MONEY SUPPLY GROWTH AND MACROECONOMIC CONVERGENCE IN ECOWAS
Macroeconomic convergence is a core issue under the ECOWAS monetary Cooperation programme. In addition to facilitating policy coordination, it affords the opportunity of ensuring macroeconomic stability, thereby, guaranteeing the purchasing power of the common currency being envisaged. Thus, in pursuance of the need for convergence of the economies within the sub-region, certain indicators have been adopted which require Member countries to comply with prescribed benchmarks in addressing their fiscal, monetary and exchange rate imbalances in order to achieve the environment congenial for a successful monetary integration. These criteria focus on price stability, prudent fiscal policies, restrictive budget deficit financing and maintenance of adequate gross foreign reserves. The key monetary indicators among the convergence criteria relate to the maintenance of inflation below five percent, central bank budget deficit financing below 10 percent of previous year’s tax revenue, positive real interest rates and real exchange rate stability.
In order to ensure compliance with the convergence criteria the Authority of ECOWAS Heads of State and Government instituted a multilateral surveillance mechanism in 2001 to ensure the achievement of the closest level of coordination of the economic policies. This action was based on the fact that the coordination of economic policies and their convergence ore prerogatives for the creation of a successful economic and monetary union. The surveillance mechanism therefore requires continuous monitoring by established bodies such as the Convergence Council, Technical Monitoring Committee and the WAMA _ECOWAS Joint Secretariat.
Money supply is the amount of money within a specific economy available for purchasing goods or services. For the purposes of this paper, the broad definition money supply (M2+) is adopted which includes currency in circulation, demand deposits, quasi-money and foreign currency deposits. The money creating activities of the deposit money banks impact directly on money supply and given that the central bank is responsible for controlling money supply in an economy, it is important to evaluate the role of these banking institutions on the convergence process. In this regard, the objective of this paper is to assess the contribution of the banking system to the convergence process particularly, with regards to performance on inflation, interest rate, exchange rate and output.
After this brief introduction, the paper is structured as follows. Section 2 provides a brief theoretical background on the implications of excessive increases in money supply, highlighting issues concerning the quantity theory, monetarism and the transmission mechanism. Section 3 gives a historical overview of developments in the quantity theory variables of the various countries in ECOWAS. Section 4 analyses the sources of money supply growth in member countries, categorized into the UEMOA, WAMZ and other countries. Section 5 uses simple statistical analyses to determine, empirically, the impact of changes in broad money supply on selected macroeconomic variables, including the established financial convergence criteria on inflation, real interest rates and real exchange rate stability. Finally, section 6 summarizes the paper and proffers important policy recommendations.