Assessing the Effect of Exchange Rate Misalignment on Trade Balance in West African Economic and Monetary Union (WAEMU)

This paper used a panel dataset from 1996 to 2021 to examine the effect of exchange rate misalignment on trade balance in West African Economic and Monetary Union (WAEMU). The paper applied Pooled Mean Group Estimator Model and Panel Causality. The variables used were trade balance (TB), real exchange rate misalignment (RERM), trade openness (OPN), foreign direct investment (FDI), interest rate (INT) and inflation rate (INF). The findings indicate that in the long run, RERM, FDI, and INF exert a significant negative impact on trade balance, while OPN demonstrates a significant positive influence. Furthermore, in the short run trade openness has a significant positive effect on trade balance while Interest rate has a significant negative effect. In line with these findings, this study recommends among other, WAEMU countries should enhance the quality and innovation of exports by processing raw materials and exploring new markets to maintain a trade surplus. Also, to mitigate the negative impact of FDI on TB, governments should enhance domestic investment and FDI towards the industrial sector. Finally, the BCEAO should control WAEMU's currency management, possibly detaching it from the euro to stabilize the trade balance.