Feasibility Study of a Single Currency for West African Monetary Zone

Abstract

The formation of a Monetary Union by the West African Monetary Zone has been in pursuance for more than a decade. The WAMZ is made up of six countries in West Africa; The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone. One significant benefit from using a common currency is the lower costs of transactions; however member countries will lose the ability to use monetary policy to respond to different shocks. The participating countries need to converge or ultimately attain an Optimum Currency Area to mitigate the asymmetric shocks. The WAMZ has a set of Macroeconomics Convergence Criteria to be attained by its member countries before the commencement of the Monetary Union. The study assesses the performance of all the WAMZ countries based on the MCC from 2001 to 2011. The study also uses various theoretical criteria to assess the Optimum Currency Area in the WAMZ. The study further employs the exchange rate variability based on the OCA index to analyze the possibility of currency integration among three of the WAMZ’s countries consisting of The Gambia, Ghana and Nigeria using time series data from 1980 to 2011. The assessment based on the MCC indicates that WAMZ is not ready to form the Monetary Union as of 2011. However, there are some convergences in the primary MCC. The results from the study also indicate that the WAMZ is not an Optimum Currency Area. The OCA index results show that the Nigerian Naira was the most stable currency in the region during the period of analysis. Furthermore, the method confirms that the WAMZ single currency (if it will be established) should start with Nigeria and Ghana, followed by The Gambia.