Determinants of Bilateral Trade Performance of the Member Countries of the West African Monetary Zone (WAMZ)

Abstract

This study sought to identify the drivers of import demand in the region, as a basis for proposing achievable alternative strategies for enhancing the level of intra-regional trade in the Zone. The study estimated a global import trade model for the Zone to establish the key determinants of its import demand. Using the pooled regression technique, the study analyzed quarterly data spanning the period 1985 to 2012, for the five original member countries of the WAMZ. The following is a highlight of the outcome of the analyses: given its positive sign and significance, trade liberalisation has the potential of boosting intraregional trade and improving the welfare of the citizens; nominal exchange rate is a significant factor in the demand for imports in the Zone; its significance and negative sign show that exchange rate movements have negative impact on bilateral intra-WAMZ trade, with implications for incurring avoidable foreign exchange transaction costs; positive signs of both domestic and foreign economic growth proxy variable (GDP) indicated that economic growth in the Zone, as well as its foreign trading partners, is generally accompanied by increase in the demand for import by members. Based on these findings, the study recommended, among others, that policy-makers in the Zone should deemphasize individual exchange controls in favour of adopting a common exchange rate mechanism as a way of reducing transaction costs associated with trading with each other through a third party currency.