Feasibility Study Of A Single Currency For West African Monetary Zone

1.0 Background to the Study In spite of the high level of globalization, international trade, financial liberalization as well as the increasing economic integration of the world as a whole, there is still a wide range of currencies circulating in the world’s economic monetary system. The International Monetary Fund with 188 member countries has more than 150 currencies. As Mundell (1961) writes: “If some spaceship captain came down from outer space and looked at the way international monetary relations are conducted, I am sure she would be very surprised….and wonder why more than one currency was needed to conduct international trade and payments in a world that aspired to a high degree of free trade”. A single currency is not new, especially in Europe as well as in other groups of African countries. For instance, the Eurozone uses the Euro as its regional currency; African Financial Community (CFA) Franc (now linked to Euro) is used by some francophone countries in Africa, Rand by the Common Monetary Area (CMA), among others. The idea of a single or a common currency is based on the theory of an Optimum Currency Area (OCA) originally developed by Mundell (1961) and extended by Mckninnon (1963). The theory establishes certain criteria that member countries willing 2 to form a Monetary Union have to attain. When member countries are able to attain such criteria, it increases the economic gain for that region (member countries) to share a common currency. An introduction of a common currency is meant to promote trade among the member countries. The member countries can only benefit from a common currency when their region can be defined as an Optimum Currency Area. In order for member countries to benefit from a Monetary Union, they should meet some criteria (i.e. flexibility of price and wages, intra-regional factor mobility, openness to trade, product diversification, and fiscal integration (Masson and Taylor, 1993) which can help to mitigate asymmetric shock. Asymmetric shock occurs when an economic supply or demand shock is different from one region to another. For example, assuming Ghana is experiencing excess demand (under production) and Nigeria is also experiencing excess supply (unemployment) in the same period, these countries are said to be experiencing asymmetric shock. Asymmetric shock makes it difficult for the Monetary Union’s Central Bank to conduct monetary policy that can solve such economic problems for both countries at the same time. A currency area with a single currency means that there is only one Central Bank that manages monetary policy in the region. This means that each member country will lose her monetary policy sovereignty. This is one of the main costs of using a common currency, a subjugation of national policy (monetary policy) to a supranational authority.