Introduction
The African Continental Free Trade Agreement (AfCFTA) entered into force on May 30, 2019 to promote industrialization, economic development and stability in Africa. The AfCFTA seeks to bring together all 55 Member States of the African Union, representing a population of over 1.3 billion, with a growing middle class and a combined gross domestic product (GDP) of over US$ 3.4 trillion. Undoubtedly, the African Continental Free Trade Agreement (AfCFTA) is wonderful news for Africa. Connection to new markets strengthened trading ties and enhanced integration are just a few of the advantages of the new continent-wide FTA. For a continent of 55 African Union nations with a combined gross domestic product of more than US$3 trillion and a young, rising population, the African Continental Free Trade Agreement (AfCFTA) has the potential to improve economic development. Members are ironing out specific details around rules of origin, intellectual property and dispute mechanisms in a process that could take about three years. AfCFTA is meant to eliminate 90 percent of tariffs and create a single market with free movement of goods and services.
The AfCFTA aims at eliminating tariffs on 90% of goods and ensuring the free movement of labor in the region. The process of increasing international trade in Africa and reducing barriers to growth resembles the objectives and policies successfully introduced in Europe. In the near future, as the new Continental Free Trade Agreement enters into force in January 2021, Africa will take a major step towards tackling entrenched economic problems, including a dearth of intra-regional trade. It is worth examining concerns about how an Africa-wide single currency could face similar challenges, following the 15-nation ECOWAS currency model and European experience, and analyzing the potential benefits of the adoption of the African single currency in the natural gas market.
Natural gas according to the IEA (2020) is a fossil energy source that forms deep beneath the earth's surface. Natural gas contains many different compounds. The largest component of natural gas is methane, a compound with one carbon atom and four hydrogen atoms (CH4). Natural gas is used as a fuel in the manufacturing companies, by vehicles and in chemical industry, for lighting at home and for cooking. The establishment of a common market in Africa, however will ensure an adequate distribution of gas from surplus areas to areas in need. As a result, to ensure equal redistribution of gas, there is a need to create an enabling environment for the natural gas market. In order to facilitate the natural gas trade in the African market, a common currency is envisaged.. These steps are similar to the process of European integration and to the agreements that were drawn up decades ago. By 1999, many countries had joined the European Union, and the link between economies was strengthened by creating a common currency, the euro. The euro was adopted by more and more countries over the decade.
Europe's leaders, who hailed a new era of closer integration, easier trade and faster growth, were united by the euro, as a currency with which to compete against the dollar. In the same futile fashion, ECOWAS countries agreed to adopt a single currency called eco in 2021. Joint currency negotiations have been in operation for 30 years. Due to the fear of economic domination, this took so many years to be implemented. Many countries believe that Nigeria, Africa's largest economy, will take a leading role in the monetary union and will put a stop to the projected benefits. Nevertheless, when the AfCFTA starts in January 2021, there are opportunities and challenges associated with using the common currency in the natural gas market.
Opportunities for Adopting Common Currency
The single currency will facilitate trade in natural gas, lower transaction costs and make payments easier for Africa's population of over 1.3 billion people. This will also eliminate the delay in payment that made Africans require a day or more to receive money transferred to them. It might be a cause for concern to create a common currency, particularly when considering its impact on Africa's two largest economies Nigeria and South Africa, and most dynamic business hubs. There is a need for a common currency in order for the natural gas market to take full advantage of the AfCFTA, allowing for a fast and reliable flow of funds for transactions across the continent.
The envisaged creation of common currency should be supported because the role of international donors will be crucial. The Western and Eastern countries that import natural gas from African countries may see the need to purchase gas via African common currency if the use of Dollar is not favourable in African natural gas common market. An example is when President Buhari of Nigeria opined that ‘we trade with China and China trade with us, so we do not need Dollar as a means of exchange. This is due to the appreciating value of Dollar against Naira in the past, present and most likely in the future. The Central Bank of Nigeria at one point made Yen the medium of exchange for China –Nigeria trade.
Challenges
The adoption of a single currency allows each participating country to give up its monetary policy to the continental central bank, thus denying domestic monetary authorities the right to tweak interest and exchange rates in order to achieve macroeconomic goals such as price stability and economic development. This can be problematic if and when countries are not at similar stages on key macroeconomic variable, as a general response will be unsuccessful because of cross-country heterogeneity. The latest Eurozone crisis, which has had various consequences on European countries, is a case in point, making it difficult for the European Central Bank (ECB) to save some countries, such as Greece and Spain, from a serious economic downturn by cutting interest rates. The dilemma is that while some countries may need expansionary monetary policy to boost growth, others may demand tighter policies to tame inflation, rendering all monetary policy ineffective in a one-size-fits-all way.
For African countries linked to the CFA, a colonial-era currency that is still used in Francophone countries, the envisaged AfCFTA common currency is also an issue. In the late 1940s, France developed the CFA franc to act as a legal tender in its then African colonies, and it is one of the most prominent indicators of the continued control of France over those former colonies. With the financial backing of the French treasury, the CFA franc is pegged to the euro. Today, the CFA connected to the euro means that not only Europe but also Africa are affected by decisions to create a single currency, which is insane. Certain economies were sheltered from inflation and instability by this colonial relic, but they have no monetary policy independence and the use of the AfCFTA common currency will create a problem for the Francophone countries.
Conclusion
Challenges and opportunities of common currency for sustainable natural gas market in AfCFTA have been discussed and it is very important to note that coming up with a currency is crucial to sustain not only natural gas market but for every other products and services that will be exchanged for money in the AfCFTA market. The idea of an organized platform through AU and ADB where African local currencies of each country will be converted against each other and used as the medium of exchange in the AfCFTA market may lead to importing cost-push inflation. This may not go down well with the receiving countries. In time, as envisaged by the AU leaders, it is recommended to come up with a common currency that will be of African origin so as to create a robust market for natural gas and other products & services in AfCFTA market.