Chapter

III Adjustment Experience

Author(s):
Stéphane Cossé, Johannes Mueller, Jean Le Dem, and Jean Clément
Published Date:
June 1996
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Overall Performance in 1994

On the whole, in 1994 the CFA franc countries broadly achieved—and at times exceeded—the objectives of their programs for economic growth, inflation, and improvement in the external position (Table 2 and Chart 1).12 The process was helped by the recovery in world economic activity and the strengthening of non-oil primary commodity prices (particularly in the case of Cameroon and Côte d’Ivoire), as well as by ample rainfall in the Sahelian countries. Policies, however, played the principal role. In particular, with nominal wages kept firmly under control, inflation slowed down rapidly after the initial wave of price corrections, and output responded strongly to the gains in competitiveness. By contrast, performance was uneven on the fiscal and structural fronts. There were also important differences in performance between the member countries of the WAEMU and those of the CAEMC, in part because of unsettled political conditions in some of these countries or because of delays on the part of incoming governments in implementing needed measures.

Table 2.Selected Economic and Financial Indicators, 1990–96
WAEMU1CAEMC1CFA Zone1
199419941994
1990–93 Average1993Original programProvisionalDeviation199519961990–93 Average1993Original programProvisionalDeviation199519961990–93 Average1993Original programProvisionalDeviation19951996
(Annual percentage changes)(Annual percentage changes)(Annual percentage changes)
Real sector
Real rate of growth0.3−1.22.52.60.15.55.6−1.2−2.1−1.1−0.40.74.25.6−0.4−1.61.01.30.35.05.6
GDP deflator−0.40.335.235.0−0.28.73.2−0.1−1.333.938.44.57.73.2−0.2−0.434.736.51.88.33.2
Inflation (CPI)0.50.531.929.7−2.29.63.4−0.4−1.733.337.34.010.23.60.1−0.532.533.00.59.93.5
Nominal GDP−0.2−1.039.138.5−0.614.89.0−1.2−3.632.938.05.112.38.8−0.7−2.236.438.31.913.78.9
(In percent of GDP)(In percent of GDP)(In percent of GDP)
Total consumption90.692.586.486.0−0.484.383.380.380.775.170.1−5.070.669.886.087.381.779.0−2.778.377.4
Total gross domestic investment13.512.518.015.7−2.316.718.017.516.619.619.5−0.120.821.915.314.318.717.4−1.318.519.7
Gross domestic savings9.37.613.514.00.515.816.719.719.324.929.95.029.430.214.012.818.321.02.721.722.6
Resource balance−4.1−5.0−4.4−1.72.7−1.0−1.42.22.75.310.45.18.58.3−1.3−1.6−0.43.64.03.22.8
(Annual percentage changes)(Annual percentage changes)(Annual percentage changes)
Exports value (f.o.b.)2−3.3−3.6120.8109.3−11.513.88.2−3.04.981.0106.325.33.09.4−3.11.0101.3107.76.48.38.8
Exports (volume)2−0.3−3.54.44.70.37.38.50.21.91.05.84.81.37.1−0.2−1.13.05.22.24.77.9
Imports value (f.o.b.)2−0.8−4.7105.575.6−29.912.411.2−3.04.486.077.9−8.19.510.0−1.6−1.298.676.5−22.111.310.8
Imports (volume)2−0.4−5.8−1.0−9.9−8.913.59.10.94.1−7.2−12.0−4.811.26.70.2−2.0−3.2−10.7−7.512.68.2
Terms of trade−2.6−2.8−1.13.24.38.2−1.9−0.13.0−4.80.85.65.4−3.6−1.5−0.2−2.62.14.87.0−2.6
Nominal effective exchange rates26.26.8n.a.−45.6n.a.n.a.n.a.6.36.7n.a.−44.4n.a.n.a.n.a.6.36.7n.a.−45.1n.an.an.a
Real effective exchange rates2−2.1−2.6n.a.−32.4n.a.n.a.n.a.−4.3−6.3n.a.−26.2n.a.n.a.n.a.−3.1−4.3n.a.−29.7n.an.an.a
(In percent of GDP)(In percent of GDP)(In percent of GDP)
Exports of goods and nonfactor serv.25.324.237.435.1−2.334.434.130.130.841.245.44.241.541.227.527.139.039.60.637.537.2
Imports of goods and nonfactor serv.29.429.241.736.8−4.935.435.428.228.233.636.02.433.333.628.928.838.436.5−1.934.534.6
External current account
Excluding official transfers−10.7−10.8−13.0−8.05.0−6.6−6.7−7.3−7.5−11.5−4.17.4−5.0−4.6−9.1−9.1−12.3−6.36.0−5.9−5.8
Including official transfers−5.8−6.0−6.8−2.14.7−2.8−3.1−4.4−5.0−7.9−1.76.2−2.7−2.5−5.2−5.6−7.3−1.95.4−2.8−2.9
Total scheduled public debt serv.339.338.632.632.70.129.925.728.729.837.328.5−8.837.931.334.034.234.730.6−4.133.828.4
(In percent of GDP)(In percent of GDP)(In percent of GDP)
Fiscal
Total government revenue417.315.416.615.9−0.716.316.517.415.818.915.1−3.817.818.617.315.617.615.5−2.117.017.4
Total government tax revenue14.112.814.113.2−0.913.614.016.314.717.614.2−3.417.017.415.113.615.613.7−1.915.015.5
Domestic9.99.18.08.20.28.28.713.111.413.211.6−1.613.413.611.310.110.29.7−0.510.510.9
International—exports0.20.22.01.5−0.51.61.40.20.20.50.50.70.70.20.21.41.0−0.41.21.1
—imports4.13.64.13.6−0.53.74.03.13.03.92.1−1.82.72.93.63.34.02.9−1.13.33.5
Total government expenditure26.425.327.424.8−2.623.422.326.426.128.522.7−5.822.021.126.425.727.823.9−3.922.821.8
Basic primary expenditure517.617.115.615.3−0.314.213.417.818.114.612.5−2.111.510.717.717.515.214.0−1.213.012.2
Government wage bill9.08.97.07.10.16.46.19.69.87.36.5−0.85.85.49.39.37.16.8−0.36.15.8
Government investment expenditure4.94.77.15.9−1.26.46.75.14.96.53.9−2.64.64.95.04.86.95.0−1.95.65.9
Public investment financed by internal resources1.41.41.61.61.61.72.02.71.51.3−0.21.31.31.71.91.51.51.51.6
Basic primary balance4−0.3−1.61.00.6−0.42.13.1−0.5−2.24.72.7−2.06.37.7−0.4−1.92.61.5−1.14.05.1
Overall fiscal balance6−6.8−7.5−7.5−5.71.8−4.3−3.6−7.9−9.3−6.6−6.20.4−2.7−1.0−7.3−8.3−7.1−5.91.2−3.6−2.5
Sources: Data provided by the authorities; and Fund staff estimates and projections as of the end of May 1995.

Weighted average using the corresponding GDP of the respective countries, except for exports and imports (value and volume).

Three-year average (1991–93).

In percent of exports of goods and nonfactor services.

Excluding grants.

Excluding interest payments due on domestic and foreign debt, foreign-financed investment, and net lending, but including domestically financed investment.

Including grants.

Sources: Data provided by the authorities; and Fund staff estimates and projections as of the end of May 1995.

Weighted average using the corresponding GDP of the respective countries, except for exports and imports (value and volume).

Three-year average (1991–93).

In percent of exports of goods and nonfactor services.

Excluding grants.

Excluding interest payments due on domestic and foreign debt, foreign-financed investment, and net lending, but including domestically financed investment.

Including grants.

Chart 1.Economic and Financial Indicators, 1990–96

Sources: Data provided by the authorities; and Fund staff estimates as of the end of May 1995.

1Including grants.

In reviewing performance in the zone, the weaknesses in the statistical apparatus in most countries must be borne in mind. The quality, coverage, and availability of data on income, output and expenditure, prices, and employment and productivity are particularly weak. The coverage of fiscal operations also varies greatly. Improving the quality and timeliness of data is crucial to strengthening program design, implementation, and monitoring, and these improvements were indeed incorporated in a number of programs, often through performance criteria and benchmarks.

Inflation, as measured by the increase in the consumer price index (CPI), was brought under control throughout the zone after the initial surge in prices following the parity change.13 Some further price corrections were necessary in several countries late in 1994 and in early 1995 as temporary price freezes on a few essential goods and public utilities were lifted or full pass-through was implemented. Progress in reducing inflation continued nonetheless (Annex I, Table 6, and Chart 2). Average annual inflation in 1994 was about 33 percent for the zone, with performance being somewhat better than targeted in the WAEMU and weaker in the CAEMC.14 On a December-to-December basis, inflation ranged from 29 percent in Burkina Faso to 64 percent in the Congo. Twelve-month inflation continued to decelerate in most countries during the first half of 1995, to a range of 4 percent (Burkina Faso and Chad) to 16 percent (Benin).

Chart 2.Quarterly Increases in Consumer Prices, 1994-March 1995

Sources: Data provided by the authorities; and Fund staff estimates.

With the reining in of inflation and the improvement in the terms of trade, competitiveness was strengthened. The depreciation of the CFA franc in real effective terms (measured in terms of relative CPIs) during 1994 is estimated at 30 percent for the zone: 32 percent for the WAEMU countries as a group and 26 percent for the CAEMC countries, broadly as expected in the programs (Annex I, Table 26, and Chart 3). If measured in terms of relative unit labor costs—which are difficult to document systematically but on which there is ample fragmentary information, for instance in Côte d’Ivoire and Cameroon—the real effective depreciation is estimated to have been significantly greater.15 As a result, the improvement in competitiveness was particularly strong in sectors where the share of labor in total costs was relatively high and that of imported inputs low (for example, agriculture, textiles, and light manufactures).

Chart 3.Real Effective Exchange Rate and Terms of Trade, 1980–94

(Weighted by 1994 GDP; 1985= 100)

Sources: IMF, Information Notice System; World Economic Outlook; and Fund staff estimates.

1An upward movement of the real effective rate is an appreciation.

2A downward movement of the terms of trade is a loss.

Economic growth in the zone is estimated at 1.3 percent in 1994, with strong momentum building up in the second half of the year and in early 1995. While this outcome was only slightly above original expectations, it represented an important reversal of past trends. Only two countries in the CAEMC, as expected, registered negative growth rates (Annex I, Table 4).16 In most countries, output generally responded more rapidly than envisaged to the shift in relative prices. The structure of consumption also began to shift in favor of locally produced goods, such as food crops, vegetables, livestock, and light manufactures.

Production in the export-oriented agro-industrial and textile sectors rebounded, notably in enterprises that had been restructured or privatized in earlier years and were therefore well placed to benefit from the devaluation. Producer incentives were also restored by the increases in producer prices—ranging from 12 percent to 200 percent—for export crops (Annex I, Table 52). As a result, export volume in the zone increased by 5 percent in 1994, even though the crop season was already well advanced in certain countries at the time of the devaluation. Tourism also picked up, especially in Senegal. By contrast, production of nontradables, particularly construction and domestic services, has tended to remain depressed, except in Benin, Mali, Côte d’Ivoire, and Senegal. In general, enterprises in all sectors have continued to adapt, searching for new markets, financing, and suppliers.

With large income gains in the tradable goods sector, and falling domestic consumption, gross domestic savings in the zone increased by 8 percentage points of GDP, to 21 percent, in 1994 (Annex I, Table 12). The increase in the CAEMC (10 percentage points of GDP) was much higher relative to program than in the WAEMU (6 percentage points of GDP), and was concentrated in the private sector. By contrast, gross domestic investment rose by a mere 3 percentage points of GDP, to 17.5 percent, or somewhat less than intended (Annex I, Table 9).17 Public investment was lower than programmed in all countries except Côte d’Ivoire, while private investment rose everywhere except in Benin and Senegal. The rise was particularly significant in the oil sector in the Congo, Equatorial Guinea, and Gabon. Private investment was also strong in the two largest economies, Cameroon and Côte d’Ivoire. However, private investment has remained confined to specific sectors, and has not yet picked up significantly in some countries. One reason that has been offered for this delay is the wait-and-see attitude of investors in the face of contracting domestic demand, a slow pace of repayment of government domestic payments arrears, and insufficiently forceful structural reforms.

Helped further by a substantial increase in foreign grants, the improvement in saving-investment balances translated into a major strengthening of external current account positions in most countries (Annex I, Tables 23 and 24). The improvement, which was concentrated in the trade balance, was better than envisaged in all cases except Equatorial Guinea, and was particularly strong in Côte d’Ivoire and Gabon. This was due largely to increases in export volume and to the sharp contraction in the quantity of imports, but also, especially in Côte d’Ivoire and Cameroon, to the strengthening of the terms of trade (Charts 4 and 5). Trade within the zone also appears to have increased rapidly—albeit from a low base—as zone products became more competitive vis-à-vis nonzone imports (Annex I, Table 22). In addition, trade flows with neighboring countries outside the zone (The Gambia, Ghana, and Nigeria) have been reversed, with a strong increase in exports (including re-exports from Benin and Togo) and a decline in imports.

Chart 4.WAEMU: Decomposition of Trade Balance Variations, 1993–94

(In millions of US. dollars)

Sources: BCEAO; and Fund staff estimates.

1Positive numbers indicate improvements in the trade balance.

2Negative numbers indicate improvements in the trade balance.

Chart 5.CAEMC: Decomposition of Trade Balance Variations, 1993–94

(In millions of U.S.dollars)

Sources: BEAQ; and Fund staff estimates.

1Positive numbers indicate improvements in the trade balance.

2Negative numbers indicate improvements in the trade balance.

The improvement in external current account positions, the resumption of foreign assistance, and large-scale repatriation of flight capital caused the foreign reserve position of the two common central banks to strengthen well beyond expectations. At end-1994, the BCEAO’s position in its operations account with the French Treasury had improved by the equivalent of US$1.7 billion, and the BEAC’s by US$0.3 billion. Gross reserves in months of imports of goods and nonfactor services increased to 1.8 months in the zone as a whole—2.4 months in the WAEMU and 1.0 month in the CAEMC.

All countries obtained comprehensive debt relief from the Paris Club in 1994 and early 1995, and most of them benefited from concessional terms. As noted above, total official debt relief amounted to about US$7.0 billion for 1994 (some US$200 million more than initially expected) (Annex I, Tables 28 and 50). The countries also benefited from substantial debt cancellation by a number of bilateral creditors, as well as large-scale exceptional assistance from bilateral and multilateral institutions (Annex I, Tables 47 and 48). However, there have also been delays in several cases in mobilizing aid disbursements, largely because of the nonobservance of applicable conditions, including those under Fund-supported and World Bank-supported programs.

Negotiated solutions to debts vis-à-vis commercial banks and other private creditors, which were virtually all in arrears at end-1993, were an integral part of the programs of Cameroon, the Congo, and Côte d’Ivoire. The authorities of these countries are continuing discussions with their private creditors with a view to developing solutions compatible with their external payments capacity and prospects.

In 1994 public external debt service due amounted to 31 percent of exports of goods and nonfactor services for the zone as a whole—33 percent in the WAEMU and 29 percent in the CAEMC. It approached 73 percent of government revenue in the WAEMU and exceeded 85 percent in the CAEMC (Annex I, Tables 29 and 30). Public external debt outstanding at end-1994 represented 126 percent of GDP in the zone: 130 percent in the WAEMU and 122 percent in the CAEMC (Annex I, Table 27 and Chart 6). The average share of multilateral debt in total public external debt exceeded 30 percent for the zone, ranging from 15 percent in the case of Gabon to more than 80 percent in the case of Chad. Payments arrears on external debt service remained outstanding at end-1994 in all countries, except Benin, Mali, and Gabon. In the case of the Congo and Côte d’Ivoire, the bulk of these arrears were to foreign commercial banks.

Chart 6.External Public Debt at End of 1994

(In percent of GDP)

Sources: Data provided by the authorities; and Fund staff estimates.

1Excluding IMF.

Policies Supporting the Exchange Rate Adjustment

Wage and Labor Policies

In general, the authorities managed to keep a firm control over remuneration in the public sector, even against the backdrop of sizable nominal salary cuts in several countries in the course of 1993.18 Nominal salary increases in the public sector were in line with targets in most countries—ranging from zero in Cameroon, Togo, and the Congo to 25 percent in Niger and Senegal, with most increases kept at 10–15 percent, as intended (Annex I, Table 39). The timing of these increases varied considerably across countries, including adjustments on account of past wage arrears (in Benin and Togo), wage drift, and family or other allowances. This wage restraint, combined with the liberalization of labor laws, in turn positively influenced wage formation in the private sector and in the state enterprises, where pay awards were in general only slightly higher than in the government sector. Developments in 1995 point to continued restraint in remuneration policy, with no general wage adjustments except in Côte d’Ivoire and Chad, where increases amounted to 5.5 percent and 10 percent, respectively.

Wage bills were also affected by reductions in government employment in most countries, except Burkina Faso, Niger, Togo, and Gabon. Overall, changes in government wage bills in 1994 ranged from minus 27 percent in Cameroon (following an 18 percent reduction the year before) to plus 28 percent in Togo, with a cluster of seven countries posting increases in the 10–15 percent range (Annex I, Table 38).

At the same time, some progress was made toward liberalizing labor markets, particularly regulations applicable to hirings, firings, and minimum wages. Mali, Senegal, and Cameroon adopted new labor codes; the remaining countries are expected to do so in the next two to three years. With the continuation of a restrained wage policy, these reforms, including, in many cases, an alleviation of taxes on salaries and social security contributions paid by enterprises, should enhance the competitiveness of labor and help create jobs for a rapidly growing labor force (assuming that the tax burden is not shifted onto employees).19

Fiscal Developments and Policy

In 1994 there was a noticeable improvement in the “basic” primary government balance (that is, the current balance excluding interest and foreign grants, but including domestically financed investments) in all countries, except Burkina Faso and Niger, although the improvement was less than targeted in several cases (Annex I, Table 42).20 The overall fiscal deficit relative to GDP also narrowed in more than half of the countries and, compared with the target, the overall deficit was lower in all countries except Cameroon, Chad, and the C.A.R. (Annex I, Table 43).

These overall results, however, were brought about through a fiscal policy mix that was often at variance with the programs. Contrary to original intentions, the brunt of fiscal adjustment tended, in most cases, to fall on current expenditure, including social spending, and, to a lesser extent, on investment outlays, as an offset to sizable shortfalls in tax revenue (particularly import-related revenue). Moreover, although foreign financing on the whole rose sharply, shortfalls in program assistance emerged in several countries. This, in turn, led to delays in the clearance of domestic and external payments arrears.

The weakest area of performance was government revenue. Tax and nontax collections fell substantially short of program in all CAEMC countries except Gabon, and in all WAEMU countries except Côte d’Ivoire, Mali, and Togo (Annex I, Table 31).21 The ratio of total tax revenue to GDP reached only 13 percent in the WAEMU and 14 percent in the CAEMC in 1994, as against targets of 14 percent and 17.5 percent, respectively, mainly because import duty collections were well below programmed levels (Annex I, Tables 32–34). Consequently, the structure of government revenue shifted in 1994, with the share of domestic taxes rising at the expense of that of taxes on international trade (including export taxes), except in Côte d’Ivoire.22

While there are several reasons for the revenue shortfalls, both exogenous factors and policy slippages have been at play. There were strikes and civil unrest in some countries (for example, the C.A.R., Chad, the Congo, Equatorial Guinea, and Niger), as well as larger-than-expected reductions in overall domestic demand and shifts in the structure of consumption and imports toward less-taxed goods; the latter also reflected the expansion of intrazone trade.

Concerning policy implementation, revenue policies in general aimed to improve the tax structure and reduce reliance on trade taxation, while respecting the objectives for indirect tax harmonization in the region. In both subzones, harmonization and the reduction of indirect taxes and external tariffs took place as envisaged.23 Following the devaluation, all countries reduced external tariffs considerably, including those on petroleum products. However, the impact of this reduction was not offset by the expected revenue impact of the expansion of the tax base and the strengthening of tax administration. The poor revenue performance highlighted the continuing problems afflicting tax administration, including weaknesses and fraud in customs, and the continued widespread granting of exemptions contrary to program undertakings, especially in the CAEMC countries, but in several countries in the WAEMU as well.24 There were also difficulties in the early months of 1994 in implementing the tax reforms—particularly in the CAEMC—and, in many cases, in properly assessing the new tax base after the devaluation. The sharp decrease in the real wages of tax collectors and the related lack of incentives might also have been a factor behind the poor revenue performance.

Where revenue shortfalls developed, they were offset in most cases by deeper-than-envisaged cuts in government expenditure. Total expenditure fell by about one half of a percentage point of GDP in the WAEMU, but by 3.5 points in the CAEMC in 1994 (Annex I, Table 35). Primary expenditure was below program in all countries but Burkina Faso, the C.A.R., and Côte d’Ivoire (Annex I, Table 36). Since the wage bill was broadly on target in most countries—except Cameroon, where it was kept 1.5 percentage points of GDP below program, and Benin, the C.A.R., Niger, and the Congo, where it exceeded program objectives (Annex I, Tables 37 and 38)—the bulk of the economies made in current outlays was concentrated in nonwage expenditure, including social spending. Investment expenditure also remained below program in all countries, except Côte d’Ivoire. Scheduled interest payments, before rescheduling, were somewhat lower than programmed in all countries, except Togo. Overall, therefore, the composition of spending often deviated from program intentions.

In most cases, progress in improving budgetary procedures and expenditure control and information systems was limited. In several countries, the investment budget remained separate from the current budget, debt operations often continued to be left off budget (for example, in Côte d’Ivoire and Cameroon), and extrabudgetary operations persisted (for example, in Cameroon, Equatorial Guinea, and Gabon). While the practice of elaborating multiyear rolling public investment programs was generalized, little progress was made in developing techniques to appraise expenditure priorities. The coverage and quality of information on government financial operations also remained uneven.

In meeting their financing needs, all countries benefited in 1994 from extensive debt relief (two thirds of the total) and, except in the case of Equatorial Guinea, from a major increase in foreign assistance. In total, such financing more than tripled, to the equivalent of about US$11 billion or 30 percent of the zone’s GDP, from the amounts obtainable a year earlier (Annex I, Table 47). In addition to Fund and World Bank assistance, considerable financial support was provided by France, the African Development Bank, and the European Union. There was nonetheless an overall shortfall in foreign financing of somewhat more than US$0.9 billion, mainly on account of shortfalls in exceptional budgetary assistance and project aid, although these were partly offset by higher debt relief. The shortfalls in most cases were traceable to the nonobservance of the applicable conditions, including under Fund arrangements.

The financing shortfalls contributed in turn to the nonobservance of certain program targets—mostly those related to the reduction and clearance of domestic payments arrears (Burkina Faso, the C.A.R., Chad, the Congo, and Niger)—as well as to external payments arrears (Côte d’Ivoire, Equatorial Guinea, Senegal, and Cameroon).

Monetary Developments and Policy

At the zone level, monetary developments in 1994 were dominated by a much faster reconstitution of real money balances than had been expected—a trend that pointed to the early return of confidence in the currency and to the credibility of the new exchange rate. Broad money increased about in line with nominal GDP, with velocity (year on year) remaining virtually unchanged in the WAEMU, and increasing only slightly in the CAEMC, the latter largely because of continued concerns over the health of some national banking systems. The increase in broad money was mostly in the form of currency in circulation, although the rate of growth varied from country to country. This was due partly to the fact that commercial banks discouraged private sector deposits in remunerated accounts because of lack of domestic use for their resources, and also to the absence of banking services in rural areas, which led farmers, who benefited from higher producer prices, to hold increasing amounts of cash.

In contrast to this rapid increase in bank liabilities to the private sector, credit growth to the economy in 1994 was sluggish in both subzones—amounting to 3.9 percent of beginning-of-period broad money in the WAEMU, and 0.8 percent in the CAEMC. In the tradable goods sector, internal fund generation appears to have been more than sufficient to meet financing needs, especially given the high international commodity prices. The repatriation of flight capital also helped dampen credit demand, as did the repayment of government domestic arrears. On the supply side, the high operational costs of commercial banks, the absence of active competition in the industry, the continued need for provisioning for doubtful loans, and the lack of collateral of most potential clients in the nontraded goods sectors all combined to foster great prudence in bank lending. At the same time, net bank credit to governments remained below ceilings in the majority of cases, reflecting the strengthening of public finances.25

In these conditions, the growth of the net domestic assets of the banking system in both subregions remained well below the increase in broad money, and thus net foreign assets improved substantially (Annex I, Tables 44 and 45). The recovery in the zone’s combined net foreign asset position during 1994 was equivalent to US$2.2 billion—US$1.6 billion in the WAEMU and US$0.6 billion in the CAEMC, with the BEAC moving from a net debtor to a net creditor position.

In conducting monetary policy, the authorities relied principally on the discount rate and the intervention rate in their respective regional money markets; but these instruments were of limited effectiveness, given the surge in the liquidity of the banking systems throughout the zone as money balances were being reconstituted and credit demand remained sluggish (Annex I, Table 46, and Charts 7 and 8). In the immediate aftermath of the devaluation, the BCEAO and the BEAC raised their discount rates26 by 4 percentage points to 14.5 percent, and by 2.5 percentage points to 14.0 percent, respectively. These increases were followed by gradual downward adjustments as inflation abated, to 8.5 percent in the WAEMU in June 1995, and 8.0 percent in the CAEMC (auction rate) in December 1994 (before it returned to 8.75 percent in June 1995). The minimum rates on bank deposits fell from 8.0 percent in January 1994 to 4.5 percent in September 1994 in the WAEMU, and from 9.0 percent to 5.5 percent in the CAEMC. Maximum lending rates were lowered from 29.0 percent to 17.0 percent in the WAEMU, and from 19.0 percent to 16.0 percent in the CAEMC.

Chart 7.WAEMU: Monetary Survey, 1994

(Annual changes in percent of beginning-of-period money stock)

Sources: BCEAO; and Fund staff estimates. IBCEAO definition.

1BCEAO definition.

Chart 8.CAEMC: Monetary Survey, 1994

(Annual changes in percent of beginning-of-period money stock)

Sources: BEAQ and Fund staff estimates.

1BEAC definition.

With the increase in their loanable resources, commercial banks drastically reduced their outstanding recourse to central bank financing, while raising their reserves with the monetary authorities in 1994 by 80 percent27 and 278 percent, respectively, in the WAEMU and the CAEMC. In the WAEMU money market, offers greatly exceeded demand, and only a small portion of funds on offer was absorbed. To mop up the excess liquidity, the BCEAO decided to securitize the consolidated claims it held on the governments of the subregion on account of the restructuring of commercial banks during the late 1980s and early 1990s. These bonds have proved to be popular with banks, as they offer a way to place unremunerated reserves and improve the banks’ financial health at, in practice, no opportunity cost.28 However, as the banks can redeem the bonds at par at any time and use them to fulfill reserve requirements, any further attempt by the BCEAO to tighten monetary conditions will be less effective. Local commercial banks have also purchased bonds issued by other WAEMU countries. In Burkina Faso and Mali, most of the increase in the commercial banks’ net foreign asset position was on account of the purchase of such claims on other WAEMU member governments.

In the CAEMC, flows in the regional interbank market tended to be largely directed to Gabon because of perceived bank risks elsewhere. In the money market, the BEAC injected reserves on a limited scale, mostly to support banks in difficulty in Cameroon and the Congo, which had no access to the regional interbank market.

Structural Reforms

To strengthen the gains in competitiveness brought about by the devaluation and the tightening of domestic demand management, and to pave the way for a resumption of sustainable growth, structural reforms were launched or deepened in all countries with the support of the Fund, the World Bank, the European Union, and bilateral donors. The reforms focused mainly on public enterprises, the civil service, the legal and regulatory framework, and the trade regime. Overall, progress was significant, albeit generally slower than envisaged because of administrative weaknesses and of delays in adopting the necessary legislations.

Over the years, public enterprises have played a central role in the economies of the zone, but they have often acted as a deterrent to growth and a source of financial imbalances. The rehabilitation or privatization of these enterprises was therefore an integral part of most structural reform efforts envisaged under the programs. However, most countries fell short of their targets for divestiture and restructuring in 1994. Of a total of about 800 public enterprises, rehabilitation or liquidation procedures were initiated for only 50, or one half of the number originally targeted.

Public enterprise reform programs, though varying greatly from country to country, generally involved the privatization or restructuring of enterprises, breaking up monopolies and opening up activities to private sector competition, and improving the institutional and legal framework within which public enterprises operate, including providing the basis for greater management autonomy. In the cases where public enterprises were to remain in the government portfolio, restructuring measures typically involved the implementation of management enhancement systems, for example, through the introduction of modern cost accounting schemes, performance-based contracts, and improved financial monitoring mechanisms, price decontrols, cost recovery for state monopolies, efforts to cut costs, including reductions in staffing levels, and the clearance of arrears to the government and of cross-debts with other public enterprises.

The devaluation of the CFA franc facilitated the privatization of some public enterprises, particularly those involved in export, import substitution activities, and food processing, where extensive streamlining had already taken place before the exchange rate change. On the whole, however, most countries are still experiencing difficulties in selling off enterprises, as demand has not yet built up sufficiently for these assets. It may also be that the original speed of privatization itself was not suited to prevailing market conditions shortly after the devaluation. Thus, many countries are now revisiting elements of their divestiture strategy, for example, by assessing possible alternative terms of sale, management contracts, and ways to improve net asset valuation.

Civil service reform was another important component of structural reform programs. Consistent with the need to contain government wage bills, while making room for improvements over time in pay relativities, most countries have moved to freeze or reduce civil service employment. The main measures have included freezes on recruitment outside the priority areas of education and health, nonre-placement of retiring personnel, voluntary departure programs, and outright layoffs accompanied by severance pay in most cases. These actions have met with varying degrees of success. On the one hand, hiring freezes, nonreplacement of retiring employees, and reorganization or closing down of government units or public enterprises have generally proven successful in shedding excess personnel, albeit at a significant cost at times in terms of severance pay. On the other hand, voluntary departure programs in most countries have only produced a small decline in the number of civil servants, partly because of the inadequacy of available funds to promote such schemes on a large and attractive scale.

To promote private sector activities, most countries have embarked on a progressive overhauling of the legal and regulatory framework and have taken other steps to remove administrative hindrances to entrepreneurial initiative. The efforts form part of a regional strategy to harmonize key legislation on investment, business, insurance, social security, and labor relations. Accordingly, the programs provided for investment codes to be reformulated in practically all countries so as to make the legal and judicial environment more stable and predictable, while improving the incentives for foreign and domestic private investment. Most countries have also increased efforts to modernize corporate, commercial, and accounting laws. As part of this effort, nine members of the zone have already ratified the treaty establishing the Organization for the Harmonization of Business Law in Africa (OHADA), which seeks to adopt uniform regulations covering the main areas of business law, as well as to establish a regional court.29

In the area of trade policy, a simplified fourtier common external tariff (TEC) and a single intrazone tariff (currently at 20 percent of the TEC) have been largely in place in the CAEMC since early 1995 (except in Chad, which completed the process only in July 1995). Discussions on reductions in tariff levels and their dispersion, however, are still taking place in the WAEMU. In both subzones, quantitative restrictions have been largely dismantled and the rates of effective protection have been lowered and become less distortionary. There is some evidence that by lowering tax rates, these reforms helped lessen price pressures in the wake of the devaluation, as well as facilitate the rebound of the export sector. Meanwhile, all countries have endeavored to maintain an exchange system free of restrictions on payments and transfers for current international transactions.30

Social Policies

The partial or total pass-through of world market prices to producers in the cash crop sectors had a very salutory effect on the income of the rural populations, which had been affected the most by the growing distortions in relative prices during the period 1986–93. The corrective price changes, however, meant an erosion of purchasing power for the urban populations. For this reason, all programs incorporated policies to alleviate the transitional effects of adjustment on the most vulnerable groups and to improve the level and quality of social services, particularly in primary education and health.

One general approach followed by most countries was to reduce tax and tariff rates—or introduce temporary subsidies—on essential goods, in particular rice, sugar, flour, kerosene, and medicines. Another instrument that was used was recourse to selected and temporary price controls to prevent unrest and speculation, as well as possible snowballing expectations of an inflation spiral. Administered prices typically covered petroleum products (ten countries), water (nine), electricity (nine), bread (nine), rice (nine), edible oil (eight), and sugar (seven). With inflationary pressures abating as the year advanced, however, most of these controls have been removed and prices adjusted, except in a few cases where the pace of liberalization is governed by understandings reached under external support operations.

Many programs have also included targeted social safety nets. These initiatives have typically consisted of budgetary allocations for labor-intensive public works aimed at creating employment in urban areas (for example, in Burkina Faso, Cameroon, and Côte d’Ivoire); vocational training programs for youth; and promotion of small businesses as, for instance, in Benin and Cameroon. However, implementation has often been hampered by lack of appropriate instruments, insufficient preparation, and limited administrative capacity, which in turn have caused international support to lag.

On a broader level, all programs have sought, with the assistance of the World Bank and bilateral donors, to place emphasis on human resource development, particularly in primary education and health. Although expenditure on social programs increased in real terms in some countries in 1994, in general, progress toward the reallocation of spending remained modest because of the shortfalls in domestic revenue collections. This reallocation therefore continues to be a central feature of the programs formulated for 1995 and beyond.

To facilitate comparisons, all data in this paper are shown on a calendar year basis. Accordingly, Cameroon’s data, which are officially reported on a fiscal year (July-June) basis, have been converted for the purposes of this paper to a January-December basis.

The CPI generally reflects urban consumption patterns, which are heavily tilted toward tradable goods; it thus tended to overestimate recorded inflation in the aftermath of the devaluation.

An important factor in explaining the variations in inflation performance between countries appears to have been the degree of openness of the economy.

Nominal wage increases were generally held in the range of 0–25 percent, a stance largely followed by the private sector. At the same time, because of the large unused capacity in late 1993, output growth (especially in manufacturing) did not translate into employment creation, suggesting large gains in productivity.

The recovery of output, however, was pronounced in Cameroon beginning in the third quarter of 1994.

For a full assessment of investment behavior one would have to take into account the import content of investment and the deflator of investment; however, detailed information is not yet available.

Niger and Senegal in the WAEMU; and Chad (in late 1992), Cameroon, and the C.A.R. in the CAEMC.

A recent study by France’s Ministry of Coopération shows that the wedge between wage costs and wage rates attributable to “fiscal and quasifiscal labor costs” represented up to one third of direct wage costs in 1993 (29 percent in Cameroon, 18 percent in Côte d’Ivoire, 32 percent in Mali, and 25 percent in Senegal).

Because most public investment in the CFA franc zone is still governed by the availability of external financing, the basic primary balance criterion has served to measure fiscal adjustment on the basis of the variables that are under the control of the authorities.

Compared with the established revenue targets, the largest shortfalls are estimated at 26 percent in the C.A.R., about 30 percent in Chad and Niger, and 40 percent in Cameroon.

Several countries have low or no export taxes, while others have temporarily introduced or maintained such taxes (for example, Côte d’Ivoire in the WAEMU and most of the CAEMC countries).

In the CAEMC, the reduction was part of the customs tariff/indirect tax reform agreed in June 1993 in the framework of the CAECU. Details are provided in Annex II. No such comprehensive reform has been adopted yet by the WAEMU countries; nonetheless, since 1993, policies in these countries have been geared to reducing the level and dispersion of tariff rates and reducing or eliminating quantitative restrictions, thus fostering a measure of regional harmonization.

The most pronounced deviations from program path were in Niger, Chad, the C.A.R., and particularly Cameroon. In this latter case, nominal GDP, imports, and exports all turned out higher in 1994 than envisaged in the program; yet, nominal tax collections declined in absolute terms compared with 1993, causing the tax/GDP ratio to fall from 11.5 percent in 1993 to 8.5 percent in 1994.

In several countries, this helped bring outstanding recourse to central bank financing below the statutory ceiling for the first time in several years.

In the WAEMU, the discount rate is a de facto penalty rate that serves as a benchmark for the BCEAO’s repurchase and auction rates. In the BEAC, the discount rate was replaced by the auction rate as the key intervention rate in July 1994.

Including securitization as noted below.

The bonds carry a tax-free, fixed interest rate of 5 percent for a 12-year maturity—compared with a yield of 5.5 percent in the money market—and are both quasi-liquid and risk free, as they are redeemable at par by the BCEAO on demand.

See Annex II.

There are national limits on foreign exchange allowances for travel, study, and medical care abroad in a number of countries, but these are normative and all bona fide transactions are allowed.

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