Asymmetric Shocks, Real Exchange Rate Distortions and Options for the Second Monetary Zone in West Africa

Abstract

The West African Monetary Zone (WAMZ) has continued to set targets of monetary integration for member states without success. With 2020 set as the new deadline for the attainment of monetary integration in the zone, it is not clear how the feasible this deadline is. It is clear that there are distortions that possibly affect not only the feasibility of enacting the union but also the potential outcome should the leaders decide to ram through the unification without due consideration to these factors. One such factor is exchange rate alignments. This study therefore investigates the presence of real exchange rate misalignments and the effects of such on the macroeconomic stabilities of the WAMZ countries. Due to paucity of data, the study captures only four of the six countries that make up WAMZ – Nigeria, Ghana, The Gambia, and Sierra Leone. It finds that there are misalignments of real exchange rates in all the four countries. These manifest mostly as real exchange rate (RER) overvaluation in two of the four countries, and as RER undervaluation in the other two countries. The RER misalignments and volatilities affect macroeconomic behaviours of the member countries in various ways and to varying degrees. We evaluate the diverse ways these misalignments affect macroeconomic policies and behaviour of the countries and their implications on the integration effort. The study concludes that efforts at stabilizing the macroeconomic fundamentals that determine RER in the WAMZ member states, beginning with monetary policy tools, will be important steps towards instituting a sustainable monetary union.