1. Annual Conference on Regional Integration in Africa (ACRIA 4) Private Sector Development and Job Creation in West Africa Abidjan 4-5 July 2013 The Quest for a Monetary Union in ECOWAS: An Econometric Test for Convergence of Countries By Mohamed B.O Ndiaye and Robert Dauda Korsu WEST AFRICAN MONETARY AGENCY

2. OUTLINE OF THE PRESETATION
1. Introduction 2. Literature 3. Methodology 4. Empirical Results 5. Conclusion 6. Recommendations

3. 1. Introduction
Interest in, and effort at Monetary Integration in ECOWAS is not a new issue in the ECOWAS region. There has been great effort by various stakeholders.
Recognising the importance of economic integration, the ETLS, CET and ECOWAS Protocol on Free Movement of goods and persons and right of establishment are being promoted by the various member countries, in spite of various challenges

4. 1. Introduction
Monetary Integration within Economic Integration: The Traditional Stages- Free Trade Area, Customs Union, Common Market, Monetary Union, Economic Union
ECOWAS STEPS: ETLS, CET, ECOWAS Protocol on Free movement of goods and persons and right of establishment, The Single Currency Project

5. 1. Introduction
EMCP was adopted in 1987: To have a common currency in the ECOWAS countries
Target dates: Observed postponements ( since The current date is 2020)
Regular Activities: Multilateral Surveillance missions to assess member countries on macroeconomic convergence and some institutional arrangements and policy harmonisation issues
Member countries meeting the primary convergence criteria on a sustainable basis and achievement of progress on the relevant institutional arrangements and policy harmonisation issues would pave the way for the common currency.

6. 1. Introduction
Status of Convergence Criteria: Countries that do well on the convergence criteria do not sustain it.
Convergence Testing in General:
THE BENCHMARK APPROACH and THE ECONOMETRIC APPROACH
Currently in Use in ECOWAS The Approach of this study

7. 1. Introduction
Objective: To Investigate the Degree of Convergence among ECOWAS Countries
Specifically, testing the degree of nominal and real convergence among:
The Non-UEMOA Countries (with and without Cape Verde
The UEMOA Countries and each non-UEMOA Country
The ECOWAS countries as a group

8. 2. Literature
Convergence Testing: Common for Countries working towards integration
Originally: The Catch Up Hypothesis ( β Convergence)
Cointegration Tests ( Carmignani (2005),
Testing Asymmetry of Shocks ( VAR)- Christodoulakis et al (1995)
β Convergence ( Dramani , 2010)
Testing partial and Full Convergence: Cointegration ( Johanson ML)- Rofael ( 2011)

9. 3. Methodology Benchmark and Econometric Approach
Nominal and Real Convergence
Nominal convergence (convergence in nominal variables) is a necessary condition for a monetary union while real convergence ( convergence in real variable) is a sufficient condition
Cointegration Approach: It points out whether there is no, partial or complete convergence
Unit Root Tests--- Dicky Fuller GLS Tests
Cointegration Tests– Johanson MLE ( It can provide information on partial and complete convergence)

10. 3. Methodology Data (Sources: IFS, WDI, WAMA)
Nominal Convergence: Nominal Exchange Rate ( Domestic Currency per U.S dollar), Interest Rate ( deposit rate), Reserve Money, Inflation Rate, Budget Deficit ( excluding grant)
Quarterly from 2000Q1 to 2010Q4
Real Convergence: The Business Cycle ( Deviation of Real GDP from Trend)- Annual 1975 to 2010

11. 4. Empirical Results
In Tables 1 to 12, which follow we provided the results of the tests for nominal and real convergence

12. Table 1: Unit Root Tests on Exchange Rate
Variable
Implication
Cape Verde EXR
I(1)
Cape Verde EXR
Gambia EXR
Gambia EXR
Ghana EXR
I(0)
Ghana EXR
Guinea EXR
Guinea EXR
Liberia EXR
Liberia EXR
Nigeria EXR
 Nigeria EXR
Sierra Leone EXR
 Sierra Leone EXR
UEMOA EXR
UEMOA EXR
On Exchange Rate, Ghana cannot be in Convergence with the Others

13. Table 2: Results of the Cointegration Test for Exchange Rate Convergence  
Country
Number of Individuals
(1)
Lags Included
(2)
Number of Cointegrating Vectors
(3)
Number of Common trend
(4) = (1) - (3)
Degree of Convergence
(5)
ALL WAMZ without Ghana 5 2 1 4
Partial
WAMZ (without Ghana) plus Cape Verde 6
UEMOA+WAMZ without Ghana+ Cape Verde 7 3
UEMOA and Cape Verde
Complete
UEMOA Gambia
None
UEMOA Guinea
UEMOA and Liberia
UEMOA and Nigeria
UEMOA and Sierra Leone

14. Table 3: Unit Root Tests: Interest Rate
Variable
Auxiliary Regression Contains
Selected Lag Based on SIC
Dickey-Fuller (ADF) GLS Statistics
Implication
Cape Verde INR
Drift
I(1)
Drift and Trend
Cape Verde INR ** **
Gambia INR 1
Gambia INR ** **
Ghana INR
Ghana INR ** **
Guinea INR
Guinea INR ** **
Liberia INR
Liberia INR ** **
Nigeria INR *
I(0)
 Nigeria INR ** **
Sierra Leone INR
 Sierra Leone INR ** **
UEMOA INR
UEMOA INR 2 ** **

15. Number of Cointegrating Vectors
Table 4: Results of the Cointegration Test for Interest Rate Convergence
Country
Number of Individuals
(1)
Lags Included
(2)
Number of Cointegrating Vectors
(3)
Number of Common trend
(4) = (1) - (3)
Degree of Convergence
(5)
ALL WAMZ without Nigeria 5 1
None
WAMZ (without Nigeria) plus Cape Verde 6 4
UEMOA +WAMZ without Nigeria+ Cape Verde 7 2 3
Partial
UEMOA and Cape Verde
UEMOA Gambia
UEMOA Guinea
UEMOA and Liberia
UEMOA and Ghana
UEMOA and Sierra Leone

16. Table 5: Results of the unit root tests : Reserve Money (RSM)
Variable
Auxiliary Regression Contains
Selected Lag Based on SIC
Dickey-Fuller (ADF) GLS Statistics
Implication
Cape Verde RSM
Drift
I(1)
Drift and Trend
Cape Verde RSM 1 ** **
Gambia RSM
0.7738
Gambia RSM ** **
Ghana RSM
2.2214
Ghana RSM ** **
Guinea RSM
0.1616
Guinea RSM ** **
Liberia RSM 2
2.1124
0.2055
Liberia RSM **
Nigeria RSM
1.3985
 Nigeria RSM ** **
Sierra Leone RSM
3.0915
 Sierra Leone RSM ** **
UEMOA RSM
1.7502
UEMOA RSM ** **

17. Number of Cointegrating Vectors
Table 6: Results of the Cointegration Test for Reserve Money Convergence
Country
Number of Individuals
(1)
Lags Included
(2)
Number of Cointegrating Vectors
(3)
Number of Common trend
(4) = (1) - (3)
Degree of Convergence
(5)
ALL WAMZ 6 4 2
Partial
WAMZ plus Cape Verde 7 3
UEMOA+WAMZ+Cape Verde 8
UEMOA and Cape Verde 1
None
UEMOA and Gambia
UEMOA and Ghana
UEMOA and Guinea
UEMOA and Liberia
UEMOA and Nigeria
UEMOA and Sierra Leone

18. Table 7: Results of the unit root tests : Inflation Rate (INF)
Variable
Auxiliary Regression Contains
Selected Lag Based on SIC
Dickey-Fuller (ADF) GLS Statistics
Implication
Cape Verde INF
Drift 1 *
I(0)
Drift and Trend
Cape Verde INF ** **
Gambia INF
I(1)
Gambia INF ** **
Ghana INF *
Ghana INF ** *
Guinea INF
Guinea INF *
Liberia INF * *
Liberia INF *
Nigeria INF ** *
 Nigeria INF ** **
Sierra Leone INF
 Sierra Leone INF ** **
UEMOA INF 2 ** **
UEMOA INF **

19. Table 8: Results of the Cointegration Test for Inflation Rate
Country
Number of Individuals
(1)
Lags Included
(2)
Number of Cointegrating Vectors
(3)
Number of Common trend
(4) = (1) - (3)
Degree of Convergence
(5)
WAMZ without Ghana, Liberia and Nigeria 3 2 1
Partial
WAMZ (without Ghana, Liberia and Nigeria) plus Cape Verde 4
Testing is not meaningful as Cape Verde has an I(0) inflation rate
None
UEMOA+ WAMZ ( without Ghana, Liberia and Nigeria )+ Cape Verde 5
Testing is not meaningful as UEMOA and Cape Verde have I(0) inflation rates
UEMOA and Cape Verde
Testing is not meaningful.
UEMOA and Gambia
UEMOA Guinea
UEMOA and Liberia
UEMOA and Nigeria
UEMOA and Sierra Leone

20. Table 9: Results of the unit root tests : Budget Deficit (BDF)
Variable
Auxiliary Regression Contains
Selected Lag Based on SIC
Dickey-Fuller (ADF) GLS Statistics
Implication
Cape Verde BDF
Drift 1
I(2)
Drift and Trend
Cape Verde BDF
2Cape Verde BDF ** **
Gambia BDF *
I(0)
Gambia BDF *
Ghana BDF ** 2 **
Ghana BDF * *
Guinea BDF *
Guinea BDF *
Liberia BDF ** *
Liberia BDF *
Nigeria BDF
 Nigeria BDF
2 Nigeria BDF ** **
Sierra Leone BDF
I(1)
 Sierra Leone BDF ** *
UEMOA BDF *
UEMOA BDF

21. Table 10: Results of the Cointegration Test for Budget Deficit
Country
Number of Individuals
(1)
Lags Included
(2)
Number of Cointegrating Vectors
(3)
Number of Common trend
(4) = (1) - (3)
Degree of Convergence
(5)
WAMZ without Gambia, Ghana, Guinea and Liberia ( That is, Nigeria and Sierra Leone) 2
None
WAMZ (without Gambia, Ghana, Guinea and Liberia) plus Cape Verde 3 1
Partial
UEMOA+ WAMZ ( without Gambia, Ghana, Guinea and Liberia)+ Cape Verde 4
Testing is not meaningful as budget deficit for UEMOA is I(0)
UEMOA and Cape Verde
Testing is not meaningful.
UEMOA and Gambia
UEMOA Guinea
UEMOA and Liberia
UEMOA and Nigeria
UEMOA and Sierra Leone
Testing is not meaningful

22. Table 11: Results of the unit root tests : Business Cycle (BCY)
Variable
Auxiliary Regression Contains
Selected Lag Based on SIC
Dickey-Fuller (ADF) GLS Statistics
Implication
Cape Verde BCY
Drift 1
I(1)
Drift and Trend
Cape Verde BCY **
Gambia BCY
0.0335
0.2457
Gambia BCY ** **
Ghana BCY 2
Ghana BCY **
Guinea BCY
Guinea BCY ** **
Liberia BCY
Liberia BCY ** **
Nigeria BCY 3
I(2)
 Nigeria BCY ** **
Sierra Leone BCY
 Sierra Leone BCY ** **
UEMOA BCY
(1)
UEMOA BCY ** **

23. Table 12: Results of the Cointegration Test for Business Cycle Convergence
Country
Number of Individuals
(1)
Lags Included
(2)
Number of Cointegrating Vectors
(3)
Number of Common trend
(4) = (1) - (3)
Degree of Convergence
(5)
ALL WAMZ 6 1 2 4
Partial
WAMZ plus Cape Verde 7 3
UEMOA+WAMZ + Cape Verde 8
UEMOA and Cape Verde
None
UEMOA Gambia
UEMOA Guinea
UEMOA and Liberia
UEMOA and Nigeria
UEMOA and Sierra Leone

24. 5.Conclusion
Nominal Convergence ( Exchange Rate) There is convergence though partial among (i) the WAMZ countries ( without Ghana) (ii) the WAMZ countries and Cape Verde but ( without Ghana) (ii) the ECOWAS countries as a whole, without Ghana and (iv) UEMOA and Cape Verde ( a complete convergence case). There is however, no convergence among the UEMOA and any of the other non-UEMOA countries. Nominal Convergence ( Interest Rate) There is convergence only in the case of all the ECOWAS countries, without Nigeria ( partial convergence). There is however, no convergence among the UEMOA and any of the other non-UEMOA countries Nominal Convergence (Reserve Money), All the WAMZ countries are in partial convergence, the WAMZ and Cape Verde are in partial convergence, all the ECOWAS countries are in partial convergence. None of the non-UEMOA countries is however in convergence with the UEMOA countries.

25. 5. Conclusion Nominal Convergence (Budget Deficit)
Budget deficit the WAMZ countries ( with or without Cape Verde) are not in convergence. However, Sierra Leone, Nigeria and Cape Verde are in partial convergence. The ECOWAS countries as a whole are not in convergence and none of the non-UEMOA countries is in convergence with the UEMOA.
Nominal Convergence (Inflation)
There is partial convergence among Gambia, Guinea and Sierra Leone but no convergence among the whole WAMZ, the whole of ECOWAS or WAMZ plus Cape Verde. Moreover, none of the non-UEMOA countries is in convergence with the UEMOA countries in terms of inflation.
Real Convergence ( Business Cycle)
There is partial convergence among the WAMZ countries, the WAMZ countries and Cape Verde and ECOWAS countries as a whole. There is however no real convergence between the UEMOA and any of the non-UEMOA countries.

26. 6. Recommendations
The existence of real convergence as well as nominal convergence, in terms of reserve money, of the WAMZ countries as well as the ECOWAS countries as a whole suggests that the WAMZ countries or the ECOWAS countries as a whole may opt for a single currency framework as long as the relevant policy harmonisations and institutional arrangements are in place.
To the extent that there is no convergence on the budget deficits of the WAMZ countries and the ECOWAS countries as a whole, a currency union in the region should be tied to a strong clause in relation to commitment to a common fiscal rule in respect of expenditure rationalisation and revenue mobilisation targets and mechanism. The national and ECOWAS parliaments may be useful in this regard in an effort to monitor domestic compliance with regional fiscal targets.

27. 6. Recommendations
There is no convergence at the WAMZ level or the ECOWAS level as a whole on the inflation rate. It is therefore important that a monetary union from the region takes low and stable inflation as the ultimate objective of monetary policy while financial sector stability interest would continue to be pursued.
The non-existence of convergence in the interest rates among the WAMZ countries as well as the ECOWAS region as a whole suggests that it is necessary to have a common money market and monetary policy rate under a single currency zone from the region.

28. 6. Recommendations
The lack of convergence between the UEMOA and each of the non-UEMOA countries ( on individual basis) on interest rate, reserve money, budget deficit, inflation rate and the business cycle suggests that it is not optimal for any of the non-UEMOA countries to enter a monetary union on an individual basis with the UEMOA.

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