V Conclusions

Stéphane Cossé, Johannes Mueller, Jean Le Dem, and Jean Clément
Published Date:
June 1996
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The CFA franc countries have largely met in 1994 the objectives of the programs they had developed in the aftermath of the devaluation of the CFA franc with regard to economic growth, inflation, and the external position. Furthermore, with restraint in wage policy, competitiveness has been restored. Performance, however, has been uneven in the two crucial areas of fiscal adjustment and structural reforms, which need to be enhanced to ensure the sustainability of the recovery and the return to external viability.

Overall, the economic policy mix envisaged in the medium-term strategy, aimed at validating the new level of the exchange rate anchor and at sparking the recovery of the economies of the zone, remains appropriate. However, contrary to program intentions, the brunt of fiscal adjustment in the first year fell disproportionately on nonwage primary expenditure and on capital outlays, as there were sizable shortfalls in tax revenue in most countries. This fiscal policy mix is not sustainable and, with the slow initial implementation of structural reforms, suggests that corrective actions are needed to keep the adjustment strategy on course. Thus, the member countries of the CFA franc zone should take advantage of the generally favorable international environment to consolidate and deepen their adjustment efforts and to implement a critical mass of structural measures that would create an environment conducive to sustainable growth with financial stability.

For the immediate future, the primary concern is to strengthen policy performance in the countries where program implementation has been weak following the devaluation. This calls first for a correction of the government revenue shortfalls experienced by several countries in 1994. The reform of customs regimes and of domestic indirect taxation is now in place in the CAEMC, and is under discussion in the WAEMU. The objective is to broaden the tax base and curb the incidence of exemptions, while reducing effective protection. But, the effect of these reforms will depend on the determination of the authorities to carry them through by strengthening the tax collection agencies and mechanisms, reducing exemptions and refraining from granting new ones, and fighting fraud and illicit practices.

A structure of government revenue less vulnerable to external shocks, however, must be the long-term aim of the reforms to be undertaken in the period ahead. Extensive Fund technical assistance has already been, or is being, provided in the design and implementation of the CAECU and WAEMU customs tariff and indirect tax reforms. It will also be needed, along with that of other donors, in designing plans of action in other areas of revenue mobilization, including tax administration. Another central issue of policy will be that of gradually reducing and eventually eliminating reliance on export taxes, and replacing them with workable mechanisms of income (or imputed income) or land taxation. In this area, however, improvements will necessarily be slow to come by. Work on strengthening the existing domestic revenue base—involving simple and easy-to-administer taxation regimes for the informal sector, and concentration on the taxpayers responsible for the bulk of economic activity—must therefore remain the central task in the short run.

As regards government expenditure, the authorities need to ensure that outlays on social safety net measures and basic social services are preserved or increased as planned, and that greater attention is given to the programming and implementation of public investment. At the same time, expenditure policies should take account of the evolving revenue situation to avoid any backsliding on consolidating budgetary positions. The authorities need to, as a matter of priority, guard against relaxing public wage policy. They should therefore pursue efforts vigorously to bring the civil service to an efficient size. This is essential not only to improve pay relativities in the administrations but also to achieve the desired restructuring of public expenditure in favor of investment in human and physical capital.

Another key challenge is to step up structural reform efforts so as to build on the gains in competitiveness permitted by the devaluation and create the conditions for self-sustained growth. Governments will need first to strengthen public sector administrative capacity. Priority areas already identified include public expenditure reviews, civil service reform, strict project selection under public investment programs, health and education sector development, and public enterprise reform.

The authorities should also promptly put in place reforms that support a strong private sector capable of becoming the true engine of economic growth. The measures required here are the acceleration of state enterprise privatization; the liberalization of remaining controls on prices, labor markets, and external and domestic commercial activity; and the completion of the restructuring of the financial sectors. At the same time, the authorities need to continue to work at the regional level to deepen financial intermediation and to improve the instruments of monetary policy at the disposal of the two central banks, in order to increase reliance on market mechanisms and to promote saving mobilization and appropriate allocation of financial resources. The pursuit of these reforms should be supported by the adoption of a stable and predictable legal framework that encourages private sector initiative and strengthens investor confidence. In that connection, the CFA franc countries have recently taken a decision to accept the obligations of Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement.

The CFA franc countries will need to sustain and deepen their adjustment efforts so as to enhance saving rates and their debt-servicing capacity. Mean-while, sound borrowing policy would mean reliance mainly on grants or on loans on highly concessional terms. With programs carefully adhered to, debt-stock operations under the auspices of the Paris Club, appropriately tailored to the countries’ capacity to pay, will help alleviate the existing debt burden. Solutions with similar effects will need to be developed with private creditors by the countries, such as Côte d’Ivoire, the Congo, and Cameroon, that have sizable debts to the market.

Finally, the two subregions need to intensify the momentum of regional integration and economic co-operation. This would help avoid inconsistent policies. It would also facilitate the emergence of large economic areas that offer broader markets and opportunities for economies of scale, and encourage factor mobility. The development of the regional instruments of surveillance to foster economic convergence therefore should be actively encouraged. Appropriate use of these instruments would greatly improve the chances for a virtuous circle of sound macroeconomic policies, increased saving mobilization, proper resource allocation, and sustainable economic growth rates.

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