Prospects of the Proposed West African Optimum Currency Area

Abstract

The adoption of the Euro by the European Economic and Monetary Union (EMU) has spurred the various Regional Economic Communities (REC) of the African Union (AU) to pursue their long-term aim of forming monetary unions and adopting common currencies. As part of the regional integration into monetary unions, ECOWAS has been pursuing a monetary union since 1987 which it finally agreed to launch a common currency (the ECO) in 2020. Even though the ECOWAS countries have not been able to simultaneously meet the revised six convergence criteria, the OCA literature also requires countries intending to adopt a single currency to have a symmetric response to demand, supply, and foreign shocks which will increase the net benefits as countries in a monetary union will have to lose autonomy over monetary policy and nominal exchange rates variability. A symmetric response to the shocks affecting the member countries will make the adoption of the ECO beneficial and sustainable to the sub-region. This research used vector autoregression (VAR) to examine whether the WAMZ countries have symmetric responses to foreign price shocks from the US, EU, and China since ECOWAS trade with these countries constituted about 50 percent of exports and imports in 2019. Using CPI and GDP growth data from 1980 to 2018 the impulse response functions and variance decomposition from the VAR system found that the WAMZ countries do not have real convergence and for that matter prices and output respond asymmetrically to price shocks from these countries. The study concludes that the WAMZ countries are not symmetric in their response to foreign price shocks and should therefore not proceed with the adoption of the ECO until further convergence is achieved and intra-regional trade is improved. The research recommends that efforts towards the attainment of the convergence criteria should be increased and intra-ECOWAS trade should also be promoted by all member states.