Annex III Monetary Policy and Banking Supervision in the Two Unions of the CFA Franc Zone

Stéphane Cossé, Johannes Mueller, Jean Le Dem, and Jean Clément
Published Date:
June 1996
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Monetary policy in the CFA franc zone is governed by the regional monetary arrangements in force within the WAEMU and CAEMC. Both unions have a common currency—the CFA franc—that is pegged to the French franc. Each union has a regional central bank (with agencies at the national level), which holds the pooled foreign reserves of the union, and conducts monetary policy at the regional level.1

Because of the fixed exchange rate and the substantial degree of capital mobility and substitutability that generally prevails between France and the unions, the room for an independent monetary policy at the level of the two subregions is limited.2 Monetary policy instruments therefore serve principally to maintain the desired distribution between the central banks’ domestic and foreign assets. In addition, the substitution in 1993–94 of indirect monetary policy instruments for country and bank-specific credit ceilings, and the ongoing development of regional/interbank and money markets, have largely eliminated the room for country-specific monetary policies.

This regional dimension of monetary arrangements and policies has also carried over into the area of banking regulations and supervision. In particular, common supervisory bodies have been established, and common banking regulations adopted, by each of the two unions in the aftermath of the economic crisis of the late 1980s-early 1990s and the resulting collapse of a number of banking institutions.

Given this regional dimension of the problems facing the CFA franc zone and of the policies and solutions that have been developed over the years, bilateral discussions between Fund staff and the BCEAO and the BEAC have been held approximately on a semiannual basis since 1990. The last two rounds of discussions took place in February 1995 with the BEAC and March 1995 with the BCEAO.

Reforms of Monetary Policy Instruments

Until the early 1990s, monetary policy in both unions relied by and large on direct instruments. Lending and deposit rates were fixed administratively by the central banks. Credit ceilings were set for each country and for each type of credit, and were then translated into ceilings for individual banks, as well as for large individual borrowers. The statutes of the two central banks guaranteed national treasuries an overdraft facility (known as statutory advances), which was limited in principle to 20 percent of the previous year’s domestic tax revenue in the respective countries. Preferential interest rates were applied to certain central bank credits, notably to crop credit refinancing (which was also excluded from the national credit ceilings) and to the statutory advances. For any loan operation to be eligible for central bank refinancing, commercial banks had to obtain prior authorization from the monetary authority.

As part of the efforts undertaken in the late 1980s and early 1990s to overcome member countries’ economic and financial difficulties, and to rely more systematically on market forces to reduce distortions, monetary reforms aimed at replacing direct instruments with indirect instruments of monetary policy were launched in both unions at the end of the 1980s (Table 57). These reforms were implemented in two stages.

During 1989–92, credit controls and selective interest rates were abolished progressively. In the WAEMU, crop credit was brought under the national overall credit ceiling, and in 1992 the prior approval requirement for individual loans was replaced by a new creditworthiness rating system to govern overall central bank refinancing policy. In both unions, discount rates were unified. In the CAEMC, a timetable was established for stepwise increases in the rate applied to advances to governments, up to the level of the standard discount rate.3

Table 57.Status of Monetary Reforms in the Two Unions of the CFA Franc Zone
West African Economic and Monetary UnionCentral African Economic and Monetary Community
ContentImplementation, commentsContentImplementation, comments
Money market
Auctions of loanable fundsWeekly, organized at the regional level, open to the zone’s banks, financial institutions, and, to a limited extent, to Treasuries. The central bank is the sole counterpart of transactions; bids have to be backed by admissible commercial paper. The central bank may offer credit, or bid for liquidity, according to its monetary targets.Effective October l993. The central bank has not absorbed excess liquidity through auctions.Weekly, organized at the level of national agencies.Effective July 1994. Interventions are limited by country-specific refinancing ceilings. Special deposits are the only mechanism for absorbing excess bank liquidity (see below).
Alternative interventions• Repurchase agreements of commercial paper.Rarely used at present.• Repurchase agreements with commercial banks, two-to-seven day maturities.Effective July 1994.
• Discount.Rarely used at present.• Penalty rate.
• Automatic refinancing (B window) for medium-term credit to “productive sectors.”Not included in the refinancing ceiling.
Interbank interventionsNo intervention.Regional interbank market.Exceptional day-to-day interventions when the refinancing ceilings are reached.Regional interbank market.
Advances to the TreasuryLimited to 20 percent of domestic tax receipts of the previous year.Penalty rates are applied to advances above the ceiling.Limited to 20 percent of domestic revenue of the previous year.Penalty rates are applied to advances above the ceiling.
Minimum reserve requirements1.5 percent of the sum of sight deposits and short-term credit, excluding crop credit.Effective December 1993. Reserves are not remunerated.In percentage of sight, time, and savings deposits.Not activated yet.
Free reservesNot remunerated.Alternatively, commercial banks can use their excess liquidity to buy securitized BCEAO claims to the government at a fixed rate. These securities are redeemable at par at any time, without restrictions.Commercial banks can deposit their excess liquidity in remunerated accounts with the central bank (special deposits).
Interest rates
DepositsFree, except a minimum rate on passbook savings deposits.Sight deposits cannot be remunerated.Minimum fixed by the central bank.
LendingFree, except a maximum lending rate (usurious, set at twice the discount rate).Maximum rate fixed by the central bank.
Refinancing• Auction rate.Set by the central bank.• Auction rate.Set by the central bank.
• Repurchase agreement rate, fixed by the central bank.Set by the central bank about 100–250 basis points above the auction rate.• Repurchase agreement rate.Set by the central bank 150–200 basis points above the auction rate.
• Discount rate, fixed by the central bank.Set by the central bank. Penalty rate.• Penalty rate.Set by the central bank.
• Special refinancing rate (B window).For credits allowed after July 1994, fixed to the average auction rate over the last six months.
• Interbank rate.Freely negotiated.• Interbank rate.Freely negotiated.

Beginning in October 1993 in the WAEMU, and in July 1994 in the CAEMC, the central banks moved decisively to a system of monetary management based on indirect instruments of monetary policy operating in the context of regional interbank and money markets. These instruments have consisted principally of money market auctions and minimum reserve requirements (the latter in place only in the WAEMU). In the WAEMU, the central bank also proceeded with the liberalization of interest rates.

In both unions, the new money market auctions are open to the banks and financial institutions of the union and are conducted on a weekly basis. In the WAEMU, the auction is organized at the regional level; banks submit to the central bank weekly offers of, or bids for, loanable funds in tranches, with a specified interest rate for each; the BCEAO can intervene, either on the demand or on the supply side, in accordance with its regional targets for credit aggregates; and supply or demand may be rationed and satisfied on a prorated basis. In the CAEMC, in contrast, the auction is organized at the level of the national agencies; it consists only of central bank credit on offer for an amount limited by country-specific ceilings, and the BEAC satisfies bank demands on a prorated basis. In both unions, the central bank determines the interest rate at which transactions are settled. In addition to the auctions, the discount window—the discount rate in the WAEMU, and the penalty rate in the CAEMC—remains in place. The BCEAO and the BEAC have also introduced repurchase agreements (prises en pension) to provide temporary liquidity to banks at a rate between the discount rate and the money market rate.4 A special window also remains open at the BEAC, which allows banks to refinance automatically medium-term credits to the so-called productive sectors outside the national refinancing ceiling.5

These reforms have been paralleled by the emergence of interbank markets at the regional level, where interest rates are freely negotiated and where operations are conducted without the intervention of the central banks. Once these markets have developed more fully and have acquired the necessary depth, expectations are that the central banks will substitute the current auction mechanism by interventions at the margin in these markets, so as to mop up or inject liquidity.

Legal reserve requirements are available as an instrument in both unions. In the WAEMU, the minimum reserve requirement has been set at 1.5 percent of the sum of sight deposits and short-term credits (excluding crop credits).6 Admissible reserves are non-interest-bearing deposits held at the central bank, as well as certain government securities (see below). Excess reserves are not remunerated. Legal reserve requirements have also been provided for in the CAEMC, but have not been activated. Unlike the BCEAO, however, the BEAC remunerates commercial banks’ free reserves (”special deposits”) at a rate that it sets periodically (currently4½percent). These special deposits are thus akin in their effect to open market (absorption) operations, except for the fact that the prevailing interest rate is probably well above market-clearing levels.

In addition to these reforms, the BCEAO has liberalized commercial bank interest rates, except the usurious lending rate (which is set at twice the discount rate) and the minimum rate on passbook savings deposits.7 In contrast, the BEAC continues to set maximum lending and minimum deposit rates, all of which are similar across the CAEMC except the rates on passbook savings.8

Recent Developments in Money Markets

Activity in the money and interbank markets has remained modest so far in both unions, reflecting mainly banks’ comfortable liquidity and a certain reluctance on the part of the two central banks to absorb excess bank loanable funds because of the attendant costs. A significant bank risk in a few countries has also contributed to the slow development of the market in the CAEMC.


Since the introduction of the money market in October 1993, the central bank has limited its intervention mostly to intermediating between banks with excess liquidity and banks with financing needs (mainly Ivoirian banks), with limited net intervention in auctions or reverse auctions of central bank money. From October 1993 to late February 1994, the BCEAO absorptions were in the range of CFAF 20–40 billion—at a fixed rate of 5 percent—leaving an excess of funds in the market reaching up to CFAF 190 billion, which remained as unremunerated excess reserves with the central bank. Yet, however modest, these absorption operations were discontinued in late February 1994. As the year advanced and financing needs in the union remained generally slack, it became even more difficult for banks with excess funds to find counterparts in the market. Thus, while 36 percent of funds on offer still found takers in the first five months of the year, this proportion declined to 2 percent in the third quarter, recovering only slightly to 6 percent in the fourth quarter. The central bank accordingly lowered its intervention rate at the auction, from 9.25 percent in the first five months of 1994 to 5.5 percent in September, where it remained thereafter. During that period, discount and repurchase agreement operations were few and far between.

Given these growing difficulties in placing excess liquidity in the money market, banks have become more active in trying to place funds with other banks through the interbank market. Operations in that market increased markedly in late 1994 with the beginning of the crop season, notably in Côte d’Ivoire, where large amounts are required for coffee and cocoa prefinancing.9

To mop up part of the large liquidity, in mid-1994 the BCEAO decided to securitize and sell the consolidated claims it had held on governments on account of the restructuring of the banking systems of the union in the late 1980s. The total claims that could be securitized under this scheme were equivalent to some CFAF 440 billion, or 17 percent of broad money in the WAEMU at end-1994, and carried an original maturity of 15 years, with 3 years’ grace.10 While the initial BCEAO claims bore interest at 3 percent, to be paid by the governments, the interest rate on the bonds issued in the context of the securitization has been set at 5 percent, tax free, with the difference being paid by the central bank. The bonds are offered to commercial banks and other financial institutions in the union, and they can be used to meet legal reserve requirements. As the initial reaction of banks to the scheme was muted, the BCEAO decided in September 1994 to make the bonds more attractive by allowing for their redemption at par and at any time, without any restriction by the central bank. Placements accelerated substantially after the introduction of this provision. At end-March 1995, 75 percent of member country governments’ consolidated debts had been placed; however, banks’ excess reserves with the BCEAO still amounted to more than CFAF 110 billion.


Central bank injection of liquidity was modest in 1994, and was driven more by the BEAC’s role as a lender of last resort to weak institutions than by demand management considerations.

Cameroon was by and large the most active taker at the BEAC auction, with central bank refinancing to Cameroonian banks accounting on average for 90 percent of the BEAC’s zone-wide interventions. At 8.0 percent (8.75 percent since June 29, 1995), the interest rate in the BEAC auction market remained significantly above the French rate, reflecting central bank concerns over the weakening of its foreign reserve position.

Activity in the regional interbank market has also remained modest. Most transactions have taken place within the same banking group or have taken the form of one-way lending to Gabonese banks. Interbank transactions rates have thus tended to fluctuate strongly, although in the last few months rates have remained within the range between the auction rates and the special deposits rate, as would normally be expected.

Given this slow start in interbank lending and the increase in bank liquidity in 1994, commercial banks first repaid their earlier recourse to central bank re-discounts. The banks also built up sizable reserves with the BEAC (CFAF 91 billion at end-March 1995), mostly in the form of special deposits, despite reductions in the remuneration rate from 9.75 percent in January 1994 to 4.2 percent in March 1995 (4.5 percent since end-June).

Need for Additional Reforms

As the discussion above indicates, the transition to fully functioning indirect instruments of monetary management is incomplete and a number of weaknesses need remedying.

Certain features in each union undermine the ability of the market to play its role, and of the monetary authorities to achieve their objectives. First, the administrative determination by the central banks of both prices and quantities in their intervention in the money market prevents the emergence of a market-clearing interest rate and introduces a distortion in the rate structure. Second, this distortion is aggravated in the WAEMU by the lack of central bank remuneration of excess reserves at a time when domestic credit demand is slack. Third, in case of a recovery in private sector credit demand, the two central banks do not appear to be equipped with the instruments needed to maintain control over the composition of their net assets. In particular, the readiness of the BCEAO to redeem the bonds issued under the securitization scheme at par and at any time, the highly liquid character of the special deposits maintained with the BEAC, and the open-ended possibility of refinancing medium-term credit to productive sectors at the BEAC all undermine the two central banks’ ability to maintain control over their own domestic assets. Fourth, it seems to be contrary to the intent of legal reserve requirements to allow bonds acquired under the securitization scheme to be used in the discharge of required reserves. Finally, the design of legal reserve requirements in the WAEMU, which incorporates short-term loans in the basis of the calculation for the required reserves, reintroduces de facto an element of selective credit allocation.

To address these weaknesses, policy instruments need to be improved and made symmetrical. In particular, the central banks should begin issuing their own debt instruments to serve initially as a support for auctions or reverse auctions in the money market, and then influence the interbank market at the margin once it has acquired sufficient depth while allowing interest rates to clear the markets. In this context, it appears that the modalities of the securitization scheme in the WAEMU and of the special deposits scheme at the BEAC would need to be reviewed.

These and other issues have been taken up in the course of the most recent discussions with the two central banks. As noted earlier, the BEAC took some corrective action at its July 1995 Board meeting. Reverse auction mechanisms are to be introduced (including the elimination of special deposits), and the administrative determination of banks’ minimum deposit and maximum lending rates is to be relaxed, with effect from January 1996. Much remains to be done, however, if the full benefits of relying on market mechanisms are to be realized. Action must also be taken to strengthen the health of the banking systems of the union, particularly in the CAEMC, for market-based instruments are of little help where the financial institutions themselves are thought to pose a risk.

Implications for Monetary Programming

Both unions follow at present a cycle of semiannual monetary programming, with broad objectives set at the regional level and detailed programming at the national level to ensure compatibility with these regional objectives. Monetary programming relies on the setting of regional objectives for external reserves, taking into account regional balance of payments projections and the need to maintain (or restore) the 20 percent statutory foreign exchange cover requirement for the central banks’ short-term liabilities. On this basis, credit objectives are established for each individual country, including national refinancing ceilings in the CAEMC.

The reform of policy instrumentation since 1993–94 has had two important implications for monetary programming: (a) with the elimination of the system of credit ceilings, attainment of the external reserve objectives has to rely exclusively on central bank interventions through the banks’ various refinancing and absorption facilities; and (b) central banks may affect the behavior of bank credit only at the regional level, since the development of regional money and interbank markets would lead to a rapid redistribution of loanable funds throughout the zone, should an attempt be made to enforce national targets. Accordingly, for purposes of programs supported by the Fund, country-specific objectives for credit to the private sector have become of limited use, and the government’s domestic borrowing requirement, as proxied by net bank credit to government, has become in practice the only immediate instrument to influence individual country contributions to the respective net foreign positions of the two central banks.11 It is therefore a matter for consideration whether in due course this should not be the only control variable constituting a policy criterion at the level of the national agencies of the central bank—as long as there are understandings with the two central banks on the desirable level for the regional net domestic assets.

Table 58.Banking Supervision in the Two Unions of the CFA Franc Zone
West African Economic and Monetary UnionCentral African Economic and Monetary Community
ContentImplementation, commentsContentImplementation, comments
Regulatory frameworkBanking Commission, responsible for the supervision of banks, credit institutions, and other specialized financial institutions, including granting or withdrawing banking licenses, and enforcing banking regulations.Established 1989, effective 1990. Supervision is ensured through banks’ obligations to provide monthly financial accounts and through regular/exceptional inspections.Central African Banking Committee (COBAC) responsible for the supervision of banks, credit institutions, and other specialized financial institutions, including granting or withdrawing banking licenses, and enforcing banking regulations.Established 1990, effective 1992. Supervision is ensured through banks’ obligations to provide monthly financial accounts and through regular/exceptional inspections.
Prudential ratios •Solvency• Solvency
—Capital ratioNet capital/total credit (weighted) > 4 percent.—Capital ratioNet capital/total credit > 5 percent.
—Quality of the banks’ loan portfoliosRatio of credit admissible to central bank refinancing to total credit fixed at 60 percent, effective January 1994.—Coverage of fixed assetsNet capital and borrowings over 5 years/fixed assets of the bank > 100 percent.
—Division of riskNet capital/weighted categories of risk.—Division of riskNet capital/weighted categories of risk.
• Liquidity• Liquidity
—Liquidity ratioRatio of liquid assets (including a weighted amount of credit admissible to central bank refinancing) to short-term liabilities > 60 percent.—Liquidity ratioRatio of liquid assets (including credit admissible to central bank refinancing) to short-term liabilities > 100 percent.
—Risk of transformationRatio of medium and long-term resources to medium- and long- term assets > 75 percent.—Risk of transformationRatio of medium- and long-term resources to medium- and long- term assets > 50 percent.

Banking Supervision

The economic crisis that beset most economies of the zone from the mid-1980s had serious consequences for the national banking systems of the unions, and led eventually to large-scale restructuring operations during 1989–92. To forestall the reemergence of such banking crises, and prevent financial and political interference at the national level, the Ministers of Finance of the unions established in 1990 two regional supervisory authorities—the WAEMU’s Banking Commission and the COBAC (Commission Bancaire de l’Afrique Centrale), each chaired by the Governor of the respective regional central bank—to ensure independent and rigorous bank supervision at the regional level. New banking legislation was also issued in each of the member countries, and the banking commissions began operations in 1990 in the WAEMU and in 1992 in the CAEMC.

The mandate of the commissions is to protect depositors’ interests and to assure the stability of the regions’ banking systems. They are responsible in particular for (a) granting banking licenses; (b) appointing trustees and liquidators; (c) defining, and adapting as needed, prudential regulations; and (d) pronouncing injunctions and taking sanctions (including through the withdrawal of banking licenses). The scope of supervision includes all banking and other financial institutions.

The banking commissions discharge their responsibilities through (a) enforcement of the requirement for member banks to provide key accounts and statements of position on a monthly basis; and (b) periodic and detailed inspections of all banks of the unions, complemented, if needed, by ad hoc inspections on specific issues (for instance, prior to initiation of a sanction procedure). In the context of the monthly supervision, the commissions focus on three groups of prudential ratios, measuring respectively the banks’ solvency, their liquidity, and the risks incurred in the transformation of short-term liabilities into long-term lending operations (Table 58).

The commissions publish annual surveillance reports on the banking systems. In the WAEMU, the soundness of the banking systems has strengthened markedly since the restructuring was completed. In the CAEMC, the new common regulatory and prudential standards are being enforced gradually. Union-wide, liquidity and solvency ratios have improved somewhat, in part because of the recovery of money demand in the aftermath of the devaluation, and in part because of improved business conditions (e.g., in the Central African Republic, Chad, and Gabon).

As of June 1995.

The principles of the fixed exchange rate and of free capital transferability are set out in the cooperation treaties between France and the two monetary unions.

Unification was eventually achieved in June 1994. The rates have diverged again since March 1995, however, when the auction rate was raised from 7.75 percent to 8.0 percent, and the rate on government advances remained unchanged. In the WAEMU, advances to governments have continued to benefit from a preferential interest rate. In both unions, the penalty rate on advances exceeding the statutory ceiling has always remained below the penalty rate applicable to banks.

The BEAC may also resort to exceptional day-to-day interventions in the interbank market at discretionary rates (though at a rate higher than that of the repurchase agreements) when the refinancing ceiling in an individual country is exceeded.

The rate applicable to this special rediscount facility is adjusted twice a year on the basis of the average auction rate during the previous six-month period.

The minimum reserve requirement is presently set at a uniform rate for all WAEMU member countries, although the central bank is empowered in principle to set country-specific rates.

Moreover, the interest rates payable on time deposits and on certificates of deposit (bons de caisse), with a maturity of less than one year and in amounts below a ceiling set by the central bank, are now automatically adjusted in line with changes in the money market rate.

However, in accordance with a decision of its Executive Board of July 1995, the BEAC is expected by January 1996 to eliminate the minimum deposit rates (except for passbook savings), while the maximum lending rates will be set at a margin above the penalty rate, that is, close to the level of the usurious rate in the WAEMU.

The weekly average transactions in the interbank market amounted to CFAF 22.8 billion during the last quarter of 1994, almost twice the level of transactions in the auction (money) market.

Securities were to be distributed as follows: claims on the government of Benin, CFAF 44.3 billion; of Burkina Faso, CFAF 9 billion; of Côte d’Ivoire, CFAF 186.1 billion; of Mali, CFAF 23.9 billion; of Niger, CFAF 25.9 billion; of Senegal, CFAF 143.7 billion; and of Togo, CFAF 7.5 billion. The bonds issued have a maturity corresponding to the remaining duration of the claims; if all were issued on January 1, 1994, the average maturity of the bonds would have been 12.5 years, with six months’ grace.

The central relevance of net bank credit to government as an instrument to achieve national targets consistent with regional net foreign asset objectives is explicitly noted in the fiscal surveillance mechanism elaborated in the draft convention establishing an economic union within the CAEMC (see Annex II); and it is referred to in the WAEMU treaty in terms of the need for national fiscal policies to be consistent with the common monetary policy.

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