Fiscal Policy and Monetary Integration in the ECOWAS

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Ony, Kenneth
Umoh, Okon J.
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African Economic Research Consortium
Those with dissenting views regarding the structure of monetary union arrangement in the ECOWAS often argue that the macroeconomic convergence criteria have hampered the ability of countries in the region to stabilize their economies with appropriate counter-cyclical fiscal policy. We tested the empirical merit of this assertion and found no support for this view. Instead, discretionary fiscal policy has actually become counter-cyclical in ECOWAS after the introduction of convergence criteria. In specifics, we found a switch from pro-cyclical fiscal policymaking in the pre-convergence era (1995-2002) to a counter-cyclical fiscal policymaking in the convergence era (2003-2018) in the ECOWAS, and that policy makers in the region respond to initial conditions – apparently taking cue from past (initial) debt and past deficit. The policy import of our result is the need to: (i) introduce more flexibility in fiscal policy making through discretionary fiscal policy that balances the budget (against the constraints imposed by the convergence rules) over the business cycle; and (ii) adopt ‘discretionary fiscal deficit’ to monitor compliance (rather than gross deficit) because it represents effort made to correct excess deficit.