Fiscal Deficit Sustainability and Fiscal Policy Persistence In The West African Monetary Zone

Abstract

The Economic Community of West African States launched the name of its proposed currency, eco, in June, 2019 for its proposed monetary union. The Regional body stipulated certain convergence criteria to be met before member countries could be admitted to the proposed union. One such criteria is that the budget deficit-to-Gross domestic product ratio be less than or equal to three percent. Available data for the past two decades indicate the non-compliance of many of these West African countries to this condition despite having control over both fiscal and monetary policies. This study investigates the sustainability of fiscal deficits in a group of six countries known as the West African Monetary Zone. This study has two objectives: First, to investigate the sustainability of deficits in the West African Monetary Zone and secondly, to examine the absence or presence of fiscal policy persistence. Fiscal deficits are sustainable when an increase in public debt is associated with a corresponding increase in the primary surplus. Using panel data, a fiscal reaction model was estimated. The findings of this study showed that deficits are weakly sustainable and fiscal policy is highly persistent. The implication of weak sustainability is that they are easily vulnerable to external shocks and the possibility of becoming unsustainable is very high. Meanwhile, a highly persistent fiscal policy leaves little or no room for fiscal policy discretion and this is a high risk because it means government won’t respond swiftly as at when due. Based on these findings, the study recommends a suspension of the proposed single currency union.