Money and Markets

Cyril Ramaphosa is backing the Afro – but a single African currency may only work if it is pegged to the rand, says an economist

Business Insider SA
President Cyril Ramaphosa. Photo: Getty Images
  • South African President Cyril Ramaphosa supports the creation of a single currency – even a digital one – for the continent.
  • An economist who researched the possibility thinks it is a 'noble idea', but perhaps fatally flawed.
  • She believes the most realistic option would be to peg a single currency to the rand. 

Apart from backing a massive new free trade area in Africa, President Cyril Ramaphosa also pushed for a single currency on the continent this week. 

Ramaphosa told an African Union summit that a single currency will help to boost African trade on the continent and attract infrastructure investment. It will also help Africa to get rid of its "colonial mentality".

He said that Africa should stop relying on foreign currency for its own development.

In an interview with the Mail & Guardian, Ramaphosa floated the idea of a digital currency, that could precede a "real" currency – because a digital currency ''is easier than having a proper full currency". (Ramaphosa's son, Tumelo, is a Silicon Valley entrepreneur who is using blockchain technology, which underpins digital currencies, to protect wildlife.)

While a single digital African currency is a new idea, a traditional single currency was first mooted in 1963, right at the start of the Organisation for African Unity (OAU). Again in 2001, when the OAU became the African Union, it committed to a single currency – jokingly called the "Afro" by Tito Mboweni, the former SA Reserve Bank governor. 

Two years later, the Association of African Central Bank Governors announced that they were actively working towards a single currency and a common central bank by 2021.

They hope that an African currency will help to bolster intercontinental trade. Currently, only 16% of African exports go to other African countries, the rest go overseas. In Europe, 70% of trade is between countries on the continent.

Also, it is supposed, a single currency would strengthen the African image abroad, and help to secure better trade deals. 

But South African economist Thabi Leoka, who has researched the impact of a single African currency, has her doubts.

“I struggle to see the benefits, both for the poorer and richer countries on the continent.”

The European monetary union has shown that countries like Greece and Portugal had to adopt a currency that was more expensive than their own, which made their own exports uncompetitive and increased local consumer prices. Even while their products were given preference (above non-European imports) inside the union, they never really caught up, says Leoka.

Also, the currency of a relative stronger country like South Africa would be impacted by the volatile economic conditions of smaller economy.

“Managing inflation and interest rates for the different African economies, which are wildly unequal, will be virtually impossible.”

Even in Europe, where countries are much more on par, this has proved challenging.

“A single African monetary union is a noble idea, but not really practical.”

A more realistic option would be to have African countries peg their currencies against the rand, or create a new currency that is pegged against the SA currency. This would be closer to the Southern African Customs Union (SACU). While Botswana, Lesotho, Namibia, South Africa and Swaziland use the rand for trading purposes, they each have their own monetary policy.

“This works really well,” says Leoka.

It helps the ease of trading over borders, but allows each country to set interest rates and other prices on their own terms.

It could however start posing challenges if many other countries join, each with their own preferred trade partners in the rest of the world. The trade flows between these countries and their trade partners could impact the main currency.

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