Does ECOWAS Macroeconomic Convergence Criteria Satisfy an Optimum Currency Area?

Louis S. Nkwatoh

doi:10.30560/jems.v1n2p61

Abstract

The Economic Community of West African States (ECOWAS) countries have expressed their desire to establish a monetary union by the year 2020 based on six macroeconomic convergence criteria. The desire is predicated on a series of strategies and various treaties ratified and signed by various ECOWAS Heads of governments and Central Banks’ Governors with more emphasis on the Maastricht-type set of convergence criteria that must be satisfied by all member countries before they ascend to the envisaged monetary union. Even though the convergence criteria may guarantee macroeconomic stability in a regional grouping, critics assert that the convergence criteria are insufficient and inconsequential to the formation of monetary union. The objective of this study is to ascertain whether ECOWAS countries have met all the macroeconomic convergence criteria making them fit for a monetary union. The analyses indicate that no ECOWAS country has met all the convergence criteria at a given point in time implying that the level of macroeconomic convergence in the region still remains inadequate relative to the set targets. However, WAEMU sub-set economies have met three of the criteria -public debts to GDP Ratio, deficits including grants, annual percentage inflation rate. The simple reason is that WAEMU is an existing monetary union with a common stabilization policy.

Highlights

Since the creation of the European Monetary Union (EMU), regional groupings around the World contemplating to form a monetary union have adopted a set of macroeconomic convergence criteria (Maastricht-type criteria) that can guarantee the credibility, sustainability and macroeconomic stability of the union
Economic Community of West African States (ECOWAS) countries have expressed their desire to establish a monetary union by the year 2020 which was predicated initially on four primary convergence and six secondary convergence criteria to be satisfied by all member countries
ECOWAS countries have expressed their desire to establish a monetary union by the year 2020 based on six macroeconomic convergence criteria

Summary

Introduction

Since the creation of the European Monetary Union (EMU), regional groupings around the World contemplating to form a monetary union have adopted a set of macroeconomic convergence criteria (Maastricht-type criteria) that can guarantee the credibility, sustainability and macroeconomic stability of the union. ECOWAS countries have expressed their desire to establish a monetary union by the year 2020 which was predicated initially on four primary convergence and six secondary convergence criteria to be satisfied by all member countries. The launch date was further postponed to 2009 and to 2015 and the Central Bank Governors of ECOWAS have postponed the implementation of the single currency to 2020, due to the inability of member countries to consistently fulfill the initial convergence criteria. The secondary criteria requires that, the public debt to GDP ratio should not be more than 70%; Central Bank financing of budget deficit should not exceed 10% of previous year’s tax revenue; and nominal exchange rate variation should be within +/-10% (see, Business News Staff, 2014).

Macroeconomic Convergence Criteria in Perspective

Demographic Indicators of ECOWAS Countries

ECOWAS Convergence Criteria and Stability of the Proposed Monetary Union

Findings

Conclusion