In January 1994, seven sub-Saharan African countries—Benin, Burkina Faso, Côte dď lvoire, Mali. Niger, Senegal, and Togo—signed a treaty establishing the West African Economic and Monetary Union (WAEMU). These countries, with the addition of Guinea-Bissau in 1997, form part of the CFA franc zone along with a second group of six African countries that participate in a similar monetary arrangement, the Central African Economic and Monetary Community (CAEMC). The CAEMC countries are Cameroon, the Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon. Within eaeh subzone, monetary arrangements are managed by a separate central bank: the Central Bank of West African States (BCEAO) for the WAEMU and the Bank of Central African States (BEAC) for the CAEMC. The two subzones share a common currency, the CFA franc, which stands for the Communauté financiere africaine in the BCEAO area and for the Coopération financiere en Afrique in the BEAC area.
Member countries of each subzone agree to pool a minimum proportion of their gross foreign exchange reserves (currently 65 percent) in an operations account with the French treasury. Through this account, the French treasury provides an unlimited overdraft facility, thus guaranteeing the convertibility of the CFA franc. Since its introduction in 1948, the CFA franc has been pegged to the French franc, and, except for a devaluation in 1994, its parity has remained unchanged. Since January 12, 1994. the exchange rate has been fixed at CFAF 100 = F 1, compared with CFAF 50 = F 1 before the devaluation.
During the second half of the 1980s and in the early 1990s, a prolonged worsening of the terms of trade and a steep rise in labor costs, combined with a nominal appreciation of the French franc against the U.S. dollar, led to a considerable real effective appreciation of the CFA franc and a serious deterioration in the region’ s competitive position. As part of a comprehensive strategy to address this problem, the 14 countries of the CFA franc zone devalued their common currency by 50 percent in January 1994 and ceased to rely exclusively on measures of internal adjustment.
The exchange rate realignment led to a significant turnaround in economic activity in the CFA franc zone, and in the WAEMU in particular, with output, exports, and investment increasing rapidly during 1994–97. Inflation, after a brief surge in the aftermath of the devaluation, has returned to low levels. On the basis of a number of real exchange rate indicators, the competitive position of the WAEMU at this time appears to be broadly adequate, although the evolution of these indicators will need to be kept under close review.
Policy Issues Facing the WAEMU
Despite these recent improvements, the WAEMU countries continue to grapple with a number of policy issues. First, the level of liquidity in the banking system is high, which appears to be related to various structural problems, including insufficient competition among banks, the limited role of the interbank market, administrative obstacles to crosscountry banking activities, and the high risks associated with reimbursements of bank loans. Although the governments of the member countries have been actively involved in the restructuring efforts of a number of banks, they must now pursue full privatization to improve banksď efficiency and strengthen their financial structure. They should, in addition, revise capital adequacy ratios to make them consistent with international standards.
Second, in the area of trade policy, the WAEMU countries are planning to implement a common external tariff during 1998–2000, which will provide an opportunity to eliminate all tariff and nontariff barriers within the WAEMU. further liberalize external trade, and deepen the countriesď integration with the world economy. Specifically, all tariffs on trade related to products that meet local content requirements will be eliminated among member countries, and the tariff structure that applies to trade with countries outside the WAEMU will be simplified.
A third major issue for the countries in the region will be to create the conditions for an increase in do mestic and foreign private investment, which, despite some improvement in recent years, remain low. Necessary steps include streamlining the regulatory framework and eliminating the discriminatory practices and distortions associated with exemptions from customs duties and other taxes. The planned adoption of a regional investment code and the liberalization of trade that is expected to result from the implementation of the common external tariff should help them achieve this objective.
Finally, the WAEMU countries are seeking to fully harmonize business laws among themselves. The vehicle for this strategy is the Treaty on the Harmonization of Business Laws in Africa, adopted in October 1993. While it represents a major step in the right direction, the countries will need to follow it up by overhauling the judicial system.
Institutional Framework of the WAEMU
The treaty establishing the WAEMU was signed on January 10, 1994 and entered into force on August 1, 1994 after its ratification by all member countries (see Box 1).1 The aim of the treaty was to build on the achievements of the West African Monetary Union (WAMU), created in 1962, whose main objective was to provide the macroeconomic stability and the credibility required to sustain the fixed exchange rate for the common currency. The WAEMU treaty aims to extend the process of integration already at work in the monetary area to the whole economic sphere.2 This goal will involve crepation of a single domestic market through the establishment of a customs union, harmonization of legal systems, implementation of common sectoral policies, and convergence of fiscal policies in support of the common monetary policy. The treaty provides a framework within which member countries can address a number of structural weaknesses that have limited their growth potential; strengthen the credibility and effectiveness of their economic policies; and achieve a number of benefits, including economies of scale and efficiency gains.
WAEMU: Institutional Framework
The highest organ of the WAEMU is the Conference of the Heads of States and Governments. It meets at least once a year, determines the broad policy orientations of the WAEMU, and has authority for introducing new provisions into the treaty.
The Council of Ministers, which meets four times a year, iheadquartered in Lomes responsible for implementing the broad decisions of the Conference of the Heads of States and Governments. It decides on the adoption of the regional Banking Commissionď s proposals. The commission, responsible for bank supervision, makes recommendations on all policy issues relevant to the WAEMU other than those within the purview of the central bank, and implements the decisions of the Council of Ministers.
The acts of the Council of Ministers and of the regional Banking Commission are translated into rulings, instructions, or decisions that are mandatory for all parties concerned. The West African Development Bank, headquartered in Lomeé, Togo, also plays an active supporting role in the economic integration effort of the WAEMU. Other regional institutions include The Court of Justice, the Consular Chamber of Commerce, and the Interparliamentary Committee.