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Current Account Im(balances) and Adjustments to Targets for Regional Integration in West Africa: One Step Forward, Two Steps Backwards

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Abstract

In this paper, we seek to answer three main questions: first, what are the long- and short-run determinants of current account balances in West Africa; second, is there a sustainable path for the current account position that is consistent with regional integration; and if yes, what has been the process of adjustment towards such a path. We address these questions by first identifying the long-term determinants of the current account, and then using the results to calculate the equilibrium sustainable targets for the current account in the region. After accounting for short-run disequilibrium adjustment processes, we show how far apart each country is from the regionally sustainable path. The key findings are as follows: the determinants of current account dynamics differ depending on the time horizon; the real exchange rate, fiscal policy, trade openness, investment, and income levels are the key determinants in the short run; there is considerable variation in the deviation of each countries’ current account position from the regionally sustainable equilibrium path. Some implications for policy are highlighted.

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Notes

  1. 1.

    Osakwe and Verick (2007) and Calderon et al. (2007) are exceptions in the sense that they consider the determinants for Africa as a whole.

  2. 2.

    Recall that the power of a test lies in its ability to reject the null hypothesis when it is not true; and the size of a test is the probability of rejecting the null hypothesis when it is actually true.

  3. 3.

    The result for the inflation variable also indicates that it is stationary in levels, however, we do not report the result in the table for lack of space, the results are available upon request.

  4. 4.

    The results for the group mean tests are suppressed, especially because we are only specifically interested in the equilibrium relationships that are consistent with integration for the entire region and not for individual countries.

  5. 5.

    This phenomenon could also be explained by the relatively high and inelastic marginal propensity to import that has been observed in many countries in the region especially for Nigeria.

  6. 6.

    Note that the “half-life” is defined as the number of periods it takes to close half of the disequilibrium. It is computed as ln(0.5)/ ln (1 − γ).

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Authors and Affiliations

  1. Department of Economics, University of Uyo, Uyo, Nigeria

    Chuku Chuku, Johnson Atan, Felix Obioesio & Kenneth Onye

  2. Macroeconomic Policy, Forecasting and Research Department, African Development Bank, Abidjan, Ivory Coast

    Chuku Chuku

Authors
  1. Chuku Chuku
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  2. Johnson Atan
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  3. Felix Obioesio
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  4. Kenneth Onye
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Correspondence to Chuku Chuku .

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Editors and Affiliations

  1. CREPOL - Center for Research on Political Economy, Dakar, Senegal

    Diery Seck

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Chuku, C., Atan, J., Obioesio, F., Onye, K. (2019). Current Account Im(balances) and Adjustments to Targets for Regional Integration in West Africa: One Step Forward, Two Steps Backwards. In: Seck, D. (eds) The External Sector of Africa's Economy. Advances in African Economic, Social and Political Development. Springer, Cham. https://doi.org/10.1007/978-3-319-97913-7_2

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