Fiscal Deficit Sustainability in the West African Monetary Zone
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Date
2020
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Uva Wellassa University of Sri Lanka
Abstract
The West African Monetary Zone is working towards having a single currency union.
Macroeconomic convergence criteria have been set and all intending members are
expected to meet these criteria. Among the criteria is that all countries shall have a fiscal
deficit of no more than three percent of their Gross Domestic Product. Evidence shows
that not all member countries have consistently satisfied this particular criterion from
2000-2018. The experience of the European Monetary Union suggests that having
sustainable fiscal policies is important for the successful take-off of a single currency
union in West Africa. Given this background, it becomes imperative to find out if these
countries are pursuing sustainable fiscal policies. The main objective of this study was to
evaluate fiscal deficit sustainability for the West African Monetary Zone member
countries. To achieve this, a fiscal policy reaction function was estimated using annual
data for a panel of six countries over the period 2001-2018. The dependent variable used
was the primary balance as a percentage of Gross Domestic Product. The explanatory
variables included lagged public debt as a percentage of Gross Domestic Product, the
output gap, and some variables to capture political and electoral institutions. The model
was analyzed using the fixed effects estimator. The empirical findings showed that there
is weak fiscal sustainability among the countries. Primary balance rises by 0.018
percentage points for every one percentage point increase in the public debt after
controlling for the effects of other explanatory variables. Institutions had a statistically
significant impact on the primary balance. The implication of this is that weak fiscal
sustainability portrays a danger sign for the West African Monetary Zone countries to
form a monetary union. Individual governments must reduce public debts and deficits and
strengthen fiscal institutions. The study suggested that the planned monetary union be
suspended for now.
Keywords: Fiscal deficit sustainability, Primary balance, Public debt, West african
monetary zone, Monetary union
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Financial Management, Economic, Marketing, Statistics