ABSTRACT
Introduction It is generally agreed that monetary integration has a higher degree of success if the economies in question are converging, i.e. their macroeconomic fundamentals and policies approach each other. Convergence does not mean equality, since short-run departures are expected. However, when there are significant differences in performance, countries will react differently to shocks, thus necessitating country-specific responses which may be injurious to the entire group. In order for convergence to be meaningful, it should take place with respect to some targets. In the WAMZ, the disparities in economic performance have necessitated the adoption of convergence criteria. In 2001 the WAMZ countries agreed on four primary convergence criteria: single-digit inflation; fiscal deficit GDP ratio of 4 per cent; central bank financing of government fiscal operations to be limited to 10 per cent of the previous year’s tax revenue; and gross foreign reserves to be equivalent to three months of normal imports. In addition, a set of six secondary convergence criteria was agreed on: non-accumulation of payment arrears; tax revenue/GDP ratio of at least 20 per cent; salary mass/total tax revenue of not more than 35 per cent; public sector investment from domestic receipts to be greater than or equal to 20 per cent; positive real interest rates; and exchange rates to fluctuate within ±15 per cent in the WAMZ exchange rate mechanism (ERM). Taken together, these criteria reflect the link between fiscal outcomes and balance of payments viability as well as recognition of the fact that rapid price increases could have a destabilizing impact on the economy. The key concern in the articulation of the convergence criteria is that fiscal dominance should not adversely impede the objective of price stability in a monetary union. In WAMZ, inflation convergence is used to ensure domestic price stability; foreign exchange reserve to ensure the price level stability of domestic currency in relation to foreign currencies; fiscal deficit cap to ensure limiting the adverse impact of excessive fiscal expenditures on price level stability; while the central banking financing government expenditure cap is also directed at attaining and ensuring funding price stability.
