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West African Economic and Monetary Union (WAEMU)

Author(s):
International Monetary Fund. African Dept.
Published Date:
April 2013
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Introduction

1. The WAEMU faced new political and security challenges in 2012. Military coups occurred in Guinea-Bissau and Mali and caused economic disruption in these countries. The northern part of Mali was taken over by terrorist groups, which led to large refugee flows to neighboring countries and triggered a military intervention to restore territorial integrity. On the upside, the sociopolitical situation in Côte d’Ivoire improved significantly, and a peaceful and democratic changeover took place in Senegal.

2. Regional policies last year have been broadly in line with the 2012 consultation’s recommendations, although reform implementation has been somewhat slower than expected. This is the case in the financial sector (e.g., the launch of key reforms to deepen the interbank market has been delayed to 2013) and in the area of regional integration (reflecting the security situation in Mali). Macroeconomic policies at the country level have also been consistent with Fund advice, generally in the context of Fund-supported programs.

Recent Developments, Outlook, and Risks

3. Regional economic activity rebounded in 2012. After a large decline in 2011 to about 1 percent because of the drought in the Sahel and the post-electoral crisis in Côte d’Ivoire, regional growth is estimated to have reached 5.8 percent in 2012. Growth was driven mainly by the post-crisis recovery in Côte d’Ivoire, the rebound of agricultural production in a number of countries, and the start of oil production in Niger. A few countries faced inflationary pressures, mainly on domestic prices for food and petroleum products. Nevertheless, average regional inflation remained low, at about 2.5 percent (Figure 1).

Figure 1.Recent Economic Developments 2007–20121

Sources: IMF, African Department database, and Regional Economic Outlook database.

1 Aggregate values for Sub-Saharan Africa exclude Nigeria, South Africa, and Zimbabwe.

4. The area-wide fiscal deficit stabilized around 4 percent of GDP in 2012, while the overall debt situation improved thanks to debt relief to Côte d’Ivoire (Figure 2). Compared with 2011, fiscal deficits increased in Burkina Faso, Niger, and Togo, stabilized in Côte d’Ivoire, and decreased in the other countries. With Côte d’Ivoire reaching the HIPC Initiative’s completion point in 2012, all WAEMU countries have benefited from substantial relief on their external debt. The average nominal debt for the region now stands at about 40 percent of GDP. All countries have public debt ratios substantially below the 70 percent of GDP ceiling set by the regional surveillance framework; they also have low or moderate ratings for the risk of debt distress according to recent debt sustainability analyses (DSAs), reflecting prudent fiscal policies and sustained growth (Appendix I). Countries have tended to re-accumulate debt in the wake of debt relief, but generally in line with expectations and there has been no indication of a major deterioration of the debt sustainability outlook in the WAEMU. However, the composition of financing has changed, with increasing reliance on domestic debt with higher interest rates and shorter maturities to supplement concessional external financing, which raises new debt management challenges. This trend is likely to continue as aid prospects are not favorable.

Figure 2.Fiscal Developments, 2010–2012

Sources: IMF, African Department database, and Regional Economic Outlook database.

5. Monetary policy was eased modestly in 2012. Despite relatively strong growth of credit to the private sector and government, money growth remained moderate in 2012 (at about 8 percent year on year) because of a significant contraction in net foreign assets (NFA). In a context of continued moderate inflation and a sharp contraction in autonomous factors of bank liquidity (related, to a large extent, to the evolution of NFA) leading to pressures on interest rates, the BCEAO injected substantial amounts of liquidity to banks which has stabilized excess reserves. It also cut the policy rates by 25 basis points to respectively 3 and 4 percent and lowered the reserve requirement ratio to from 7 to 5 percent (Figure 3).

Figure 3.Monetary Policy and Inflation, 2007–2012

Sources: BCEAO, IMF, African Department database, and Regional Economic Outlook database.

1 Excess reserves as a percentage of required reserves.

6. The region’s current account deficit widened significantly in 2012. This outcome reflects a number of exceptional factors, such as higher imports of intermediate and capital goods by Côte d’Ivoire related to reconstruction efforts, Burkina Faso and Niger for mining and hydrocarbon projects, higher food imports to make up for the impact of the 2011 drought, and unfavorable terms of trade. The higher current account deficit, combined with temporary delays in repatriating export proceeds (mostly by Côte d’Ivoire), led to a deficit in the overall balance of payments and a decline of official reserves. Nevertheless, at about 5 months of regional imports and 98% percent of short-term domestic liabilities, reserves remain adequate. Updated staff estimates indicate that the level of the real effective exchange rate is broadly in line with the region’s fundamentals (Appendix II).

7. Growth is expected to remain robust in 2013 and the medium term, at about 6 percent (Figure 4). It will be driven this year by a large increase in public investment and crowding in of private investment in post-crisis Côte d’Ivoire, continued mining and hydrocarbon sector investment in Burkina Faso and Niger, infrastructure investment in Senegal, and a further recovery in agriculture. Growth would remain high in the medium term under the assumption of full implementation of growth-enhancing policies, including policies aimed at closing the region’s infrastructure gaps. Inflation would remain below 3 percent. The current account deficit is projected to remain large in 2013, but would gradually decline in the medium term as Côte d’Ivoire’s reconstruction needs subside.

Figure 4.Medium Term Outlook, 2010–20171

Sources: IMF, African Department database, and Regional Economic Outlook database.

1 Aggregate values for Sub-Saharan Africa exclude Nigeria, South Africa, and Zimbabwe.

2 Historical series based on BCEAO data, projections based on Regional Economic Outlook database.

8. The outlook is subject to a number of downside risks (Risk Assessment Matrix). The economic impact on other countries of the crises in Mali and Guinea-Bissau has been moderate so far because of limited interconnectedness in the region (Appendix III). While the situation in Mali is evolving towards restoration of territorial integrity, the region may face broader political stability and security issues if terrorist activity were to spread and the perception of insecurity extended to neighboring countries, with a negative impact on public finances, risk perception by investors, and ultimately growth. Another downside risk is whether public policies needed to reach the projected growth rates, which are high by historical standards, will be fully implemented. Failure in this area would reduce significantly growth prospects with implications for poverty reduction and fiscal sustainability as suggested by recent DSAs (see Figure 5). The main risks related to the international environment include a possible intensification of the euro area crisis, which could affect exports, remittances, foreign direct investment, and official assistance. WAEMU countries also remain vulnerable to negative shocks to international food and fuel prices.

Figure 5.Sensitivity of Public Debt to Lower Growth

WAEMU: Risk Assessment Matrix
Source of risksOverall level of concern
Relative likelihoodImpact if realized
Short-term risks
Global risks:

(i) stalled or incomplete delivery of Euro area policy commitments

(ii) deeper than expected slowdown in emerging economies (EMs)
Medium for EA/medium for EMsMedium
• WAEMU is exposed to the euro area through trade, worker remittances, foreign direct investment, and aid.

• WAEMU is also increasingly exposed to China, India and other emerging countries.
• A 1 percentage point decline in growth in EA may translate into a 0.5 percent decline in the WAEMU growth rate. Impact could be larger if EMs slow down significantly too.

• Social programs and infrastructure investment may be affected by reduced aid. Large projects financed by emerging creditors may be delayed.

Policy recommendation

• If shock is temporary, let automatic stabilizers play where financing is available; monetary policy could also be loosened.
Global risk

Oil price shock
LowMedium
• Poor harvest in North America and Australia has produced an increase in prices for imported food.

• Geopolitical risks in the Middle East can lead to an increase in oil prices.
• Support may be needed from the authorities, impacting the budgets of WAEMU countries.

Policy recommendation

• Domestic prices should reflect changes in international prices. Assist most vulnerable people through targeted transfers.
Regional risk:

Spillovers from continued instability in the region
MediumMedium
• Terrorism in Northern Mali (which might spread) could affect the perception of insecurity in the region

• Higher risk perception by investors
• Negative impact on investment and growth.

• Additional security-related expenditure may affect fiscal consolidation efforts.

Policy recommendation

• Security-related expenditure may need to be accommodated and financed through savings on non-priority expenditure.
Regional risk:

Food price shock
LowMedium
Periodic droughts in the Sahel region may affect prices for locally produced food.• Food insecurity for vulnerable people, increased need for international humanitarian assistance. Support may be needed from the authorities, impacting the budgets of WAEMU countries.

Policy recommendation

• Domestic prices should reflect changes in international prices. Assist most vulnerable people through targeted transfers.
Medium-term risks
MediumMedium
Domestic risk:

Delays in key growth-enhancing reforms (e.g., higher public investment, higher public spending efficiency)
• Absence of public expenditure reform and financing constraints could affect key public investments, and more generally the efficiency of government spending.

• Insufficient progress in financial deepening, non-price competitiveness, and quality of institutions and governance could constrain growth.
• Insufficient fiscal consolidation could affect medium-term sustainability.

• Growth remains slow and poverty reduction is curbed. Lower growth would further affect fiscal sustainability.

Policy recommendation

• Keep reform momentum and avoid policy slippages.

Improving Effectiveness of Policies Through Better Coordination

A. Macroeconomic Policy Mix in 2013

9. Fiscal consolidation is expected in 2013 in countries with higher deficits. In Burkina Faso, Côte d’Ivoire, Senegal and Togo overall fiscal deficits are projected to decrease, while they would remain broadly stable at relatively low levels in Benin, Guinea Bissau, and Mali. Only Niger would record a large increase in its fiscal deficit, reflecting spending related to a new large project in the hydrocarbon sector. The area-wide deficit would remain broadly unchanged at about 4 percent of GDP in 2013; excluding Niger, it would decrease.

Staff’s advice

10. The current macroeconomic policy mix is appropriate, but the authorities should stand ready to respond to possible adverse developments. The planned fiscal consolidation in the countries with higher deficits is warranted given the projected high growth. In the medium term, these countries should continue reducing their fiscal deficits, which would preserve debt sustainability and reconstitute fiscal space needed for countercyclical policy. This will require additional efforts on revenue mobilization and improving the quality of public spending. The monetary policy stance has been adequate too, taking into account the outlook for inflation, which remains largely determined by non-monetary factors (e.g., exchange rate fluctuations, terms of trade, shocks affecting agricultural production), and the constraints imposed by a shallow financial system. Should downside risks materialize, automatic stabilizers (i.e., higher deficits driven by lower tax receipts) could be left to operate where financing is available, and monetary policy could be loosened. Country debt management should be strengthened to address risks arising from higher recourse to market financing. More coordination in this area would reduce rollover risk.

11. The effectiveness of monetary policy can be improved through a range of measures. The BCEAO should continue strengthening inflation and liquidity forecasting. Further analysis of the monetary policy transmission channels is also desirable, as is better coordination with governments, which will facilitate liquidity management. Improving the quality, availability, and timeliness of macroeconomic and financial information would also facilitate the conduct of monetary policy. However, in the absence of more developed financial markets, the transmission of monetary policy signals remains weak. Only the bank lending channel is relatively active, while the interest rate and the asset price channels remain constrained by the shallowness of the financial system. The development of the interbank and the government debt markets therefore remains critical for strengthening the effectiveness of monetary policy. More developed financial markets would also allow banks to trade liquidity more actively, limiting the need for liquidity injections by the BCEAO and allowing for the emergence of an interbank rate that would provide highly valuable information for the conduct of monetary policy.

Authorities’ views

12. The authorities broadly agreed with the assessment of the policy mix. They stressed that member countries were facing large public investment requirements to reduce infrastructure gaps and improve the provision of social services. Addressing these needs, while preserving fiscal sustainability, would require expenditure rationalization. Monetary policy’s best contribution to a growth-friendly environment would be to ensure macroeconomic stability.

13. The BCEAO was confident that major reforms to deepen the interbank market would be launched by mid-2013. These reforms include the introduction of collateralized operations (repos) to address the reluctance of liquid banks to lend to illiquid ones; the rollout of an electronic platform to auction and trade liquidity and government paper (“application Trésor”); and the introduction of primary dealers, which should accelerate the development of the secondary government debt market. The BCEAO also stressed that the imminent establishment of a regional debt agency, with the main mission to advise treasuries, improve issuance coordination, and contribute to the development of the government debt market, would facilitate liquidity management.

B. Responding to Shocks While Preserving Sustainability

14. Observance of the key fiscal convergence criterion remains limited, suggesting a need to reconsider the regional surveillance framework. The criterion on the basic fiscal balance was missed by 5 of the 8 countries in 2012, and is likely to be missed again in 2013 by the largest two economies (Côte d’Ivoire and Senegal). This criterion has rarely been met by a majority of member countries, raising the question of its relevance and credibility. Following debt relief, the debt criterion is now met by all countries (Text Table 1).

Text Table 1.WAEMU: Number of Countries Not Observing Convergence Criteria, 2009–2012
2009201020112012
Est.
First-order criteria
Basic fiscal balance/GDP (≥ 0 percent) 16365
Average consumer price inflation (≤ 3 percent)0154
Total debt/GDP (≤ 70 percent)2010
Change in domestic arrears (≤ 0)0000
Change in external arrears (≤ 0)2011
Second-order criteria
Wages and salaries/tax revenue (≤ 35 percent)5456
Capital expenditure domestically financed/tax revenue (≥ 20 percent)3422
External current account balance, excluding grants/GDP (≥ -5 percent)7677
Tax revenue/GDP (≥ 17 percent)7775
Sources: WAEMU; Central Bank of West African States (BCEAO); and staff estimates.

Total fiscal revenues, excluding grants, minus total expenditures excluding foreign-financed investment expenditure. From 2009, total fiscal revenues plus budget support grants plus counterpart of HIPC/MDRI-related spending for both current and capital spending less current expenditure and capital expenditure financed by own resources.

Sources: WAEMU; Central Bank of West African States (BCEAO); and staff estimates.

Total fiscal revenues, excluding grants, minus total expenditures excluding foreign-financed investment expenditure. From 2009, total fiscal revenues plus budget support grants plus counterpart of HIPC/MDRI-related spending for both current and capital spending less current expenditure and capital expenditure financed by own resources.

15. The frequency and asymmetry of shocks in the region are still high. Business cycle synchronization within the WAEMU and between the WAEMU and the euro area remains limited (Appendix IV). Nevertheless, WAEMU countries are highly susceptible to various exogenous shocks, many of them asymmetric. Staff analysis suggests that shock absorption–the smoothing of the impact of GDP fluctuations on consumption–has been much more limited than in other monetary areas. The limited scope for, and effectiveness of, monetary policy suggest that fiscal policy has in principle an important role to play in addressing both symmetric and asymmetric shocks.

Staff’s advice

16. Preserving debt sustainability and the stability of the Union in the medium term will require better 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. At the same time, this discipline could be weakened by externalities, such as a non-credible no-bailout commitment. Staff analysis suggests that market discipline is limited in the WAEMU, and while it may improve with the development of the market, is likely to remain insufficient in the next few years (Appendix V). A strengthening of the regional surveillance framework is therefore desirable. Any new or modified rules should be relevant to the overarching objective–preserving the stability of the Union. They should be also easy to interpret, implement, and monitor, given administrative and technical capacity limitations.

17. Both the design of the main convergence criteria and their enforcement could be reconsidered. The criterion on nominal public debt could be lowered to reduce the risk of debt distress. Based on recent empirical research by the IMF and the World Bank, a threshold closer to 50 percent of GDP applied to a comprehensive definition of public debt would seem more appropriate. This threshold should be seen as a ceiling, not as an optimal debt level. A criterion on the overall fiscal deficit would allow better control of debt accumulation than the current basic balance, which excludes foreign-financed capital expenditure.1 The ceiling for the deficit would need to be consistent with preserving fiscal sustainability, while leaving room for countercyclical policies. It should also take into account that the timing of some expenditures, such as donorfinanced projects, is not entirely within the control of the authorities. While a cyclically-adjusted balance has been introduced in the euro area surveillance framework, its use in the WAEMU seems premature given data limitations and difficulties in identifying clearly cycles. However, even better designed rules may not lead to expected outcomes if they are not properly implemented. A first step should be a strengthening of the monitoring, and increased transparency and dissemination of regional and national fiscal outcomes.

Authorities’ views

18. The WAEMU Commission agreed that a comprehensive review of the regional surveillance framework was needed. Convergence is unlikely to be achieved by the (several times postponed) deadline of end-2013. The Commission will shortly launch a comprehensive study on the surveillance framework and desirable reforms, which is expected to be ready before end-2013. It expressed interest in continuing the close dialogue with staff on these issues.

C. Other Areas for Policy Coordination

19. Transposition of the WAEMU directives on national public financial management is lagging. The directives harmonize the rules for the preparation, submission, approval, execution, budget control, and encourage efficient and transparent management of public finances in all countries of the Union. To date, only Senegal has completed the transposition of all directives. Staff and the regional authorities agreed that national authorities should complete transposition as soon as possible and start working on implementation.

20. Further coordination of tax policies is desirable to increase revenue and reduce tax competition. Staff and the WAEMU Commission saw scope for further coordination in the following areas: the introduction of a unified methodology for the assessment of tax expenditure; a strengthening of the surveillance of countries’ compliance with WAEMU directives; implementation of the VAT (to better ensure neutrality) and corporate income tax; tax incentives for investment; mining taxation; the transition to a tax system less dependent on customs duties; and the implications for tax harmonization efforts of extending the common external tariff to ECOWAS. The WAEMU Commission will benefit from IMF TA in some of these areas. Work on taxation and pricing of petroleum products should also be pursued in a coordinated manner at the regional level.

21. Information quality and availability need to improve. Efforts at all levels to improve data quality, coverage, and timeliness should continue. The data should be widely shared at the national and regional levels between the authorities and with the public. This is critical for the design and effective implementation of national and regional policies, and more generally for the efficient functioning of markets. Staff welcomes the recent strengthening of the mechanism to monitor annually implementation of regional policies at the national level and encourages publication of its results.

Deepening and Strengthening the Financial Sector

22. The financial system in the WAEMU remains largely bank-based.2 The regional interbank, debt, and equity markets are underdeveloped, with the exception of the market for government debt, which has expanded fast recently. Microfinance has developed quickly too in some countries and helped improve financial inclusion, but the sector remains small compared to banking. On average, the banking system is liquid and well capitalized, although the situation varies substantially across banks and countries (Figure 6). Lending concentration is high in all countries of the region, and quality of assets, as reflected in high gross NPLs, represent the main risk. The exposure of banks to WAEMU sovereigns has increased rapidly, with the development of the regional market; their broader exposure to the public sectors is also substantial. Compliance with prudential norms remains low for a number of ratios, and some of these norms are not in line with international standards. The interconnection between the various segments of the financial system is low but increasing.

Figure 6.Financial Soundness

Sources: BCEAO, IMF, African Department database, and Regional Economic Outlook database.

Note: The transformation ratio (stable resources/M&L term loans) was lowered from 75 percent to 50 percent early 2013, the data reported for 2012 takes the 50 percent into account.

23. Financial depth has increased in recent years but remains low. A benchmarking exercise conducted on the countries of the region suggests that the limited depth of the banking system reflects these countries’ structural characteristics, while financial markets look particularly underdeveloped from this perspective (Figure 7). Further development of the financial sector would facilitate the financing of growth, improve financial inclusion and the ability of firms and households to cope with a volatile environment, and increase the effectiveness of macroeconomic policies (Box 1).

Figure 7.Selected Indicators on Financial Sector Depth

Source: FinStats database, staff calculations

Staff’s advice

24. Further development of the financial sector requires resolute action on several fronts. As pilot studies on Benin and Senegal have shown, obstacles to financial development include insufficient transparency and informational asymmetries, weak business environment and legal and judicial frameworks, unfavorable taxation regimes for financial operations, regulatory and supervision issues (including issues related to the division of responsibilities in a monetary union) and lack of financial skills. Staff urged the authorities to complete ongoing reforms to develop the interbank market and deepen the market for government debt (above), but also encouraged them to avoid distortions (e.g., in terms of taxation), which would affect the development of private debt and equity markets. Staff welcomed the authorities’ efforts to reduce information asymmetries (e.g., through the planned creation of credit and guarantee bureaus) and to facilitate access to, and lower transaction costs on, the regional stock exchange (e.g., through the introduction of ratings, the reduction of various fees and the planned new market for small and medium sized companies).

Box.1Financial System Shallowness and Macroeconomic Policies

The pilots on strengthened financial sector surveillance showed that the limited development of the financial system is a constraint on the scope for, and effectiveness of, macroeconomic policies.

Constraints on fiscal policies.

Limited scope for counter-cyclical fiscal policies. While the regional market has developed substantially, there are limits to the amounts governments can raise on it. This is a significant constraint since fiscal policy is the main instrument to address asymmetric shocks, which are frequent in the region.

High liquidity (rollover) risks. As most public debt is short-term, it needs to be regularly rolled over, which may be challenging in certain circumstances. Senegal faced such difficulties ahead of the 2012 presidential election. This situation also reflects the fact that the investor base—composed mainly of banks—is relatively narrow.

High borrowing cost, because of low liquidity and limited economies of scale. For instance, the yield at issuance for Senegalese bonds with maturities of three to five years was in the 7–9 percent range in the first half of 2012, while average inflation was around 2 percent.

Limited scope for investment financing, as governments cannot easily raise long-term financing.

Constraints on monetary policy. In a currency area, monetary policy is generally better suited to address symmetric shocks. Under the fixed exchange rate arrangement, the BCEAO has some scope for active monetary policy in the short-to-medium term, as capital mobility is limited. However, the transmission of monetary policy is hampered by the limited depth of financial markets, which affects the effectiveness of most channels of transmission, and the absence of the exchange rate channel given the fixed exchange rate regime.

The bank lending channel seems the only relatively effective transmission channel. Changes in the BCEAO policy rates do affect credit to the private sector, although the impact is more limited than in countries with more developed financial systems (Appendix IV).

The interest rate channel seems largely ineffective. There is little evidence of a statistically significant impact of policy rates changes or liquidity injections on the short-term T-bill and the interbank market rates. This could reflect the limited development of the interbank market, the absence of a secondary government debt market, and large excess liquidity.

The asset price channel is constrained by the limited development of financial markets.

25. Development of the financial sector and strengthening of its supervision should go together. Strengthened bank supervision is needed for earlier identification of risks and increased compliance with prudential norms. The emergence of regional banking groups requires the development of supervision on a consolidated basis and strengthening of cooperation with banking supervisors in countries where these groups operate. The increasing exposure of banks to sovereigns is also a risk which needs to be recognized, including through a non-zero weight on government paper in capital adequacy calculations. Micro-prudential regulation should be revised to bring certain prudential standards closer to international best practice, for example on risk concentration, classification of claims and provisioning, while taking into account the regional context.

26. The financial crisis prevention and management framework could also be strengthened. Crisis prevention requires greater transparency, including through the regular and timely compilation and publication of financial soundness indicators for all member countries. Regular stress tests would be a welcome step toward the introduction of an early warning system. Staff sees scope for improving the bank resolution framework, which would reduce the budgetary cost of government intervention. Staff underscored the importance of swift action in this area, including by giving broader powers to the supervisor and close collaboration with other supervisors in the case of cross-border groups.

Authorities’ views

27. The authorities concurred with the need to develop further the financial sector and shared the analysis on the main obstacles. Improving the financing of the economies and financial inclusion are seen as priorities. Financial sector development will also help absorb the impact of shocks, including by making monetary policy more effective. A comprehensive action plan to develop the financial system was devised and endorsed by heads of state in 2012 and is now being implemented; it involves the national and regional authorities. The WAEMU authorities are also exploring with the CEMAC’s options to increase financial integration between the two unions.

28. Work is ongoing, or will be launched shortly, to address the stability issues raised by staff. The resources of the Banking Commission have been significantly increased, and staff is being trained on a number of issues (risk-based supervision, bank resolution), including through Fund TA. With regards to prudential rules, the BCEAO reported that the transformation ratio linking long-term assets to long-term resources, which had long been seen as constraining excessively the provision of medium- and long-term credit, was loosened in December 2012. At the same time the ratio on portfolio structure (requiring a certain proportion of rated assets on bank balance sheets) was discontinued. The BCEAO reiterated its intention to move to Basel II in the next few years and expressed interest in Fund TA in this area. The authorities are also developing their macroprudential analysis, with ongoing work on early warning indicators and a map of risks in the whole financial system. They welcomed the stress-testing exercise conducted jointly with staff and intend to develop their expertise in this area. Work is also well advanced on a deposit insurance scheme and a financial stability fund, whose main goal would be to avoid possible debt payment incidents by sovereigns facing liquidity problems.

Increasing Growth and Competitiveness Through Regional Integration

29. Regional integration remains limited. There are significant impediments to good labor and capital mobility. Nontariff barriers and inadequate transportation and energy infrastructure remain obstacles to reaping the full benefits of the common market. A recent study commissioned and endorsed by franc zone finance ministers suggested that the growth gains from further integration could be substantial.3

30. Nonprice competitiveness problems continue to affect growth in WAEMU countries, which has been sub-par. The 2010-13 Doing Business Reports show a deterioration in the average WAEMU rankings, most of which are in the lowest quartile of the distribution (Text Table 2). In addition todeveloping the financial sector, improving institutions, governance, infrastructure, and trade integration could contribute to increasing competitiveness and raising the region’s growth potential. Stronger and sustainable growth, including in agriculture, and greater attention to inclusiveness in the design of growth strategies and policies will allow faster reduction of poverty incidence, which remains high in the region.

Text Table 2.WAEMU: Doing Business Indicators
2010*2011*2012*20132010/112011/122012/13
Benin172173176175−1−31
Burkina Faso15415114915332−4
Cote d’Ivoire168170177177−2−70
Guinea-Bissau175181178179−63−1
Mali15514814515173−6
Niger171172175176−1−3−1
Senegal151157162166−6−5−4
Togo1621581611564−35
Average1641641651670−1−2
Total of183183183185

Adjusted for data corrections and comparability.

Source: World Bank, Doing Business Indicators, 2010-13.

Adjusted for data corrections and comparability.

Source: World Bank, Doing Business Indicators, 2010-13.

Staff’s advice

31. The integration agenda needs to be reinvigorated. The regional authorities could build on the momentum generated by the recent franc zone study to develop a plan for coordinated action on removing all barriers to intra-WAEMU trade, implementing fully the common external tariff (CET), coordinating further tax and customs practices, facilitating labor mobility, and developing regional structural policies.

32. Staff encouraged the authorities to preserve the integrity of the CET and common market. In the absence of an agreement in the negotiations between ECOWAS and the European Union on an Economic Partnership Agreement (EPA), the interim EPA of Côte d’Ivoire could enter into force in early 2014. This could seriously affect free trade within the WAEMU and the CET. Staff reiterated its concerns regarding the introduction of a new tariff band of 35 percent in the context of the extension of the CET to ECOWAS, potentially covering a large number of products, which would lead to an increase in the overall tariff protection.

Authorities’ views

33. The WAEMU Commission was confident that the second phase of the Regional Economic Program would accelerate integration. It stressed that many lessons were learned from the first phase with regards to the selection and implementation of projects. It indicated that fundraising efforts were stepped up in recent months to ensure full financing of the program. The Commission also reported on its plans to enhance the identification and dissemination in the region of the best-practice business approaches adopted by single countries. On EPA issues, it expressed concern about the risks to free trade within the WAEMU and the CET should an agreement not be found with the European Union.

Staff Appraisal

34. Growth is expected to remain robust in 2013. It will be driven by continued post-crisis recovery in Côte d’Ivoire, mining and infrastructure investment in a number of countries, and strong output in agriculture. Growth would remain strong in the medium term under the assumption of full implementation of growth-enhancing policies. Inflation would remain moderate.

35. Risks are on the downside. While the situation in Mali is evolving fast toward a restoration of territorial integrity, broader political stability and security issues could arise for the region, with a negative impact on public finances, risk perception by investors, and ultimately growth. Another downside risk is whether the policies needed to reach the projected growth rates, which are high by historical standards, will be fully implemented. Failure in this area would reduce significantly growth prospects with implications for poverty reduction and fiscal sustainability.

36. The macroeconomic policy mix is appropriate. The planned fiscal consolidation in the countries with higher deficits is warranted in light of the projected high growth and the need to reconstitute policy buffers. The modest easing of monetary policy in 2012 has been appropriate, taking into account the outlook for inflation. Official reserves remain adequate, even though their recent decline requires close monitoring. Should a temporary downside risk materialize, automatic stabilizers could be left to operate where financing is available, and monetary policy could be further loosened. Debt management needs to be strengthened at the country level and better coordinated.

37. Preserving debt sustainability and the stability of the Union in the medium term will require better coordination of fiscal policies. The regional authorities’ intention to conduct a comprehensive review of their regional surveillance framework is therefore welcome. Convergence criteria on public debt and the fiscal deficit need to be reconsidered, and implementation of the framework strengthened to increase adherence and traction.

38. Further development of the financial system is desirable; a strengthening of the regulatory and supervisory framework is necessary to address existing and new risks. Financial development will help raise growth, mitigate the impact of volatility, increase inclusion and improve the effectiveness of macroeconomic policies. Completing ongoing reforms that will allow the development of the interbank market and secondary government debt market is critical. Although banks on average seem relatively well capitalized and liquid, there is substantial heterogeneity among them, with high lending concentration and uneven asset quality being the main risks. Banks are also increasingly exposed to sovereigns in the region and more generally to the public sector. Finally, the emergence of regional groups raises new risks to address. Observance of prudential rules needs to improve, and some of the rules need to be brought closer to international standards. Staff welcomes the authorities’ ongoing efforts to strengthen bank supervision and improve bank regulation. Ongoing work to strengthen the financial crisis prevention and resolution framework is also welcome.

39. Nonprice competitiveness problems affecting growth require concerted regional and national efforts. Beyond developing the financial sector, improving institutions, governance, infrastructure, and trade integration are needed. The area-wide real exchange rate appears to be in line with fundamentals.

40. Transparency and availability of information need to improve. Efforts at all levels to improve data quality, coverage, and timeliness should continue. The data should be widely shared at the national and regional levels between the authorities and with the public.

41. It is proposed that the discussions with the WAEMU authorities remain on the standard 12-month consultation cycle.

Table 1.WAEMU: Selected Economic and Financial Indicators, 2009–2017
200920102011201220132014201520162017
Est.Proj.Proj.Proj.Proj.Proj.
(Annual percentage change)
National income and prices
GDP at constant prices2.94.81.15.86.06.36.15.95.8
GDP per capita at constant prices0.11.8−1.12.93.23.43.23.13.0
Broad money to GDP9.78.65.54.1
Consumer prices (average)0.41.43.92.42.42.42.22.12.3
Terms of trade4.3−4.7−0.41.5−0.20.60.2−0.4−0.4
Nominal effective exchange rates0.9−4.31.7−2.2
Real effective exchange rates0.2−6.30.9−2.5
(Percent of GDP)
National accounts
Gross domestic savings15.314.115.513.014.415.516.016.515.9
Gross domestic investment18.718.818.620.221.422.022.121.922.0
Of which: public investment7.16.46.37.89.19.69.79.69.5
Resource gap−3.4−4.7−3.1−7.2−7.0−6.5−6.2−5.5−6.1
(Annual changes in percent of beginning-of-period broad money)
Money and credit 1
Net foreign assets5.83.11.0−5.5
Net domestic assets8.912.69.713.9
Broad money14.715.710.78.4
(Percent of GDP, unless otherwise indicated)
Government financial operations 2
Government total revenue, excl. grants17.417.916.719.019.119.319.519.719.8
Government expenditure23.923.323.225.526.525.725.725.625.5
Overall fiscal balance, excl. grants−6.5−5.4−6.5−6.5−7.3−6.4−6.2−5.9−5.7
Official grants3.02.32.52.73.13.43.33.23.0
Overall fiscal balance, incl. grants−3.5−3.1−4.0−3.8−4.2−3.0−2.9−2.7−2.7
Basic fiscal balance, incl. grants & HIPC−1.3−0.6−2.1−2.0−0.6−0.6−0.4−0.3−0.3
External sector
Exports of goods and services 327.029.429.927.828.929.129.028.828.8
Imports of goods and services 332.736.534.536.437.236.936.335.535.2
Current account, excl. grants 4−5.8−6.7−5.0−8.8−8.8−8.3−7.9−7.3−7.2
Current account, incl. grants 4−3.6−4.9−3.1−7.3−7.2−6.9−6.5−5.9−5.8
External public debt35.932.331.529.128.828.728.628.428.0
Total public debt45.443.443.540.939.338.838.537.937.1
Broad money32.335.037.038.5
Memorandum items:
Nominal GDP (in billions of CFA francs)32,56034,67136,46839,58942,77046,48350,52954,91959,753
Nominal GDP per capita (in US dollars)722714775750783822861901944
CFA franc per US dollars, average472495472511
Euro per US dollars, average0.720.760.720.78
Foreign exchange cover ratio 598.999.997.297.7
Reserves in months of imports (excl. intra-WAEMU imports)5.96.55.95.24.94.8
Sources: IMF, African Department database; World Economic Outlook; IMF staff estimates.

The estimates for 2012 refer to annual change at end-Sep, with the beginning-of-period referring to end-Sep 2011.

Fiscal data for 2013 reflect a strong increase in the fiscal deficit of Niger following a new project in the hydrocarbon sector.

Excluding intra-regional trade.

Data up to 2011 are corrected for intra-regional trade discrepancies by BCEAO.

Gross official reserves divided by short term domestic liabilities (IMF definition). For 2012, the estimate refers to end-Sep.

Sources: IMF, African Department database; World Economic Outlook; IMF staff estimates.

The estimates for 2012 refer to annual change at end-Sep, with the beginning-of-period referring to end-Sep 2011.

Fiscal data for 2013 reflect a strong increase in the fiscal deficit of Niger following a new project in the hydrocarbon sector.

Excluding intra-regional trade.

Data up to 2011 are corrected for intra-regional trade discrepancies by BCEAO.

Gross official reserves divided by short term domestic liabilities (IMF definition). For 2012, the estimate refers to end-Sep.

Table 2.Sub-Saharan Africa: Cross-Group Comparison, 2009–2017
200920102011201220132014201520162017
Est.Proj.Proj.Proj.Proj.Proj.
(Annual percentage change)
Real GDP
WAEMU2.94.81.15.86.06.36.15.95.8
CEMAC 10.55.34.04.74.95.87.15.14.7
Sub-Saharan Africa 22.75.45.24.75.56.26.15.95.5
Inflation (annual averages)
WAEMU0.91.23.62.72.42.42.22.12.3
CEMAC 14.41.92.54.43.43.13.03.02.9
Sub-Saharan Africa 29.37.59.39.26.86.15.65.55.5
Terms of trade
WAEMU4.3−4.7−0.41.5−0.20.60.2−0.4−0.4
CEMAC 1−16.412.411.3−0.74.20.91.5−2.2−1.7
Sub-Saharan Africa 2−4.68.57.0−1.2−2.9−1.2−0.2−0.9−0.8
(Percent of GDP, unless otherwise indicated)
Gross national investment
WAEMU18.718.818.620.221.422.022.121.922.0
CEMAC 130.929.828.229.428.829.231.531.030.1
Sub-Saharan Africa 223.622.621.922.623.323.824.023.823.7
Overall fiscal balance, incl. grants
WAEMU−3.5−3.1−4.0−3.8−4.2−3.0−2.9−2.7−2.7
CEMAC 1−0.61.23.0−0.5−1.5−1.9−2.2−2.2−2.5
Sub-Saharan Africa 2−5.6−3.9−1.1−1.9−2.7−2.5−2.4−2.3−2.5
External current account, incl. grants
WAEMU−3.6−4.9−3.1−7.3−7.2−6.9−6.5−5.9−5.8
CEMAC 1−4.5−3.2−0.1−1.9−1.3−2.0−4.3−4.6−4.7
Sub-Saharan Africa 2−3.0−1.2−1.2−2.7−3.1−3.4−3.8−3.9−3.8
External public debt
WAEMU35.932.331.529.128.828.728.628.428.0
CEMAC 114.010.011.112.814.115.616.817.918.7
Sub-Saharan Africa 211.79.39.59.610.310.911.211.411.5
Sources: IMF, African Department database; and staff estimates.

Central African Economic and Monetary Community (CEMAC).

Including Nigeria and South Africa.

Sources: IMF, African Department database; and staff estimates.

Central African Economic and Monetary Community (CEMAC).

Including Nigeria and South Africa.

Table 3.WAEMU: Selected National Accounts and Inflation Statistics, 2009–2017
200920102011201220132014201520162017
Est.Proj.Proj.Proj.Proj.Proj.
(Annual percentage change)
Real GDP
Benin2.72.63.53.53.84.14.34.54.5
Burkina Faso3.07.94.28.07.07.07.06.96.8
Côte d’Ivoire3.72.4−4.78.68.07.37.06.76.5
Guinea-Bissau3.03.55.3−2.85.711.05.24.64.5
Mali4.55.82.7−1.54.85.85.35.05.0
Niger−1.010.72.211.26.27.36.96.95.7
Senegal2.14.12.63.74.34.85.05.15.2
Togo3.54.04.95.05.35.55.64.95.8
WAEMU2.94.81.15.86.06.36.15.95.8
Real GDP per capita
Benin−0.3−0.30.70.71.11.41.71.92.0
Burkina Faso−0.14.71.15.64.64.54.64.54.4
Côte d’Ivoire0.7−0.6−7.55.54.94.13.83.63.4
Guinea-Bissau0.91.33.2−4.83.58.83.02.52.4
Mali1.32.7−0.4−4.51.72.62.11.81.8
Niger−2.87.06.57.93.04.13.73.72.6
Senegal−0.61.4−0.10.91.52.12.22.32.5
Togo1.31.72.62.73.03.23.32.63.5
WAEMU0.11.8−1.12.93.23.43.23.13.0
Inflation
Benin0.92.62.76.63.33.13.02.82.8
Burkina Faso2.6−0.62.73.62.02.02.02.02.0
Côte d’Ivoire1.01.44.91.32.52.52.52.52.5
Guinea-Bissau−1.61.15.05.02.53.02.02.02.0
Mali2.21.33.15.43.13.02.52.62.5
Niger1.10.92.90.51.51.61.31.51.7
Senegal−1.71.23.41.11.61.71.71.71.7
Togo1.93.23.62.54.23.62.90.54.5
WAEMU0.41.43.92.42.42.42.22.12.3
(Percent of GDP)
Gross domestic savings
Benin11.910.38.79.69.610.510.911.411.9
Burkina Faso13.316.014.513.913.614.115.016.016.1
Côte d’Ivoire16.411.417.69.211.912.713.313.112.8
Guinea-Bissau3.71.63.72.95.912.012.612.916.1
Mali13.05.810.010.611.514.615.816.415.6
Niger7.817.614.114.517.518.215.919.213.6
Senegal22.625.322.622.723.523.924.424.825.2
Togo11.312.611.611.612.615.216.915.815.8
WAEMU15.314.115.513.014.415.516.016.515.9
Gross domestic investment
Benin20.917.618.719.119.219.219.219.419.7
Burkina Faso18.018.315.618.217.617.718.017.717.7
Côte d’Ivoire8.99.08.212.515.616.917.117.317.4
Guinea-Bissau10.19.810.15.78.814.614.214.217.7
Mali20.318.420.216.319.523.524.724.824.8
Niger32.637.538.840.238.533.231.128.928.8
Senegal29.329.728.730.330.130.230.530.530.5
Togo18.018.918.820.121.022.322.521.721.4
WAEMU18.718.818.620.221.422.022.121.922.0
Sources: IMF, African Department database; and staff estimates.
Sources: IMF, African Department database; and staff estimates.
Table 4.WAEMU: Fiscal Balances, 2009–2017
200920102011201220132014201520162017
Est.Proj.Proj.Proj.Proj.Proj.
(Percent of GDP)
Primary fiscal balance
Benin−3.8−1.0−1.4−0.1−0.70.30.50.50.5
Burkina Faso−4.3−4.0−1.9−2.7−2.1−2.4−2.3−2.0−1.9
Côte d’Ivoire0.0−0.6−2.3−2.4−1.4−1.2−1.4−1.2−1.1
Guinea-Bissau2.8−1.9−2.7−1.8−1.5−1.0−0.9−0.9−1.0
Mali−3.9−2.3−3.5−1.5−1.7−2.0−2.0−2.0−2.1
Niger 1−5.2−2.2−2.7−3.1−16.1−3.4−2.8−2.7−2.6
Senegal−4.2−4.2−5.2−4.2−3.0−2.8−2.4−2.1−1.9
Togo−1.9−0.7−2.2−5.6−2.9−3.0−2.4−1.6−1.3
WAEMU−2.6−2.1−2.9−2.6−3.0−1.9−1.8−1.6−1.4
Overall fiscal balance (including grants)
Benin−4.3−1.6−1.8−0.7−1.2−0.3−0.1−0.10.0
Burkina Faso−4.8−4.5−2.5−3.2−2.6−3.0−2.9−2.5−2.3
Côte d’Ivoire−1.6−2.3−4.3−4.3−2.9−2.8−3.2−3.1−3.1
Guinea-Bissau2.7−2.5−2.8−1.9−2.0−1.4−1.3−1.3−1.4
Mali−4.2−2.7−4.1−2.1−2.3−2.6−2.6−2.6−2.6
Niger−5.4−2.4−3.0−3.5−17.1−3.9−3.4−3.2−3.2
Senegal−4.8−5.2−6.7−5.9−4.9−4.4−3.9−3.7−3.5
Togo−2.8−1.6−2.9−6.6−4.4−4.1−3.6−2.8−2.5
WAEMU−3.5−3.1−4.0−3.8−4.2−3.0−2.9−2.7−2.7
Government revenue (commitment basis, excluding grants)
Benin18.518.617.618.919.119.719.919.920.0
Burkina Faso13.715.616.516.616.816.917.117.818.0
Côte d’Ivoire18.919.214.920.019.920.020.220.420.6
Guinea-Bissau9.010.810.910.113.813.914.014.014.1
Mali17.117.316.918.518.919.219.319.519.7
Niger14.513.614.316.417.117.518.018.519.0
Senegal18.619.420.220.920.820.820.820.620.6
Togo16.918.918.219.320.220.020.220.220.2
WAEMU17.417.916.719.019.119.319.519.719.8
Government expenditure
Benin26.021.621.922.522.522.222.022.022.0
Burkina Faso24.324.624.327.226.026.326.426.526.3
Côte d’Ivoire21.122.019.424.824.624.825.225.225.3
Guinea-Bissau23.222.521.216.022.822.422.322.322.3
Mali25.922.824.720.321.423.723.823.923.9
Niger24.320.721.126.242.229.228.928.828.7
Senegal26.727.129.029.728.427.927.426.926.7
Togo21.222.524.229.528.228.328.027.126.4
WAEMU23.923.323.225.526.525.725.725.625.5
Government current expenditure
Benin15.915.515.015.715.715.515.515.415.4
Burkina Faso12.712.113.114.512.512.812.812.912.9
Côte d’Ivoire17.918.616.919.517.117.117.117.217.3
Guinea-Bissau12.811.912.413.614.814.414.314.314.3
Mali13.012.914.114.413.713.012.912.912.9
Niger12.013.012.713.113.013.213.013.313.5
Senegal16.515.618.117.716.616.115.515.215.1
Togo15.714.715.919.717.316.516.516.616.5
WAEMU15.615.515.616.915.415.315.115.115.2
Government capital expenditure 2
Benin9.75.56.66.86.86.66.56.56.7
Burkina Faso11.611.110.212.513.413.413.513.513.3
Côte d’Ivoire3.13.12.55.47.57.78.18.08.1
Guinea-Bissau9.28.88.12.17.77.77.77.87.8
Mali10.87.98.74.16.08.99.19.29.2
Niger12.37.76.913.016.216.015.915.515.4
Senegal10.111.610.512.111.811.811.911.711.6
Togo5.57.98.39.810.911.811.510.59.9
WAEMU7.97.26.98.49.710.110.310.210.1
Sources: IMF, African Department database; and staff estimates.

2013 data for Niger reflect the impact of a new project in the hydrocarbon sector.

Excludes net lending.

Sources: IMF, African Department database; and staff estimates.

2013 data for Niger reflect the impact of a new project in the hydrocarbon sector.

Excludes net lending.

Table 5.WAEMU: External Balances, 2009–2017
200920102011201220132014201520162017
Est.Proj.Proj.Proj.Proj.Proj.
(Percent of GDP)
Exports of goods and services
Benin16.520.615.015.115.315.815.815.815.7
Burkina Faso12.621.425.427.026.026.728.129.129.4
Côte d’Ivoire50.954.154.950.649.749.950.250.050.1
Guinea-Bissau15.417.723.515.720.221.321.121.021.3
Mali23.726.026.131.230.829.828.427.025.4
Niger20.622.222.224.825.728.627.627.329.4
Senegal24.425.024.724.223.923.223.023.223.1
Togo36.740.240.040.040.641.242.443.043.1
WAEMU127.029.429.927.828.929.129.028.828.8
Imports of goods and services
Benin29.831.127.627.727.927.627.026.826.7
Burkina Faso23.329.032.136.333.533.834.434.134.2
Côte d’Ivoire39.045.940.447.948.849.049.149.349.5
Guinea-Bissau29.128.631.222.327.227.225.824.924.6
Mali31.439.936.136.136.837.436.034.834.1
Niger47.549.250.751.745.043.541.738.737.1
Senegal41.340.540.941.739.938.637.837.036.4
Togo52.357.357.158.158.458.357.958.457.7
WAEMU132.736.534.536.437.236.936.335.535.2
External current account (excl. grants)
Benin−12.8−10.3−11.8−12.1−11.9−11.0−10.4−10.5−10.9
Burkina Faso−9.1−6.2−5.3−8.0−6.3−5.9−5.3−4.2−4.0
Côte d’Ivoire4.91.78.1−3.6−5.3−5.1−4.8−5.3−5.7
Guinea-Bissau−14.4−11.8−9.2−7.3−8.8−8.3−7.6−7.0−7.0
Mali−9.2−14.8−11.5−7.3−8.8−10.4−10.1−9.7−10.5
Niger−25.4−25.4−28.0−28.7−23.0−18.7−18.6−15.2−11.5
Senegal−7.1−4.9−6.4−8.0−6.9−6.6−6.4−5.9−5.7
Togo−8.2−8.7−10.4−12.0−12.0−11.3−9.8−9.2−8.5
WAEMU−5.8−6.7−5.0−8.8−8.8−8.3−7.9−7.3−7.2
External current account (incl. grants)
Benin−8.9−7.3−10.0−9.7−9.7−8.9−8.4−8.5−8.7
Burkina Faso−4.7−2.3−1.0−4.3−4.0−3.6−3.0−1.8−1.6
Côte d’Ivoire7.52.49.4−3.3−3.7−4.2−3.9−4.4−4.7
Guinea-Bissau−6.4−8.3−6.4−4.0−4.1−3.6−2.6−2.2−2.6
Mali−7.3−12.7−10.2−5.8−8.0−9.0−8.9−8.5−9.3
Niger−24.7−19.9−24.7−25.8−20.5−16.6−16.7−13.5−10.0
Senegal−6.7−4.4−6.1−7.5−6.6−6.3−6.1−5.6−5.4
Togo−6.6−6.7−7.2−8.4−8.4−7.1−5.6−5.5−5.1
WAEMU−3.6−4.9−3.1−7.3−7.2−6.9−6.5−5.9−5.8
Sources: IMF, African Department database; and staff estimates.

Excludes intraregional trade

Sources: IMF, African Department database; and staff estimates.

Excludes intraregional trade

Table 6.WAEMU: Government Debt, 2009–2017
200920102011201220132014201520162017
Est.Proj.Proj.Proj.Proj.Proj.
(Percent of GDP)
External Debt
Benin16.218.116.517.818.518.819.219.619.9
Burkina Faso23.124.022.825.225.425.425.425.124.7
Côte d’Ivoire53.950.655.135.633.331.630.329.128.1
Guinea-Bissau127.819.017.921.020.918.217.516.716.3
Mali20.728.425.426.323.123.924.825.824.0
Niger19.916.915.734.436.637.438.339.040.0
Senegal26.927.528.832.734.635.435.836.136.2
Togo55.117.215.518.220.521.822.522.823.0
WAEMU35.932.331.529.128.828.728.628.428.0
Domestic Debt
Benin11.812.113.815.511.19.88.67.26.3
Burkina Faso4.13.25.24.13.53.73.83.53.2
Côte d’Ivoire12.615.816.015.213.613.413.213.012.9
Guinea-Bissau36.029.926.325.923.419.818.016.314.8
Mali2.14.44.75.14.74.34.03.83.5
Niger8.06.86.25.54.73.93.32.82.3
Senegal7.28.211.312.312.212.813.013.012.9
Togo20.831.430.828.325.323.521.920.117.9
WAEMU9.511.112.011.810.510.29.99.59.1
Total Debt
Benin28.030.230.333.329.628.627.826.826.2
Burkina Faso27.227.228.029.328.929.129.228.627.9
Côte d’Ivoire66.566.471.250.946.945.043.542.141.0
Guinea-Bissau163.849.044.246.944.238.035.433.031.0
Mali22.932.830.131.427.828.228.829.627.5
Niger27.923.721.939.941.341.341.641.842.3
Senegal34.235.740.045.046.848.248.849.149.1
Togo75.948.546.346.545.845.344.442.940.8
WAEMU45.443.443.540.939.338.838.537.937.1
Source: IMF, African Department database.
Source: IMF, African Department database.
Table 7.WAEMU: Monetary Survey, March 2010–Sep 2012
20102010201020102011201120112011201220122012
Mar.Jun.Sep.Dec.Mar.Jun.SepDecMar.Jun.Sep
(Billions of CFA francs)
Net foreign assets5,0475,1884,9805,3855,1445,4235,5495,5015,4085,0024,860
Net domestic assets5,2605,6706,0506,5876,9166,8476,8867,7517,7718,4898,618
Domestic credit7,2187,4507,9878,6438,9939,0049,26210,06510,21410,75411,001
Net credit to government1,4391,4021,6251,8422,2151,9032,1112,2512,4492,5962,662
Net credit to the economy5,7796,0496,3626,8016,7787,1017,1507,8147,7658,1588,339
Claims on private sector5,7786,0466,3576,7966,7757,0977,1497,8137,7648,1568,334
Claims on other financial institutions23542411124
Other items, net−1,959−1,781−1,937−2,056−2,077−2,157−2,375−2,313−2,443−2,265−2,382
Broad Money10,30610,85811,03011,97212,06012,27012,43513,25213,17913,49113,478
Money6,6776,9476,9337,7097,7797,9147,9928,7148,5298,7288,571
of which: Currency in circulation2,9672,9922,9713,5593,4473,3973,2323,6763,5463,5933,468
Quasi-money3,6293,9114,0974,2634,2804,3554,4434,5394,6504,7634,907
(Factors affecting liquidity, in percent of previous period’s broad money)
Net foreign assets7.29.26.63.10.92.25.21.02.2−3.4−5.5
Net domestic assets7.68.611.612.616.110.87.69.77.113.413.9
Domestic credit10.810.714.014.017.214.311.611.910.114.314.0
Net credit to government8.86.68.47.47.54.64.43.41.95.64.4
Net credit to the economy1.94.15.66.69.79.77.18.58.28.69.6
Claims on private sector1.94.15.66.69.79.77.28.58.28.69.5
Claims on other financial institutions0.00.00.00.00.00.00.00.00.00.00.0
Other items, net−3.1−2.1−2.4−1.5−1.1−3.5−4.0−2.2−3.0−0.9−0.1
Broad Money14.817.718.215.717.013.012.710.79.310.08.4
(Year on year percent change)
Net foreign assets14.619.514.06.41.94.511.42.25.1−7.7−12.4
Net domestic assets15.016.221.924.631.520.813.817.712.424.025.2
Domestic credit15.515.219.520.224.620.916.016.513.619.418.8
Net credit to government122.275.893.271.053.935.829.922.210.636.426.1
Net credit to the economy3.16.78.911.217.317.412.414.914.614.916.6
Claims on private sector3.16.78.911.217.317.412.515.014.614.916.6
Claims on other financial institutions57.655.0294.5163.845.533.6−78.4−74.7−53.3−44.8300.5
Other items, net16.812.112.87.96.021.122.612.517.65.00.3
Broad Money14.817.718.215.717.013.012.710.79.310.08.4
Source: IMF, International Financial Statistics.
Source: IMF, International Financial Statistics.
Table 8.West African Economic and Monetary Union: Financial Soundness Indicators 2005–2012
20052006200720082009201020112012
Dec.Dec.Dec.Dec.Dec.Dec.Dec.Jun.
(in percent, unless otherwise indicated)
Solvency ratios
Regulatory capital to risk weighted assets9.178.366.759.7910.1611.0910.7210.99
Tier I capital to risk-weighted assets8.787.986.019.379.8010.5510.0810.59
Provisions to risk-weighted assets14.9814.1712.7512.2410.9612.0510.4012.49
Capital to total assets5.825.454.296.076.206.416.485.71
Composition and quality of assets
Total loans to total assets63.4461.9159.0659.4157.5655.2755.1755.29
Gross NPLs to total loans19.9020.5018.9019.2017.2017.5815.9216.17
Provisioning rate66.8866.1765.7468.0561.4563.6864.2364.96
Net NPLs to total loans7.608.007.407.107.407.196.356.33
Net NPLs to capital82.7491.1790.8569.0068.5461.9954.0761.33
Earnings and profitability
Average cost of borrowed funds2.102.202.402.602.502.902.40
Average interest rate on loans9.708.809.9010.6010.1010.909.60
Average interest margin17.606.607.508.007.608.007.20
After-tax return on average assets (ROA)1.111.19
After-tax return on average equity (ROE)5.204.804.801.9014.8012.6313.67
Noninterest expenses/net banking income57.9060.7562.6460.9163.7964.7561.63
Salaries and wages/net banking income26.5027.7527.5726.5027.0927.1126.37
Liquidity
Liquid assets to total assets41.7940.8938.1336.6433.9333.2733.5933.25
Liquid assets to total deposits55.1554.4150.9550.4346.0445.1246.0746.61
Total loans to total deposits83.7682.3878.8981.7678.4583.9784.2986.59
Total deposits to total liabilities75.7475.1574.8772.6673.3774.1272.9171.35
Sight deposits to total liabilities238.1737.8938.4136.9036.0736.6637.7936.72
Term deposits to total liabilities37.5737.2636.4535.7637.3037.4635.1134.63
Source: BCEAO. Simple average.Note: Simple averages of country indicators.

Excluding tax on bank operations

Including saving accounts

Source: BCEAO. Simple average.Note: Simple averages of country indicators.

Excluding tax on bank operations

Including saving accounts

Table 9.WAEMU: Main Features of WAEMU Economies in 2011 1
BeninBurkina FasoCôte d’IvoireGuinea-BissauMaliNigerSenegalTogoWAEMU Total
Population (millions)9.117.020.21.515.816.112.86.298.6
Land area (thousands of sq.km.)110.6273.6318.028.11220.21266.7192.554.43464.2
GNP (billions of U.S. dollars)7.19.723.00.99.65.813.73.473.4
GNP per capita (current U.S. dollars)78057010906006103601070560705
Agriculture, value added (percent of GDP) 232.233.324.3n.a.36.539.617.843.232.4
Industry, value added (percent of GDP) 213.422.430.3n.a.24.217.123.715.921.0
Services, etc. value added (percent of GDP) 354.444.445.4n.a.39.143.258.440.946.5
Exports of goods (billions of U.S. dollars)0.72.312.70.22.41.32.41.123.0
Imports of goods (billions of U.S. dollars)1.62.27.00.22.82.24.71.622.4
Intraregional trade4
Exports (in percent of total)11.18.19.53.64.50.925.125.117.9
Import (in percent of total)2.525.31.315.719.512.83.23.56.5
Share of individual countries (in percent) 5
In GNP9.713.231.41.313.17.918.74.7100.0
In exports2.99.855.20.810.35.510.64.9100.0
In imports6.910.031.41.112.49.920.97.3100.0
In net domestic assets 65.77.425.70.78.03.616.75.373.0
In net foreign assets 615.514.329.42.012.47.618.25.1104.5
Poverty headcount ratio at $1.25 a day (PPP) (% of population) 747.344.623.848.950.443.633.538.741.4
Poverty headcount ratio at $2 a day (PPP) (% of population) 775.372.646.378.078.775.260.469.369.5
Health expenditure, total (% of GDP) 84.16.75.38.55.05.25.77.76.0
Public spending on education, total (% of GDP) 95.34.04.6n.a.4.84.55.64.64.8
Sources: World Bank, World Development Report; IMF, Direction of Trade Statistics, World Development Indicators; and staff estimates.

Unless otherwise indicated.

Data shown for Benin is 2005, Burkina Faso is 2006, Mali is 2007, and Niger is 2003.

Data shown for Benin is 2005, Burkina Faso is 2006, Mali is 2006, Niger is 2003.

Exports to and imports from WAEMU countries in percent of total exports and imports.

Totals may not add up to 100 because of statistical discrepancy.

September 2012 numbers.

Data shown for Benin is 2003, Burkina Faso is 2009, Côte d’Ivoire is 2008, Guinea-Bissau is 2002, Mali is 2010, Niger is 2008, Senegal is 2005, and Togo is 2006. WAEMU is simple average.

Data shown for 2010 for all countries. Sum of public and private health expenditure. WAEMU is simple average.

Data shown for Beinin is 2010, Burkina Faso 2010, Côte d’Ivoire 2008, Guinea-Bissau not available, Mali 2011, Niger 2011, Senegal 2010, and Togo 2011. WAEMU is simple average.

Sources: World Bank, World Development Report; IMF, Direction of Trade Statistics, World Development Indicators; and staff estimates.

Unless otherwise indicated.

Data shown for Benin is 2005, Burkina Faso is 2006, Mali is 2007, and Niger is 2003.

Data shown for Benin is 2005, Burkina Faso is 2006, Mali is 2006, Niger is 2003.

Exports to and imports from WAEMU countries in percent of total exports and imports.

Totals may not add up to 100 because of statistical discrepancy.

September 2012 numbers.

Data shown for Benin is 2003, Burkina Faso is 2009, Côte d’Ivoire is 2008, Guinea-Bissau is 2002, Mali is 2010, Niger is 2008, Senegal is 2005, and Togo is 2006. WAEMU is simple average.

Data shown for 2010 for all countries. Sum of public and private health expenditure. WAEMU is simple average.

Data shown for Beinin is 2010, Burkina Faso 2010, Côte d’Ivoire 2008, Guinea-Bissau not available, Mali 2011, Niger 2011, Senegal 2010, and Togo 2011. WAEMU is simple average.

Appendix I. Debt Sustainability in the WAEMU1

This short note examines the evolution of debt sustainability in WAEMU countries in recent years. Thanks to debt relief, all WAEMU countries now have public debt to GDP ratios way below 70 percent, the ceiling set by the regional surveillance framework, and have low or moderate ratings for the risk of debt distress according to debt sustainability analyses (reflecting prudent fiscal policies, often under Fund-supported programs). Countries have tended to re-accumulate debt in the wake of debt relief, broadly in line with expectations. Overall, there is no indication of a significant deterioration of the overall debt sustainability outlook in the WAEMU. There are new risks, however, related to the characteristics of debt issued (increasingly) on the regional market, which has relatively short maturities and high interest rates.

1. All WAEMU countries now have public debt ratios way below the convergence criterion. With Côte d’Ivoire reaching the HIPC Initiative completion point in June 2012, all WAEMU countries now have public debt to GDP ratios around or below 50 percent, i.e., way below the ceiling of 70 percent set by the regional surveillance framework. Total public debt in the WAEMU as a percent of WAEMU GDP has slightly decreased from 2009 to 2011, and is expected to decrease again by end of 2012 to about 40 percent.

2. Public debt ratios have tended to increase in the wake of debt relief. This can be seen by focusing on the five countries for which the debt relief process was completed in 2006 with the delivery of MDRI relief, namely Benin, Burkina Faso, Mali, Niger, and Senegal. Figures 13 show that the public debt ratio increased in all these countries. There is, however, a broad range of situations, with some countries recording only very limited increases (e.g., Burkina Faso) and others larger ones (particularly Senegal).

Figure 1.Benin, Burkina Faso, Côte d’Ivoire: Total Public and Domestic Debt

Source: WAEMU Joint World Bank/IMF Debt Sustainability Analyses. Circles represent DSA ratings for respective years following Table 1 legend: green for low, yellow for moderate, red for high, black for in debt distress.

Figure 2.Guinea-Bissau, Mali, Niger: Total Public and Domestic Debt

Source: WAEMU Joint World Bank/IMF Debt Sustainability Analyses. Circles represent DSA ratings for respective years following Table 1 legend: green for low, yellow for moderate, red for high, black for in debt distress.

Figure 3.Senegal, Togo: Total Public and Domestic Debt

Source: WAEMU Joint World Bank/IMF Debt Sustainability Analyses. Circles represent DSA ratings for respective years following Table 1 legend: green for low, yellow for moderate, red for high, black for in debt distress.

3. Public debt accumulation was generally in line with expectations. This can be seen by comparing projected debt ratios in debt sustainability analyses (DSAs) conducted by Bank and Fund staff after MDRI relief with actual developments. Most older DSAs were projecting some debt accumulation post-MDRI relief, reflecting that debt ratios were low after debt relief and that the fiscal space thus created was expected to be at least partly used. Developments in Burkina Faso, Mali and Niger have been very close to expectations, while debt accumulation was faster than expected in Benin and Senegal, likely reflecting the impact of various unanticipated shocks.

4. Taking into account countries that have received debt relief recently, the overall debt sustainability outlook has clearly improved in the WAEMU. A simple way to assess the evolution of debt sustainability is to look at the recent history of DSA risk ratings. Ratings have not deteriorated since MDRI relief was provided in 2006 to the five countries mentioned above, which currently all face a low or moderate risk of debt distress.2 The three countries that benefitted from debt relief more recently (Côte d’Ivoire, Guinea-Bissau, and Togo) have improved their ratings and now face a moderate risk of debt distress (Table 1).

Table 1.WAEMU DSA Ratings
200520062007200820092010201120122013
Benin
Burkina Faso
Côte d’Ivoire
Guinea-Bissau
Mali
Niger
Senegal
Togo
Source: WAEMU Joint World Bank/IMF Debt Sustainability Analyses.

Debt Distress Ratings LegendLowModerateHighIn Debt Distress

Source: WAEMU Joint World Bank/IMF Debt Sustainability Analyses.

Debt Distress Ratings LegendLowModerateHighIn Debt Distress

5. In all countries, the share of domestic debt in public debt has increased. This reflects, to a large extent, debt relief which has only affected external debt (Table 2). The share of domestic debt to GDP did not increase substantially, with the exception of Senegal (Figures 13). However, domestic debt composition has changed in recent years, following the elimination of BCEAO financing and with the development of the regional debt market. This shift may have changed significantly the risk characteristics on domestic debt, because financing raised on the regional market has relatively short maturities and relatively high interest rates. This point is well illustrated in the case of Senegal, which has also relied recently on financing from international markets.

Table 2.WAEMU: Domestic Debt as Share of Total Debt, 2007–2012
200720082009201020112012
Est.
(Percent of Total Debt)
Benin42.339.242.240.145.646.4
Burkina Faso14.811.815.111.718.613.9
Côte d’Ivoire14.317.819.023.822.530.0
Guinea-Bissau20.522.122.061.159.555.2
Mali11.19.19.313.315.716.1
Niger36.033.228.828.828.513.8
Senegal23.818.221.123.128.127.3
Togo123.533.427.464.666.560.8
WAEMU17.821.120.825.627.628.8
Source: IMF, African Department database.

Togo’s domestic debt has been revised up since the country’s last DSA.

Source: IMF, African Department database.

Togo’s domestic debt has been revised up since the country’s last DSA.

Senegal Interest Payments

(Percent of GDP)
Appendix II. External Stability Assessment

The WAEMU current account deficit has hovered around 5 percent of GDP during the last decade and has been financed mainly by aid and foreign direct investment. Official reserves coverage remains adequate and the real effective exchange rate is broadly in line with the region’s fundamentals. Non-price competitiveness, however, needs to improve.1

A. Balance of Payments

1. The region’s current account deficit has hovered around 5 percent of GDP during the last decade (Figure 1A). In 2012, the current account deficit increased substantially reflecting exceptional factors such as reconstruction efforts in Côte d’Ivoire and investment in mining in Burkina Faso and Niger. The current account deficit is projected to remain high in 2013 for similar reasons, but would decline subsequently as Côte d’Ivoire’s reconstruction needs subside. All WAEMU countries have experienced current account deficits of various magnitudes over the past decade, with the exception of Côte d’Ivoire which used to record surpluses until recently (Figure 1B).

Figure 1.WAEMU: External Sector Developments

Source: BCEAO, DTTS, IMF staff calculations

The current account deficit is financed mostly through aid. Official transfers (grants) increased substantially in the second half of the 2000s, averaging 4 ½ percent of GDP in the past 5 years (Figure 1C). Official loans, with the exception of a 2009 spike, have remained stable at about 1 percent of GDP. Foreign direct investment is another stable source of financing (about 1 ½–2 percent of GDP).

B. Official Reserves Adequacy

2. Official reserves coverage remains adequate. Foreign exchange reserves declined in 2012, reflecting the large increase in the region’s current account deficit. However, they still amounted to CFAF 6,777 billion at end-2012 (about US$ 13 billion) covering more than 5 months of next year’s imports excluding intra-regional trade (Figure 1D), about 50 percent of broad money, and about 100 percent of short-term external liabilities. Reserves therefore look ample according to traditional metrics. An alternative methodology to assess adequacy suggests however that reserves are not excessive.2 This approach takes into account the cost of holding reserves and their benefits in terms of mitigating the impact of macroeconomic volatility. According to this approach, the optimal reserve coverage in the WAEMU varies between 5 and 10 months of imports, depending on the interest rate differential with the rest of the world.3 This approach, however, does not take into account the access to reserves guaranteed by the French Treasury under the franc zone arrangements.

C. Price Competitiveness

3. The real exchange rate remains broadly in line with fundamentals. The real and nominal effective exchange rates for the WAEMU have depreciated slightly by about 1 percent in the last 12 months. Among WAEMU member states, the largest depreciation occurred in Senegal and Niger. Model-based assessments (Box 1) do not suggest a significant misalignment of the real effective exchange rate.

Box 1.Various Approaches to Assess the Real Effective Exchange Rate

The macroeconomic balance approach estimates the exchange rate adjustment necessary to close the gap between the equilibrium current account balance, based on economic fundamentals, and the underlying current account projected over the medium term. The exchange rate adjustment is computed using WAEMU country-specific trade elasticities estimated by Tokarick (2010).1

The equilibrium real exchange rate is estimated as a function of medium-term fundamentals (e.g., terms of trade, openness, productivity differentials).

The external sustainability method compares the underlying current account balance with the balance that stabilizes net foreign assets (NFA) at its 2011 level (48 percent of GDP).

The results from applying these three approaches are reported in the table below. They show relatively small deviations from equilibrium, both positive and negative, which suggest no significant misalignment.

Table 1.WAEMU: Real Effective Exchange Rate Assessment
CAB/GDPREER1
NormUnderlying
Macroeconomic Balance−3.9−6.33.8
Equilibrium real exchange rate−5.2
External Sustainability−3.7−6.34.1

“-” indicates undervaluation

Source: IMF staff estimates.

“-” indicates undervaluation

Source: IMF staff estimates.
1 Tokarick, S., 2010, “A Method for Calculating Export Supply and Import Demand Elasticities”, IMF WP 10/180.

D. Structural Competitiveness

4. Survey-based indicators point to low non-price competitiveness. Various indicators rank WAEMU countries among the worst performers.

  • The World Bank’s 2013 Doing Business Report ranks on average WAEMU countries 167 among 185 countries. Many WAEMU countries (and the aggregate) moved down in the ranking compared to previous years, suggesting worsening deterioration in the business climate (at least in relative terms). The region faces particular challenges in protecting investors’ rights, enforcing contracts, starting a business, and accessing financing. Supply of infrastructure remains inadequate and procedures for paying taxes and registering propriety continue to be cumbersome.
  • The recent World Economic Forum’s Global Enabling Trade Report ranks five WAEMU countries 125.6 on average out of 144 countries. Factors identified as having the highest negative impact on the ease of exporting include access to trade financing and production inputs, availability and use of information, burdensome procedures, and production technologies and skills.
Table 2.WAEMU: “Doing business”
2010201120122013
Benin172173175175
Burkina Faso147151150153
Cote d’Ivoire168170167177
Guinea-Bissau181181176179
Mali156148146151
Niger174172173176
Senegal157157154166
Togo165158162156
Average165164163167
Source: World Bank, Doing Business Indicators.
Source: World Bank, Doing Business Indicators.

Figure 2.WAEMU-5 Most Problematic Factors For Exporting

(Percent of responses)

Source: World Economic forum. The Global Enabling Trade Report, 2012.

Appendix III. The Impact of the Malian Crisis on WAEMU1

The economic spillovers from the Malian crisis have been limited so far, reflecting that Mali trades significantly with only three countries in the region and other economic and financial linkages are not very strong. The main risks, should the political and security situation worsen in 2013, would be a further outflow of refugees and the spread of terrorist violence which could destabilize neighboring countries.

A. Background

1. In the first quarter of 2012, Mali suffered the double shock of a conflict in the North of the country and a military coup in Bamako. After the Malian army suffered a string of setbacks at the hands of Touareg separatists in Northern Mali, in March 2012 mid-ranking officers in Bamako staged a coup, overthrowing the government and forcing the resignation of President Touré. The power vacuum was exploited by a coalition of Touareg separatists and terrorist groups, which took control of the North of the country.

2. Mediation efforts resulted in a gradual return to the constitutional order. In April, the President of the National Assembly took over as interim President and appointed an interim Prime Minister. In August, the cabinet was reshuffled and expanded to broaden representation.

3. In January 2013, the French military intervened to stop the advance of the terrorist groups and restore territorial integrity. After terrorist groups advanced to key cities in central Mali without significant resistance, the Malian government solicited military assistance from France, which, in cooperation with the Malian army, halted the terrorist groups’ advance and counterattacked.

B. Linkages Between Mali and other WAEMU Countries

4. While exports to other WAEMU economies are rather limited, Mali’s imports from the region are non-negligible. Gold constitutes about 75 percent of Mali’s exports, and WAEMU-bound exports only add up to about 11 percent of the total (Table 1). Imports from other WAEMU countries have increased by about 50 percent over the past three years and made up 38 percent of Mali’s total imports in 2011. Senegal has become an increasingly large source of imported goods (cement and petroleum products), accounting for CFAF 338 billion, or 21 percent of total imports in 2011. Imports from Benin and Côte d’Ivoire are also significant, while imports from other WAEMU countries are negligible. The fact that the main three countries of origin in the WAEMU are those through which most imports from Mali get into the WAEMU (by sea) raises the possibility that some of this trade may be transit not properly recorded.

Table 1.Mali: Trade Flows
200920102011Average 2009-11
ExportsImportsExportsImportsExportsImportsExportsImports
(in CFAF billions)
Bénin3.263.82.7113.08.1119.84.798.9
Burkina15.02.221.43.347.62.528.02.7
Côte d’Ivoire16.3143.019.8113.042.4127.426.2127.8
Guinée Bissau0.00.00.00.00.00.00.00.0
Niger1.30.01.70.22.30.01.80.1
Sénégal48.0162.343.5239.654.4338.248.6246.7
Togo0.830.51.027.03.216.91.724.8
WAEMU84.7402.090.1496.2158.0604.8110.9501.0
Rest of the World756.6772.1899.11196.7974.2976.9876.6981.9
(in percent of total trade)
Bénin0.45.40.36.70.77.60.56.6
Burkina1.80.22.20.24.20.22.70.2
Côte d’Ivoire1.912.22.06.73.78.12.69.0
Guinée Bissau0.00.00.00.00.00.00.00.0
Niger0.20.00.20.00.20.00.20.0
Sénégal5.713.84.414.24.821.45.016.5
Togo0.12.60.11.60.31.10.21.8
WAEMU10.134.29.129.314.038.211.033.9
Rest of the World89.965.890.970.786.061.889.066.1
Source: BCEAO
Source: BCEAO

5. The number of Malian emigrants in WAEMU countries is considerable and inward remittances significant. There were more than 1 million Malians living abroad in 2010 (about 7 percent of the population),2 with Côte d’Ivoire, Nigeria and Niger as the top-three destinations. Annual remittances have added up to about 4 percent of GDP on average over the past decade. The number of immigrants in Mali is much lower (about 163,000 in 2010, mostly from neighboring countries), and remittances outflows have hovered around 1 percent of GDP.

6. Financial linkages between Mali and the rest of the WAEMU are limited. The main one is likely to be Malian government securities purchases by WAEMU-area banks outside Mali (see next section and Table 2). Although there is no good information on other cross-border financial flows within the WAEMU, these linkages are likely to be very small.

Table 2.Mali: Domestic Debt Service due in 2013
(in CFAF billions)
Malian BanksWAEMU Banks
T-bonds
Principal13.24.6
Interest3.00.9
T-bills
Principal66.752.9
Interest3.12.6
Total
Principal79.857.5
Interest6.13.5
Source: Malian Authorities
Source: Malian Authorities

C. Economic Developments in 2012 and Implications for other WAEMU Countries

7. The economy shrunk owing to the coup d’etat, the conflict in the North and the reduction in donor support. The coup and the ensuing violence had a negative effect on industrial activity, and the drastic reduction of donor support led to a contraction of the construction and public works sector. Travel to Mali was brought to a halt by the deterioration of the security situation, causing a reduction of the activity in the services sector. Despite strong growth in agriculture, gold, and cotton production, real GDP is estimated to have contracted by 1.5 percent.

8. The Malian crisis had a limited economic impact on other WAEMU countries. The drop in Malian imports of construction materials has contributed to a fall in Senegal’s cement production and exports. Beyond that, there is little evidence that exports from other WAEMU countries have been substantially affected.

9. Mali’s maturing public debt was rolled over and has had little impact on the WAEMU banking system. The government reached an agreement with banks, facilitated by the BCEAO, on rolling over its maturing treasury bills and bonds. The amount of debt rolled over was CFAF 138 billion, of which CFAF 43 billion was due to WAEMU-area banks outside Mali. While this is not negligible, it is only a fraction of bank holdings of WAEMU government debt.

10. The humanitarian and security repercussions have been significant. The violence in the North exacerbated the food crisis caused by the poor harvest of 2011, and resulted in the displacement of about 400 000 people, only about half of which remain within Mali. The other half sought refuge in neighboring countries, with Mauritania, Burkina Faso and Niger hosting about 96,000, 38,000,3 and 53,000 refugees, respectively.

D. Economic Outlook for 2013

11. The baseline scenario for Mali in 2013 would entail no further negative effect on other WAEMU countries. In 2013, the Malian economy is projected to recover. Real GDP growth would return to trend (4.8 percent), average inflation would decrease to 3 percent, and the current account deficit (including grants) would increase (to 8 percent of GDP) as economic activity picks up and the authorities reconstitute their emergency food stocks. This deficit would only be partially financed by foreign direct investment and the resumption of project aid, implying that Mali would draw down foreign exchange reserves to finance the rest (about $160 million). In this scenario, other WAEMU countries’ exports to Mali would be expected to pick up. However, the refugee situation in neighboring countries is likely to remain subject to uncertainty until the situation in the North has normalized.

12. The outlook for 2013 is subject to more downside risks than usual owing to uncertainties related to the political and security situation. While the terrorists have been driven out of urban areas in the North and a roadmap envisaging new elections in July has been adopted, most of the terrorists are believed to have retreated into the rugged desert terrain, and the terrorist threat remains elevated. Setbacks in the government’s attempts to stabilize the north of the country could worsen the security situation, weaken investor and consumer confidence, and slow down growth.

13. For neighboring countries, the main risk would be the spread of terrorist violence. The direct economic and financial impact would indeed be limited. Assuming import elasticity vis-à-vis output of 1.45,4 a 2 percent5 reduction in Malian real GDP would cause a reduction of WAEMU-area imports of about 3 percent, or CFAF 18 billion using 2011 data; the loss for Senegal would be about 0.1 percent of its GDP, assuming all countries are affected similarly. Another risk would be the inability of the Malian government to repay its debt to banks in other countries maturing in 2013 but the amount is limited (CFAF 57 billion, or less than 0.2 percent of the WAEMU GDP excluding Mali) and a rollover could presumably be envisaged as in 2012. The main risk for neighboring countries would likely be a period of prolonged instability the North, which could lead to an expansion of terrorist activities in these countries and require them to further increase defense and security spending.

Appendix IV. Shocks and Shocks Absorption in the WAEMU.1

This note first assesses to which extent business cycles are synchronized in the WAEMU, and how synchronization has evolved over time. Looking then at shocks more explicitly, it explores whether there has been “shock convergence” (i.e., whether shocks have become less asymmetric over time). In a second part, the note explores the effectiveness of monetary policy in influencing certain key variables, and whether other mechanisms contribute to smoothing the impact of shocks on consumption. The results suggest a still high prevalence of asymmetric shocks and limited smoothing of shocks. The limited scope for, and impact of, monetary policy suggests that fiscal policy has an important role to play in addressing both symmetric and asymmetric shocks. Further integration and strengthening of market-based smoothing mechanisms (e.g., developing and improving access to the financial system) would also likely reduce the occurrence and economic impact of asymmetric shocks.

1. The monetary policy framework in the WAEMU has ensured price and exchange rate stability, but reduces member countries’ ability to respond to asymmetric (idiosyncratic) shocks. This framework has produced substantial benefits in terms of price and exchange rate stability and convertibility of the CFA franc. At the same time, it can make maintaining macroeconomic stability more challenging if the business cycles of the member countries are not well synchronized and stabilization mechanisms aimed at absorbing common and idiosyncratic shocks are absent or ineffective (Karras, 2006).

2. Susceptibility to idiosyncratic shocks reflects structural characteristics and a lack of integration. The degree of business cycle synchronization depends on factors such as the similarity of economic structure, trade and financial openness, the presence and type of idiosyncratic shocks, and the efficiency of adjustment mechanisms to deal with such shocks (De Grauwe, 2005). Some authors (Frankel and Rose, 1998) have argued that business cycle synchronisation may be endogenous and increase over time with the level of economic integration within a monetary union. WAEMU countries are characterized by heterogeneous economic structures. In addition, limited economic diversification and a range of geographical conditions make them prone to output volatility. Although they have been members of a monetary union for decades, trade, labor and capital market integration has not progressed significantly. Output volatility remains large (Figure 1).

Figure 1:Vulnerabilites of WAEMU Economies

Source: BCEAO, DTTS, WITS, IMF staff calculations

3. This note: (i) assesses the degree of business cycle synchronization and shock convergence; and (ii) provides simple estimates of the ability of monetary policy to absorb common shocks and of various mechanisms in absorbing common and idiosyncratic shocks.

Nature and Convergence of Shocks

A. Business Cycle Synchronization over Time

4. Business cycles synchronization in the WAEMU has been modest (Table 1).2 Over the period 1980–2012, business cycle synchronization in the WAEMU has averaged at about 0.2, ranging from about -0.2 for Togo (the less synchronized economy) to about 0.5 for Mali and 0.6 for Burkina Faso (the most synchronized economies). The degree of business cycle synchronization has varied over the last three decades, with a low point during the 1990s and an increase during the 2000s. Synchronization has decreased again during the most recent years, possibly reflecting political instability in a number of countries (Côte d’Ivoire, Guinea-Bissau, Mali). Business cycle correlation has tended to be higher in landlocked countries (Burkina Faso, Mali, and Niger), which are more dependent on intra-WAEMU trade, and lower in countries with higher extra-zone trade links (Benin, Senegal, and Togo).

Table 1.WAEMU: Business cycle correlation with WAEMU aggregate1 (1980-2012)
1980’s1990’s2000’ssince 2007
Benin0.370.120.47−0.11
Burkina Faso0.760.570.710.44
Guinea-Bissau0.35−0.130.260.03
Cote d’Ivoire0.630.030.300.15
Mali0.360.630.900.43
Niger0.340.110.560.41
Senegal0.120.140.390.05
Togo0.22−0.80−0.030.17
Average0.390.080.450.20

Each country is taken out in the computation of the WEAMU aggregate for its respective correlation.

Source: IMF staff estimations.

Each country is taken out in the computation of the WEAMU aggregate for its respective correlation.

Source: IMF staff estimations.

5. Business cycles of many WAEMU countries have become more synchronized with that of the euro zone (Table 2). This synchronization has become relatively strong in several countries in the recent period (with the notable exceptions of Côte d’Ivoire, probably due to its political crisis at the time, and Togo). This increased correlation may reflect the impact of the global crisis. Business cycle correlation with China (taken as a proxy for emerging markets) remains limited on average, except for Guinea-Bissau and Senegal.

Table 2.WAEMU: Business cycle correlation with the Euro zone and China (1990-2012)
the Euro zoneChina
1990’s2000’ssince 20071990’s2000’ssince 2007
Benin−0.530.390.40−0.710.160.16
Burkina Faso−0.530.000.47−0.01−0.07−0.08
Guinea-Bissau−0.010.340.580.010.010.33
Cote d’Ivoire−0.95−0.44−0.300.15−0.27−0.09
Mali−0.44−0.210.43−0.55−0.04−0.20
Niger−0.320.150.55−0.07−0.02−0.08
Senegal0.140.180.940.120.170.86
Togo0.73−0.25−0.37−0.400.02−0.51
WAEMU−0.84−0.140.02−0.08−0.090.00
Source: IMF staff estimations.
Source: IMF staff estimations.

B. Shocks Convergence

6. Supply shocks have not converged across all WAEMU countries. The methodology used to identify various kinds of shocks and their dynamics is detailed in Box 1. Supply shocks appear very heterogeneous among WAEMU members. In Burkina Faso, Mali, Niger, and Senegal supply shocks have become more asymmetric (Figure 2). They have become more symmetric in other countries.3

Figure 2:Dynamics in Supply Shocks Convergence in the WAEMU

(1994-2012)

Box 1.Structural Shocks Convergence

Structural shocks convergence is assessed following a two-step approach. In the first step, three types of structural shocks–supply, real demand, and nominal–are identified using a structural vector autoregressive (VAR) model1 with the Blanchard and Quah (1994) long-term restrictions, as developed by Clarida and Gali (1994).

In particular, it is assumed that: (i) only supply shocks, such as productivity or demographic shocks, affect output (Δyt) in the long term; (ii) both supply and real demand shocks (government spending or change in fiscal policy) affect the real exchange rate (Δreert) in the long term; and (iii) all shocks influence prices (Δpt). These restrictions require that A12 = A13 = A23 = 0. The structural shocks are serially uncorrelated and have a covariance matrix normalized to the identity matrix. A reduced-form of the VAR model is then estimated and the time series of structural shocks are recovered.

In the second step, a dynamic space-state model using the Kalman filter technique2 is estimated to assess how shocks convergence has evolved.

The dependent variable in (2) represents asymmetric shocks, measured as the difference between shocks affecting WAEMU (etW) and each country (eti). A time-varying coefficient βt getting closer to zero is interpreted as increasing convergence, while βt close to one suggests that shocks affecting the rest of the world (etk) affect countries in an asymmetric fashion. αt denotes the time-varying coefficients, capturing idiosyncratic shocks not related to the external environment. The two time-varying coefficients are shown in Figure 2.

1 The data are annual and taken from the IMF database; they cover the period 1970–2012.2 See Boone (1997), Babetski et al., (2002), Zdzienicka (2010) for details.

Monetary Policy and Response to Symmetric Shocks

7. Monetary policy can be used in the WAEMU to address symmetric shocks. Although the CFA franc is pegged to the euro, there is some scope for an active monetary policy in the WAEMU because of limited capital mobility (Kireyev 2012). The most important transmission channel of monetary policy in the region is the bank lending channel. While transmission is imperfect due to a shallow interbank market, there is correlation of about 0.5 between policy rates and interbank market rates after one to four quarters. The absence of a secondary government debt market and relatively illiquid equity and real estate markets make it difficult for the asset and interest rate channels to be effective.

8. Monetary policy seems to have a significant, but relatively small, impact on economic activity via the credit market.4 An increase of 100 basis points in the main monetary policy rate is found to decrease private credit growth by about 3 percentage points after one quarter and 4 percentage points after one year (non-cumulative) (Figure 3). Reserve requirements are found not to affect credit growth in the short term. When testing the effect of changes in both interest rates and reserve requirements by means of an index, the impact of monetary policy is higher.

Figure 3:The Effect of the Monetary Policy Rate on Credit Growth

(in percentage points)

Source: IMF staff estimates

Other Smoothing Mechanisms

9. Smoothing of the impact of macroeconomic shocks may occur through a range of channels. The main ones are: (i) private insurance via international capital markets (e.g., through the holding of diversified portfolio of international assets or explicit insurance); (ii) saving and borrowing via international credit markets; (iii) private transfers (e.g., remittances) and official ones (e.g., foreign aid); and (iv) fiscal risk sharing across countries (e.g., via intra-union transfers). A methodology to measure the effect of some of these mechanisms is presented in Box 2.

Box 2.Measuring the Effectiveness of Smoothing Mechanisms

The effectiveness of shock smoothing mechanisms in the WAEMU is estimated using the approach proposed by Asdrubali et al. (1996). The approach consists in disaggregating GDP into different national account aggregates: Gross National Product (GNP), Net National Income (NI), Disposable National Income (DNI), and the sum of Government Consumption and Private Consumption (G+C). Using these aggregates, GDP can be decomposed as follows:

where i denotes each WAEMU state. Each ratio measures a specific smoothing mechanism. For instance, if GDPiGNPi varies like GDPi, then smoothing is taking place through international income transfers (which reduces GNP variations). The GNPiNIi ratio will measure smoothing through capital depreciation or unilateral transfers (foreign aid). Further smoothing may take place through net international transfers and taxes (NIiDNIi) and total saving (DNIi(C+Gi)).

Full smoothing of shocks (deviations from the trend) occurs if total consumption remains unchanged when GDP varies.

To measure the contribution of each factor (channel) in smoothing shocks to GDP, we take log and first difference of both size of equation (1) and we multiply each term by ΔlogGDPi,. The cross-sectional variance in GDP is then divided by ΔlogGDPi, to obtain the following equation:

The βs are then estimated running the following system of independent panel regressions:

Each β measures the incremental percentage of smoothing achieved by each channel described above1/ and βu measures the part of the shock to GDP which is not smoothed. The β coefficients are not constrained; a negative value indicates amplification, rather than smoothing, of a shock. The αt coefficients capture time fixed effects,

1/Table 3 presents how the β coefficients changed over time. Capital depreciation (equation 4) and net tax and transfers (equation 5) channels are reported jointly because of data availability issues.

10. Shock smoothing, while on the rise, remains limited in WAEMU countries (Table 3). A large share of shocks to GDP (about 83 percent in the recent period) is not smoothed in the WAEMU, which generates substantial consumption volatility (and likely welfare losses). In particular, net taxes and transfers and public and private saving do not have a statistically significant effect on consumption smoothing. The main (statistically significant) smoothing mechanism in the recent period has been factor income (most likely remittances, which have been shown to be counter-cyclical). Smoothing has modestly increased over the past decades. The limited amount of smoothing likely reflect a number of factors: (i) limited access to credit markets, which reduces the scope for counter-cyclical fiscal policies (with possible adverse implications for investment volatility too); (ii) the fact that most aid flows tend to be procyclical; and (iii) the absence of significant risk-sharing mechanisms at the level of the region.

Table 3.WAEMU: Channels of output smoothing
Risk-smoothing channels1B coefficient2
1980-20101980-19941995-2010
Factors income flows0.068**0.1700.205***
[−1.91][0.39][2.84]
Capital depreciation & Net tax and transfers0.0980.138−0.006
[−1.27][1.30][−0.04]
Saving
Public0.0040.2610.151
[0.90][0.51][1.24]
Private0.0550.087−0.179
[0.46][0.61][−0.54]
Unsmoothed0.878***0.884***0.830***
[8.56][7.94][2.83]
Source: IMF staff estimates

indicates the risk-smooting channels identfied by euqation (4)-(7) in Box 2;

reports the pourcentage of smoothing achieved by each channel;

***, **, *denotes significance at 1%, 5%, 10%, respectively.
Source: IMF staff estimates

indicates the risk-smooting channels identfied by euqation (4)-(7) in Box 2;

reports the pourcentage of smoothing achieved by each channel;

***, **, *denotes significance at 1%, 5%, 10%, respectively.
Appendix V. Fiscal Discipline in the WAEMU: Rules and Markets1

This note explores the extent to which rules and market discipline are effective in ensuring fiscal sustainability in the West African Economic and Monetary Union (WAEMU). After evaluating the responsiveness of sovereign interest rates to governments’ fiscal behavior, the paper finds that an improvement of the effectiveness of market discipline in WAEMU would necessitate further development of the regional financial market. In addition, fiscal aspects of the WAEMU’s regional surveillance framework could be reconsidered to improve both design and enforceability.

A. Introduction

1. Achieving fiscal discipline in a monetary union without a central fiscal authority, while crucial for its stability, is more challenging than elsewhere. A monetary union is likely to increase economic and financial interconnectedness among its members. While regional integration is in itself a welcome development, it also brings new risks. One of them is that debt sustainability issues in one country could have a higher impact on the other members. Close financial linkages, such as large holdings of government debt by banks in other countries of the union, can indeed be a powerful channel of transmission of a fiscal crisis in one country to the rest of the union, with implications for the stability of the latter as has been seen in the euro area. While ensuring fiscal sustainability in all the countries may be vital for the survival of a monetary union, some its members may actually have incentives to over-borrow in the absence of a credible commitment that no country will be bailed out by the others should it face an unsustainable debt burden. Countries with weaker fiscal situations may indeed benefit from the credibility of those with stronger public finances, and face lower interest rates than they would otherwise.

2. Fiscal discipline can in principle be supported by rules and financial markets. Fiscal rules can be useful in anchoring expectations and providing macroeconomic stability (Morris et al., 2006), and have been viewed as a central pillar of the policy coordination framework that aims at ensuring the stability of a monetary union. Designing such rules is a delicate exercise: they need to help preserve fiscal discipline while leaving scope for counter-cyclical policies, since fiscal policy is the main tool to cope with asymmetric shocks in a monetary union. Market discipline can also help if a number of conditions are met, including free movement of capital, a credible no bail-out commitment, no monetization of the debt, and sensitivity of sovereign interest rates to fiscal behavior (Anker et al., 1997).

3. This note explores the extent to which rules and market discipline are effective in ensuring fiscal sustainability in the WAEMU. It first evaluates the responsiveness of interest rates on sovereign debt issued in the regional market to governments’ fiscal behavior, thus gauging the market’s ability to signal the need for fiscal tightening. It also reviews the design and enforcement mechanism of fiscal rules in the WAEMU and their effectiveness. Finally, the note discusses possible ways to improve the effectiveness of the regional surveillance framework and market discipline.

B. The Role of the Regional Market in Fostering Fiscal Discipline

4. The regional government debt market has become an important source of financing for a number of WAEMU countries (Table 1). The elimination of BCEAO statutory advances to governments from 2003 served as a catalyst for the government securities market, which was sustained by excess liquidity in the banking system (Sy, 2010). A few countries have accounted for the bulk of the issuances, which consist mostly of T-bills with a maturity of less than a year (Diouf et al., 2012). Furthermore, foreign participation in the WAEMU government securities market remains marginal, and trade in the secondary market limited.

Table 1.WAEMU: Treasury Bills Issuance
20012002200320042005200620072008200920102011
(CFAF billions)
Benin0.00.00.00.023.445.60.040.1119.7119.8237.7
Cote d’Ivoire0.00.016.315.747.50.0164.8103.0538.31245.92278.8
Mali12.00.015.221.0114.944.153.130.554.199.5119.6
Senegal42.90.023.045.335.550.867.263.282.094.7238.8
Burkina Faso0.051.930.941.543.350.946.961.034.343.6160.8
Niger0.00.00.00.030.023.350.035.00.035.064.5
Guinee0.00.00.00.06.06.70.00.00.00.00.0
Togo0.00.00.00.00.00.00.010.015.030.060.0
WAEMU54.951.985.4123.5300.5221.4382.0342.7843.51668.53160.2

Box 1.Estimating the Disciplining Effect of the Regional Debt Market

The objective is to assess the relationship between interest rates requested by investors on the regional market and the fiscal behaviour of sovereigns. The dataset used covers all WAEMU countries over 1997-2011. All data used in the estimations are annual. The dependent variable is the average short-term annual interest rate a country is charged by the market.

The estimates in Table 2 are obtained through the Arellano-Bond estimation technique, which accommodates a dynamic equation specification while controlling for time-invariant country characteristics. The variables used are:

  • (i) Fiscal variables: the overall fiscal balance as a share of GDP and the general government’s debt-to-GDP ratio. One would expect higher deficit and debt ratios to lead to higher interest rates, as they both increase the probability of default and therefore the credit risk premium. The debt variable used here is domestic debt, which to a large extent is composed of debt issued in the WAEMU market. External debt remains mostly owed to donors, and in the past decade has been relieved in all WAEMU countries, while regional market debt continued to be serviced.
  • (ii) The level of excess bank reserves in the region. With banks being the main investors, a higher level of excess reserves is likely to lead to lower interest rates.
  • (iii) The WAEMU overall fiscal balance-to-GDP ratio. This variable gives a sense of how much demand there is in the market for bank excess reserves. One would expect a higher WAEMU fiscal deficit to lead to higher interest rates. This variable is calculated separately for each country, excluding the country’s own fiscal balance to avoid multicollinearity.
Table 2:Determinants of Interest Rates in the WAEMU
Overall Balance to GDP−0.153***−0.0577
(0.001)(0.274)
Domestic Debt to GDP0.0944**0.103***
(0.013)(0.006)
Inflation0.0608**−0.0201
(0.016)(0.487)
Excess Reserves−0.787***−1.290***
(0.000)(0.000)
WAEMU Overall Balance to GDP−0.498***−0.228*
(0.000)(0.099)
Political Risk Rating0.0502***
(0.000)
L.Int Rate0.736***0.528***
(0.000)(0.000)
Observations5247
p-values in parentheses* p<0.10, ** p<0.05, *** p<0.01
p-values in parentheses* p<0.10, ** p<0.05, *** p<0.01

5. While the regional market responds to fiscal variables, borrowing costs seem to be driven mostly by the relative supply and demand for excess bank reserves.

An increase in domestic debt has a positive and significant impact on the interest rate, suggesting that the regional market does discriminate across sovereigns based on their fiscal behavior. However, the magnitudes of the effects of the WAEMU-level excess reserves and overall fiscal balance indicate that availability of and demand for bank reserves in the regional market are the main determinants of borrowing costs. This suggests a currently limited role of WAEMU financial markets in enforcing fiscal discipline. These results are in line with those from Sy (2010), who finds that supply and demand conditions are the most important determinants of the yield curve in the WAEMU. They likely reflect the limited development of the financial system, which means in particular that banks have limited investment opportunities for their excess reserves, and the quasiabsence of other investors.

C. The Role of the Regional Surveillance Framework

6. The regional macroeconomic surveillance framework in the WAEMU includes key fiscal rules. Three of the four first-order convergence criteria are of a fiscal nature: the basic fiscal balance should record a surplus, the overall public debt-to-GDP ratio should be less than 70 percent, and governments should not accumulate arrears. Second-order criteria also include a number of fiscal targets, but they are less directly aimed at the stability of the monetary union.

7. All WAEMU countries now have debt ratios way below the convergence criterion (Table 3). The latter was designed at a time when all WAEMU countries were over-indebted, with debt ratios way above 70 percent of GDP. With Côte d’Ivoire having reached the completion point under the HIPC Initiative in 2012, all WAEMU countries have now benefitted from substantial debt relief and have debt ratios way below 70 percent of GDP. This major structural break raises the issue of whether the existing ceiling remains appropriate.

Table 3:WAEMU First-order Convergence Criteria, 2001–12
200120022003200420052006200720082009201020112012
Est.
Basic fiscal balance/GDP (≥ 0 percent) 1
Benin−3.0−2.8−0.1−0.5−1.40.11.5−1.1−1.51.5−0.20.4
Burkina Faso−2.5−3.7−2.9−3.2−3.5−4.5−5.8−4.9−1.90.41.2−0.8
Côte d’Ivoire1.1−0.4−1.7−1.3−1.6−1.6−0.6−1.6−1.0−1.6−4.0−3.8
Guinea Bissau−6.9−5.8−7.0−12.0−7.2−6.2−7.7−6.73.21.02.91.5
Mali−1.7−1.3−0.3−0.7−1.2−0.4−1.2−1.20.40.2−1.1−1.1
Niger−3.7−1.9−2.1−2.2−1.51.1−0.21.9−2.8−1.0−0.10.9
Senegal−1.21.20.2−0.5−1.2−4.7−2.6−2.4−2.1−1.8−4.2−3.0
Togo1.50.32.71.4−2.0−2.8−2.7−0.7−1.41.3−1.7−4.2
WAEMU−0.8−0.9−1.1−1.3−1.8−2.1−1.6−1.8−1.3−0.6−2.1−2.0
Number of countries violating666786776365
Total debt/GDP (≤ 70 percent)
Benin54.047.736.533.837.211.621.925.628.030.230.333.3
Burkina Faso0.00.00.00.00.00.023.222.127.227.228.029.3
Côte d’Ivoire175.2150.7133.6120.4107.2107.175.675.366.566.471.250.9
Guinea Bissau208.3230.7217.3195.6179.3176.9187.5157.6163.849.044.246.9
Mali88.756.151.648.448.319.921.020.822.932.830.131.4
Niger85.288.969.958.852.317.225.121.027.923.721.939.9
Senegal77.380.369.268.057.337.223.523.934.235.740.045.0
Togo108.093.492.482.572.682.5112.984.075.948.546.346.5
WAEMU110.196.382.975.367.054.948.442.845.443.443.540.9
Number of countries violating653333332010
Overall fiscal balance (including grants)
Benin−4.8−5.1−1.7−1.2−2.3−0.30.2−1.7−4.3−1.6−1.8−0.7
Burkina Faso−3.9−4.9−3.0−4.5−5.016.6−5.7−4.4−4.8−4.5−2.5−3.2
Côte d’Ivoire0.9−1.1−2.1−1.7−1.7−1.8−0.8−0.6−1.6−2.3−4.3−4.3
Guinea-Bissau−5.4−3.6−1.0−4.6−4.9−2.3−2.71.72.7−2.5−2.8−1.9
Mali−3.2−3.8−1.3−2.6−3.131.3−3.2−2.2−4.2−2.7−4.1−2.1
Niger−3.5−3.0−2.8−3.6−2.040.3−1.01.5−5.4−2.4−3.0−3.5
Senegal−2.40.0−1.3−3.1−3.0−5.7−3.7−4.6−4.8−5.2−6.7−5.9
Togo−0.1−0.42.41.0−2.4−2.8−1.9−0.9−2.8−1.6−2.9−6.6
WAEMU−1.6−2.1−1.7−2.4−2.76.9−2.2−1.9−3.5−3.1−4.0−3.8

Total fiscal revenues, excluding grants, minus total expenditures excluding foreign-financed investment expenditure. From 2009, total fiscal revenues plus budget support grants plus counterpart of HIPC/M DRI-related spending for both current and capital spending less current expenditure and capital expenditure financed by own resources.

Total fiscal revenues, excluding grants, minus total expenditures excluding foreign-financed investment expenditure. From 2009, total fiscal revenues plus budget support grants plus counterpart of HIPC/M DRI-related spending for both current and capital spending less current expenditure and capital expenditure financed by own resources.

8. The basic fiscal balance criterion has rarely been met, raising issues about its relevance and credibility. Most countries have repeatedly missed the target over the past ten years (Table 3 and Figure 1). This begs the question of whether policies were inadequate (in light of the repeated breaches) or if the criterion itself needs to be reconsidered.

Figure 1.WAEMU Fiscal Balance

9. Another issue which could warrant reconsideration is monitoring and enforcement. The Excessive Deficit Procedure (EDP), while outlining a sequence of remedial steps, does not stipulate a clear timeline or specify the mitigating circumstances that could temporarily exempt a country from the process. A deviating country is given 30 days to develop an adjustment strategy, which can benefit from financial assistance from the Union. In case a country cannot come up with corrective measures or they are poorly executed, it is liable to sanctions, which can include publication of a statement on the country’s economic situation, withdrawal of the Union’s assistance, recommendation to the BCEAO to review its intervention policy towards the country, and finally suspending financial support from the Union. It is not clear how much time a country is given to take the correcting measures and whether, in case adjustment fails, the process reverts to the very beginning, or to the last fulfilled step. Furthermore, the acceptable adjustment and the monetary value of the sanctions are not specified; in fact financial sanctions have never been implemented. The ambiguity of the corrective mechanism above is compounded by the leeway provided by Article 71 of the WAEMU Treaty which states that, if a member country is experiencing economic distress or is susceptible to such distress because of exceptional circumstances, the (unanimous) WAEMU Council can exempt it from the obligation to meet part or all of the convergence criteria.

D. Strengthening the surveillance framework and market discipline

10. Deepening the regional market would increase market discipline. The WAEMU financial market, while having developed substantially in the last decade, is still relatively shallow. This likely results in imperfect pricing of sovereign borrowing. Market monitoring may also be hampered by banks’ limited capacity to assess fiscal sustainability. Further market development, and the associated increasing reliance of sovereigns on this kind of financing, can be expected to increase market discipline. Improving information quality and availability, which can then be used by market participants for pricing purposes, would also help. Banks, on their side, may need to improve their analytical capabilities. Finally, the supervision authorities could consider introducing a non-zero risk weight for government paper in the financial institutions’ capital adequacy calculations.

11. The ceiling for the public debt ratio could be lowered. The current ceiling was set at a time when debt ratios were much higher. Recent research conducted by Bank and Fund staff in the context of the debt sustainability framework (DSF) suggests that a ceiling of 70 percent of GDP may be higher than desirable from the perspective of limiting the risk of debt distress. It could be considered to lower it to around 50 percent, which is the level suggested by Bank and Fund staff for countries with low or medium quality of policies and institutions in the sense of the DSF (i.e., countries with a Country Policy and Institutional Assessment (CPIA) index lower than 3.75). Whatever its level, the ceiling should be seen as a debt level to avoid reaching, not as an optimal level.

12. The design of the fiscal balance criterion could also be reconsidered if its main objective is to preserve fiscal sustainability. The exclusion of foreign-financed capital expenditure from the current definition raises two issues: first, it excludes a substantial source of debt accumulation, which in the past was a major contributor to over-indebtedness; second, it discriminates among sources of financing, to the detriment of regional financing at a time when it might actually be desirable to develop the regional market. An overall deficit target would allow better control over debt accumulation and would not create distortions. If the authorities were to move in this direction, the next issue to address would be how to set the ceiling for the overall deficit to both ensure debt sustainability and allow for counter-cyclical policy responses. A solution considered in the euro area has been to set a target for the structural (cyclically-adjusted) balance. However, such an approach may be more challenging to implement in the WAEMU, due to the absence of clear business cycles and data quality and availability issues. A possible alternative approach would be to use as a reference for the ceiling the deficit level which would stabilize the debt ratio in the steady state. For instance, assuming that nominal GDP grows by 7 percent at the steady state (5 percent for real growth, and 2 percent for inflation, which is the BCEAO’s objective), a deficit of 3.5 percent stabilizes the debt ratio at 50 percent. The ceiling could be set slightly below this level, while allowing it to exceed it temporarily (and by a limited amount) under exceptional circumstances.

13. Finally, the monitoring and enforcement mechanism may need to be strengthened. The WAEMU Commission encounters difficulties collecting the information it needs to do effective regional surveillance; for instance, the data on fiscal arrears do not seem easily available. The timeliness of information may also be an issue. Improving the availability, quality, and timeliness of information is critical if the regional institutions are to exercise meaningful surveillance. Another issue is enforcement. While the design of the EDP could perhaps be improved, the more fundamental issue is the readiness of member states to subject themselves to strong oversight and possible sanctions from their peers. This is obviously a highly political issue, and perhaps not an urgent one, but it will need to be addressed in the medium term. A first step should be increased transparency and dissemination of regional and national fiscal outcomes.

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1

The basic fiscal balance could continue to be monitored for analytical purposes.

2

An overview of the WAEMU’s financial system and issues was produced in the context of the pilot on strengthening financial sector surveillance in LICs. More detailed analysis can be found in Supplement 1. Similar reports were produced for Benin (IMF Country Report No 13/9) and Senegal (IMF Country Report No 12/337).

3

Evaluation des gains attendus de l’intégration économique régionale dans les pays africains de la Zone franc, FERDI, September 2012 (http://www.ferdi.fr/uploads/sfCmsContent/html/135/Rapport_ZF_4oct_IMP.pdf)

1

Douglas Shapiro is the author of this note.

2

Benin actually recorded an improvement. Burkina Faso and Mali incurred rating changes during that period, but are back to the rating they had in 2006 or 2007.

1

The authors of this note are Aleksandra Zdzienicka and Christina Kolerus.

2

Dabla-Norris, E., J.I. Kim, and K. Shorono, 2011, “Optimal Precautionary Reserves for Low-Income Countries: A Cost-Benefits Analysis”, IMF WP 11/249.

3

See last year’s report for more detail (IMF Country Report no 12/59, March 2012).

1

Ermal Hitaj is the author of this note. The note reflects information available at the time the mission took place (January 2013).

2

Migration and Remittance Factbook 2011, World Bank

3

UNHCR estimates the number of Malian refugees in Burkina Faso at 38,000 as of December 2012. This figure is a significant downward revision from UNHCR’s earlier estimate of 107,000, which was based on self-declaration by heads of refugee households. The new estimate was based on a biometric registration of all refugees, and a precise headcount of incoming refugees.

4

Senhadji (1998) estimates average short-run and long-run income elasticity of imports at 0.45 and 1.45, respectively. This note conservatively assumes a rapid reaction of Malian import demand to income changes.

5

A 2 percent decline in GDP is predicated on a similar drop in services and industrial production as in 2012, and a lower growth in the primary sector.

1

The authors of this note are Aleksandra Zdzienicka and Christina Kolerus.

2

Business cycle synchronization measures for WAEMU countries are obtained by: (i) de-trending the series of real GDP using a Hodrick-Prescott (HP) filter with a smoothness parameter equal to 1 (Rand and Tarp, 2012); (ii) computing the correlation between the country’s cyclical component and WAEMU’s cyclical component.

3

Similar analysis shows a higher symmetry of demand shocks in the WAEMU.

4

The impact of monetary policy measures is identified by estimating panel regression equations of the changes in the monetary policy rate on private sector credit up to four quarters ahead.

1

This note was prepared by Ermal Hitaj.

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