Monetary Integrations in Western Africa and the Real Effective Exchange Rates

1 Summary In Western Africa, two economic integrations, WAEMU (West African Economic and Monetary Union) and ECOWAS(Economic Community of West African Countries) exist. WAEMU is consisted of eight countries around French possession in Africa and issued the unique legal tender, the CFA franc. On the other hand, ECOWAS is the wider economic integration for 15 countries encompassing the entire WAEMU and aims to develop itself into monetary integration as well as custom union. Thus, the plan to introduce a new common currency for the ECOWAS countries including the WAEMU was announced in 2000. It means the ECOWAS is planning to establish a second monetary zone, the West African Monetary Zone (WAMZ) which is consisted of five following countries, The Gambia, Ghana, Guinea, Nigeria and Sierra Leon and introduce a new currency " ECO " by the end of the year 2009. Meanwhile, the parity of the CFA franc is fixed at the rate of 655.957CFA Franc per Euro. However, the value of the euro has been appreciating since July 2001 until mi-2008 and it has been considered as one of central causes of WAEMU's low price competitiveness in the world market comparing to those of their neighbors. In this paper, first, we calculate the Real Effective Exchange Rate (REER) of all the WAEMU member countries from 1999 to 2006 using the quarterly data and compare them with those of their neighbors. The REER is calculated with the nominal exchange rate, trade weights for each trade partner in relation to total trade, and the price indices of both of foreign and domestic countries. While the sum of import and export values is used, in most cases, for computing the trade weight for each country and also the weight is fixed over a period of time considering the level of one year or the average of a few sample years, we have contrived a way to calculate REER using only export data and each trade partner's weight reflecting their shift from quarter to quarter because the trade partners for exportation often differ from those for importation in developing countries and the share of the partners changes drastically year after year in this global era. Second, we analyze each REER, breaking down them into two factors, NEER(Nominal Effective Exchange Rate) and ERPI (Effective Relative Price Index) ,and its variability derived from each standard deviation of the log difference and the correlation of their …