By Gylych Jelilov Abdullahi Ahmad Jibrin Abdurahman Isik Wagner College, 26 May 2016 EXCHANGE RATE AND ECONOMIC GROWTH IN ECONOMIC COMMUNITY OF WEST AFRICAN STATES (ECOWAS)

Presentation Schedule Introduction Literature Review The Economic Community of West African States (ECOWAS) Methodology Classical Regression model of Real GDP, Exchange Rate, Inflation Rate and Interest Rates Analysis of Results Conclusion and Policy Recommendations

Introduction Exchange rate is the price of one country’s currency expressed in terms of some other currency. It determines the relative prices of domestic and foreign goods, as well as the strength of external sector participation in the international trade(Adeniran, 2014). According to (Jhingan, 2009) Foreign exchange rate or exchange rate is the rate at which one currency is exchanged for another; it is the price of one currency in terms of another currency. Exchange rate is very important nowadays because of oil price fall create us crisis on exchange rate basis.

Introduction Cont. (Cornell, 1982) Presented a test of the joint hypothesis in ‘’Money Supply Announcements, Interest Rates, and Foreign Exchange’’ he stated that; ‘’In response to an unexpected increase in the money supply, the expected rate of inflation will rise, driving up nominal Interest rates. The increase in nominal rates reduces the demand for money causing the US price level to rise and the dollar to depreciate (or the price of foreign exchange to rise). ‘’

Literature Review (Rodrik, 2008), (Rapetti M. et al, 2012) and (Ghura, Jibril, & Abdurezzak, 1991), In their summaries they states that decrease in overvaluation of real exchange rate boosts economic growth, but all these facts are established on the developing countries only. (Taylor, 2001), defined exchange rate as an important part of monetary policy which serve as transmission mechanism in policy-evaluation models, exchange rate serves as arbitrage equation relating the interest rate in one country to the interest rates in other countries through the expected rate of appreciation of the exchange rate.

Literature Review Cont. The exchange rate also affects the terms of trade and thus the flow of exports and imports, although, Taylor was pessimistic on difficulties to model exchange rate effect. This has been substantiated in the work of Katz. (Katz, 1973) In his studies to examine imported inflation, he established that the inflation experienced by the OECD countries in was attributed to imported inflation from North America i.e. (US and Canada), because they accounted for about 50% of the aggregate output of these member countries.

Sub Saharan Africa Monetary Experience The Sub-Saharan Africa (SSA) countries have adopted different strategies in terms of exchange rate policy. In the early 1960s, the former British colonies have dumped their currency boards to create their own currencies while the former French colonies decided to form a monetary union named “CFA franc zone”.

The Economic Community of West African States (ECOWAS) These situations augment to the proliferation of non- convertible currencies, which was seen as an impediment to trade, integration and economic development. The Economic Community of West African States (ECOWAS) was created on 28 May 1975, with the signing of the treaty of Lagos by the Heads of States of West African countries in Lagos (Nigeria). The organization was founded in order to achieve "collective self-reliance" for its member states by creating a single large trading bloc through an economic and trading union.

ECOWAS Structure The Economic Community of West African States (ECOWAS) comprises three arms of governance, namely, the Executive, the Legislature and the Judiciary. At the helm of the organization structure is the Chairman of the Authority of Heads of State and Government. The Chairman is the current Head of State and Government appointed by other Heads of State and Government to oversee the affairs for a period of one year. The Minister in charge of ECOWAS affairs in the country of the Chairman of the Authority automatically becomes the Chairman of Council of Ministers; similarly, that country presides over all other ECOWAS statutory meetings for the year (ministerial and senior level, such as the Technical Committees).At the helm of the Executive arm of the Community is the President of ECOWAS Commission appointed by the Authority for a non- renewable period of four years. He is assisted by a Vice President and 13 Commissioners. The legislative arm of the Community is the Community Parliament headed by the Speaker of the Parliament. The administrative functions of the Parliament are directed by the Secretary General of the Parliament. Pending elections by direct universal suffrage in future, parliamentarians are seconded by national Parliaments to the Community Parliament for a period of four years. The judicial arm of the Community is the Community Court of Justice, headed by the President. They are all seconded by the Supreme Courts of their respective Member States to fill the country positions. The Court ensures the interpretation and application of Community laws, protocols and conventions. The administrative functions of the Court are handled by the Court Registrar who is assisted by other professionals.

The Economic Community of West African States (ECOWAS) Cont. The organisation comprises of two institutional units that engage in policies implementation; the ECOWAS Secretariat and the ECOWAS Bank for Investment and Development. Other monetary institutions associated with ECOWAS include the West African Monetary Agency (WAMA), West African Economic and Monetary Union (WAEMU), and West African Monetary Zone (WAMZ), (Central Bank of Nigeria, 2016).

The West African Monetary Agency (WAMA) WAMA was created by ECOWAS in 1996 after its transformation from the West African Clearing House (WACH). As WACH, it promoted multilateral payment facility within West African sub-region. Agency is charged with monitoring, coordinating and implementing the ECOWAS Monetary Cooperation Programme (EMCP) in order to hasten the creation of the ECOWAS single currency.

ECOWAS Monetary Cooperation Programme (EMCP) To give new momentum to the program, the leadership of ECOWAS decided in December 2000 to develop another strategy that was christened “Accelerated Integration”. This strategy had two phases: the conception in 2003 of a second monetary union WAMZ and the merging of the latter with the WAEMU in 2005.

ECOWAS Monetary Cooperation Programme (EMCP) Cont. EMCP defined a sets of macroeconomic convergence criteria; that is first-order and second-order convergence criteria The first-order criteria, Average annual inflation rate less or equal to 5%; Budget deficit including grants/GDP lower than 4%; External reserves greater than 3 months of imports cover and Central bank financing of government budget deficit lower than or equal to 10% of previous year's tax revenue.

The Economic Community of West African States (ECOWAS) Cont. Second-order criteria focuses on the monetary and exchange rate policies management; Non-accumulation of domestic and external arrears, and settlement of all outstanding arrears greater than 20% of GDP; Tax Revenue/ GDP Ratio greater than or equal 20%; Salaries & Wages/ Tax revenue lower than or equal 35%; Positive interest rate and stable nominal exchange rate, Real GDP growth rate greater or equal to 7%; Internally funded public investment /Tax revenue ratio greater than or equal to 20%. (Issiaka & Blaise, 2013), (Jimoh, Ibiyemi & Adekunle, 2015).

Methodology Classical Regression model of Real GDP, Exchange Rate, Inflation Rate and Interest Rates The model is given as follows; Rgdp t = α 0 + α 1 Inf t - α 2 Int t + α 3 exch t + ε 1,t Definition of Variables Rgdp t = Real gdp in (dollar $) Inf t = inflation rate (Consumer Price Index) Int t = Interest rates exch t = Real exchange rate

Regression Results Ten (10) west African countries are analysed using the classical linear regression model (CLRM), these countries are; Benin Republic, Burkina Faso, Cape Verde, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, others are Nigeria and Sierra Leone.

Results In overall, inflation was observed to be significant in explaining the dependent variable in Benin, Liberia and Sierra Leone; Interest rate was only significant in Ghana; Non of the variable is significant in Guinea; But exchange rate shows a significant relationship in about four countries out of nine, these comprise Benin, Guinea Bissau, Liberia and Nigeria.

CONCLUSION AND POLICY RECOMMENDATIONS In general, it imperative for effective exchange rate control in the ECOWAS countries, the monetary authority and fiscal policy makers must be well coordinated to prevent unnecessary monetary expansion. Though exchange rate is a determining factor for inflation in simple economic theory, the fact that it influences inflation positively and by implication the total output that is the GDP, it is worthy to sustain exchange rate stability as a prerequisite for stable domestic prices. Diversification of the economy from import to export based economy is fundamental for economic growth and hence development. This can be achieved through efficient and effective regulation of foreign exchange and political stability, which are a very volatile macroeconomic variable. According to (Yaya & Sel, 2006) threy are of the opinion that volatility of the exchange rates is higher with unstable political regimes as such, external shocks have every tendency of impacting into macroeconomic stability in SSA.

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