The ECOWAS monetary union proposal on intra-regional trade

Economic Community of West African States

The Economic Community of West African States (ECOWAS) comprises eight French-speaking countries, five English-speaking countries and two Portuguese-speaking countries. These countries have been classified into two zones namely; UEMOA (West African Economic and Monetary Union) formed as an African colony of France during colonial times, and the West African Monetary Zone (WAMZ).

UEMOA includes seven French-speaking countries and one Portuguese-speaking country, and the WAMZ includes five English-speaking countries, one French-speaking country and one Portuguese-speaking country.

Comparatively, UEMOA uses the CFA (XOF) as its common currency and WAMZ uses its sovereign currencies. In addition, WAEMU is fundamentally stable macroeconomic than WAMZ due to stringent monetary policy practices and fixed macroeconomic convergence criteria.

In addition, intra-UEMOA trade is on average 13.7% above the overall ECOWAS average although the WAMZ is the economic center of the sub-region. Therefore, the use of sovereign currencies by WAMZ countries could constitute a barrier to trade.

Despite the frantic effort of ECOWAS, the level of trade has remained robust, below 12% of total trade. Studies have shown that the sub-region suffers from multiple barriers which inhibit the consolidated gains of intra-regional trade.

Even if some artificial barriers serve as a source of income, these barriers have a negative impact on the level of employment because they reduce the level of savings in real terms, divert trade flows to countries with relatively minimal barriers by affecting prices and increase the time required to trade. , therefore, reduces the level of trade.

In this context, ECOWAS considers it appropriate to strengthen ties to improve living standards by stimulating trade.

Empirically, when countries integrate, the volume of trade appreciates considerably to stimulate economic growth. In this context, such a policy stimulating trade flows has proven to reduce asymmetric and external shocks, ensure convergence through the synchronization of the business cycle, create employment opportunities so far of economic growth.

Conversely, some studies oppose the formation of the monetary union because of the prevalence of the asymmetry shock without admitting the prowess of the shock canceling trade and the negative effect of sovereign currencies, and the strong demand foreign exchange compounded by the asymmetric shock existing between members. .

Comparative analysis of ECOWAS to RECs in Africa
Verifiably, the most successful regional economic communities (RECs) in Africa have monetary arrangements that favor trade compared to ECOWAS.

The Kenyan shilling, a convertible currency, facilitates trade in the East African Community (EAC). In addition, the South African Rand, the convertible currency and anchor currency of the Southern African Customs Union (SACU), facilitates trade within the Southern African Development Community (SADC).

According to the UNCTAD database, the EAC and SADC trade averages are 19.1% and 15.1%, compared to 9.0% recorded by ECOWAS using the average intra-trade data. -trade from 2000 to 2017.

The argument of exchange rate volatility on trade in ECOWAS

Exchange rate volatility is assumed to have a small effect on trade flows due to a country-by-country analysis using a dataset measured in dollar equivalents, which reduces the marginal disparity of sovereign currencies. In addition, the non-convertibility of currencies obscured the effect of sovereign currencies on trade. In addition, the use of currencies to undertake intraregional trade has caused an economic gap in the estimation of exchange rate volatility on trade.

Conversely, recent empirical studies have shown that exchange rate volatility harms trade and is further compounded by the high demand for currencies to undertake intraregional trade.

In conclusion, sovereign currencies result in high trade costs in the sub-region compared to other trading blocks. As a result, the prevalence of overt external shocks makes currencies more volatile and weakens investor confidence.

To improve the monetary performance of sovereign currencies, it is necessary to apply macroeconomic restrictions by reaching the criteria for macroeconomic convergence.