Fiscal Deficit Sustainability in the West African Monetary Zone

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