West African Economic and Monetary Union (WAEMU)
Recent Economic Developments and Regional Policy Issues; and Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund
Publication Date:
14 Mar 2003
eISBN:
9781451840612
Language:
English
Keywords:
ISCR; CR; WAEMU economy; CFA franc; monetary union; WAEMU country; monetary policy; member country; exchange rate; terms of trade; inflation rate; West Africa; broad money
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This report examines recent economic developments and regional policy issues in the West African Economic and Monetary Union (WAEMU). Although progress has been achieved on the integration front since 1994, including the establishment of a customs union and the creation of the economic union, the momentum of integration appears to have slowed in recent years. Progress toward convergence of the WAEMU countries during 2001 and 2002 was below expectations, and difficulties were encountered in the effective implementation of various regional reforms.

Abstract

This report examines recent economic developments and regional policy issues in the West African Economic and Monetary Union (WAEMU). Although progress has been achieved on the integration front since 1994, including the establishment of a customs union and the creation of the economic union, the momentum of integration appears to have slowed in recent years. Progress toward convergence of the WAEMU countries during 2001 and 2002 was below expectations, and difficulties were encountered in the effective implementation of various regional reforms.

I. Introduction

1. This paper provides a regional dimension to the Executive Board’s discussions of Article IV consultations with the eight member countries of the West African Economic and Monetary Union (WAEMU): Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. Discussions were held in Dakar, Ouagadougou, and Accra during November 26-December 5, 2002 with senior officials of the Central Bank of West African States (BCEAO), the WAEMU Commission, the Economic Community of West African States (ECOWAS), and the West African Monetary Institute (WAMI).1

2. The last Executive Board meeting on WAEMU regional issues was held on October 22, 2001 (SM/01/246, 8/6/01). Directors observed that, owing to weaknesses in policy implementation and the economic slowdown in the region, compliance with the regional convergence criteria by member countries had proved difficult. They urged the authorities to back their regional reform agenda with a more forceful political commitment in order to achieve the ultimate goals of economic integration in terms of growth and poverty reduction. In this vein, Directors underscored the necessity of strengthening macroeconomic policies, deepening structural reforms, and improving competitiveness in WAEMU countries. Directors welcomed the integration efforts under way to create a single ECOWAS market but considered that the plan to introduce a single monetary union in West Africa by 2004, appeared to be very ambitious, for several economic reasons and in light of institutional capacity constraints.

3. The regional authorities agreed with the staff’s proposal to elevate the regional discussions to a formal regional surveillance of WAEMU-wide issues as part of the Article IV consultation process with member countries, provided that it does not require additional obligations for them, and that the WAEMU Council of Ministers agrees. Discussions on this issue will continue in the period ahead.

II. Overview of Key Issues and Main Challenges

4. The 2002 discussions with WAEMU institutions took place amid heightened concerns about the regional implications of the deepening crisis in Côte d’Ivoire—the largest economy of the zone. Because of the recent events in Côte d’Ivoire and their regional ramifications, the challenges facing the WAEMU authorities have become much more complex than envisaged during the previous consultation discussions. At that time, the authorities already faced the tasks of locking in the progress achieved on the integration front, and of moving forward with the remaining reform agenda. The policy framework under the Convergence, Stability, Growth, and Solidarity Pact2 ensured a satisfactory starting point for the budgetary convergence process within the union, but progress toward convergence has been below expectations. The lack of an adequate framework to tackle structural and institutional rigidities has weakened the region’s growth prospects. Now the policymakers must also address the uncertainties in the macroeconomic outlook posed by the situation in Côte d’Ivoire, delayed global economic recovery, and likely increases in oil prices in case of war with Iraq.

5. The crisis in Côte d’Ivoire has brought to the fore rising concerns about the economic and financial performance of the WAEMU as a whole and the momentum of the integration process. There is a common view among the regional authorities and the staff that the WAEMU is now at a crossroads and that the political commitment of member governments to regional integration should be backed by strong actions. Moreover, for the integration process to regain its full momentum, the crisis in Côte d’Ivoire will need to be resolved quickly.

6. Against this background, the WAEMU countries are faced with four main challenges. First, the risks to the region’s nascent recovery should be addressed urgently. Prior to the start of the crisis in Côte d’Ivoire on September 19, 2002, there were signs of a recovery, although with downside risks associated with weakening commodities prices. Subsequently, these risks have intensified, and should be addressed decisively. Second, appropriate policies, including prudent monetary and fiscal policies and effective implementation of the regional convergence programs, should be pursued vigorously to keep the reform agenda on track. Third, there is a need to improve the zone’s underlying real economic performance and diversify the economies of member countries through a deepening of structural reforms and implementation of measures that would create an environment conducive to domestic and foreign private investment. Fourth, further progress on key regional policy issues is also needed, including trade and tax harmonization, common sectoral policies to increase labor productivity and lower production costs, and issues related to wider integration within West Africa. These and other related issues are discussed in the remainder of this report.

III. Recent Economic Developments and Prospects

7. The exchange rate realignment of 1994 brought a significant turnaround in the economic performance of the CFA franc countries, and in the WAEMU in particular, with output, exports, and investment increasing more rapidly than in other sub-Saharan African countries during 1994-98. Helped by a strengthening in non-oil commodity prices and favorable rainfall in Sahelian countries, real GDP in the WAEMU area grew by about 5 percent on average during this period, compared with 3 percent growth in the rest of sub-Saharan Africa. With nominal wages kept firmly under control, inflation returned to low single-digit levels in the subregion, after the initial wave of price correction in 1994. Also, the pursuit of stability-oriented macroeconomic policies by member countries during this period, together with the accompanying recovery of external assistance, contributed to a substantial reduction in financial imbalances, For the region as a whole, the overall fiscal deficit (including grants) declined from 8.6 percent of GDP on average in 1993 to about 2.5 percent of GDP during 1994-98 (see table below).

WAEMU: Key Economic Indicators 1993-2002

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Sources: WAEMU; BCEAO; and staff estimates.

First nine months in 2002.

First ten months in 2002.

Gross official reserves divided by base money.

8. The strong economic expansion in the aftermath of the 1994 devaluation of the CFA franc has tapered off. Since 1999, real GDP in WAEMU countries has grown on average by only 2.9 percent annually, compared with an average annual rate of 5 percent during 1994-98, and a growth rate of 3.1 percent in sub-Saharan Africa. This performance was the result of the slowdown in the world economy, the deterioration in the regional terms of trade, and some weakening in the policy stance in the context of sociopolitical uncertainties in some countries. More recently, the economic situation has been seriously affected by the crisis in Côte d’Ivoire.

A. Developments in 2001-02

9. WAEMU real GDP grew moderately by 3½percent in 2001, despite an improvement in the region’s terms of trade (Tables 1 and 2 and Figure 1). Average consumer price inflation rose to 4.1 percent from 1.7 percent in 2000, owing to food supply shortages in several countries. The overall fiscal deficit, including grants, decreased slightly to 2.1 percent in 2001 (5 percent, excluding grants)(Table 5). The external current account deficit (excluding official transfers) narrowed to 8.4 percent of GDP in 2001 from 9.1 percent in 2000 (Table 6), as the decline in the ratio of exports to GDP, which resulted from weak commodity prices, was more than compensated for by a weakening of import demand.

Table 1.

WAEMU: Selected Economic and Financial Indicators, 1994-2002

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Sources: IMF, African Department database; and staff estimates.

First eleven months of 2002.

First nine months of 2002.

Grass official reserves divided by base money.

Table 2.

Sub-Saharan Africa: Cross-Group Comparison, 1994-2002

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Sources: IMF, African Department database; and staff estimates.

Central African Economic and Monetary Community (CEMAC).

Including Nigeria and South Africa.

Gross official reserves as a percentage of base money.

Table 3.

WAEMU: Main Features of WAEMU Economies in 2001 1/

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

GNP 2000.

About 40 per cent of the official reserves are held by the headquarters of the Central Bank of West African States (BCEAO).

Exports to and imports from WAEMU countries in percent of total exports and imports.

Table 4.

WAEMU: National Accounts, 1994-2002

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Sources: IMF, African Department database; and staff estimates.
Table 5.

WAEMU: Fiscal Balances, 1994-2002

(In percent of GDP)

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Sources: IMF, African Department database; and staff estimates.
Table 6.

WAEMU: External Balances, 1994-2002

(In percent of GDP)

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Sources: IMF, African Department database; and staff estimates.
Figure 1.
Figure 1.

WAEMU: Selected Macroeconomic Indicators, 1995-2002

Citation: IMF Staff Country Reports 2003, 070; 10.5089/9781451840612.002.A001

Source: IMF, African Department database.

10. Developments in 2002 were marked by a pronounced slowdown of the economies of several member countries during the last quarter of the year. Earlier, robust aggregate output growth had been expected, thanks to a strengthening of manufacturing activity, particularly in Niger, Benin, and Côte d’Ivoire. However, the reverberating effects of the ongoing crisis in Côte d’Ivoire, coupled with adverse developments in international commodities markets, have slowed economic growth in the region. With a significant markdown of the growth estimates for Côte d’Ivoire, Burkina Faso, and Niger, growth in the WAEMU as a whole is estimated to have been around 3 percent in 2002, well below the 414 percent initially projected, in spite of good climatic conditions.3 Inflation had drifted upward in the earlier part of the year, primarily owing to the impact of several, largely transitory, factors, but since came down to 3 percent for the year as a whole. The external current account deficit, excluding official transfers, is estimated to have narrowed to 7.2 percent of GDP, mainly because of a decline in imports resulting from weakened economic activity. The real effective exchange rate (REER) appreciated by 5.6 percent during 2001-November 2002, reaching 73 percent of the level immediately prior to the 1994 devaluation (Table 10 and Figure 2).

Table 7.

WAEMU: External Public Debt, 1994-2002

(In percent of GDP)

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Source: IMF, African Department database.
Table 8.

WAEMU: Convergence Criteria, 1997-2002

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Sources; WAEMU, Central Bank of West African States (BCEAO); and staff estimates.

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