Abstract:
The Economic Community of West African States (ECOWAS), comprising fifteen states, was established in 1975 to accelerate economic growth and development of the sub-region through facilitation of economic and monetary cooperation and integration. The paper investigates the current account sustainability in ECOWAS using the intertemporal solvency framework (Hakkio and Rush, 1991, and Husted, 1992) within a small open economy that allows debt. The model is based on the idea that the amount a country borrows or lends in international markets equals the present value of the future trade surpluses.
The intertemporal solvency establishes the net inflows and outflows under the intertemporal budget constraint. A country can run current account deficits for some time and remain solvent as long as there are surpluses at some time in the future. More importantly, the current account that leads to an increase without bounds of the foreign debt to the GDP ratio will effectively unsustainable. As a result, the financial markets will become concerned about the country’s ability and willingness to repay its debt and therefore limit their borrowing, leading to a foreign crisis. The model examines the long-run relation between exports and imports using cointegration analysis to see if intertermporal solvency exists. The annually data covers real exports, real imports and real GDP from 1960 to 2008.
This study provides guide to ECOWAS in their policy decision makings in achieving economic growth and alleviating poverty. Keywords: Current Account, Intertemporal solvency, Sustainability, ECOWAS
JEL Classification: C22, F32, F41