VULNERABILITY OF WAMZ MEMBER COUNTRIES TO EXTERNAL SHOCKS AND IMPLICATIONS ON THE CONVERGENCE PROCESS
Ibrahima Diallo (),
Olukayode S. Odeniran,
Nkenchor Neville Igue,
Thomas Basseh Wreh and
No 13, Working Papers from West African Monetary Institute
The West African Monetary Zone (WAMZ) member countries are predominantly low income countries, and exhibit certain characteristics, which make them very susceptible to macroeconomic vulnerability. These characteristics include, among others, heavy dependence on imports of food and fuel products, concentration of exports on few primary commodities, heavy reliance on foreign sources of finance (foreign aid, debt and capital inflows), economic size, peripherality, political crises, corruption and incidence of natural disasters. The vulnerability of these economies to external shocks increases the risks of adverse effects on economic growth and imposes costly setbacks on the performance of other key macroeconomic indicators, invariably slowing the progress on economic convergence and integration among Member States. The economic integration process, thus, requires appropriate understanding of the degree of vulnerability of Member States to various kinds of shocks as well as identification of appropriate measures to mitigate the impact of these shocks on macroeconomic performance. Against this background, this study seeks to measure the degree of vulnerability of WAMZ member countries to external shocks by computing economic vulnerability indices for each Member State and for the zone as a whole, utilizing data spanning over the period 2004 – 2016. The paper employs the Briguglio-type economic vulnerability index (EVI) in which the EVI is composed of three components – trade openness, export concentration and dependence on strategic imports. The paper computes the indices by taking a weighted average of the three components. Three different EVI indicators were computed for each country and the WAMZ, by assigning weights to each of the components in the first two EVI indicators, and generating the component weights for the third indicator utilizing principal component analysis. The EVI3 was chosen as the preferred index in view of the usage of a statistical methodology in generating the component weights. The computed EVI values and the component indices ranged between 0 and 1, with a high score in the index corresponding to a high level of vulnerability and vice versa. Results from the empirical analysis show that the average EVI for the Zone is 0.581, implying that the Zone, as a whole, is vulnerable to external shocks. Specifically, Liberia, Ghana and Guinea were found to be most vulnerable in the Zone, while The Gambia is the least. In addition, the trade openness indicator shows that Liberia is the most open economy while Nigeria is the least. On the other hand, export concentration is highest in Nigeria and lowest in The Gambia, while dependence on strategic imports is highest in The Gambia and lowest in Ghana. Being highly vulnerable to external shocks has profound implications for the attainment of the macroeconomic convergence criteria and sustenance of regional economic integration. It triggers wider fiscal deficits in countries with no adequate fiscal frameworks to control volatility in government revenues, increases in gross public debts arising from the financing of higher budget deficits, lead to lower international reserves emanating from lower foreign exchange inflows, exchange rate instability and higher inflationary pressures. Macroeconomic vulnerability could be mitigated in the WAMZ economies by implementing a number of measures aimed at building economic resilience – enhancing countries’ ability to withstand economic vulnerability emanating from external shocks. The emphasis on resilience is important because of the huge success achieved by the South-East Asian economies in building economic resilience through appropriate economic policies to mitigate macroeconomic vulnerability and achieve high level of economic development. Ensuring macroeconomic stability with a healthy fiscal position, among others, would assist in building resilience against external shocks. In addition, member countries need to make concerted efforts aimed at diversifying their export base; promote savings and create stabilization funds both of which could come handy in periods of commodity price falls. They could also explore using market-based instruments such as forwards, futures and options to manage commodity price risks.
Keywords: Commodity dependence; external shocks; vulnerability index; export concentration; macroeconomic convergence (search for similar items in EconPapers)
JEL-codes: C38 C43 O13 (search for similar items in EconPapers)
Pages: 60 pages
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