A common currency area for MENA countries? A VAR analysis of viability

Purpose – This paper aims to examine the feasibility of a Common Currency Area (CCA) among ten MENA (Middle East and North Africa) Countries. The ten sample countries constitute the six GCC Countries and the four Agadir nations. Design/methodology/approach – Macroeconomic data for the 34‐year‐period 1970‐2003 is used. Feasibility is examined by analyzing the symmetry of response of countries within each group to a common external shock. The impulse response functions (IRF) from a Vector Autoregression Model is used. The strength of linkages within each economic bloc was examined using Pearson pairwise correlation and variance decomposition. Findings – Among GCC countries, the results show the existence of strong linkages among the monetary variables, signifying strong monetary sector integration. Such integration however is lacking where the real sector is concerned. Despite the symmetry seen in the impulse response functions, variance decomposition showed the absence of any meaningful influence of countries on each other within the bloc. Amongst the Agadir nations, the results show no correlation in real output growth, some correlation among monetary variables but no symmetry whatsoever in response to external shocks. The variance decomposition too did not show mutual influence intra group. Practical implications – The lack of real sector integration will present a challenge to GCC's desired goal of a CCA by 2010. The Agadir nations appear to be simply a loosely knit economic grouping with little integration of any kind. Thus, hopes of a CCA among Agadir nations is far too premature. Originality/value – The paper concludes that the GCC is, at present, a quasi‐monetary bloc with little real sector integration.