West African Economic and Monetary Union (WAEMU)
Recent Economic Developments and Regional Policy Issues in 2000
Author: International Monetary Fund
Publication Date:
05 Nov 2001
eISBN:
9781451840605
Language:
English
Keywords:
ISCR; CR; central bank; terms of trade; exchange rate; member country; monetary policy
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There has been a marked deterioration in the economic and financial performance of the West African Economic and Monetary Union (WAEMU) as a whole. These developments reflected unfavorable terms of trade, political conflicts in certain countries, and a weakening of adjustment policies. Progress needs to be made in achieving fiscal consolidation and macroeconomic convergence among WAEMU member countries. It would be important to achieve a greater integration of the WAEMU region's money and financial markets.

Abstract

There has been a marked deterioration in the economic and financial performance of the West African Economic and Monetary Union (WAEMU) as a whole. These developments reflected unfavorable terms of trade, political conflicts in certain countries, and a weakening of adjustment policies. Progress needs to be made in achieving fiscal consolidation and macroeconomic convergence among WAEMU member countries. It would be important to achieve a greater integration of the WAEMU region's money and financial markets.

I. Introduction

1. This paper reports on discussions held in Dakar, Abidjan, and Ouagadougou during May 30–June 8, 2001 with senior officials of the Central Bank of West African States (BCEAO), the Commission of the West African Economic and Monetary Union (WAEMU), the Regional Banking Commission, and the Regional Securities Commission.1 It provides a regional dimension to the Executive Board’s discussions of Article IV consultations with the eight member countries of the WAEMU: Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. The most recent Executive Board meeting on WAEMU regional issues was held on June 19, 2000.2 On that occasion, Directors welcomed the adoption of a regional convergence pact that provided a framework for promoting macroeconomic convergence and strengthening multilateral surveillance. They urged the authorities to push ahead with the removal of the remaining trade barriers and to streamline the various temporary import surcharges and exemptions in order to establish a full-fledged customs union and to foster the creation of an effective single market. They focused on the external competitiveness of the WAEMU countries and suggested that traditional exchange rate indicators should be broadened and monitored closely, in view of the demonstrated vulnerability of the external current account to fluctuations in terms of trade, combined with domestic price rigidities and economic inefficiencies.

2. The present report reviews recent economic developments in, and prospects for, the region and discusses the main regional policy issues. Section II summarizes recent economic developments and prospects. Section III discusses coordination of macroeconomic policies, as well as tax harmonization, monetary policy, banking supervision, and common trade policy issues. Section IV discusses other regional policy issues facing member countries. The relations between the WAEMU and the Economic Community of West African States (ECOWAS) are discussed in Section V, and the main conclusions are summarized in Section VI.

II. Recent Economic Developments and Prospects

A. Developments in 2000

3. Developments in 2000 were characterized by a marked slowdown in economic growth in the region, particularly in its major economy (Côte d’Ivoire), aggravating a deterioration in the overall economic situation that had begun in 1998. Following a rapid expansion during 1994–98,3 real GDP growth in WAEMU countries declined to 3.4 percent in 1999 and only 1½ percent in 2000 (Tables Table 2, 3, Figure 1). The decline reflected mainly the deterioration of the terms of trade caused by a decline in the prices of key export commodities—cotton, cocoa, and coffee—and the sharp rise in the import prices of oil products. It also resulted from a weakening in fiscal resolve and difficulties encountered in implementing structural reforms in several countries in the context of sociopolitical uncertainties (Côte d’Ivoire, Guinea-Bissau, Niger, and Togo). In this setting, investment dropped by more than 1 percentage point of GDP, further dampening aggregate demand and growth potential.

Table 1.

WAEMU: Main Features of WAEMU Economies

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Sources: World Bank, World Development Report; IMF Direction of Trade Statistics; and staff estimates.

GNP 1998.

About 40 percent of the official reserves are held by the headquarters of the BCEAO.

Table 2.

Sub-Saharan Africa: Cross-Group Comparison, 1994–2001

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Source: African Department database.

Gross official reserves as a percentage of base money.

Table 3.

WAEMU: Selected Economic and Financial Indicators, 1994-2001

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Source: African Department database.

Gross official reserves divided by base money.

Figure 1.
Figure 1.

WAEMU: Economic Indicators, 1994-2001

Citation: IMF Staff Country Reports 2001, 193; 10.5089/9781451840605.002.A001

Sources: African Department database; and World Bank, World Development Report.

4. The overall performance of the zone in 2000 was largely driven by a slowdown in economic activity in the countries that did not have operative adjustment programs supported by the international community (Côte d’Ivoire, Niger, and Togo). In Côte d’Ivoire, which accounts for about 40 percent of WAEMU’s economy, real GDP contracted by 2.3 percent as a result of the sociopolitical crisis that had begun in 1999. Neighboring countries (Burkina Faso and Mali) were also affected by the Ivoirien crisis. However, continued adjustment in the other countries (Benin, Burkina Faso, Mali, and Senegal) helped to mitigate the deterioration of the financial indicators in the subregion, taken as a whole (Tables Table 4, 5, Figure 2). Average consumer price index (CPI) inflation remained subdued in the WAEMU at less than 2 percent. Mirroring the deterioration in the terms of trade and fiscal slippages in some countries, the external current account deficit, including official transfers, widened from 6.2 percent in 1999 to 7.6 percent of GDP in 2000.

Table 4.

WAEMU: National Accounts, 1994-2001

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Source: African Department database.
Table 5.

WAEMU: Fiscal Balances, 1994–2001

(In percent of GDP)

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Source: African Department database.
Figure 2.
Figure 2.
Figure 2.

WAEMU: Selected Macroeconomic Indicators, 1994-2001 1/

Citation: IMF Staff Country Reports 2001, 193; 10.5089/9781451840605.002.A001

Source: African Department database,1/ Shaded area indicated projections.

International Comparisons: Selected Indicators, 1990–2000

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Source: African Department database.

Last year of the period.

Including grants.

5. An important question in assessing recent developments in the WAEMU is how far the lackluster economic performance of recent years reflects structural rigidities and other distortions in the economy, as opposed to short-term cyclical factors. Because member countries still face significant institutional and structural impediments to growth and continue to be heavily dependent on exports of a single commodity, there are concerns that the prolonged deterioration of the terms of trade, combined with high domestic production costs, may have translated into a weakening of the competitive position of the zone. While the real effective exchange rate of the CFA franc (based on the CPI) depreciated by 2.7 percent during 2000, reflecting low inflation and the appreciation of the U.S. dollar against the euro (Table 11 and Figure 3), the authorities’ reading of nontraditional indicators of competitiveness (Box 1) suggests that overall competitiveness needs to improve.

Figure 3.
Figure 3.

WAEMU: Effective Exchange Rates and Terms of Trade, 1992-2000

(Index 1990 = 100)

Citation: IMF Staff Country Reports 2001, 193; 10.5089/9781451840605.002.A001

Sources: IMF, Information Notice System and African Department database

6. In discussing recent economic developments and prospects, WAEMU representatives concurred with the staff that reform efforts needed to be sustained and expanded in order to broaden the productive base and promote private sector initiative and investment. They underscored the role of structural reforms, noting that the exchange rate realignment of 1994 was supposed to be accompanied by internal adjustments through the implementation of measures aimed at reducing domestic factor costs and creating a single market. These efforts did not succeed, in part because liberalization was pursued without taking into account certain constraints (e.g., the lack of adequate regulatory framework), which led to the substitution of private for public monopolies in the operation of key agricultural sectors of the WAEMU economies. The staff noted that the challenge was to address these constraints in the context of policies aimed at poverty reduction.4

The External Competitiveness of the WAEMU Economies

The vulnerability of the WAEMU economies to external shocks, including the recent fluctuation in the zone’s terms of trade, as well as the weakening of the external environment, heighten the importance of monitoring the developments in external competitiveness. The WAEMU Commission and the BCEAO assess the zone’s competitiveness largely on the basis of traditional indicators. Based on the measure of the real effective exchange rate, the zone’s competitiveness declined by 9 percent from the 1994 devaluation to 2000.

The mission noted that such aggregate indicators might not provide adequate information about the zone’s external competitiveness and inquired about progress in developing a methodology for other conventional, as well as nontraditional, competitiveness indicators. The mission held two special meetings devoted to external competitiveness indicators with staffs of the WAEMU Commission and of the BCEAO. In particular, the discussions focused on the methodological aspects and applicability of the following indicators:

– traditional indicators: real effective exchange rates for the zone and by country; and unit labor costs; and

– nontraditional indicators: export market shares; comparative wage indicators (real wages in the public, private, and informal sectors) in the zone and in competitor markets; transport costs (including informal costs), and energy and telecommunications costs; financial intermediation costs; industrial output per worker and real output per labor-hour; “internal terms of trade” defined as the ratio of prices of tradable to nontradable goods; relative producer price indices for inputs and outputs in tradable and nontradable sectors. In the discussions, the representatives of the regional institutions noted that the margin of competitiveness gained following the 1994 devaluation appears to be eroding. They agreed that in order to help identify appropriate policies and support the design of common sectoral policies to strengthen the productive base and enhance economic diversification, there is a need to accelerate work on a set of reliable competitiveness indicators. The WAEMU Commission has finalized the terms of reference for a project (to be financed by the European Union) to develop the methodology and set up the reporting system for traditional competitiveness indicators - mostly unit labor costs. The BCEAO has started work on constructing an index of unit labor costs in manufacturing; a study is about completed on Benin’s competitiveness and it will serve as a basis for developing nontraditional competitiveness indicators to complement the assessments based on the real effective exchange rate; and a broader use (beyond in-house analysis) of comparisons of real effective exchange rates computed for member countries will be considered.

7. The zone-wide overall fiscal deficit (commitment basis, excluding grants) declined somewhat to 4.1 percent of GDP in 2000 from 5.4 percent of GDP in 1999 (Table 5), reflecting a moderation in government outlays to 21 percent of GDP from 21.9 percent in 1999, mainly because of a reduction in foreign-financed investments. Overall government revenue declined slightly to 16.1 percent of GDP. Including official transfers, the fiscal deficit narrowed to 2.2 percent of GDP in 2000 from 2.7 percent in 1999 (see table below). The deficit was partially financed by an accumulation of domestic and external payment arrears, particularly in Côte d’Ivoire and Togo.

8. Regional broad money grew by 6.6 percent in 2000, with bank deposits rising by 6 percent. Reflecting the decline in the overall fiscal deficit, net credit to the government fell by 4.7 percent in 2000 relative to the beginning-of-period broad money. Central bank advances remained within the ceilings in all countries, and were reduced from their 1999 levels in all countries except Niger.5 Because of a strong pickup in ordinary credit demand, partially offset by a decline in crop credits, credit to the private sector rose by the equivalent of 6.2 percent of beginning-of-period broad money. As a result, net domestic assets of the banking system fell somewhat. The net foreign assets position of the banking system was further strengthened, by the equivalent of 8.7 percent of beginning-of-period money. The gross official reserves of the BCEAO rose to about US$3.6 billion (117.7 percent of base money) at end-December 2000 Figure 6.

Figure 4.
Figure 4.

WAEMU: Selected Monetary Aggregates, 1994-2000

(In percent of GDP)

Citation: IMF Staff Country Reports 2001, 193; 10.5089/9781451840605.002.A001

Source: Central Bank of West African States (BCEAO).
Figure 5.
Figure 5.

WAEMU and French Interest Rates, 1994-2000

(In percent)

Citation: IMF Staff Country Reports 2001, 193; 10.5089/9781451840605.002.A001

Source: IMF, International Finance Statistics (IFS).
Figure 6.
Figure 6.

WAEMU: Foreign Assets and Cover Ratio, December 1994-December 2000

Citation: IMF Staff Country Reports 2001, 193; 10.5089/9781451840605.002.A001

Source: BCEAO.

B. Prospects for 2001

9. Reflecting expected negative growth in Côte d’Ivoire and Mali, the region’s GDP growth is currently projected to remain modest at around 2 percent in 2001. Underlying this forecast are the following factors: a slowdown in world trade and output, favorable weather conditions for agricultural production, the strengthening of macroeconomic policies as countries implement corrective measures to remain on the regional convergence path, and the deepening of structural reforms, which should boost confidence and increase private sector investment. This outlook also envisages an end to the economic deterioration of Côte d’Ivoire and Togo with the adoption of Fund staff-monitored programs. The inflation outlook in the zone is expected to be benign, with CPI inflation projected at 3 percent. The overall fiscal deficit (commitment basis, including grants) is projected to widen slightly to about 3 percent of GDP, while the external current account deficit is expected to remain unchanged. The mission stressed the importance of fiscal discipline, particularly in the largest member countries, so as to avoid a poorly balanced macroeconomic policy mix, with national fiscal policies too loose and regional monetary policy too tight, which would negatively affect private sector activity.

10. Notwithstanding the relatively favorable economic prospects for the zone, a number of potential vulnerabilities present downside risks to the outlook. Some stem from the uncertainties attached to the global environment, and in particular from a possible continued deterioration in the region’s terms of trade. The latest World Economic Outlook (WEO) forecasts a sharper slowdown in global growth, implying a further softening of export market growth for the WAEMU. Other factors are of domestic origin. They stem from a weakening of policy resolve in some countries, sociopolitical uncertainties in others (e.g., Côte d’Ivoire), and structural rigidities, with imperfect mobility of factors of production, inadequate infrastructures, and high transaction costs that tend to weaken the competitive position of the zone.

Selected Economic Indicators, 1998-2001

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Source: African Department database.

Based on an harmonized consumer price index from 1997.

III. Main Regional policy issues

11. Two sets of issues provided the main focus of the consultation. First, discussions covered recent experience with the WAEMU integration process (including the regional multilateral surveillance, common monetary policy, financial sector issues, and trade and sectoral policies) since the introduction of the CET and the entry into force of the regional convergence pact in 2000. Second, the regional authorities discussed with the staff actions that had been taken, as well as regional initiatives under consideration to strengthen competitiveness, improve the region’s growth performance, and reduce poverty. Given the current uncertain environment, the main challenge facing the regional authorities was to strengthen regional institutions to ensure the fiscal discipline and macroeconomic policy convergence necessary to support the common pegged exchange rate regime and boost the regional reform agenda. In this context, it was agreed that the WAEMU was now at a crossroads and that the integration process, to regain its full momentum, needed the strong political commitment of member governments, and the support and assistance of the international community.

A. Coordination of Financial Policies

12. To support the monetary arrangement, the regional Convergence, Stability, Growth, and Solidarity Pact considerably reinforced the system of mutual surveillance through a new set of relevant criteria, starting in 2000 (Box 2). Two periods were identified in the pact, a convergence phase (2000-02), at the end of which member countries were expected to be in compliance with the criteria, and a stability phase (from 2003 onward). Because of the decline in growth and the weaknesses in policy implementation noted above, complying with the convergence criteria by end-2000 was difficult, with only two member countries meeting the key basic fiscal balance criterion, compared with three countries in 1999 (see table below and Table 6). Performance was uneven across countries: one country (Senegal) met six of the nine criteria, three countries (Benin, Burkina Faso, and Mali) met five criteria, one country (Guinea Bissau) met two criteria, and the remaining three countries (Côte d’Ivoire, Niger, and Togo) met only one of the nine criteria. The staff noted that attaining compliance with the criteria by end-2002 would imply a much more forceful commitment and adoption of corrective measures by member countries’ governments and a reinforcement of the institutional capacities of the WAEMU Commission to manage the process.

Table 6.

WAEMU: Convergence Criteria, 1994-2001

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Sources: WAEMU Commission; national authorities; and staff projections.

Total revenu excluding grants minus total expenditures, excluding foreign-financed investment outlays.