ghana remains at 17.7 per cent, that of Guinea is 7.5 per cent; The Gambia is 7.2 per cent; Sierra Leone recorded 8.11 per cent, Liberia 6.5 per cent with Nigeria recording 9.4 per cent.
Remedies
Mr Bari said countries in the WAMZ needed to make their currencies attractive so that people would want to keep it.
To ensure stability, a Senior Economist at the Financial Stability Department at WAMI, Mr Kemoh Mansarey, said the countries needed to pursue prudent macroeconomic policies to hold inflation down, so the dollar did not become an alternative unit of value for economic actors.
Mr Mansarey said boosting productive capacity to export to earn foreign currency was also important in reducing pressures on the domestic currencies. — GB