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IMF Working Paper Summaries (WP/95/1 - WP/95/61)
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Summary of WP/95/25: “Fiscal Policy Coordination in the West African Economic and Monetary Union After the Devaluation”

Author(s):
International Monetary Fund
Published Date:
August 1995
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The devaluation of the CFA franc--effective January 12, 1994--provides new impetus for a thorough re-evaluation of the conduct of fiscal policy within the West African Economic and Monetary Union (WAEMU). There seems to be a consensus that some mechanism for coordinating fiscal policies must be put in place; this need is recognized in the new WAEMU economic integration treaty, which was signed by the heads of state of the member countries the day before the devaluation. The purpose of the treaty is mainly to promote political integration in the region and to achieve domestic policy goals through the peer pressure of the union. However, fiscal harmonization may also be warranted on purely economic grounds. This paper attempts to provide an economic rationale for such fiscal policy coordination in the CFA franc zone and to investigate its implications.

First, the conduct of fiscal policies in the WAEMU’s predecessors since the mid-1980s is examined. To a large extent, these policies, which still prevail today, were characterized by a severe lack of policy coordination. The paper identifies the main (negative) fiscal externalities and intrazone policies that distort trade at both the microeconomic and the macroeconomic levels. This analysis shows that (1) distortive tax and tariff systems reduced trade and prevented the region from reaping all the benefits of a monetary union; and (2) some countries used their fiscal instruments to conduct beggar-my-neighbor policies vis-à-vis their partner countries. Thus, the lack of fiscal coordination and the resulting divergences in economic performance may well have exacerbated the problems that the CFA franc zone has faced in recent years.

The second part of the paper is devoted to the prospects and possibilities, as well as the implications, of fiscal harmonization in the new WAEMU. In the light of the January 1994 devaluation of the CFA franc, closer coordination of indirect taxation, customs duties, and budget policies is more desirable than ever if the countries in the region are to achieve their economic objectives, including the expansion of trade. Moreover, coordination of fiscal policies will mitigate any harmful fiscal externalities. Based on the analysis in the first part of the paper, recent efforts to coordinate fiscal policies in the zone area are reviewed and evaluated. The paper concludes that, despite the overall merit of the general harmonization strategy, tax rates, tariff rates, and convergence criteria require some modification. Finally, the paper offers recommendations for reinforcing this strategy.

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