Monetary Approach to the Balance of Payments: A Case Study for West Africa Monetary Zone Countries

Abstract

With the advent of globalization and regional economic integration across the globe, monetary and financial integration has become imperative in West Africa and this has led to the creation of a West African Monetary Zone (WAMZ). A major challenge for the introduction of a single currency within WAMZ countries has been the persistence instability in the balance of payments. The objective of the study is to analyse the monetary approach to the balance of payments (MABP) in the West Africa Monetary Zone. Employing the Pooled Mean Group estimator, the study utilises a panel model of 5 countries in WAMZ covering the period 1985 to 2019. The empirical results of this study validate the monetary approach to the balance of payments in the WAMZ. The findings of the study reveal that monetary variables significantly impact the balance of payments. An expansion in the domestic credit contributes to the balance of payments deficits of WAMZ countries. Additionally, an increase in interest rate reduces the demand for money, which generates excess supply of money and consequently results in reserve outflows. Further, the results indicate that GDP growth, has a positive association with the balance of payments, suggesting that, an increase in the income level improves the balance of payments in the WAMZ. Based on the findings, WAMZ countries should implement appropriate monetary policy and prudent fiscal policy to improve the balance of payments disequilibria.