An African Exchange Rate Mechanism in the Era of an African Continental Free Trade Area

Inspired by the success of the EU monetary union and how it brought prosperity and development for the entire region, the AU has sought to create an African Monetary Union (AMU) under the Abuja treaty in 1991. The prospect of an AMU could lead to tremendous economic gains. Another enduring proposition is a single African currency, first mooted in 1963. However, Africa’s 55 states are diverse. A monetary union and a single currency would require converging differing economic aims with regard to inflation and interest rates. Not only would Africa struggle to achieve this in the current economic climate, but it would also likely create a myriad of new, unpredictable issues. Considering these facts, and for the dream of an integrated Africa to manifest, the continent needs to enact a prerequisite step which is the adoption of a unified African Exchange Rate Mechanism (AERM). The adoption of an AERM would allow for a smooth transition among the African countries into a single currency and the long-sought monetary union afterward. An AERM is a key enabler for growth of the African Continental Free Trade Area (AfCFTA). This chapter provides evidence on the relevance of AERM and tackles the most prominent challenge of how Africa could develop a plan to initiate an AERM given the structural differences between its economies and the low intra-trade rate.