II The Central Bank of West African States, 1962–74: Its Structure and Functions
- Rattan Bhatia
- Published Date:
- May 1985
The “politico-economic” framework within which the BCEAO operated changed between the time it look on the broader functions of a common central bank in 1962, and the revision of its statutes in 1974. At the time of its transformation in 1962, almost all the countries belonging to the WAMU were economically and financially dependent upon France. About 60 percent of their exports went to France, a large share under preferential agreements: France also represented an important source of official capital, and provided almost two thirds of the union’s imports.1
Since then, there has been a steady and significant change in the trading relationship with France. With the advent of independence, member countries had a growing interest in closer relations among themselves, and with the outside world. They joined such international financial institutions as the International Monetary Fund and the World Bank, and became associate members of the European Community with the signing of the first Yaoundé Convention on July 20. 1963 (which became effective on June I, 1964). These developments opened the countries in the area to economic influences outside the franc zone. By the time the new statutes of the BCEAO came into effect in 1974. France had ceased to provide preferences for exports originating in the WAMU countries (except in its capacity as a member of the European Economic Community), and the proportion of French imports and capital into the Union had fallen significantly. Individual member countries had also begun to turn increasingly to the resources, both financial and technical, of the World Bank and the Fund.
Apart from becoming increasingly open, member countries of the WAMU also changed markedly in other ways between 1962 and 1974. The economy of Ivory Coast, for instance, experienced a remarkable growth. Financial intermediation expanded fairly rapidly in every member country and, accordingly, the relationship between the BCEAO and other banks and financial institutions changed. National authorities pursued independent economic policies, particularly budgetary policies, bringing into bold relief the problem of integrating monetary with other policies.
In the member countries of the WAMU, especially in Burkina Faso. Niger, and Senegal, the contribution of agriculture to domestic employment and total exports predominates. But its share in total gross domestic product (GDP) in the group as a whole declined progressively from 40 percent in the three years 1963—65 to 31 percent in 1972–74—-the relative decline being more evident in Benin, Ivory Coast, and Togo (Table 1, and Tables 1–6 in the Statistical Appendix). However, there were no uniform reasons for the decline in the share of the agricultural sector among countries. In Senegal, it reflected a reduction in the output of its main cash crop (groundnuts); in Ivory Coast it was due to the growing diversification of the economy and the expansion of the manufacturing and construction sectors; while in Niger and Togo it was the result of the increasing share in GDP of the mining sector (phosphates and uranium).
|(Percentage of GDP)||(41)||(40)||(39)||(38)||(38)||(37)||(35)||(35)||(31)||(33)||(32)||(27)|
|(X + M)/GDP||(37)||(42)||(40)||(40)||(40)||(42)||(43)||(47)||(45)||(46)||(52)||(64)|
|(Percentage of GDP)||(15)||(17)||(15)||(12)||(15)||(16)||(16)||(16)||(14)||(16)||(14)||(20)|
|Financial savings (FS)1||84.8||97.9||98.6||105.0||108.5||128.8||158.7||183.8||197.4||211.6||256.4||369.0|
|(Percentage of GDP)||(15)||(16)||(15)||(14)||(14)||(16)||(18)||(19)||(19)||(19)||(22)||(25)|
|Changes in financial savings||…||13.1||0.7||6.4||3.5||20.3||29.9||25.1||13.6||17.2||44.8||112.6|
|(Percentage of FS)||(…)||(13)||(1)||(6)||(3)||(16)||(19)||(14)||(7)||(8)||(18)||(31)|
Currency and deposits.
Currency and deposits.
The WAMU countries as a whole experienced a substantial increase in GDP at current prices; the average annual GDP growth during the three-year period 1972–74 was twice that in the three-year period 1963–65. However, real growth rates varied from a high of 15 percent and 11 percent for Togo and Ivory Coast, respectively, to a virtual stagnation in Senegal. As a result, the relative economic position of member countries in the Union changed. At the time of the inception of the BCEAO, Ivory Coast and Senegal each accounted for approximately one third of the total GDP of the area; by 1974 Ivory Coast alone accounted for over half of total GDP, and Senegal for less than one fifth. The annual rate of price increase was remarkably small in all countries between 1963 and 1974: the smallest annual increase in prices during the period was in Burkina Faso (2.5 percent), followed by Togo (4.6 percent), Senegal (5.7 percent), and Ivory Coast and Niger (6 percent each).
Despite the impressive growth in nominal incomes and relative price stability over the period, the ratio of savings to GDP for the area as a whole changed but little—the average annual ratio was 16.7 percent during 1972–74, compared with 15.7 percent during 1963–65. The savings ratio declined in Burkina Faso (quite dramatically) and Senegal, while it increased in Benin, Ivory Coast, and Togo, the largest increase being in Togo (from 10 percent to 20 percent) and the smallest in Ivory Coast (from 23 percent to 27 percent). Furthermore, the year-to-year fluctuations in the savings ratio were wide, with the ratio turning from positive to negative and again to positive in Senegal, rising from a low of 4 percent to a high of 35 percent in Togo, from a high of 12 percent to a low of –4 percent in Burkina Faso, and from a high of 29 percent to a low of 21 percent in Ivory Coast. For the area as a whole, the savings ratio increased from 15 percent in 1963 to 20 percent in 1974, though it declined to its lowest level in 1966 (12 percent).
The proportion of the savings ratio channeled through the domestic money and banking system has also fluctuated widely in the Union and showed a strong tendency to rise only in the last two years of the period considered here, when incomes increased following a substantial increase in export prices. Thus, financial savings (currency and deposits) as a share of domestic savings recorded sharp changes in the Union—ranging from 1 percent in 1965 to 39 percent in 1974, with the average being 15 percent. For Ivory Coast, which accounted for 60 percent of the financial savings of the whole area in 1974, they fluctuated between I percent of the country’s total savings and a high of 34 percent during the period, with an average share of 11 percent. For Senegal, the second largest member in the area in terms of its share of total GDP, this ratio behaved even more erratically, with financial savings actually declining in five of the eleven years of the period for which data are available. The low, and fluctuating, ratio of domestic financial savings to domestic savings indicates the prevalence of both low incomes and more liberal exchange rate arrangements.
In developing countries generally, the financial component of domestic savings is of vital importance, as it is through financial assets that domestic savings are transferred to the most productive sectors of the economy. However, in the WAMU area, the size of domestic financial savings is crucially determined by the liberal exchange rate arrangements, which tend to influence inflows and outflows of financial savings, depending, inter alia, upon interest rate differentials.
The WAMU countries tended to be increasingly exposed to external trade influences between 1963 and 1974. As members of the French franc zone, these countries maintained a liberal trade and payments regime. As a result, the ratio of their total foreign trade (imports and exports) to GDP increased substantially from 37 percent in 1963 to 64 percent in 1974. At the same time, the group’s exports met approximately 90 percent of the cost of imports virtually throughout the whole period, with the trade account being in balance midway in 1968 and again at the end of the period in 1974, However, this satisfactory outcome mainly reflected the performance of Ivory Coast, which was the only country in the area with a consistent trade surplus throughout the period: in general, all other countries had deficits every year, with Senegal’s trade balance registering a marked deterioration in the 1970s.
The Establishment of the BCEAO
The origins of the present Central Bank of West Africa—the BCEAO—may be traced back to 1955 when the right of note issue in the then French West African Federation was transferred from a commercial bank—la Banque de l’Afrique de l’Ouest—to a new publicly owned institution—l’Institut d"Emission de l’Afrique Occidentale Française el du Togo.2 In 1959 the name of this institution was changed to la Banque Centrale des Etats de l’Afrique de l’Ouest. It was not until November 1962 that it was authorized to perform the wider functions appropriate to a common central bank serving several countries, following an agreement signed in 1961 between the seven countries.3 Except for some ad hoc amendments, the BCEAO operated under the 1962 statutes until October II, 1974, when these were revised under a new treaty signed on November 13, 1973 between the member countries of the WAMU, and under the new Cooperation Agreement, signed on December 4, 1973, between the WAMU and France. This agreement replaced an earlier one between France and the WAMU countries, signed after the latter obtained independence.
Although the statutes of the BCEAO remained virtually unchanged between November 1962 and October 1974, the membership of the Bank as well as the economic and financial conditions within the area changed dramatically during the period. The 1961 agreement was originally signed by seven countries (Dahomey—now Benin—Ivory Coast, Mali, Mauritania, Niger, Senegal, and Upper Volta—now Burkina Faso). However, Mali withdrew from the Union, and Togo, which had not signed the Treaty, joined it later, in November 1963. In 1972, Mauritania decided to withdraw from the WAMU and to create its own currency. Thus, until 1984, the BCEAO served as a common central bank for six countries—Benin, Burkina Faso, Ivory Coast, Niger, Senegal, and Togo; Mali rejoined the Union in 1984.
The Bank’s headquarters was in Paris but it maintained agencies in each member country. At the apex of the organization of the Bank was the Council of Ministers. A central Board of Directors, consisting of two directors from each country and a number of French directors equal to all member-country directors, was entrusted with the overall management of the BCEAO, while day-to-day management was exercised by a President (Directeur Général) appointed by the Board. The Bank performed the usual functions of a central bank: it issued a common currency (the CFA franc); it held external reserves on behalf of the entire area; and it provided credit facilities to banks and other financial institutions and to the governments of its member countries. Although the currency it issued was common and it held member countries’ external reserves in the same pool, the Bank maintained separate accounts for the assets and liabilities of agencies in each member country. Thus, though the BCEAO had in principle one operations account with the French Treasury, in practice it maintained individual operations accounts for each member country.
The detailed credit and monetary decisions (such as credit ceilings for banks and for individual enterprises), though taken by the Board, were implemented for each member country by a five-member National Monetary Committee that was appointed by the respective governments and consisted of the two national executive directors of the BCFAO and three other nominated members. The Bank’s day-to-day local operations, including credit policy emanating from the decisions of the Board and National Monetary Committees, were the responsibility of its national agencies, managed by national directors.
The statutes of the Central Bank were not explicit about its objectives and made no specific mention of monetary and price stability, adequate economic development, or balance of payments equilibrium. The statutes appeared to have rather more concern with maintaining the liquidity of the Bank. They required the BCEAO to introduce corrective measures when the ratio of its average foreign assets to its average demand liabilities had fallen to a level equal to or less than 20 percent for 30 consecutive days. Further measures were prescribed when the ratio fell to 10 percent and remained at that level for 30 consecutive days. Under the terms of the Cooperation Agreement with France, the discount rate had to be increased by 1 percentage point if the BCEAO’s operations account with the French Treasury showed a debit for 60 days. At the same time, agencies with negative balances in their individual accounts had to reduce their ceilings on rediscounts, advances, and other facilities by 20 percent, and those with positive balances by 10 percent.
These provisions imply that the drafters of the statutes of the BCEAO considered that the overall balance of payments situation could be adequately controlled by limiting the creation of additional liquidity by restraining the central banks” credit operations. However, these provisions were mandatory only when the ratio of external reserves to demand liabilities had reached a critical limit.
Instruments of Monetary Control
The instruments of monetary control at the disposal of the BCEAO were clearly specified in its statutes. The principal tool was the prescription of short-term and medium-term ceilings (relevant for up to six months and 15 years, respectively) on the value of commercial bills presented by commercial banks and some enterprises to regulate central bank credit. In addition, the BCEAO was authorized to prescribe the liquidity ratio for commercial banks and other financial institutions, to establish, and to vary, its rediscount rate, to compel banks to maintain, when necessary, special deposits, and to provide limited credit to governments.
Rediscount ceilings were the principal instrument of monetary control exercised by the BCEAO. They were fixed separately for each country and, within each country, separately for each bank. Credit limits were also prescribed for individual enterprises. Finally, separate ceilings were fixed for short-term and medium-term credit. The rules for establishing these ceilings were agreed by the Bank’s Board of Directors in February 1963.
The 1963 rules distinguished between two layers of decision making—by the central Board of Directors and by the National Monetary Committees.
The Board of Directors was charged with fixing overall rediscount ceilings, both short term and medium term, for each member country, and with establishing the general rules and conditions under which the National Monetary Committees distributed rediscount ceilings among banks and other enterprises in individual member countries. The ceilings were fixed twice a year for the succeeding six months, and the Board of Directors reviewed these limits at the request of the National Monetary Committees. The latter were charged with, first, the preparation and submission of requests for global rediscount ceilings and individual limits on enterprises to the Board of Directors; and, second, the allocation of the ceilings among banks and individual enterprises in their respective countries.
The short-term rediscount ceilings were fixed for the following monthly periods: December 1-May 31, generally covering the period of the crop season, and June 1-November 30, the low season-—the rationale for higher ceilings during crop seasons being that most WAMU countries were agricultural, and seasonal cycles in money demand were strong. To determine these ceilings, each commercial bank was required to submit to the respective national agency of the BCEAO its expected demand for bank credit, on the basis of specific formulas prescribed by the BCEAO. Given this information, the National Monetary Committees made monthly estimates of total credit needs and of the banks’ own resources—deposits, and free reserves (including external borrowing, or other financial support)—and, taking into account the national monetary situation, the Committees submitted proposals for global rediscount ceilings to the central Board of Directors. The latter, after taking into consideration the monetary situation in the Union, then decided on national rediscount ceilings.
The procedure was similar for medium-term ceilings, except that those for enterprises were fixed by reference to the total cost of investment projects (and were normally 50 percent but could be relaxed to SO percent). To be eligible, these projects had to be profitable and conform to the country’s development policy. However, under the 1962 modified statutes, the Board of Directors, on the initiative of a National Monetary Committee, had to review its total medium-term ceilings for a country where the national agency recorded a negative position in its net monetary assets for the last three months.
Each National Monetary Committee then proceeded to allocate the allotted rediscount ceilings among local banks and enterprises. In determining individual bank ceilings, each Committee examined each bank’s resources and its use of them, including any investment of funds abroad. Under the prescribed rules, the ceiling assigned to each bank did not exceed 50 percent of its expected short-term credit. However, under a decision of the Board made in 1971), this limit could be relaxed and a ceiling of up to 80 percent was permitted for total loans made for the marketing of agricultural produce. Limits on individual banks were automatically re-examined if the liabilities of the bank fell below 20 percent of the respective rediscount ceilings in any six-month period. Re-examination was also automatic if the liabilities of all banks fell below 20 percent of the ceilings.
The limits on rediscount ceilings for credit 10 individual enterprises were fixed by National Monetary Committees on the basis of an examination of the financial position of the enterprise and took into account the contribution of the enterprise to the productive base of the country. The statutes prescribed a maximum limit on an enterprise’s total debt at ten times its equity capital, except for enterprises whose activities were characterized by marked seasonally, in which case the limit was set at 15 times the equity capital.
The BCEAO was empowered to impose minimum liquidity ratios upon banks and other nonbank financial institutions. The purpose of such ratios was to limit the expansion in nonrediscountable credit, by definition of low priority, and to assure that short-term liabilities were appropriately covered by short-term assets.
As defined by the BCEAO, the liquidity ratio related short-term assets (actifs disponibles on mobilisables) to short-term liabilities. The “short term” was defined as six months (this was also the maximum maturity for assets eligible for rediscount with the BCEAO). The ratio (Q) was defined as follows:
This definition implied an upward bias in the ratio, because the short-term assets in the numerator covered all rediscountable credit, whether actually redisounted with the Central Bank or not, while the part rediscounted with the BCEAO also appears as a short-term liability in the denominator.4 This upward bias exaggerates the restrictive effect of monetary policy based on the ratio. Another feature of this ratio was that it pre-empted more of any marginal increase in a bank’s resources for rediscountable credit if it was already operating at the minimum required liquidity level than it would if the ratio totally excluded rediscounted credits. In a situation of excess liquidity, the ratio as defined will not guarantee that additional resource flows into banks will be rediscountable. Indeed, as pointed out by Marquis (1966), the liquidity ratio was more a safety device designed to assure the repayment of short-term liabilities, including rediscounts, when they fell due, rather than a way of channeling credit into rediscountable assets.
The liquidity ratio was initially fixed at 70 percent and was raised by I percentage point a year, beginning in 1966, until it reached 75 percent in September 1970. This ratio was maintained until 1974.
The statutes of the BCEAO specifically required the rediscount rate to be raised when the ratio of the Bank’s gross external reserves to its short-term liabilities fell below a critical minimum. As will be shown later, during almost the entire period between 1962 and 1974 the BCEAO regarded its role as supplementing banks’ resources to meet “legitimate” credit needs. Accordingly, it did not use the rediscount rate as a penalty rate to regulate banks* access to the BCEAO, but as an inducement to encourage them to use the BCEAO’s rediscount facilities to extend credit to desirable sectors. Hence, the rediscount rate remained unchanged for more than a decade until 1973.
Until 1966 the structure of interest rates (linked to the discount rate) charged by commercial banks was uniform among purposes of loans but varied according to the assessed creditworthiness of the borrower. After 1966 interest rates were also differentiated according to the purpose of borrowing; loans to productive and “priority” sectors, as determined by the BCEAO, were made at relatively low interest rates, while others were at higher rates. In addition, penalty rates were prescribed for credit operations beyond the individual discount limits prescribed by the BCEAO. Although the discount rate policy was not used actively as a monetary policy instrument, it did affect commercial bank rates.
The statutes of the BCEAO empowered it to require banks to maintain special deposits as a proportion of a bank’s deposit liabilities “if the monetary situation so requires,” In practice, this instrument was regarded as exceptional by monetary authorities, and the BCEAO did not use it during the period under consideration.
Credit to Governments
The 1962 statutes of the BCEAO contained strict limitations on bank credit to the governments of member countries; such credit could not exceed a certain proportion of fiscal receipts and could not be granted for more than 240 days in any calendar year, whether consecutive or not. Initially, the maximum credit was fixed at 10 percent of fiscal receipts in the previous year, but in the revised statutes of December 1968 the maximum was raised to 15 percent, and, in the revision of November 1973, to 20 percent. For purposes of calculation, this limit comprised not only direct advances to a government by the BCEAO but also the latter’s holdings of national treasury paper as well as the indebtedness of the treasury vis-à-vis banks and other financial institutions using the BCEAO’s rediscount facilities.
These statutes circumscribed the member governments as well as the BCEAO. The former were limited in their recourse to bank financing even though their “needs” may have been high. Since these advances were basically short term, at least in theory, the monetary arrangements appeared to have established the philosophy of the need for a balanced budget. The statutes also constrained the BCEAO in its operations vis-à-vis the governments. It had no right to refuse credit to a treasury as long as the statutory ceilings were not exceeded. Thus, even when other considerations would have justified restricting credit, loans to governments could not in general be refused if their drawings happened at that juncture to be below the statutory minimum.