The West African Monetary Zone : Is Inflation Convergence Sufficient for a Currency Union?

The West African Monetary Zone is a proposed monetary union among the nations of The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone. A key characteristic for a well-functioning common currency is convergence in inflation rates among constituent members. A failure to achieve convergent inflation rates leads to real exchange rate misalignment, balance-of-payments problems, possible debt crises and economic stagnation as (often sticky) prices are all that can adjust when there is no possibility of nominal depreciation. Nigeria is by far the largest of the economies in the proposed union, and will likely dominate in terms of monetary policy. Using a pairwise approach, along with other methods, we find evidence that all other potential members exhibit inflation differentials vis-à-vis Nigeria that are, at a minimum very slow to converge to zero. There is also often slow convergence in inflation differentials among the other five nations. These findings strongly suggest much caution prior to the formal creation of this proposed common currency