Chapter

Annex II Economic Integration Within the Two Unions of the CFA Franc Zone

Author(s):
Stéphane Cossé, Johannes Mueller, Jean Le Dem, and Jean Clément
Published Date:
June 1996
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Economic and Monetary Unions1

Institutional Aspects

The devaluation of the CFA franc in January 1994 was the occasion for the member countries of the CFA franc zone to reaffirm their commitment to regional economic integration. The current initiatives aim at strengthening economic cooperation with a view to transforming the existing monetary arrangements into full-fledged economic and monetary unions. On January 10, 1994, the Heads of State of the West African Monetary Union (WAMU) signed the treaty establishing the West African Economic and Monetary Union (WAEMU); and on March 16, 1994, the Heads of State of the member countries of the Bank of Central African States (BEAC) signed a treaty setting up the Central African Economic and Monetary Community (CAEMC).2 In addition, as part of an effort to improve the legal and regulatory framework in the CFA franc zone, initiatives have been taken to establish regional institutions capable of enforcing regional regulations in critical areas.

The treaty establishing the WAEMU became effective on August 1, 1994. Preparatory work had been conducted since 1992 by a Steering Committee that included officials of the seven countries and representatives of the donor community. The treaty sets up a new institutional framework, largely inspired by the European Union, with an executive committee consisting of seven members (the Commission) and jurisdictional organisms. The Commission was installed in Ouagadougou on January 30, 1995, and the legal, administrative, and financial framework under which WAEMU institutions will operate was adopted in August 1995.

In the Central African subregion, progress toward establishing a full-fledged economic and monetary union has been slower, although the first steps were initiated at end-1991. Following meetings of a group of national experts in 1991–92, the Governor of the BEAC presented a report to the Heads of State in December 1992 that led to the preparation of two draft conventions in the economic and monetary areas. In March 1994, the Heads of State of the six member countries signed the CAEMC treaty in N’D-jaména joined by Cameroon in June 1994. The treaty itself, however, sets up only a legal framework, which is to be fleshed out by the two conventions on the Central African Monetary Union (CAMU) (and the attendant revision of the statutes of the BEAC) and the Central African Economic Union (CAEU).

In both subregions, the objectives of the treaties are the establishment of a common market based on a customs union and the harmonization of indirect tax legislation, and the coordination of economic policies between member countries through inter alia regional surveillance procedures. In addition, both treaties provide for the implementation in due course of common sectoral policies (in agriculture, human resources, manufacturing, transport, energy, and the environment). The pace of implementation of treaty dispositions has been uneven so far, with WAEMU countries taking a lead in multilateral surveillance matters, and CAEMC countries making more rapid progress toward a common customs union. Detailed measures included in the treaties and draft conventions, as well as a status of implementation, are presented below and summarized in Table 54.

To prevent dependency on national treasuries’ resources, both treaties provide for the creation of an autonomous community budget, with earmarked tax and customs resources, and annual budgeting procedures to fix both the recurrent expenditures of the new institutions and regional economic interventions, notably in the area of sectoral policies.

Toward a Common Market

Both subregions have set the goal of a common market for their member countries, involving a free flow of goods, services, persons, and capital. Meeting this goal requires: (a) the establishment of a full-fledged customs union based on a free trade area—that is, the elimination of tariff and nontariff barriers within the subregion—protected by a common external tariff (CET); (b) the harmonization of domestic tax regimes, notably for indirect taxation; and (c) the definition of a common regulatory framework in a number of areas such as technical norms, financial transactions, and government subsidies.

Table 54.Summary of Economic Integration Initiatives/Results in the CFA Franc Zone
West African Economic and Monetary UnionCentral African Economic and Monetary Community
ProjectContentImplementationContentImplementation
Institutional Arrangements
Treaty establishing the economic union• Enlarges the monetary union to economic integration, defines the new institutions, and the scope of their activities.Signed on January 10, 1994; effective on August 1, 1994.• Umbrella treaty for both economic and monetary unions.Signed on March 16, 1994; specific conventions on both monetary and economic unions still under negotiation.
Executive authority• Creates a seven-member executive committee (the Commission).Installed January 30, 1995 in Ouagadougou.• Creates an Executive Secretariat (to replace the CAECU General Secretariat).Draft proposal.
Judiciary authority• Creates a Court of Justice.Installed January 30, 1995.•Creates a Court of Justice.Draft proposal.
Community budget• Earmarks tax and customs resources to finance recurrent and intervention expenditures.Autonomous budget to be put in place by 1997. Transitory period financed by the BCEAO and the BOAD.• Earmarks tax and customs resources to finance recurrent expenditures.Not specified.
Common market
Customs union• Common external tariff (may consist of three rates); preferential rate for intraregional trade to be phased out progressively; elimination of nontariff barriers within the union; and harmonization of tax regimes, including exemptions.Preliminary proposals on the general principles based on three specific studies. However, differences in customs tariff rates have already been reduced in the context of the CFA franc devaluation.•Common external tariff consisting of four rates (5, 10, 20, and 30 percent), and a preferential tariff for intraregional trade (20 percent of the CET, to be phased out by 1998).Partly implemented in 1994 and in full by mid–1995, temporary surtaxes (30 percent maximum) allowed on a limited list of products.
•Elimination of ad hoc exemptions.Unevenly implemented in 1994.
•Elimination of exemptions included in bilateral agreements between governments and companies.To be completed by end–1995.
Tax harmonization
Indirect taxes•VAT with a limited number of rates and of exemptions.Significant progress toward harmonization in 1994–95 through measures included in programs supported by the use of Fund resources.•Turnover tax consisting of two rates, with a normal rate in the7–18 percent range, and a reduced rate in the 3–6 percent range.Implemented in 1994, except in Gabon, which introduced a single-rate VAT system in April 1995.
• Common list of excisable goods.Being studied.• Common list of excisable goods.Implemented in 1994.
Regional financial market• Creation of a regional stock market.Mid–1996, will replace the present stock market in Abidjan.
Regulatory framework• Harmonization of technical norms.Not started.
Free intraregional competition to be achieved by for bidding restrictive practices, including government intervention.Not started.
Common investment code.Preliminary study by the BCEAO.•Adaptation of national investment codes to the common tax and customs regime.Achieved in all countries but the C.A.R. and Chad.
Surveillance of fiscal policies
Fiscal indicatorsList of five quantitative fiscal indicators centering on primary surplus, domestic and external arrears, wage bill, and investment financed by domestic resources.Adopted in September 1993.• List of four fiscal norms centering on the primary surplus, domestic and external arrears, and wage bill. In addition, use of present national foreign reserves indicators as a possible sign of excessive public sector bank borrowing.Still to be adopted.
Surveillance procedures• Periodic reports by the Commission, including recommendations to countries not satisfying the norms.In 1994, the BCEAO submitted a quarterly report to the Council of Ministers, which presented each country’s position with respect to the five indicators. Should be taken over in 1995 by the Commission itself.•A regional surveillance committee will prepare semiannual reports to the Council of Ministers.Still to be adopted.
SanctionsProvided for in the Treaty, the first step being the publication of a report by the Commission.In process.• Limited to the publication of a communique mentioning noncompliance with indicators.Still to be adopted.
Budget law and public accounting, public finance, and price statistics• Harmonization.Studies being prepared with technical assistance from the French CFD, the Fund, and the European Union.
Sectoral policies
Human resourcesEducation, research, vocational training.Studies being prepared by the BOAD.•Common policies in education, research, vocational training.Implementation should start within the first five years following treaty ratification.
Regional development• To open up landlocked areas.Studies being prepared by the BOAD.
Other areasIncluding agricultural, energy, manufacturing industry, environment, and transportation.Studies being prepared by the BOAD.•Harmonization of policies in other sectors, including agriculture, energy, manufacturing environment, and transportation.

In the WAEMU region, discussions on the CET are still at a preliminary stage. A possible option, which was considered by the Steering Committee in May 1994, based on a preliminary study financed by a bilateral donor, could include inter alia a three-tier tariff and an intraregional tariff.3 However, the implications of these proposals for the members’ public finances are still to be assessed, and an agenda defining the sequence of steps leading to the CET must be drawn up. The objective of narrowing national discrepancies between indirect tax regimes was retained as a condition for establishing a true regional common market, and also with a view to rationalizing and simplifying existing tax systems. Based on preliminary studies, the Steering Committee recommended the adoption in each member country of a value-added tax (VAT) with at most two rates.

In the CAEMC, the customs union has, by and large, already been implemented in the context of the CAECU-sponsored tax and customs reform launched in Bangui in June 1993, and guided by a Steering Committee including donors. The provisions of the reform included (a) a four-tier CET (at rates of 5, 15, 35, and 50 percent); (b) a preferential tariff rate for intraregional trade, set initially at 20 percent of CET, to be phased out gradually by January 1, 1998; (c) a turnover tax (TCA) with two rates—a normal rate in the 7–18 percent range, and a reduced rate in the 3–6 percent range to replace the existing domestic production and sales taxes, and to be replaced in turn in due course by a VAT;4 (d) excise taxes and temporary surtaxes on a limited list of products; and (e) the elimination of all customs and indirect tax exemptions, including those attached to current investment codes or to special regimes.5

Progress in the harmonization of customs tariffs and indirect taxes in both unions over 1993–95 is summarized in Table 55. Although reforms are being prepared slowly in the WAEMU, the adoption in 1994 of Fund-supported adjustment programs by the seven member countries led to a significant narrowing of customs tariff and tax rates dispersion. In particular, the three countries (Côte d’Ivoire, Niger, and Senegal) that had a VAT with three rates or more in 1993 reduced these rates to two or fewer in 1994–95. Togo introduced a VAT with two rates on July 1, 1995.

CAECU member countries took most of the planned measures in the aftermath of the CFA franc devaluation in 1994, although they decided to lower the CET rates to 5, 10, 20, and 30 percent, respectively, to alleviate the increase in the cost of imports. By the end of 1994, the common external and preferential tariffs, as well as the turnover and excise taxes, had been implemented in all countries but Chad (where only the CET and temporary surtaxes had been implemented). Chad, however, implemented the remainder of the reform effective July 1, 1995.

In practice, the broadening of the tax base predicated on these reforms did not occur at the speed or on the scale that had been expected, as exemptions—whether granted on an ad hoc basis, or attached to investment codes or special regimes—were not fully eliminated (although the investment codes of Cameroon and Gabon were duly adjusted). The CAECU member countries also resorted temporarily to safeguard measures with a view to limiting the price increases of essential commodities in the after-math of the devaluation; these measures included partial or total exemptions of customs duties and turnover tax (Cameroon, Central African Republic, Chad) or the declassification of some imports from the two highest tariff categories to the lowest one (Congo, Equatorial Guinea). In order to restore the momentum of implementation of the CAECU reform, as envisaged in the Bangui agreement, the Steering Committee urged member countries during its meeting in Malabo in April 1995 (a) to draw up a list of observed deficiencies and eliminate them by end-June 1995; (b) to prepare a comprehensive inventory of all remaining ad hoc or regulatory tax exemptions and abolish those that are not supported by international treaties by end-June 1995; and (c) to proceed without further delay (by the end of December 1995 at the latest), with the elimination of tax exemptions provided for in bilateral agreements with companies.

Regional Surveillance

As included in the WAEMU treaty and as envisaged in the CAEU convention, the regional surveillance of economic policies within both unions is in-tended to prevent member countries from incurring excessive government deficits or from adopting in-appropriate expenditure structures, as well as fiscal policy stances inconsistent with the commonly defined monetary policy objectives.6 The surveillance procedure is based on the common review of selected fiscal “convergence indicators” focusing on primary balances, wage bills, and domestic and external arrears. For WAEMU countries, it also includes the share of public resources devoted to public investment; and for each indicator, nonbinding quantitative norms have been agreed.7 For CAEMC countries, primary balances are expected to be positive, changes in the wage bill should be equal or less than change in government revenue, and domestic and external payments arrears should not be accumulated; in addition, the fiscal stance is explicitly supposed to be adjusted whenever the country’s contribution to the level of foreign reserves of the BEAC falls below the common norm.8 In both unions, the surveillance mechanism is expected to be complemented: (a) upstream, by efforts to harmonize public finance statistics, as well as budget laws and procedures; and (b) downstream, by mechanisms allowing public disclosure of recommendations and eventually, at least in the WAEMU, by sanctions vis-à-vis those countries that maintain in-appropriate policies.

Table 55.Harmonization of Customs Duties and Indirect Taxes in the CFA Franc Zone(In percent unless otherwise specified)
West African Economic and Monetary UnionCentral African Economic and Monetary Community
BeninBurkina FasoCôte d’lvoireMaliNigerSenegalTogoCameroonC.A.R.ChadCongoEquatorial GuineaGabon
Status in 1993
Customs tariff rates1,20–1600–330–1510–360–660–650–300–2850–1900–1550–402.5–3050–260
Statistical fee rate342.53–54.56–123110.22
Turnover tax rates2.25–3052.4–16.5150.5–13.6105–14
Value-added tax (VAT) rates1810–155–3510–1710–247–345–30
Total taxation321.5–21614–527.6–2173–6515–11512–1278.2–742.25–3053.4–20716–1700.7–15912.8–3467–276
Number of customs tariff rates12755
Existence of nontariff barriers (Yes/No)NoYesYesNoYesYesYesYesYesYesYesNoYes
Exemptions from customs duties (in percent of imports)2722234428225861586544
Number of turnover tax/VAT rates41152353871415
Excise duties and other indirect taxes5P,A,T,OP,A,T,OP,A,T,OP,A,T,OP,A,T,OA,T,OA,T,OP,A,T,OP,OP,A,T,OP,AP,A,T,OP,A,T,O
Status as of September 1995
Customs tariff rates1,60–200–330–350–300–300–400–205–305–305–305–305–305–30
Statistical fee rate542.53–55531112
Turnover tax rates8–175–165–155–155–12
Value-added tax (VAT) rates181511–2010–151710–207–1818
Total taxation323.9–4919–5213.8–653–5522.9–59.75–7310.2–4613.4–52.111.3–5211.3–50.711.3–50.710.35.67–55
Number of customs tariff rates5785344444444
Elimination of nontariff barriers7TP,RPTTRRPTRTRTRTRRR
Exemptions from customs duties (in percent of imports)3966466533
Number of turnover tax/VAT rates41122122222221
Excise duties and other indirect taxes5P,A,T,OP,A,T,OP,A,T,OP,A,T,OP,A,T,OA,T,OA,T,OP,A,T,OP,A,T,OP,A,T,OP,A,T,OP,A,T,OP,A,T,O
Source: Data provided by the authorities.

Consolidated customs and fiscal import duties. Excluding statistical fees and temporary surcharges.

In the WAEMU, intraregional trade flows of CEAO countries were subject to a preferential rate (TCR).

Excluding excise duties.

Excluding the zero rate for exports.

Petroleum products (P), alcoholic beverages (A), tobacco (T), other (O).

In the WAEMU, following the dissolution of the CEAO, the TCR was abolished. In the CAEMC, a generalized preferential rate for intraregional trade is applied at 20 percent of the standard common external tariff, to be reduced to 10 percent on January I, 1996, and eliminated on January I, 1998.

Total elimination (T), Partial elimination (P), Replacement by temporary surcharges (R).

Source: Data provided by the authorities.

Consolidated customs and fiscal import duties. Excluding statistical fees and temporary surcharges.

In the WAEMU, intraregional trade flows of CEAO countries were subject to a preferential rate (TCR).

Excluding excise duties.

Excluding the zero rate for exports.

Petroleum products (P), alcoholic beverages (A), tobacco (T), other (O).

In the WAEMU, following the dissolution of the CEAO, the TCR was abolished. In the CAEMC, a generalized preferential rate for intraregional trade is applied at 20 percent of the standard common external tariff, to be reduced to 10 percent on January I, 1996, and eliminated on January I, 1998.

Total elimination (T), Partial elimination (P), Replacement by temporary surcharges (R).

In the WAEMU, the set of convergence indicators was adopted in September 1993 after consultations with the Fund and other donors. While recognizing that any reliance on these indicators would represent, in the present situation, an important contribution to the strengthening of public sector financial positions, the Fund staff cautioned against adopting too rigid an approach in defining excessive deficits and inappropriate public expenditure structures. It encouraged a further elaboration of fiscal norms based on more country-specific approaches, taking into account the level of public debt, the sustainability of public deficits, and the likelihood of different cyclical developments between countries. The Fund staff also pointed to the varying vulnerability of WAEMU countries to terms of trade and other shocks, and to the need for room to maneuver should one or several countries be buffeted by such temporary shocks. There would also be a need in such circumstances for some coordination and assistance at the regional level. Since September 1993, fiscal surveillance, including the review of these indicators, has been conducted on a quarterly basis by the Council of Ministers of the WAEMU; it has now been taken over by the newly installed Commission.

In the CAEMC countries, the surveillance mechanism is still not in place, but its broad principles in the draft CAEU convention are roughly similar. The prudence suggested by the Fund staff has, if anything, been even greater in this case because of the considerable differences in endowment, stages of development, and prospects for fiscal and external viability in the CAEMC countries (for instance, Gabon’s per capita income is about 12 times that of Chad).

Sectoral Policies

Both unions place a high priority on the coordination of the sectoral policies implemented by the member countries, and, for the long run, envisage adopting common and complementary policies in a large number of areas, including human resource development, agriculture, industry, transportation, and the environment. Education, research, and vocational training have been identified as areas where common actions could be taken rapidly, so as to achieve economies of scale in budgetary programs and improve the free circulation of skilled labor within the unions by harmonizing diplomas. The WAEMU treaty foresees the implementation of regional development policies, including the harmonization of national infrastructure programs, and opening up landlocked areas. These policies could be financed by resources of the common budget through structural funds that would have to be established.

So far, no sectoral initiatives have started in either union. In the WAEMU, however, the West African Development Bank has been entrusted with the task of undertaking studies and making proposals to the Council of Ministers.

Zone-Wide Initiatives

In parallel with these initiatives in the two subregions, several important initiatives are also being pursued at the level of the CFA franc zone as a whole (Table 56). The key objectives are (a) harmonizing the legal and regulatory framework in critical areas; and (b) creating common institutions that oversee and ensure the implementation of regional regulations. These objectives have already been achieved in both subregions for the banking sector where, following the creation of independent regional banking commissions, common regulatory standards have been established (see Annex III). A single and updated insurance code also came into force in the zone on February 1, 1995; and, in the course of the next few months, a regional supervisory agency is to take over from the national administrations the supervision of insurance companies.9 In a similar vein, a regional supervisory agency responsible for the technical and financial audits of individual countries’ social security institutions is to be set up in the course of 1996.10 In addition, a regional institution (AFRISTAT) has been established, to provide common methodologies and facilities in the statistical area.

Table 56.Economic Integration Projects at the CFA Franc Zone Level
ProjectContentImplementation
Business law•General treaty establishing the Organization for the Harmonization of Business Law in Africa (OHADA) and related institutions.Signed on October 17, 1993, by the 14 franc zone countries plus Guinea-Bissau, already ratified by 10 countries. Open to all OAU countries.
•Harmonization of commercial law, corporate law, private accounting laws and plans, bankruptcy and debt recovery procedures, and securities law. Could be extended to other fields, including labor codes.To be completed by March 1996.
•Creation of a regional Court of Justice to ensure the judicial enforcement of the uniform laws.To be effective in mid–1996.
• Creation of a common training institute
Insurance sector•General treaty establishing the Interafrican Conference of Insurance Markets (CIMA), and related institutions.Signed on July 10, 1992; ratified by the 14 franc zone countries.
•Common insurance code regulating insurance companies.Effective February 1, 1995.
• Regional insurance commission, in charge of regulatory and prudential supervision, as well as of granting and withdrawing licenses.Based in Libreville (Gabon), effective by September 1995.
Social Security institutions• General treaty establishing the Interafrican Conference of Social Security Funds (CIPRES) and related institutions.Signed on September 21, 1993, ratified by six countries, not effective yet.
• Common regulatory, accounting, and financial framework.
• Regional Commission, notably in charge of regular financial audits of Social Security Funds.To be based in Libreville (Gabon).
Statistics• General treaty establishing an African Institute of Statistics (AFRISTAT), in charge of defining common concepts and methodologies, producing studies, supporting national institutes, and providing training to civil servants of member countries institutions.Signed on September 21, 1993, ratified by six countries, not effective yet. To be based in Bamako (Mali).

Among these zone-wide initiatives, the ongoing project on harmonization of business law is possibly the most ambitious. The Organization for the Harmonization of Business Law in Africa (OHADA) is intended to establish a set of uniform laws covering the main areas of business law, as well as a regional Court of Justice that will ensure the judicial enforcement of the laws. OHADA’s objective is to provide for a sound, stable, and predictable environment conducive to sustained private sector development. Thirteen CFA franc countries, as well as Comoros and Guinea-Bissau, signed the treaty establishing the OHADA in October 1993—which has come into force in September 1995, following the ratification by eleven countries (Benin, Burkina Faso, Cameroon, the Central African Republic, the Comoros, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo). The minimum number of ratifications required by the treaty has thus been reached. The areas of business law that most urgently need to be harmonized include notably corporate and commercial law; harmonized regulations are currently being reviewed by national commissions and should be finalized by March 1996. Accordingly, the regional institutions, including the Court of Justice, should become operational in 1996.11

As of September 1995.

Accordingly, the Economic Community of West Africa (CEAO), which included all WAMU member countries but Togo, and included Mauritania as well, was dissolved; in Central Africa, the CAEMC will succeed the Central African Monetary Area (CAMA) and the Central African Economic and Customs Union (CAECU).

This intraregional tariff would replace the regional cooperation tax (TCR) that was eliminated de facto in 1994 with the decision to dissolve the CEAO. Following this dissolution, some countries decided to abolish the regional preferential treatment by submitting regional trade to their own external tariff in March 1994. Because of the damage thus caused to a few member countries, a new regime for intraregional flows is being prepared presently by the WAEMU Commission.

With the exception of Gabon, which moved immediately to a VAT on April 1, 1995.

Notably, by renegotiating the tax incentives provided for in bilateral agreements between governments and companies (conventions d’établissement).

As a transitional measure, Convergence Councils (Conseils de Convergence) were created as early as September 1992 in both subregions under the joint chairmanship of the respective common central bank and the French Treasury. The committees’ principal tasks were to review the implementation of the adjustment programs in member countries, particularly in the fiscal area.

Three norms are defined in terms of fiscal revenue: the wage bill should not exceed 50 percent, the primary surplus should stay above 15 percent, and public investment financed by domestic resources should be at least 20 percent. The other two norms relate to the nonaccumulation of domestic and external arrears.

This norm is defined in the BEAC’s statutes and requires that foreign exchange reserves of each member country cover at least 20 percent of the short-term liabilities of the BEAC’s national agency.

The insurance commission of the Interafrican Conference of Insurance Markets (CIMA) will be based in Libreville.

The treaty establishing the Interafrican Conference for Social Security Funds (CIPRES) had been ratified by eight governments at the end of September 1995 and has thus entered into force. Moreover, the agency’s statutes and the prudential regulations to be enforced by social security institutions have already been finalized.

Even in the case of failure of the OHADA initiative, a readily available set of uniform laws could prove helpful in some countries where most business regulations are considered to be obsolete.

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