Full Thesis with cover page and table of content

UNIVERSITY OF APPLIED SCIENCE (HTW)BERLIN, GERMANY

TOWARDS A MONETARY UNION IN WEST

AFRICA- THE VIABILITY OF THE

UEMOA

BY

YAKUBU MUSAH SEIDU

MASTER OF ARTS IN INTERNATIONAL AND DEVELOPMENTECONOMICS

A THESIS SUMMITED IN PARTIAL FULFILLMENT OFTHE REQUIREMENT FOR THE AWARD OF DEGREE INMASTER OF ARTS INTERNATIONAL AND DEVELOPMENT

ECONOMICS IN THE UNIVERSITY OF APPLIEDSCIENCE (HTW-BERLIN)

Towards a monetary Union in West Africa: the Viability of UEMOA

JULY 8, 2013

2 Table of Contents | Yakubu Musah Seidu


UNIVERSITY OF APPLIED SCIENCE (HTW)BERLIN GERMANY

TOWARDS A MONETARY UNION IN WEST AFRICA-

THE VIABILITY OF THE UEMOA

BY

YAKUBU MUSAH SEIDU

MASTER OF ARTS IN INTERNATIONAL AND DEVELOPMENTECONOMICS

Approved by Signature Date

First supervisor ……………………… ………………Sebastian Dullien

Second supervisor ………………………. ………………Michaela Trieble

THESIS SUMMITED IN PARTIAL FULFILLMENT OF THEREQUIREMENT FOR THE AWARD OF DEGREE IN MASTER OF



ARTS INTERNATIONAL AND DEVELOPMENT ECONOMICS IN THEUNIVERSITY OF APPLIED SCIENCE (HTW-BERLIN)

JULY 8, 2013



Statutory Declaration

I hereby formally declare that I have written the submitted dissertation independently. I did not use any outside support except for the quoted literature and other sources mentioned in the paper.

I clearly marked and separately listed all of the literature and all of the other sources which I employed when producing this academic work, either literally or in content.

I am aware that the violation of this regulation willlead to failure of the thesis.

Student’s Name: Yakubu MusahSeidu

Student’s Matriculation Number: S0539152

Student’s Signature: ……………………..…



Place/Date : Berlin July 8, 2013



AbstractThis study analysed the impact that the common currencies

that exist between eight West African countries have had on

the economic wellbeing of the member countries. The main

macroeconomic variable used in comparing these economies

with their compatriots in the same sub region were; GDP

growth, FDIs inflows, Openness and External debt. It was

found that the countries with the common currency rather

performed badly in economic growth and FDI inflows but their

performance was similar to those without a common currency

in openness and external debt. This suggests that the common

currency have not been beneficial to these economies in the

West African sub-region. Therefore certain basic

requirements need to be in place for countries contemplating

joining a common currency, to be able to reap the benefits

and minimize the costs associated with a common currency.

Word count 11328



Table of ContentsAbstract ……………………………………………………………………………………i

Table of Contents …………………………………………………………………………ii

List of |Tables …………………………………………………………………………….iv

List of Figures ……………………………………………………………………………v

List of abbreviations …………………………………………………………………..….vi

INTRODUCTION………………………………………………………………………..1

1.1............In troduction…………………………………………………………………………..1

CHAPTER TWO…………………………………………………………………………4THE THEORY OF OPTIMUM CURRENCY AREAS (OCA THEORY) ……………..42.1 The OCA Theory …………………………………………………………………….4

CHAPTER THREE ………………………………………………………………………8

HISTORY AND ORGANISATIONAL SET UP OF WAEMU …………………………8

3.1 History of WAEMU ………………………………………………………………….8

3.2 Organisational Set up of WAEMU …………………………………………………..9

3.3 The WAEMU customs Union ………………………………………………………..10

CHAPTER FOUR ……………………………………………………………………… .11ANALYSIS OF THE STRUTURE AND CHARACTERISTICS OF WAEMU

ECONOMIES ……………………………………………………………………………11

4.1 Background Characteristics of WAEMU Economies

……………………………….11

4.2 Production and Demand Structure……………………………………………………13

4.2.1 Intra regional trade ……………………………………………………………18



4.3 Other Macroeconomic Characteristics ………………………………………………204.3.1Inflation ……………………………………………………………………..20

4.3.2 External Debt ………………………………………………………………224.3.3 Openness…………………………………………………………………....26 4.3.4 Foreign Direct Investment (FDI) Inflows

………………………………….27

4.3.5 Labour Market Integration …………………………………………………28

CHAPTER FIVE ………………………………………………………………………...31

GAINS AND LOSSES (BENEFITS AND COSTS ) ……………………………………31

5.1 The benefits associated with the common

currency………………………………….31

5.2 The main Costs

5.3 Reconciling Gains and Losses………………………………………………………..32

5.3.1 Economic Stability and GDP growth………………………………………………5.3.2 Trade Integration……………………………………………………………………5.3.3 Business Cycle synchronisation and Asymmetric shocks………………………….405.3.4 A case for fixed exchange rate?.................................................................................42

CHAPTER SIX…………………………………………………………………………..44

CONCLUSION AND RECOMMENDATIONS………………………………………..44

6.1 Conclusions………………………………………………………………………...…44

6.2 Recommendations………………………………………………………………….…45



Reference…………………………………………………………………………………47



List of TablesTable 4.1 General Background statistics on WAEMU Economies……………………....12Table 4.2 Main exports and imports of WEAMU Economies……………………………14Table 4.3 Exports structure of WAEMU 2011…………………………………………..17Table 4.4 Imports structure of WAEMU 2011…………………………………………..17Table 4.5 Intra regional trade in WAEMU and WAMZ………………………………....19Table 4.6 Average inflation in the WAEMU (1993-2011 and 2002-2011)……………...20Table 4.7 Average inflation in the WAMZ (1992-2011 and 2002-2011)………………..21Table 4.8 External trade balance of WEAMU and WAMZ zones………………………23Table 4.9 External debt stock of WAEMU and WAMZ zones………………………….25Table 4.10 Level of Openness of WAEMU and WAMZ Economies…………………...26Table 4.11 Average FDI inflows as a percentage of GDP (1992-2011)....………………28Table 5.1 Average GDP growth of WAEMU and WAMZ countries1992-2011 and 2002-2011……………………………………………………………………………………...35Table 5.2 Main trade Features of WAEMU economies 2010…………………………...39



List of Figures Figure 1.1 WAEMU (in green) on the map of Africa……………………………………3Figure 4.1 Averages GDP of WAEMU Economies……..………………………...………13Figure 4.2 Inflation trend in Guinea Bissau… ……………………………………………22Figure 4.3 Current Account balances of WAEMU economies……………………………24Figure 4.4 Current Account balances of WAMZ economies…………………………….25Figure 4.5 Literacy rates in WAEMU countries…………………………………………30Figure 4.6 Literacy rates in WAMZ countriesFigure 5.1 Current account balances of WEAMU 2005-2011…………………………....30Figure 5.2 Current account balances of WAMZ 2005-2011………………………………35Figure 5.3 Manufacturing exports as a percentage of merchandise exports for WAEMU Figure 5.4 Percentage contributions of WEAMU and WAMZ toTotal Intra ECOWAS Trade……………………………………………………………………………………….39



List of Abbreviations BCEAO Banque Centrale des Etats de l’Afrique

de l’Ouest

CET Common External Tariff

CFA Franc of the African Financial

Community

ECOWAS Economic Community of West African States

EU European Union

FDI Foreign Direct Investment

GDP Gross Domestic Product

GNI Gross National Income

IMF International Monetary Fund

OCA Optimum Currency Area

ODI Overseas Development Institute

PPP Purchasing Power Parity

SSA Sub-Saharan Africa

UEMOA Union Économique et Monétaire Ouest-

africaine

US United States

WAEMU West African Economic and Monetary

Union

WAMU West African Monetary Union

WTO World Trade Organisation



CHAPTER ONE

INTRODUCTION

1.1 Introduction The current global financial crises have highlighted the

need for countries to choose the optimum exchange rate

regime suitable for their peculiar situation in other to

deal with economic shocks and to spur economic growth. Some

economist have argued that the Euro periphery countries

would have fared far better if they were to have their own

independent currency which they could devalue and regain

competitiveness rather than having to go through painful

austerity to restore competiveness in the absence of

independent monetary policy as result of being part of the

euro. Some have even gone to the extent of suggesting a

breakaway of some of the euro periphery countries like

Greece as the best option for them.

Meanwhile a lot of literature has been published showing the

numerous benefits as well as cost of the choice of exchange

rate regime for both open and closed economies, particularly

for fixed exchange rate in the form of a common currency.

Most of these literatures have shown that the benefits will

mostly accrue to countries that meet a certain set of

criteria and relatively higher cost for those that do not

meet them. However there are monetary unions or currency



areas that have existed for a long time that on prima facie

does not meet these criteria.

Former French colonies that shared the Franc of the African

Financial Community (CFA Franc) as a common currency, in 1994

formalised the common currency union into an economic and

monetary union, known as West African Economic and Monetary

Union (WAEMU or UEMOA)1 (Anadi, 2005). WEAMU is made up of

eight West African countries namely Benin, Burkina Faso,

Ivory Coast, Guinea Bissau, Mali, Niger, Senegal and Togo

(Figure 1). The common currency Franc of the African

Financial Community (CFA Franc) pre-dated the Euro, as it

has been in used since 1945 (IMF, 2012). Despite the long

existence of the CFA franc as a common currency, it does not

seem to be an OCA on the face of it.

Some studies have already been done (for example Fielding

and Shield, 2000, Goretti and Weisfeld, 2008 and Eguome and

Nayo, 2011), mostly looking at how the common currency have

enhanced trade. Others have also examined whether the

framework conditions is ripe for the formation of such a

union using the criteria set out in the optimum currency

area (OCA) theory (Fielding and Shield 2000, Page and Bilal

2001, and Couharde et al, 2012).

1 WAEMU and EUMOA will be used interchangeably throughout this work withmore preference for WAEMU because it is the English version and easier to pronounce.



However no empirical work has been done comparing

macroeconomic variables in the WAEMU economies with non

WAEMU economies in the West African sub-region.

This research work therefore aimed at filling that gap to

give a true picture of the costs and benefits that have

accrued to the eight countries that are members of WAEMU and

have adopted the CFA franc as their common currency in West

Africa. By comparing essential macroeconomic variables of

countries in the same sub-region with similar economic

structures, it is hoped that the true costs and benefits

will be clearly manifested. Since the non-WAEMU countries

will serve as a control group, so that the impact of the

common currency can be measured2.

This work is therefore aimed at giving a definite answer to

the question “have the common currency (CFA franc) been

beneficial to the economies of the countries sharing it?”

The main macroeconomic variable used in comparing these

economies with their compatriots in the same sub region

were; GDP growth, FDIs inflows, Openness and External debt3.

2 It is assumed that the countries in the sub-region have common characteristic so that the only differentiating variable is the common currency. 3 These macroeconomic variables were used as proxies because the welfaregains such as reduction in transaction cost will be difficult to measure.



Figure 1.1 WAEMU (in green) on the map of Africa

Source: (Mapsof.net, 2013).

This work is laid out as follows; chapter two takes a look

at the theory of optimum currency area (OCA theory), chapter

three is about the history and organisational setup of the

West African economic and monetary union (WAEMU). Chapter

four then analyses the structure and characteristics of the

economies in the WAEMU zone under some macroeconomic17 Table of Contents | Yakubu Musah Seidu


variables. Chapter five will isolate the benefits and cost

of belonging to the monetary union and then chapter six will

concluded and give some recommendations.



CHAPTER 2THE THEORY OF OPTIMUM CURRENCY AREAS (OCA THEORY)

2.1 The OCA TheoryThe notion of Optimal currency area (OCA) was first

propounded in the seminal work of Robert Mundell in 1961(pp.

657-665) in which he argued that the survival of a currency

union is hinged on how well it is able to meet the criteria

spelled out in the OCA theory. He argued that the

macroeconomic cost of a monetary union which is not OCA will

in terms of lingering high unemployment and low output,

surpass the microeconomic benefits of lower transaction and

hedging.

Factor mobility, the degree of openness and productivity and

consumption diversification were the main OCA criteria for

monetary integration between states. The theory is hinged on

“money, markets for goods and for factors of production”, and

seeks to explain the conditions under which fixed exchange

rate (or common currency) and flexible exchange rates (or

different currencies) will be more viable (Optimal) for

achieving internal and external balance. (Anadi, 2005, p.

151)



The OCA theory emerged out of the debate on the benefits

and costs of flexible and fixed exchange rate regimes

ignited by Milton Friedman (1953, pp. 157-203) in his famous

work “A case for flexible exchange rate”. In which he argued

that for countries contemplating a currency union, price and

wage flexibility is very crucial in facilitating the

adjustment process after a shock particularly in the very

short run. Because the adjustment process following a shock

in a flexible wage and price regime will not leave in its

wake sustained unemployment in one country and inflation in

another and therefore there will be no need for adjustment

of the exchange rate. However in a rigid price and wage

regime, flexibility can only be achieved with adjustment to

the exchange rate if inflation/unemployment is to be

avoided. In such a case the loss of the nominal exchange

rate instrument is a real cost.

By comparing costs and benefits, Mundell tried to determine

whether an area will be better off with its own currency or

not (Glovan, 2004 pp. 30-31 ). Mundell presented a scenario

where two regions (countries) are hit by a demand shock with

asymmetric effect. He then argued that in such a case prices

and wages in the two regions need to alter to reflect the

new demand pattern. With wages being sticky, a depression

can only be avoided if labour was highly mobile and could

move from the depressed region to the other region or



through activist monetary intervention in the depressed

region if that option is available (separate currencies).

In other words factors of production (mainly labour) should

move from the affected country to the others in the monetary

union so that the prices of those factors do not need to

fall sharply in the affected economy. Therefore high factor

market integration and mobility in a region could eliminate

or reduce the need to change nominal exchange rate in the

face of an economic shock (Mundel 1961, p. 660).

According to McKinnon (1963, pp. 717-725) a flexible

exchange rate is more advantageous for a closed economy

while a fixed exchange rate is more beneficial for an open

economy. The core of his argument is that there is a greater

possibility of foreign prices of tradable goods being

transmitted to the domestic cost of living in an open

economy, so that changes in exchange rate will be less

useful as an adjustment mechanism since it will have little

effect on the terms of trade because there will be little or

no money illusion in an open economy. The degree of openness

of an economy is therefore very important for the formation

of a currency area according to the McKinnon criteria.

Kenen (1969, p. 54) on the other hand argues that countries

with well diversified economies do not face the same risk as

those with highly specialised economies. Diversification of



production and exports therefore serves as a buffer against

industry specific shocks and countries with well diversified

economies are better candidates for forming a monetary

union. In such a case any economic disturbance will hardly

be asymmetric and can be dealt with through the common

exchanges rate mechanism, also industry specific shocks will

not have as much negative impact on a well-diversified

economy (Glovan, 2004 p32).

Paul Krugman on the other hand using the case of the United

States as an example argued that monetary union can result

in regional specialization since that enables firms to take

advantage of economies of scale which then increases the

risk of an asymmetric shock. So countries which converged on

the OCA criterion of diversity in production and export

prior to integration may end up diverging as a result of

specialisation after forming a monetary union (Krugman, 1993

pp. 241-261).

Then entered Frankel and Rose in trying to answer the

question whether countries enter into currency union because

they trade more or states trade more because they form a

currency union? And using cross country data they showed

that having a common currency increases the intensity of

trade between countries and this will in turn synchronise

the business cycles between those countries in the monetary



union because of the increased intensity of trade, thereby

reducing the shock asymmetry (Frankel and Rose, 1998). To

them many of the prerequisites for OCA are rather endogenous

which means that countries tend to converge towards the OCA

criteria after forming a monetary union (ex post).

According to Kouparitas (2001, p.1) for a group of countries

to be considered optimal for a common currency, four

criteria must be met. : (i) regions should be exposed to

similar sources of economic disturbance (common shocks);

(ii) the relative importance of these shocks across regions

should be similar (symmetric shocks); (iii) regions should

have similar responses to common shocks (common responses);

and (iv) if regions are subject to region specific economic

disturbances (idiosyncratic shocks), they need to be capable

of quick adjustment. Common monetary policy will be optimal

for countries satisfying these conditions since they will

then have similar business cycles.

Other conditions that may be very helpful in the formation

of a currency area are;

1. The existence of a transfer system where in the face

of an asymmetric shock the affected state receives a

transfer from other states that may be experiencing

a boom. A form of common insurance against adverse

asymmetric shocks.



2. The existence of wide range of policy consensus on

how to deal with shocks.

3. The presence of solidarity among the states such

that in the face of an asymmetric shocks other

unaffected states will sacrifice to some extent to

lessen the pain of the affected area for the common

good of the union. (Baldwin and Wyplosz, 2012,

pp.415-417)



CHAPTER THREE

HISTORY AND ORGANISATIONAL SET-UP OF WAEMU

3.1 History of WEAMU

Monetary arrangements in West Africa dates back to the pre-

independence era or the period immediately after

independence. The former British colonies (Anglophone

countries) adopted their own currencies and moved from the

currency boards that existed before independence to a

floating exchange rate regime immediately after

independence, while the former French colonies (Francophone

countries) after world war II even before independence set

up a monetary arrangement in the form of the CFAF zone with

France and maintained the CFA franc as a common currency

even after independence with fixed parity to the French

franc (Tsangarides, and Qureshi, 2006, p. 4)

.

France introduced the CFA franc into its colonies in 1939 to

ease transaction cost for traders and was fully convertible

to the French francs at a fixed exchange rate. At

independence, France offered its colonies in West Africa an

opportunity to join the French community, which they did

except Guinea which opted out. The CFA zone is made up of

two separate monetary unions (groups of countries) in



central Africa and West Africa4. The CFA franc which is the

currency in WAEMU was peg previously to the French franc and

latter to the Euro, with the French treasury guaranteeing

its convertibility to the Euro at a fixed rate. In exchange

for this guarantee 65% of the reserves in WAEMU countries

central banks must be deposited in the French treasury. The

conversion rate of the CFA franc to the Euro can only be

adjusted with the consent of France. This exchange rate has

been adjusted only once in 1994 (Fielding and Shields,

2000). The fact that there can be no unilateral devaluation

gives this arrangement a high level of credibility.

The French community created the central bank of West

African states or Banque Centrale des Etats de l’Afrique de

l’Ouest (BCEAO) with head office in Dakar, Senegal in 1978.

The BCEAO, is controlled through the French treasury however

the WAEMU countries have unlimited withdrawal powers. The

French community of francophone West Africa became the West

African monetary union (WAMU) in 1974. The WAMU treaty

covers essentially monetary issuance rules, foreign exchange

reserves centralization and free movement of capital. WAMU

was converted to the West African Economic and Monetary

Union (WAEMU or UEMOA in French) in 1994 and charged with

the responsibility of establishing a customs union

(harmonisation of the legal and regulatory framework,

4 This work is based only on the West African CFA franc zone WAEMU26 Table of Contents | Yakubu Musah Seidu


setting up of a common market, multilateral surveillance of

macroeconomic policies and coordination of national

sectorial policies). In 1999, the Euro replaced the French

franc as the official currency in France and also as the

monetary anchor for the CFA franc, with same parity

((Tapsoba, 2009, pp. 31-32, Banque de France, 2010, pp. 2-

6).

BCEAO’s monetary policy goal is to maintain price stability

which has been defined for it as inflation at or below two

percent and an appropriate level of foreign reserves.

3.2 Organisational set-up of the WAEMU

The WAEMU is made up of council of heads of state and

government, the council of ministers, the BCEAO and the

banking commission.

1. The conference of heads of state and government is

the supreme authority of WEAMU, all final decisions

about the union rests with it. It meets at least

once a year and all decisions are unanimously taken.

2. The council of ministers monitors the implementation

of decision of the heads of states; it is also in

charge of financial and banking system regulation in

the union as well as its exchange rate policy in

consultation with the BCEAO.



3. The WEAMU Commission is an advisory body to the

council of ministers and provides opinions and

recommendations to the latter, execute the budget of

the union as well as ensuring compliance by member

states. It carries out the semi-annual assessment of

the convergence process and the multilateral

surveillance of macroeconomic policies. It may refer

noncompliance of member states to the WAEMU court of

justice as stated in the WAEMU treaty.

4. The BCEAO is charged with monetary policy design and

implementation and to ensure financial and banking

stability in the union. It is also responsible for

managing the official foreign exchange reserve of

member countries and implementation of the exchange

rate policy as spelt out by the council of

ministers. It has the exclusive right to issue

currency units in member countries. Although BCEAO

support general economic policies of WAEMU its

primary objective is to maintain price stability

defined as inflation at or below two percent.

5. The banking commission is the regulator of banks in

WAEMU. Its assent must be obtained for the

authorization or the revocation of authorization of

a credit institution in WAEMU. It is an active

participant in defining applicable prudential

regulations of credit institutions in the union and



carries out inspections of the union’s credit

institutions. (Banque de France, 2010, pp. 1-12,

(Valdovinos and Gerling, 2010, p. 6)



CHAPTER FOUR

ANALYSIS OF THE STRUCTURE AND CHARACTERISTICSOF WEAMU ECONOMIES

4.1 Background Characteristics of WAEMU Economies WAEMU is made up of eight countries with a combined

population of 96 million representing 32% and 11% of the

population of Economic Community of West Africa States

(ECOWAS) and Sub-Saharan African (SSA) respectively (303

million and 853 million), and covers a land area of

3,506,000 square kilometres representing 57% and 14% of

ECOWAS and SSA respectively. (World Bank, 2012)

Ivory Coast is the most populous country in the group with

20 million people (21%) followed by Burkina Faso, Niger and

Mali with 16 million, 16 million and 15 million (17%, 17%

and 16%) respectively, however Niger has the largest land

area followed by Mali, the Ivory Coast and Burkina Faso(36%,

35% 9% and 8% respectively). Guinea Bissau and Togo have

the smallest population 2 million and 6 million

respectively(2% and 6%) and the smallest land area as well

36000 square kilometres and 57000square kilometres (1% and

1.6%) respectively (Table 4.1).



The WAEMU area had a total gross income of $ 71 billion in

2010 representing 37% and 7% of ECOWAS and SSA respectively.

With the largest economy being the Ivory Coast $ 23bn

followed by Senegal $13.5bn with the smallest economy being

Guinea Bissau and Togo $0.9bn and $3bn respectively. The

zone also has an average GNI per capita of $704 which is

well below the ECOWAS average of $858 and the SSA average of

$1176. Again the Ivory Coast topped the list with a GNI per

capita of $1160 followed by Senegal $1090 and at the bottom

of the list is Niger and Togo, $ 370 and $490 respectively

(Table 4.1). This shows the heterogeneity of the zone in

terms of GNI and population density.

Table 4.1 General Background statistics on WAEMU Economies

Country

Popu

lati

on

(mil

lion

s)

Surf

ace

Area

(100

0 sq

km)

Popul

ation

Densi

ty

(peop

le

per

sq

km)

Gross

Natio

nal

Incom

e

(GNI)

($Bil

lions

)

GNI

per

cap

ita

($)

GNI

Purch

asing

Power

parit

y

($

Billi

on)

GNI

PPP

per

capi

ta

($)

Gross

Domes

tic

Produ

ct

(%

growt

h)

GDP

grow

th

per

capi

ta

(%

grow

th)

GDP

per

capi

ta

(%

grow

th

rate

)Benin 9.1 112. 82 45 7.1 780 14.6 1610 3.5 0.7



6Burkina

faso 17

274.

2 62 27 9.9 580 22.5 1330 4.2 1.1Guinea

Bissau 1.5 36.1 55 44 0.9 600 1.9 1230 5.7 3.5Ivory

Coast 20.2

322.

5 63 51

22.

1 1090 34.5 1710 -4.7 -6.7

Mali 15.8

1240

.2 13 35 9.7 610 16.8 1060 2.7 -0.3Niger 16.1 1267 13 18 5.8 360 11.6 720 2.3 -1.2

Senegal 12.8

196.

7 66 43

13.

7 1070 24.8 1940 2.6 -0.1Togo 6.2 56.8 113 38 3.5 570 6.4 1040 4.9 2.7TOTAL

WEAMU 98.7

3506

.1 467 301

72.

7 707.5

133.

1 1330

Ghana 25

238.

5 110 52

35.

1 1410 45.2 1810 14.4 11.8

Guinea 10.2

245.

9 42 36 4.4 430 10.5 1020 3.9 1.5Cape Verde 0.5 4 124 63 1.8 3540 2 3980 5 4.1

Liberia 4.1

111.

4 43 48 1.4 330 2.2 540 9.4 5.9

Mauritania 3.5

1030

.7 3 42 3.6 1030 8.9 2530 4 1.6

Nigeria

162.

5

923.

8 178 50

207

.3 1280

372.

8 2290 7.4 4.7Seira leon 6 71.7 84 39 2.8 460 6.8 1140 6 3.7The Gambia 1.8 11.3 178 57 0.9 500 3.1 1750 -4.3 -6.9



TOTAL Non

WAEMU

ECOWAS

213.

6

2637

.3 762 387

257

.3

1122.

5

451.

5

1882.

5

Total

ECOWAS

312.

3

6143

.4 1229 688 330 915

584.

6

1606.

25 0 0

Total SSA

874.

8

2424

2.3 37

1003.

6

125

8

1946.

2 2225

1833.

4 4.7 2.1Source: World Bank (2012) and Authors calculations

Although the zone cover a large geographical area it is

still very small in terms of GNI as it contributes less than

0.5% of global GNI, this coupled with the fact that these

economies are open makes them good candidates for inflation

import, with consequences for monetary policy in terms of

targets and instruments in the zone. The Ivory Coast and

Senegal accounts for a total of 51% of the zone’s GNI (32%

and 19% respectively), making them the dominant economies in

the zone (Figure 4.1).



Figure 4.1 Average GDP of WAEMU Economies

Average GDP (1992-2011)BeninBurkina FasoCote d'IvoireGuinea-BissauMaliNigerSenegalTogo

Source: World Bank (2012) and Authors depiction

4.2 Production and Demand structure The current account and balance of payment position of a

country is determined to a large extent by its pattern of

exports and imports. These are determined by the demand in

the economy, natural resource endowment and the general

structure or sophistication of the economy. Most countries

in the WAEMU zone are exporters of few primary and mainly

agricultural commodities and mostly to destinations outside

the zone and outside ECOWAS as well Table (4.2). The Ivory

Coast is the most diversified economy and exports some

manufacturing products mainly plastics a by-product of

petroleum to other countries in the ECOWAS sub-region.



Table 4.2 Main exports and imports of WEAMU EconomiesCount

ry

Major Exports Major Imports

Major Exports

(% of Total

Exports)

Main

destinatio

ns (%)

Imports (% of

total

imports)

Main

Origins

(%)Benin Petroleum

products and

refined

petroleum(48.3

)

Gold (Raw)

(16)

Cotton (raw)

(9.2) Oil nuts

(Coconuts,

brazil nuts

and cashew

nuts) (7.4)

Others (18.8)

Nigeria,

(48.5)

China

(11.7)

EU, (7.2)

India

(5.2)

Chad (4.1)

Petroleum oils,

refined (40%),

Imitation

jewellery

(11%),

Telephones

(8%), Woven

fabrics (6%),

Automatic data

processing

machines (5%)

EU (41.2)

China

(12.6)

Togo

(10.9)

Malaysia

(4.6)

Nigeria

(3.8)

Others

(26.9)

Burki

na

Faso

Gold (60%),

Cotton raw (23%),

Other oil seeds

(5%), Reaction

initiators,

reaction

accelerators and

catalytic

Switzerland

(49%),

South.

African

Customs

Union (9%),

China (6%),

Belgium-

Medicaments,

packaged (24%),

Petroleum oils,

refined (7%),

Mineral or

chemical

fertilizers,

mixed (6%),

EU (33.1)

Ivory

Coast

(10.7)

China

(9.8)

US (4.3)



products (1%),

Dates, figs,

pineapples,

avocados, guavas

and mangoes (1%)

Luxembourg

(5%),

Nigeria

(4%)

Parts for use

with hoists and

excavation

machinery

(5%), Pumps for

liquids (4%)

Togo (3.9)

Others

(38.2)

Ivory

Coast

Cocoa (33)

Petroleum and

petroleum

products

(20.6)

Natural rubber

(6.8)

Other oil

seeds (4.1)

Others (35.5)

EU (37.6)

USA (11.9)

Nigeria

(6.0)

Canada

(5.7)

South

Africa

(5.5)

Others

(33.3)

Medicaments,

packaged (6%),

Telephones

(5%),

Frozen fish,

excluding

fillets (5%),

Petroleum oils,

refined (4%),

Cars (4%)

EU (26.1)

Nigeria

(23.4)

China

(6.9)

Thailand

(5.2)

Colombia

(3.9)

Others

(34.5)Guine

a

Bissa

u

Oil seeds

(coconuts

brazil seeds

and Cashew)

(63)

Frozen fish

(20)

Natural rubber

( 6.7)

Timber (3.7)

India

(86.6)

Singapore

(12.1)

EU (0.8)

Panama

(0.2)

Korea DPR

(0.2)

Others

Raw sugar, cane

(21%), Rice

(8%),

Arms (5%),

Petroleum oils,

refined (5%),

Motor vehicles

for

transporting

goods (4%)

EU (46.9)

Senegal

(40.9)

Thailand

(7.0)

China

(2.4)

Gambia the

(1.6)



Others (6.6) (0.1)Mali Gold (70)

Cotton (14)

Petroleum (4)Bovines (2)

Others (8)

South

Africa

(57.1)

Switzerlan

d (12.1)

EU (8.9)

Senegal

(4.4)

US (3.2)

Others

(14.3)

Petroleum oils,

refined (30%),

Medicaments,

packaged (8%),

Cement (5%),

Telephones

(2%),

Woven fabrics

(2%)

EU (24.0)

Senegal

(13.6)

Benin

(9.9)

China

(9.9)

US (9.0)

Others

(33.6)

Niger Radioactive

chemical elements

and radioactive

isotopes (33%),

Uranium or

thorium ores

(31%),

Gold (10%),

Petroleum oils,

refined (4%),

Bovines (3%)

EU (67.4)

Switzerlan

d (9.3)

Nigeria

(5.4)

US (4.7)

Ghana

(3.6)

Others

(9.6)

Petroleum oils,

refined (9%),

Structures and

parts thereof

(bridges, lock

gates, towers,

etc) (9%),

Motor vehicles

for

transporting

goods (3%),

Parts for use

with hoists and

excavation

machinery (3%),

Rice (3%)

EU (34.5)

China

(26.9) US

(5.8)

Nigeria

(4.6)

Togo (4.2)

Others

(24.0)



Seneg

al

Petroleum oils,

refined (24%),

Gold (9%), Cement

(8%),

Diphosphorus

pentaoxide;

phosphoric acid;

polyphosphoric

acids (6%),

Ground-nut oil,

crude (5%)

Mali

(17.3)

EU (14.9)

India

(14.0)

Switzerlan

d (8.7)

Guinea

(5.3)

Others

(39.8)

Petroleum oils,

refined (17%),

Petroleum oils,

crude (11%),

Cars (3%),

Medicaments,

packaged (3%),

Wheat and

meslin (3%)

EU (41.4)

Nigeria

(9.2)

China

(6.6)

US (4.9)

Turkey

(3.8)

Others

(34.1)

Togo Cocoa beans,

whole (20%),

Cement (12%),

Gold (11%),

Petroleum oils,

refined (8%),

Cotton raw (7%)

China

(12.5)

Burkina

Faso

(11.5)

Benin

(11.2)

Niger

(8.7)

Ghana

(6.4)

Others

(49.7)

Palm oil, crude

(8%),

Petroleum oils,

refined (7%),

Motorcycles

(5%),

Woven fabrics

(4%),

Cars (4%)

EU (36.6)

China

(18.1)

Thailand

(3.8)

Ghana

(3.3)

India

(2.7)

Others

(35.5)

Source: WTO (2013)



Agricultural products dominate export earnings in all the

countries with the exception of Niger, Togo and Senegal

(Table 4.2, 4.3 and 4.4). However all the countries exports

more primary products (Minerals, Agriculture and Forest

products) than manufacturing. The main agricultural

commodities exported are oil seeds (cocoa, cashew, brazil

nuts and coconuts) and cotton, which are exported outside

the zone and outside the sub-region as well, mainly to the

EU and of late to China. But most of the food crops are

staple foods that are endemic in the region such as yam,

cassava, plantain and cereals; these tend to be consumed

locally with a few exported within the zone and the sub-

region.

The WAEMU economies imports mainly manufactured products and

they mostly originate from EU and China (table 4.4). In the

WAEMU zone, like in most developing regions especially in

sub-Saharan Africa, the EU and China are the main trading

partners despite the geographical proximity to each other.

Table 4.3 Exports structure of WAEMU 2011Exports (%

of Total)

Agricultur

al

products

Fuels and

Mining

products

Manufactur

ing

Share in

world

total

exportsBenin 26.4 0.3 4.6 0.01Burkina 28.0 0.5 2.8 0.01



FasoGuinea

BissauIvory

Coast

60.3 24.3 9.2 0.07

Mali 14.0 1.6 5.2 0.01Niger 11.6 54.5 4.5 0.01Senegal 32.0 18.4 39 0.01Togo 32.3 5.1 38.2 0.01

Ghana* 27.8 59.3 12.9 0.07Guinea* 5.4 56.0 11.1 0.01Source WTO (2011)

*= Non WAEMU countries for comparison

Table 4.4 Imports structure of WAEMU 2011Imports (%

of Total)

Agricultur

al

products

Fuels and

Mining

products

Manufactur

ing

Share in

world

total

exportsBenin 24.5 14.8 29.8 0.01Burkina

Faso

15.9 22.9 60.9 0.01

Guinea

BissauIvory 26.0 29.8 42.8 0.04



CoastMali 12.1 26.6 61.2 0.02Niger 14.6 15.5 49.0 0.01Senegal 24.6 32.4 42.9 0.03Togo 12.9 12.2 45.9 0.01

Ghana* 12.9 1.9 70.2 0.09Guinea* 13.6 33.2 53.2 0.01Source WTO (2011)

*= Non WAEMU countries for comparison

4.2.1 Intra regional trade As shown in table 4.5 there have been relatively higher

trade among the WAEMU countries than the West African

monetary zone (WAMZ) countries5. Average intra WEAMU trade

have grown from 10% in 1990 to 14% and 16% in 1995 and 2000

respectively and has remained there up to 2010 although with

a slight reduction. WAMZ on the other hand have had a

consistent average increases in intra zone trade from 6% in

1990 to 9% and 11% respectively in 1995 and 2000, and from

11% to 12% in 2005 to 2010. All this figures must be

appreciated in the light of the fact that the WAEMU

countries are contiguous, in addition to the fact that they

have a common official language (French) and shares a common

5 A group of five countries in the West Africa sub-region which is contemplating forming a monetary union.



currency. Whiles in the WAMZ6, it is only Sierra Leon and

Guinea which shares borders, all the others are completely

surrounded by francophone countries, besides that Guinea in

WAMZ7 have French as its official language.

According to the gravity model of trade8, trade between

countries is directly proportion to their economic sizes

(measured mainly as GDP) and inversely proportional the

distance between them (Krugman et al, 2012, p 11-15). So the

gravity model predicts that there should be more trade

between WAEMU countries than WAMZ countries, because of the

geographical, historical and language proximity9 of WAEMU

countries to each other.

Table 4.5 Intra regional trade in WAEMU and WAMZ WEAMU Country Intra WAEMU exports as percentage of total

exports1990 1995 2000 2005 2010 Country

Average

6 The countries in the WAMZ zone are The Gambia, Ghana, Guinea Nigeria and Sierra Leon. These countries have plans to set up a common currency among then called the eco. However they have postponed this several times because members have not been able to meet the convergence criteria. 7 All the WAMZ have English as the official language except Guinea whichhas French as its official language. 8 The gravity model (first used by Tinbergen in 1962) is used in international economics to predict bilateral trade flows based on economic size and distance between states. 9 Geographical distance, historical closeness and language can all be proxies for distance according to the gravity model.



Benin 8.7 13.2 15.1 16.1 15.9 13.8Burkina Faso 9.2 7.8 8.5 10.1 9.0 8.92Ivory Coast 8.9 11.2 9.5 9.8 10.5 9.98Guinea Bissau 6.8 5.9 8.1 7.8 7.3 7.18Mali 7.1 4.8 6.1 4.2 5.0 5.44Niger 1.2 2.0 1.7 1.5 1.9 1.66Senegal 21.2 30.9 35.3 31.8 33.7 30.58Togo 18.7 35.2 46.4 45.2 41.3 37.36WAEMU Average

10.225 13.87516.33

7515.81

2515.57

5WAMZ CountryThe Gambia 4.3 5.2 7.6 6.7 8.0 8.84Ghana 6.7 5.6 8.9 13.2 12.5 12.74Guinea 2.5 5.7 8.1 9.7 8.8 9.76Nigeria 2.3 1.8 4.3 2.9 3.2 5.76Sierra Leon 6.7 9.8 7.3 9.4 10.3 11.84WAMZ Average 6.3 8.74 10.8 11.08 12.02Source: (IMF, 2013)

4.3 Other Macroeconomic charateristics

4.3.1 InflationAs shown in table 4.6 and 4.7 the WAEMU zone have

experienced very low inflation (5.7%) compared to their

compatroits in the same region WAMZ (16.5%) between 1992 and

2011, this is despite the over 50% depreciation of the CFA

franc in 1994 and its attendant inflation explossion in that

year (29.5%). The WAEMU zone have had an average inflation



of 2.7% in the decade between 2002 and 2011 while the

corresponding figure for WAMZ is 13.8%.

Guinea Bissua is the only country in WAEMU that posted a

double digit average inflation in the zone while all the

WAMZ have had double digit inflation except the Gambia. This

may be due to the fact that the Gambia is completely

sorounded by Senegal the lowest inflation country in the

WAEMU zone and in the sub-region (figure 1). The fact that

The Gambia is avery small open economy makes it a good

candidate for importing low inflation from Senegal.

The two zones (WAEMU and WAMZ) have similar inflation

variability ( calculated as standard deviation) if the

1992-2011 period is considered however if only the 2002-2011

period is taking into account the WAMZ showed relatively

high inflation variabilty than the WAEMU ( Tables 4.6 and

4.7).

Table 4.6 Average inflation in the WAEMU (1993-2011 and2002-2011)

Country

Average |

Inflation %

(1992-2011)

Standard

deviatio

n

Average

inflation %

(2002-2011)

Standar

d

Deviati

onBenin 5.6 8.61 3.0 2.16Burkina Faso 4.1 6.01 2.8 3.47



Cote d'Ivoire 4.8 5.94 3.0 1.67Guinea-Bissau 13.3 19.10 2.7 3.82Mali 4.0 6.19 2.5 3.60Niger 4.8 8.45 2.9 4.01Senegal 3.8 7.27 2.2 2.28Togo 5.4 9.18 2.9 2.92WAEMU Average 5.7 2.738701Source : World Bank (2012) and Authors calculations

Table 4.7 Average inflation in the WAMZ (1992-2011 and 2002-2011)

Country

Average |

Inflation %

(1993-2011)

Standard

deviatio

n

Average

inflation %

(2002-2011)

Standar

d

Deviati

onGambia,

The 5.3 4.23 7.1 4.80Ghana 21.8 13.19 14.6 5.31Guinea 21.3 10.02 21.3 10.02Nigeria 20.4 19.64 12.1 3.51Sierra

Leone 13.7 3.17 13.7 3.17WAMZ

Average 16.5 13.8Source : World Bank (2012) and Authors calculations



Also the countries that had the higher inflation figures

also had higher inflation variabilty for both zones, this

shows that inflation and inflation variabilty co-move. The

relatively low inflation and low inflation variabilty in the

WAEMU zone suggest that monetary union do result in price

stabilty. (Cham, 2009, p. 100)

For example between 1992 and 1997 Guinea Bissau had a

runaway inflation with an average of 46%, with inflation

standard deviation of 16, however they were able to arrest

that high level of inflation just a year after they joined

the common currency in 1997. Inflation in Guineas Bissau

droped to 8% in 1998 and the average inflation between 1998

and 2011 have been 3% with. inflation standard deviation

also droping to 4 (Figure 4.2).

Figure 4.2 Inflation trend in Guinea Bissau

1992199419961998200020022004200620082010

-10

10

30

50

Guinea-Bissau Inflation, consumer prices (annual %)

Guinea-Bissau Inflation, consumer prices (annual %)

Source : World Bank (2012) and Authors depiction



4.3.2 External Debt External debt of a country is money owed by that country to

creditors outside its jurisdiction. It is always the result

of borrowing in several forms some of which may include;

trade deficite (imports exceeding exports), borrowing to

finance investments, borrowing for consumption and so on. If

a country runs an expenditure that exceeds its income for

the period (mostly a year) it is said to have run a deficite

to that amount in excess of its income10. It is these

deficites that accumulate into the debt stock of a country

which is the total amount it owes its creditors. As a rule

of thumb economist have estimated that a deficite above 5%

of GDP is regarded as danger signal which if not mitigated

could lead to an unsuatainable debt stock for the country

concerned.

In this regard most of the WAEMU and WAMZ economies can be

considered to be running unsustainable deficites and for

that matter may not be able to service their debt in the

future (Figures 4.3 and 4.4 and Tables 4.8 and 4.9). With

the exception of the oil producing countries, Nigeria in

WAMZ and Ivory Coast in WAEMU that have run an average

surpluse of 17.1% and 2.2% respectively, all the other

10 The reverse is called surplus thus when a country spends less than its income for that period.



countries in the region have been running budget deficites

from year to year.

Table 4.8 External trade balance of WEAMU and WAMZ zones.

WAEMU

Countries

Exports of goods and

services (% of GDP)

Imports of

goods and

services (% of

GDP)

Exports –

Imports

(Trade

balance)Benin 22.37 30.41 -8.04Burkina

Faso 11.49 24.98 -13.50Cote

d'Ivoire 42.86 35.02 7.84Guinea-

Bissau 18.45 42.58 -24.13Mali 25.23 37.81 -12.58Niger 16.44 23.80 -7.36Senegal 26.56 39.01 -12.45Togo 34.55 48.11 -13.56Average

WAEMU 24.74 35.22 -10.47

WAMZ CountriesGambia, The 26.75 36.65 -9.90Ghana 32.11 47.53 -15.42Guinea 26.57 30.67 -4.10Nigeria 41.87 34.88 6.99Sierra 16.99 29.27 -12.28



LeoneAverage

WAMZ 28.86 35.80 -6.941276587Source: World Bank (2012) and Authors calculations

The deteriorating terms of trade experienced in the region

which is also a common charasteristic of most sub-Saharan

African countries can be attributed to the the low

productivy growth in these countries visa vis relatively

hight productivity growth in their major trading partner

countries. Poor infrastruture, heavy reliance on primary

products with limited value addition, poor institutional

structures and low literacy levels can be cited as

contributing factors to the low productvity.

For such highly indebted countries, having a stable currency

can be beneficial because of currency mismatch due to the

‘orginal sin’ problem – “the systemic inabilty to issue

external debt in local currency – in the balance sheets of

banks, non banks, enterprises, government or even private

households” (Priewe, 2007 p.10). The original sin probelm

disables the exchange rate channel as a policy tool for such

countries because devaluation also increases their debt

stock in their local currency. Therefore any exchange rate

mechanism that give credibilty and stregnthen the local

cureecny should be a welcome development. The common



cureency (CFA franc) seem to have done just that for the

WAEMU economies (see the section 4.3.1)

Figure 4.3 Current Account balances of WAEMU economies

Benin

Burkina Faso

Cote d'Ivoire

Guinea-Bissau

Mali

Niger

Senegal

Togo

-30

-20

-10

0

10

Current account balance (% of GDP) 2005

20062007200820092010




Figure 4.4 Current Account balances of WAMZ economies

2005 2006 2007 2008 2009 2010-20

0

20

40

Current account balance (% of GDP) Gambia, The Ghana

Guinea NigeriaSierra Leone


Table 4.9 External debt stock of WAEMU and WAMZ zonesWAEMU

Countries Average External Debt Average External Debt(% of exports of goods, (% of exports of goods,services and primary income

1992-2011)

services and primary

income 2002-2011)Benin 236.54 131.66Burkina Faso 440.05 266.26Cote

d'Ivoire 371.85 140.87Guinea-

Bissau 2674.65 1112.08Mali 514.91 162.29Niger 471.35 273.08Senegal 269.96 146.80Togo 294.65 205.39Average

WAEMU 659.24 304.80



WAMZ

countriesGambia, The 194.68 267.64Ghana 317.60 142.50Guinea 418.21 295.84Nigeria 228.12 51.51Sierra Leone 1594.39 491.01Average WAMZ 550.60 249.70Source: World Bank (2012) and Authors calculations

4.3.3 Openness Based on the criteria of degree of openness of the various

economies calculated here as the ratio of total trade

(exports and imports) to GDP, Togo and Ivory Coast topped

the list as the most open economies in WAEMU as well as in

ECOWAS (0.93 and 0.91 respectively) (Table 4.10). Whiles

Niger and Burkina were the least open economies (0.38 and

0.39 respectively) in WAEMU and in ECOWAS. The Gambia and

Ghana were the most open economies in WAMZ (0.74 and 0.71

respectively) while Sierra Leon is the least open economies

in WAMZ (0.44).

Table 4.10 Level of Openness of WAEMU and WAMZ Economies

WAEMU

Countries

Average Exports

of goods and

services (BoP,

Average Imports

of goods and

services (BoP,

Average GDP

(current US$)

Opennes

s



current US$) current US$)

A B C

((A+B)/

C)Benin 1534164327 1301068799 5724415373 0.50Burkina

Faso 1897609460 979903129.3 7328559648 0.39Cote

d'Ivoire 8002132477 10628828058 20483852018 0.91Guinea-

Bissau11 0 135008349.2 725484112.9Mali 2868049310 2047912343 7573710880 0.65Niger 824694578.6 886786639.7 4562599462 0.38Senegal 5195381489 2906584870 11399837115 0.71Togo 1494825088 1030605386 2726742371 0.93Average

WAEMU 0.64

WAMZ countriesGambia, The 352707779.2 253633651.4 816053065.2 0.74Ghana 10331673047 6523271554 23763534341 0.71Guinea 1382189666 1229023333 3774436552 0.69Nigeria 50202883071 68311179131 1.71323E+11 0.69Sierra

Leone 616976583.8 335075691.3 2170308262 0.44Average

WAMZ 0.65Source: World Bank (2012) and Authors Calculations

11 Data on exports were missing so openness could not be calculated. 53 Table of Contents | Yakubu Musah Seidu


4.3.4 Foreign Direct Investment (FDI) InflowsForming a monetary union and for that matter having a common

currency is seen in economic theory as reducing the risk

premium associated with exchange rates and therefore a pull

factor for FDI inflows. But a comparison of FDI inflows into

the sub-region has shown that it is rather the WAMZ with

their separate currencies that have been more successful in

attracting FDIs, despite their perceived high risk premia.

Niger and Togo top the list of WAEMU countries as the

favourite destination for investment capital in WAEMU with

receipt of 3% and 2.3% respectively of FDI inflow as a

percentage of GDP12 (Table 4.11). Burkina Faso and Benin are

the least attractive destination recording 0.5% and 1.2% of

FDI inflows as a percentage of GDP respectively. On FDI

inflow variability, Niger again had the highest variability

with a standard deviation of 5.6 whiles Burkina Faso had the

lowest variability of inflows with a standard deviation of

0.4. There seem to be a strong positive correlation between

FDI inflows and FDI inflow variability in the WAEMU zone in

other words FDI inflow and FDI inflow variability co-move.

The Gambia and Nigeria topped the list of favourite

destinations for FDI inflow in the WAMZ zone with 4.8% and

3.8% respectively. Guinea and Sierra Leon were the laggards

12 FDI inflows as a percentage of GDP were used in order to make comparisons easier (by eliminating the effect of economy size).



in the WAMZ zone with 1.5% and 3.3% respectively of inflows

as a percentage of GDP. The Gambia also showed the highest

inflow variability in the WAMZ zone, while Nigeria had the

lowest variability in inflows. Although there is also a

positive correlation between FDI inflows and FDI inflow

variability, the correlation is weaker compared to what

pertains in the WAEMU zone.

Table 4.11 Average FDI inflows as a percentage of GDP (1992-2011)

WAEMU Country

Average Foreign direct investment, net inflows (%of GDP)

Standard Deviation

Benin 1.22 1.14Burkina Faso 0.49 0.35Cote d'Ivoire 1.79 1.12Guinea-Bissau 1.24 1.23Mali 1.86 2.042Niger 3.05 5.60Senegal 1.72 1.14Togo 2.27 1.55Average WEAMU 1.70

WAMZ CountryGambia, The 4.80 3.90Ghana 3.54 2.91Guinea 1.53 3.88Nigeria 3.80 1.46



Sierra Leone 3.27 5.62Average WAMZ 3.39

Source: (World Bank, (2012) and Authors Calculations)

4.3.5 Labour Market IntegrationMundell (1961) emphasised the need for factor mobility in a

monetary zone to make it optimal in the sense of the OCA

theory. Factor mobility across borders particularly of

labour is seen as an adjustment mechanism after an

asymmetric shock in a monetary zone. The incidence of

frictional unemployment could be curbed through wage

stabilization as a result of movement of resources from

surplus to deficit areas thereby equilibrating the supply

and demand for factors of production. (Oshikoya et al, 2010

p. 136)

Free movement of people within WAEMU is enshrined in the

broader ECOWAS protocol on Free Movement of Persons and the

Right to Establishment adopted by the ECOWAS heads of states

and Government on 29th May, 1979. Which was in two parts,

the first phase of the protocol abolished the need for entry

visas and permits from citizens of member countries for 90

days. The second phase that gave the right of residence was

ratified in 1987. Based on this protocol citizens of member



states should be allowed free entry and right of residence

(Agyei and Clottey, 2007, pp. 72-98). However high levels of

illitracy and low awareness of citizens, numerous road

blocks on highways and extortion by officials particularly

at border posts makes mokery of the entire protocol.

On the other hand there is harmony in the convertibility and

recognition of educational qualification among members

states in the WAEMU. This is due to the fact that similar

educational system was inherited from their colonial past

and all reformes have been implemted in a similar way by the

member countries.

With only an adult literacy of 43% (adult above 15 years),

there is high level of illitracy in the WEAMU zone relative

to the WAMZ (52%) (figure 4.5 and 4.6). This high levels of

illitracy and the extremely high numbers of ethnic and

language groups in the region makes migration only posible

for very few people who are educated and can speak french.

The few who migrants in the region tend to live in fringes

of the communities in which they settle in called the

‘Zongos’, this makes integration difficult as a result of

the cultural diveristy associated with ethnicity. The civil

war in the Ivory Coast had some tribal and ethnic

underpinnings. As it is expected in such a situation, labour

mobility have been very low in the sub-region as whole,



however there is a sizeable unofficial movement of people

particularly from the sahelian regions to the forest belt,

and most of them ends up as labourers in cocoa farms.



Figure 4.5 Literacy rates in WAEMU countries

Benin

Burkina Faso

Cote d'Ivoire

Guinea-BissauMaliNiger

SenegalTogo

0

20

40

60

Literacy Rate WAEMU

Literacy Rate WAEMU


Figure 4.6 Literacy rates in WAMZ countries

Gambia, The

Ghana

Guinea

Nigeria

Sierra Leone

0204060

Literacy Rate WAMZ

Literacy Rate WAMZ




CHAPTER FIVE

GAINS AND LOSSES (BENEFITS AND COSTS)

5.1 The benefits associated with the common currency

The process of monetary and economic integration involves

the synchronization of macroeconomic policies as well as

legal and institutional frameworks. It may originate from

historical and cultural ties as well as trade links with the

main objective of creating an enabling environment for

businesses to flourish. However the process involves some

potential costs as well as benefits. These cost and benefits

depend on the nature of the economic structure of the

economies of the participating countries (De Grauwe, 1997 p

84. Oshikoya et al, 2010 p24-26).

While most of the costs associated with common currencies

are at the macro level, almost all the benefits are at the

micro level. Having a common currency is expected to lead to

higher economic efficiency arising from the elimination of

national currencies and its associated transaction costs and

the risks associated with “uncertain future movement of the

exchange rate” (De Grauwe, 1997, p. 52). Implicitly, the



adoption of the CFA franc as a common currency has brought

the following benefits to the WAEMU countries;

Elimination of currency exchange costs leading to a

lower transaction costs in the region.

Increased price transparency and comparability as a

result of the elimination of exchange rate risk and

reduction of its associated uncertainty

The common currency has created a very large market for

goods and services,

It has led to policy discipline by serving as an agent

of restrain on politicians and national governments.

Comparing inflation in WAEMU to WAMZ tells it all

(table 4.5 and 4.6). For example Guinea Bissau was able

to arrest its runaway inflation almost overnight by

joining CFA franc zone.

The stronger economic ties created as a result of the

common currency have led to the adoption of an

integrated approaches to the provision of social goods

such as construction of highways, environmental and

water management, HIV prevention, migration and

conflict prevention. (De Grauwe, 2003 p 59-77,

Oshikoya et al, 2010 p 24-25)

5.2 The main Costs The main cost identified to be associated with the common

currency for WAEMU countries include:



Loss of the ability to conduct national monetary policy

and the use of the exchange rate channel (devaluation

and revaluation) as in instrument of stabilization

especially in the face of an economic shock.

Loss of revenue from seigniorage. The ECOWAS sub-region

has only 20% of its labour force being in wage

employment (World Bank, 2012). This means that there is

huge informal sector which is not being appropriately

taxed. Inflation would have been a tax the informal

sector cannot evade. But only small revenue is accruing

to the WAEMU governments from this source as a result

of the very low inflation in the zone.

The greater competition resulting from the monetary

integration will “discourage the development of infant

industries” unless clear legislation is adopted in the

trade policies of the participating countries. (De

Grauwe, 2003 pp. 5-21, Oshikoya et al, 2010 p 26)

5.3 Reconciling Gains and Losses 5.3.1 Economic Stability and GDP growth “Monetary policy is one of the most sensitive economic

policies” and is central to economic strategy in any economy

(Javanovic, 2005 p 89). Because it is the main short term

stabilizing instrument available to mangers of an economy.

Monetary policy is hinged on the relationship between



interest rate and money supply and uses the control of these

to pursue other results such as growth, exchange rate and

inflation targets. Mostly the goal of monetary policy is to

ensure relatively stable prices and low unemployment, which

are necessary for sustained macroeconomic growth.

To achieve these objectives the monetary authorities

normally control the money supply or the interest rate. The

authorities embark on contractionary policies by reducing

the money supply or raise interest rates to prevent the

economy from overheating (entering into an inflation

spiral). They cut the interest rate or increase the money

supply in an expansionary policy to prop up the economy from

going into a recession or to lift it up from a recession.

Handing over this very important policy tool to an

independent body as is the case in a monetary union will

come with a price tag ( the policy maker would have to

decide whether the benefits is worth the price). As stated

in chapter two there are framework conditions that must

exist for a currency area to be considered ‘optimal’.

Without those conditions, the OCA theory states that the

cost of forming a monetary union or of handing over monetary

policy as tool will be relatively higher than the benefits.



The CFA franc zone has a unique feature among monetary

unions in the world, in the sense that the WAEMU zone has a

common currency and a common central bank and in addition,

the common currency (CFA franc) is rigidly pegged to another

currency (the euro). The implication of this is that not

only have the WAEMU countries relinquished their individual

monetary policy, but as a group they have also surrendered

the exchange rate channel as a tool for stabilisation as a

result of the rigid peg of the CFA franc to the euro. In

such a case even in the face of a symmetric shock,

depreciation or expansionary monetary policy cannot be used

to mitigate its effect because the WAEMU countries do not

have exchange rate autonomy. Therefore the only tool

available to deal with demand shock in the WEAMU zone is

contractionary policies (‘austerity’). This has

repercussions for growth in the short to medium term. This

may be the main reason for the relatively sluggish growth in

the WAEMU zone compared to other countries in the sub-

region.

According to Krugman (1989, pp. 1038-1039) economic growth

is mostly propelled by the development of new products or

development of old products with new features, with higher

income elasticity. The reliance of the WAEMU economies on

the export of few commodities with very low income

elasticity means that their terms of trade will deteriorate



against their major trading partners which are the EU and

China which have consistently produce goods with higher

income elasticity. Because of the low income elasticity of

commodities, attempts by developing countries to produce

more leads to glut and further reduction of their prices in

the world market, which further worsens their terms of trade

position. This continous deterioration in the terms of trade

may have led to the chronic deficites and increasing debt

stocks of countries in the sub-region (figure 5.1 and 5.2).

Figure 5.1 Current account balances of WEAMU 2005-2011

200520082011

-30

-20

-10

0

10

Current account balance (% of GDP) WAEMUBenin Burkina Faso

Cote d'Ivoire Guinea-BissauMali NigerSenegal TogoBenin Burkina FasoCote d'Ivoire Guinea-BissauMali NigerSenegal Togo

YearCurr

ent

acco

unt

balanc

e (%

of G

DP)

Source: World Bank (2012) and authors depiction



Figure 5.2 Current account balances of WAMZ 2005-2011

2005

2006

2007

2008

2009

2010

2011

-60-40-2002040

Current account balance (% of GDP) WAMZ

Gambia, TheGhanaGuineaNigeriaSierra Leone

YearCurr

ent

acco

unt

balanc

e (%

of G

DP)

Source: World Bank (2012) and authors depiction

According to an ODI report (ODI, 1990, p. 2), the exchange

rate in the WAEMU countries have become increasingly

overvalued as result the pegging of the CFA franc to a

relatively strong currency (the French franc/euro). This

makes WAEMU exports uncompetitive in the sub-region which

makes smuggling from neighbouring non WAEMU economies a

lucratuve venture. This has further worsened the plight of

the WAEMU economies and have contributed to the relatively

slower growth (table 5.2). Since most of the non WAEMU

economies have been running very high inflation rates (table

4.5, 4.6 and 5.1) and and as a result steep depreciation of

their currencies – the so called “begger thy neighbour”

policies – Where policies conducted in one country have

negative repercussions on its neighbour.



Table 5.1 Average GDP growth of WAEMU and WAMZ countries 1992-2011 and 2002-2011

WAEMU

Countr

ies

Average GDP

growth

Standard

deviation

Average GDP

growth

Standard

deviation)(1992-2011) (2002-2011)

Benin 0.6 0.85 -0.3 0.68Burkina Faso 2.6 1.96 4.8 1.14Cote d'Ivoire -0.6 1.71 0.4 -6.69Guinea-Bissau 0.1 4.78 -0.4 3.52Mali 1.7 1.48 2.6 -0.35Niger 0.2 2.99 4.2 -1.24Senega

l 1.2 2.04 1.4 -0.05Togo 0.1 1.82 1.9 2.70Average 0.7

1.8

WAMZ Countries

Gambia, The 0.4 3.85 3.7 -6.87Ghana 3.3 1.34 5.5 11.76Guinea 0.8 1.86 -0.3 1.47Nigeria 4.1 2.79 5.3 4.68Sierra Leone 4.5 6.71 3.0 3.72Avera 2.6 3.4



geSource: World Bank (2012) and Authors Calculations

5.3.2 Trade Integration The OCA theory discussed in chapter two posits that

countries that trade substantially with each other will find

it more beneficial to have a common currency because they

will then benefit from the reduction in transaction cost

imposed by the exchange rate. When WAEMU was created in

1994, it was charged with additional responsibility to among

others create a common market in the WAEMU zone. A common

market is an arrangement between states which call on

members to eliminate all barriers to trade between them

whiles imposing a synchronised barrier between them and the

rest of the world. This is aimed at increasing the volumes

of trade between the member countries so as to improve

living standards in the zone (Oshikoya et al, 2010 p. 20).

Despite the geographical proximity of the countries in WAEMU

zone the level of trade between them have been abysmal

(Table 4.5). This means that other factors are more

important that geographical distance in shaping the pattern

of trade in these countries. Some of these factors may

include trade complementarity and transportation

infrastructure.



The heavy reliance on primary products (commodities) and

little manufacturing does not encourage trade

complementarity in the sub-region as whole (Table 5.2).

Also most of the highways that exist were inherited from the

colonial era with some rehabilitation and these were

designed to extract primary products from the colonies to

the European colonial masters. The structure of the sub-

regions exports does not seem to have changed that much

after 6 decades of independence with the exception of

Senegal and Togo (figure 5.3). Manufacturing is still

relatively low compared to agriculture and mining (Table

5.2).

Figure 5.3 Manufacturing exports as a percentage of merchandise exports for WAEMU

0

100

Manufactures exports (% of merchandise exports) for

WAEMU 1970 19801990 20002010


In 2007, WAEMU’s contribution to intra ECOWAS trade was

51.3% as against 48.7% of WAMZ (Figure 5.4) ( Oshikoya et

al, 2010, p. 116). This clearly shows that the impact of the



common currency in fostering higher trade in the WAEMU zone

is not being felt, if geographical proximity and language is

taken into account (Table 4.5). It will be expected that

the common currency will lead to higher trade among the

member countries and therefore a higher share of intra

ECOWAS trade, but this has not been the case. Also the

level of openness of the WAEMU economies have not been

significantly different from that of the WAMZ, in fact at a

glance at table 4.9 suggest that the WAMZ have done better

in their level of openness. It was expected that the

adoption of the WAEMU protocol will lead to policies that

will foster greater trade among members and therefore

improve their overall level of openness. Here again the

common currency does not seem to have improved the

performance of the WEAMU economies in these two scores

(Intra regional trade and Openness).

According to Frankel and Rose, a “naive examination of

historical data gives a misleading picture of a country’s

suitability for entry into a currency union since the

criteria are endogenous” (Frankel and Rose, 1996, p2), but

after six decades of using a single currency, if there is no

marked differences in the volume of trade between these

countries (WAEMU and WAMZ), it becomes difficult to accept

the endogeniety of OCA in the case of these countries. It is

either it takes too long to manifest or it is just not



applicable to these countries, or may be because the

structures of these economies have not changed very much

since the common currency was introduced (figure 5.3). These

suggest that a minimum framework conditions such as road

infrastructure and complementarity in production needs to

exist for benefits from trade as a result of a common

currency to be unleashed. In their absence, not much benefit

can be expected.

Figure 5.4 Percentage contributions of WEAMU and WAMZ to Total Intra ECOWAS Trade

2003 2004 2005 2006 2007020406080

% Contribution of WEAMU and WAMZ to ECOWAS Trade

WAEMUWAMZ

Source: Oshikoya et al (2010)

Table 5.2 Main trade Features of WAEMU economies 2010Feature Ben

in

Burki

na

Faso

Ivo

ry

Coa

st

Guin

ea

Biss

au

Mal

i

Nig

er

Seneg

al

Tog

o

WAEMU

Total



Agricul

ure

Value

added

(% GDP)

32.

2

34.1 22.

9

36.

5

39.

6

16.7 43.

5

32.2

Industr

y Value

Added

(%GDP)

13.

4

22.4 27.

4

24.

2

17.

1

22.1 23.

9

21.5

Service

s etc

value

added

(%GDP)

54.

4

44.4 49.

7

39.

1

43.

2

61.1 32.

4

46.3

Export

of

goods

(Billio

ns of

USD)

0.8 1.4 10.

9

0.1 2.0 1.0 2.2 0.9 19.3

Imports

of

goods

(Billio

ns USD)

1.4 1.7 7.5 0.2 2.3 1.8 4.2 1.3 20.4



Intra WAEMU tradeExports

(%

total)

15.

9

9.0 10.

5

7.3 5.0 1.9 33.7 41.

3

14.6

Imports

(%

total)

3.9 33.1 1.2 20.2 27.

1

12.

8

2.4 6.8 8.6

Source: IMF (2013)

5.3.3 Business Cycle synchronisation and Asymmetric shocks

As stated in chapter 2 the four main criteria for a group of

countries to be considered optimal for forming a currency

union are: (i) exposure to common shocks (ii) similar effect

of symmetric shocks (iii) common responses and (iv) the

capability of quick adjustment. These are the main

prerequisite for having a similar or synchronised business

cycle in a region. If these criteria are met, it means that

the business cycles in the region will be highly correlated

and most economic shocks will tend to be symmetrical

therefore monetary policy conducted by the union’s central

bank will be the same as the one conducted by independent

central banks of the countries in the region and therefore

there will be no or little adjustment costs for the member

countries in giving up their independent monetary policy

(Oshikoya et al 2010).



However if these criteria are not met, a divergent business

cycle will exist in the region and the common central bank

will face a dilemma on the kind on monetary policy to

pursue. This dilemma is exacerbated if the business cycles

are negatively correlated. For example an increase in oils

prices is a positive shock for the Ivory Coast and a

Negative shock to all the others. So the commitment of

members to stabilization policies that is determined by some

aggregate welfare function will not only be a poor

substitute for some members but will tend to be very

destabilising and therefore run counter to their interest

and welfare.

Looking at the export structure of the WAEMU countries it is

clear that their business cycles are not in any way

synchronised, because they export entirely different

products with very little complementarity. This implies that

any shock will tend to be sector and country specific. In

such a case whenever an economic shock hits a sector, the

only remedy will be a recession in that sector and in the

country which has that sector as a leading sector, which is

more painful compared to the exchange rate channel.

WAEMU economies are exposed to destabilising events both

economic and political. The region is home to many conflicts



with the Ivory Coast and Mali currently burning with raging

conflicts. It is also susceptible to natural disasters such

as flooding, pest and disease infestation to crops and

animal and drought particularly in the Sahel regions. Heavy

reliance on the export of few but different primary

commodities particularly agricultural produce makes the

WEAMU countries susceptible to a wide range of destabilising

economic forces (table 5.2).

For example, Benin relies on two commodities, petroleum and

gold for 65% of its foreign exchange earnings, Burkina Faso

relies on Gold and raw cotton for 73% of its export

earnings. Even the most diversified economy among the pack,

Ivory Coast earns 54% of its exports from two commodities

cocoa and petroleum, while Guinea Bissau earns a whopping

83% of its foreign exchange from only two commodities, oil

seeds and fish, same for Mali but from gold and raw cotton.

The rest also has similar heavy reliance on few commodities

as well, whiles Niger relies on mainly radioactive isotopes

(64%), Senegal relies on refining petroleum which it imports

and some few minerals such as gold, phosphorus and cement

(47%) and Togo relies on cocoa, cement and gold (43%).

So BCEAO’s commitment to stabilization policy that is

determined by some cross-country aggregate welfare function



may differ sharply from the optimal policy for any one

individual country.

This exposure to highly destabilizing and asymmetric shocks

may also be a contributing factor to the rather sluggish

growth in the zone compared to the other countries in the

region. Because any economic shock in the leading sectors

for any of the countries automatically leads to a recession

in that country, which might not be the case if they had

their own currency.

With the kind of economic structure in place in the WAEMU

countries monetary union does not seem to be a very optimal

option for them at this moment. This is due to the fact that

the common currency seems to have created a “stable

recession” among these countries, which is inhibiting their

growth and therefore their ability to reduce poverty and

solve other pressing problems.

5.3.4 A case for fixed exchange rate? Given the fact that most of the countries in the region both

WAEMU and WAMZ have consistently imported more than they

exports, it would have made sense for their currencies to be

pegged under a common currency to their largest trade

partners currency (the euro). This is due to ‘the original

sin problem’, because they are indebted in a ‘hard’

currency, any devaluation will lead to an increase in their



debt in their currency. Also the accumulated debt will have

to be paid latter so using the exchange rate channel for

stabilization in reality may create more problems than it

solves in the case of these countries.

In a region where institutions do not function properly, it

becomes difficult for monetary policy to work effectively.

For example in Ghana (even with its relatively developed

financial sector) although the central bank lending rate is

around 11%, the bank lending rate is more than twice as high

(around 25%) this is due to so many institutional lapses and

the shallow depth of the banking sector. This means that

monetary policy might not work effectively through the known

channels as expected, because a reduction in interest rate

for example might not trickle down to the private sector.

For these and other reasons, it makes much sense for these

countries to peg their exchange rate in other to reap the

benefits therein since the benefits of flexible exchange

rate cannot be fully guaranteed in the case of these

countries. In any case the exchange rate regime cannot be a

substitute for sound management of an economy.

In a region where central bank independence cannot be

guaranteed, having a fixed exchange rate regime helps in

avoiding a ‘political business cycle’- a situation where

economic activity and employment picks up in periods just



before an election and a recessions follows immediately

after the election. Fixed exchange rate can be good source

of restrain on politicians whose main objective is winning

the next election; this may motivate them to seek short term

objectives that may be detrimental to the wellbeing of the

economy in the medium to long term.

Another strong case for having a fixed exchange rate for the

countries in the sub-region is the fact that most of the

economic shocks that are likely to prevail are not demand

shocks that could be dealt with through the exchange rate

channel. But rather these countries are more prone to supply

shocks such as droughts, floods, and pest and disease

infestations resulting in crop failure, because agriculture

is the dominant sector in the sub-region. Fluctuations

emanating from such shocks cannot be smoothed with either

monetary or fiscal policies (Hossain and Chowdhury, 1999,

pp. 103-121).

Despite all these apparent case for having an fixed exchange

rate in the sub-region, the facts and figures presented

(Table 4.10 and table 5.1) so far point to the fact that the

WAEMU countries have performed woefully in terms of economic

growth and attracting FDIs (two of the proxies used for

reduction in transactions costs), besides these they have

not performed any better in all the other parameters



considered (Openness, and intra zone trade). These are some

of the strongest expected benefits and justification for

being in a monetary union. If these gains have proven to be

elusive for the WAEMU economies then it becomes difficult

for one to accept that monetary integration has been good/is

good for these countries.



CHAPTER SIX

CONCLUSION AND RECOMMENDATIONS“A currency system that is backed by the resources of a foreign State is ipso facto subject to the trade and financial arrangements of that foreign country”. Dr Kwame Nkrumah – First President of Ghana (a speech atthe birth of the OAU the precursor to the AU in Addis Ababa, 1963)

6.1 Conclusions This work tried to determine whether the common currency in

the WAEMU zone have been beneficial to the individual

countries that forms the WAEMU zone. Data used in this work

were mainly from 1992 to 2011 wherever they were available

and in some cases 2002 to 2011 to give a more recent trend.

The three main OCA criteria were applied to determine

whether the WAEMU countries satisfied them. These criteria

were labour mobility, openness and diversification of trade

(exports). The WAEMU zone failed on labour mobility and

diversification of exports, it however did well on the

openness criterion and even with that, other countries in

the same sub-region outperformed them. Therefore WAEMU

cannot in anyway be considered an OCA. The CFA zone from the

perspectives of the OCA theory have remained a puzzle

because on prima facie it should have broken down long ago,

but it has survived. This may be due to failure of the

traditional OCA theory to take into account political



consideration in the formation of a currency union (Prewe,

2009).

This work went further to determine the impact that the

common currency have had on the general macroeconomic

wellbeing of the member country economies. To examine the

impact of the common currency, price stability, GDP growth,

FDI inflows and external debt were the variables isolated

and compared with other countries in the same sub-region. On

the count of price stability the WAEMU zone performed

remarkably well as the common currency has consistently

delivered very low inflation and inflation variability to

the member countries. The performance of the WAEMU countries

on the count of GDP growth and FDI inflow was very low

compared to other countries in the same sub-region, however

WAEMU’s performance was similar to its compatriots in the

same sub-region when external debt is considered. This means

that the common currency has not spurred economic growth as

will be expected. Also the expected positive correlation

between stability and growth has not been observed in the

case of the WAEMU economies.

One of the findings of this research is that other factors

may be more important in attracting FDIs in the sub-region

than low investment risk premia - the result of having

stable and credible currency. This is because the WAMZ with



its separate currencies and therefore relatively higher risk

premium have been more successful in attracting FDIs than

the WAEMU countries.

Also beside the heavy reliance on the exports of a few and

different commodities, there is wide heterogeneity in the

WAEMU zone in terms of natural endowments, GDP, population,

size and trade patterns (exports and imports). These

heterogeneous macroeconomic characteristics expose the WAEMU

economies to large asymmetric shocks. Therefore having a

‘one size fits all’ conservative monetary policy is not

‘optimal’ for these economies considering their different

vulnerabilities.

Therefore the answer to the initial question posed “have the

common currency (CFA franc) been beneficial to the economies

of the countries sharing it?” is no.

6.2 Recommendations Other countries in the sub-region particularly the WAMZ

with similar economic structures as WAEMU that are

contemplating forming a monetary union should ensure that at

least some basic requirements of OCA are satisfied so that

adjustment cost in case of an asymmetric shock will be

minimal. The WAMZ countries should therefore move ahead and

ensure that the convergence criteria are met before adopting



a common currency as happened in the case of the EU with the

euro13 (Issing, 2008, p. 13), because the WAEMU case has

shown that political considerations without the economic

fundamentals can be costly.

There is also the need for countries in the sub-region to

pay particular attention to the development of

infrastructure (particularly transport infrastructure),

human resources, and local entrepreneurship, creating a

stable macroeconomic framework and conditions favorable for

productive investments. These will enhance diversification

of their export base and the volume of merchandise trade

within the sub-region. And therefore move them closer to the

OCA criteria. Also removal of all non-tariff barriers to

trade such as extortion at borders and excessive bureaucracy

will reduce smuggling and improve official trade in the sub-

region. All these can move them closer to the OCA criteria.

It is still not clear why the WAMZ outperformed the WAEMU on

FDI inflows; this may be due to natural endowments or may be

some other reasons beyond the scope of this work. Therefore

further research looking at sectors, natural endowments,

legal frameworks and general policies on investment is

13 The Maastricht treaty was the blueprint that stipulating the convergence criteria that were followed by the EU to ensure some degree of structural convergence before adopting the Euro. Some of the criteriawere, inflation, government debt, long term interest rate, exchange rateand budget deficits.



needed to determine the real pull factors of FDIs in the

sub-region.




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