Report on trends in exchange rates of ECOWAS currencies at end of December 2007
For some years now, there has been a flurry of literature on exchange rate trends in countries that are seeking to joint a monetary union. In fact, the use of direct criteria such as exchange rate volatility is in response to weak empirical validation of traditional criteria on optimum monetary zones.
Economists that have worked on this approach think that countries are likely to form a monetary union if the exchange rate variability observed between their currencies is stable (Poloz1990; DeGrauwe and Heens, 1993; Hagen-Neuman, 1994). Proponents of this approach stress on the fact that exchange rate stability is the result of stable fundamentals in line with the theory of optimum monetary zones.
This concern was largely shared by those promoting the ECOWAS Monetary Cooperation. Indeed, as part of creating the necessary conditions for the adoption of a single currency, governments in the region adopted as far back as 1999 a macroeconomic convergence pact.
This macroeconomic convergence is sought mainly through price stability, limiting public deficit, restrictions on monetary financing of budget deficit by central banks and holding of adequate external reserves.
Beyond this convergence programme, the West African Monetary Agency (WAMA) which is steering the programme has to reflect on the implementation of strategies aimed at ensuring increased use of the region’s currencies in sub regional transactions.
In this regard, economic operators need to rely on strong and stable currencies. This presupposes the availability of dynamic and liberalized exchange markets.
The medium term objective of WAMA is to ensure the convertibility of the region’s currencies. In fact, this is an important step in the establishment of a single currency.
In this perspective, fluctuations in exchange rates remain a major source of concern. Indeed, excessive volatility of exchange rates affects the competitiveness and macroeconomic base of countries. Economies that record excessive fluctuations become more risky for both local and foreign investors.
Hence the need to have a regular detailed report on developments in exchange rates.
This report falls within this perspective. It will provide a review of trends on the international exchange market and focus on currencies that make up the Special Drawing Rights to which the West African Unit of Account is pegged through a fixed parity .
It will then provide a detailed analysis of nominal exchange rates of ECOWAS currencies in relation to the WAUA during the period under review before indicating the economic policy implications necessary to control fluctuations in the exchange rate of these currencies.
The analysis will cover both official and parallel markets which sometimes play an important role in the sub-region.
For a better appreciation of recent developments, trends in exchange rates between 2001 and 2007 will be reviewed.