Par  Gbêmèho Mathieu TRINNOU , Chercheur au COFEB

ABSTRACT

The alignment of national currencies is a major prerequisite in the implementation of the ECOWAS single currency program. In this regard, the objective of this study is twofold : on one hand, to analyze the functioning of the official foreign exchange markets in ECOWAS in order to draw the implications and, on the other hand, to empirically examine the convergence of currencies within the Community in order to identify levers that will contribute to the alignment of national currencies. The analysis of the functioning of official foreign exchange markets reveals that ECOWAS member countries face several constraints, in particular the strong presence of central banks in these markets, the absence of uniform regulations governing the external financial relations of Member States of the Community, the non-convertibility and the absence of quotation between national currencies within the Community and the non-presence of a functional interbank foreign exchange market in the WAEMU, despite the clear progress in terms of economic and financial integration in the Union. Based on the currency convergence analysis, the results from an Error Correction Model (ECM) for the case-study of Nigeria and Ghana, in particular with regard to the inflation and budget deficit, the parallel market premium has a significant influence on the convergence of exchange rates, in addition to the macroeconomic convergence. The implementation of a structural model inspired by that of Kamin (1990) for the two countries shows that a decrease in the activity of the parallel foreign exchange market, through the imposition of restrictions to reduce the diversion of currencies, induces a drop in the parallel exchange rate and, consequently, a decrease in the premium of the parallel market. Overall, the study shows that the alignment of national currencies in ECOWAS is conditioned by the efficient functioning of official foreign exchange markets, good control of macroeconomic convergence variables, in particular inflation and the budget deficit as well as the reduction of the activity of parallel exchange markets in the Community. On this basis, it draws the institutional and operational implications aimed at fostering currency alignment.

Keywords : Alignment of currencies, foreign exchange market, ECM, structural model, ECOWAS

JEL code : F31, F45, C22, C54, O55.