Common Currency Membership and West African Countries’ Capacity to Borrow from International Private


Abstract

By Diery Seck, Center for Research on Political Economy (CREPOL)

In spite of their current high growth episode, the level of financing of West African economies is too low to ensure sustainable long term economic growth.   Their domestic savings are insufficient and access to foreign borrowing from official creditors is also low.  For most countries foreign indebtedness from private creditors is non-existent because of their poor credit risk ratings.  Given their inability to improve their sovereign risk profile in the short to medium term, participation in a broad common currency union (CCU) can be the only means to achieve significant reduction in sovereign credit risk and borrow from international private creditors, the largest source of global finance.

With the theoretical model of Contingent Claims Analysis (CCA), it is shown that West African countries can combine their foreign reserves and, through a facility of mutual insurance against adverse debt service outcomes, increase the expected level of net foreign assets available for external debt service, and lower its volatility.  The simulation model of the CCA shows that, as members of a CCU, West African economies can benefit from a lower credit risk score that translates into easier access to private creditor lending than in the absence of CCU membership.  Once a suitable level of risk is attained, borrower countries can raise their level of indebtedness without changing their risk profile provided the level of foreign reserves available to service their debt increases commensurately.


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