- Christina Kolerus, Aleksandra Zdzienicka, Ermal Hitaj, and Douglas Shapiro
- Published Date:
- October 2013
© 2013 International Monetary Fund
Joint Bank-Fund Library
Responding to shocks and maintaining stability in the WAEMU / Ermal Hitaj … [et.al.].—Washington, D.C.: International Monetary Fund, c2013.
p.: col. ill. ; cm.
Includes bibliographical references.
Series: African departmental paper
1. Monetary policy—Africa, West. 2. Fiscal policy—Africa, West. 3. Africa, West—Economic policy. I. Hitaj, Ermal. II. International Monetary Fund.
Disclaimer: The views expressed in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.
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The West African Economic and Monetary Union (WAEMU), like other monetary unions, faces a number of challenges in dealing with macroeconomic shocks.1 A symmetric shock—that is, a shock affecting similarly all members of a monetary union—can in principle be addressed by the common monetary policy or by a coordinated fiscal policy response. Monetary policy, however, cannot address an asymmetric shock, for which a (national) fiscal policy response remains the main available instrument (or fiscal transfers if available). An additional constraint in the WAEMU for dealing with shocks is that the exchange rate of its common currency, the CFA franc, is pegged to the euro, which limits the scope for active monetary policy.
Shocks have been frequent in the WAEMU and often asymmetric. Some of them have been of a political nature, as illustrated by the crises experienced in the past few years in Côte d’Ivoire, Guinea Bissau, and Mali. The region is also affected by a large number of exogenous shocks of various natures: climate-related (e.g., droughts, floods), with a heavy toll on populations and agriculture, but also economic (e.g., terms of trade gyrations), with a large impact on key sectors and the cost of living. More generally, business cycle synchronization within the WAEMU seems low.
Addressing these shocks, while preserving the stability of the union, is therefore a critical issue in the WAEMU. With a limited scope for monetary policy responses and in the absence of fiscal transfers at the regional level, national fiscal policies should in principle play an important role in the response to shocks, both symmetric and asymmetric. The scope for countercyclical fiscal policies is, however, constrained by the limited development of the financial sector in the WAEMU. In addition, preserving debt sustainability and the stability of the Union in the medium term requires strong coordination of fiscal policies. The experience of the euro area has shown that fiscal discipline in each member of a monetary union is critical for the stability of the union, and that this discipline could be weakened by externalities, such as a noncredible no-bailout commitment.
This paper discusses these issues and suggests possible reforms. Chapter 1 analyzes the business cycles in the WAEMU, its synchronization and evolution over time. It explores whether shocks have become less asymmetric over time, and the effectiveness of monetary policy in smoothing the impact of shocks on consumption. The following three chapters look at different dimensions of external sustainability of the WAEMU. Chapter 2 analyzes a specific shock (the crisis in Mali) and its impact on the rest of the WAEMU. Chapter 3 discusses the crucial role of fiscal policy in the context of the WAEMU in addressing exogenous shocks and preserving external stability. It finds that an improvement of the effectiveness of market discipline in the WAEMU would require further development of the regional financial market and improvements in fiscal aspects of the WAEMU’s regional surveillance framework. Finally, Chapter 4 and Chapter 5 provide an assessment of the current external stability and debt sustainability situation.