Impact of Common Currency Membership on West African Countries’ Enhanced Economic Growth

  • Diery Seck
Part of the Advances in African Economic, Social and Political Development book series (AAESPD)


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 their 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 possibly 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.


Regional integration Common currency union Africa’s economic development Africa’s external debt Contingent claims analysis 

JEL Classification

O110: Macroeconomic Analyses of Economic Development 


  1. Arellano C (2008) Default risk and income fluctuations in emerging economies. Am Econ Rev 98:690–712CrossRefGoogle Scholar
  2. Black F, Scholes M (1973) The pricing of options and corporate liabilities. J Polit Econ 81:637–654CrossRefGoogle Scholar
  3. Borensztein E, Panizza U (2008) The costs of sovereign default. IMF Working Paper, WP 08 238Google Scholar
  4. Cohen D (1991) Private lending to sovereign states – a theoretical autopsy. MIT, Cambridge, MAGoogle Scholar
  5. Cohen D (1993) A valuation formula for LDC debt. J Int Econ 34:167–180CrossRefGoogle Scholar
  6. KMV Corporation (2002) Modeling default risk. Technical ReportGoogle Scholar
  7. Duffee GR (1999) Estimating the price of default risk. J Financ Stud 12:197–226CrossRefGoogle Scholar
  8. Duffee D, Pedersen LH, Singleton K (2003) Modeling sovereign yield spreads: a case study of Russian debt. J Financ 57(1):119–159CrossRefGoogle Scholar
  9. Francois P, Hubner G, Sibille J (2011) A structural balance sheet model of sovereign credit risk. Working Paper 11-41, CIRPEEGoogle Scholar
  10. Frankel J (2004) Lessons from exchange rate regimes. In: Asian Development Bank (ed) Monetray and financial integration in East Asia: the way ahead, vol 2. Palgrave MacMillan, BasingstokeGoogle Scholar
  11. Gapen M, Gray D, Lim CH, Xiao Y (2008) Measuring and analyzing sovereign risk with contingent claims. IMF Staff Pap 55(1):109–148CrossRefGoogle Scholar
  12. Gray D, Merton RC, Bodie Z (2007) Contingent claims approach to measuring and managing sovereign credit risk. J Invest Manag 5:5–28Google Scholar
  13. Gray D, Merton RC, Bodie Z (2008) New framework for measuring and managing macrofinancial risk and financial stability. Harvard Business School Working Paper, 09-015Google Scholar
  14. Grossman H, Van Huyck J (1985) Sovereign debt as a contingent claim: excusable default, repudiation, and reputation. Working Paper No. 1673, National Bureau of Economic ResearchGoogle Scholar
  15. Hilscher J, Nosbuch Y (2010) Determinants of sovereign risk: macroeconomic fundamentals and the pricing of sovereign debt. Rev Financ 14:235–262CrossRefGoogle Scholar
  16. Jobst A, Gray D (2013) Systemic contingent claims analysis – estimating market-implied systemic risk. IMF Working Paper WP/13/54Google Scholar
  17. Lee J, Barro RJ (2011) East Asian currency union. In: Barroa RJ, Lee J-W (eds) Costs and benefits of economic integration in Asia. Oxford University Press, New York, NY, pp 10–52Google Scholar
  18. Merton RC (1973) Theory of rational option pricing. Bell J Econ Manag Sci 4:141–183CrossRefGoogle Scholar
  19. Merton RC (1974) On the pricing of corporate debt: the risk structure of interest rates. J Financ 29:449–470Google Scholar

Copyright information

© Springer International Publishing Switzerland 2016

Authors and Affiliations

  1. 1.Center for Research on Political EconomyDakar YoffSenegal

Personalised recommendations