Statement by Kossi Assimaidou Executive Director for West African Economic and Monetary Union

In 2010, average inflation has remained low in all West African Economic and Monetary Union (WAEMU) countries, but has edged up in the second half of the year. After a moderate fiscal easing by about 1½ percentage points of GDP in 2009, mostly the result of higher capital spending, the area-wide average deficit is estimated to have declined slightly to 3.1 percent of GDP in 2010. A compression of imports in 2009, the region’s external current account deficit is estimated to have returned to about 5½ percent of GDP in 2010.

Abstract

In 2010, average inflation has remained low in all West African Economic and Monetary Union (WAEMU) countries, but has edged up in the second half of the year. After a moderate fiscal easing by about 1½ percentage points of GDP in 2009, mostly the result of higher capital spending, the area-wide average deficit is estimated to have declined slightly to 3.1 percent of GDP in 2010. A compression of imports in 2009, the region’s external current account deficit is estimated to have returned to about 5½ percent of GDP in 2010.

My WAEMU authorities appreciate the constructive discussions with staff in the context of regional surveillance. They broadly share the thrust of the staff report which gives a first-hand assessment of the policy reforms within the region as well as the institutional framework underpinning the integration efforts of member countries of the WAEMU. The cooperation with the Fund has helped the countries stabilize their macroeconomic environment, improve growth rates, lower debt ratios, and foster structural reforms. Nonetheless, development prospects remain fragile, in view of the potential shocks stemming from the still adverse international environment and the impact of the decade-long political crisis in Cote d’Ivoire, the largest economy of the WAEMU.

Recent Economic Developments

After slowing in recent years, as a consequence of the fuel and food crisis and the global financial meltdown, GDP growth is resuming in the region, recording 4 percent in 2010 in real terms against 3 percent in 2009. The main drivers of this positive development were buoyant output in the mineral and food sectors, favorable terms of trade, and dynamic construction activities. Annual Inflation is slightly on the rise at 1.4 percent, compared to 0.4 percent in 2009, especially because of trade disruptions stemming from the crisis in Côte d’Ivoire. Nonetheless, inflation remains well below the regional convergence threshold of 3 percent. On the external front, the Union posted comfortable levels of reserves, at 6 months of imports coverage.

My authorities are committed to implementing policies to address the downside risks to the outlook. In this regard, WAEMU authorities are joining efforts with the Economic Community of West African States (ECOWAS) and the African Union to expeditiously and peacefully resolve the post-election crisis in Cote d’Ivoire. In the meantime, appropriate measures are being taken to lower its impact on the region. Landlocked countries have turned to alternative means for their imports, with the view to curbing down inflationary pressures linked to the ensued trade distortions.

As regards the financial sector, my authorities have taken steps to safeguard the regional banking system from liquidity and solvency risks, especially by rolling over maturing Ivorian government paper mainly held by banks in the region. Though 15 out of 19 commercial banks operating in Cote d’Ivoire have suspended their activities, the BCEAO is in constant consultation with them to secure their important assets and limit the impact of this disruption on the whole regional financial system.

A temporary relocation in other member countries of regional financial institutions such as the stock exchange market is also envisaged.

Achievements on Common Policies and Outlook

My WAEMU authorities have achieved noticeable results on their economic integration agenda. Member countries have significantly improved their performance on meeting the convergence criteria. In the area of public finance, six out of eight countries met the criterion on the primary fiscal balance while most of them have now addressed the issue of stock arrears thanks to the last SDR allocation. Going forward, the authorities are taking initiatives which will allow member countries to better assess the scope of domestic arrears and hence improve the reporting on public finance data. As regards debt levels, all countries but Côte d’Ivoire posted reassuring ratios, for having benefitted from the HIPC and MDRI initiatives.

My authorities’ policy actions, paired with the resolution at a sooner date of the crisis in Côte d’Ivoire and a more favorable international environment, should help economic recovery to take hold. Output growth is projected at 4.5 percent in 2011 and above 5 percent over the medium term. Policies that should underpin this momentum are planned in many areas, including the fiscal, financial, and private sectors, not to mention many reforms regarding competitiveness, infrastructure and the institutional framework of the WAEMU.

In the fiscal area, my authorities have taken note that most of the measures of giving up taxes to offset the impact of the food and fuel crisis have come to an end. Mindful of the lessons learned from this experience, in terms of disruption in the coordination of fiscal policies, my authorities have decided to establish a list of basic foodstuff which will be entitled a lower VAT rate. This measure will benefit lowincome households and improve the predictability of governments’ revenues in case of shocks. Going forward, my authorities are working steadfastly on their program of fiscal transition aimed at increasing the share of domestic tax revenue compared to customs and duties in the financing of government budgets. To this end, the WAEMU Commission is pushing for the implementation of broad-based tax reforms and for further improvements in tax administrations, notably the modernization of procedures, capacity building, and the harmonization of practices. At the same time, the authorities are pursuing their efforts of keeping in check current spending; especially wage bills.

My authorities have improved the conduct of monetary policy and ongoing work will contribute to the development of the financial sector. The recent institutional reform of the BCEAO has brought in key changes and new decision-making bodies. The Monetary Policy Committee (MPC) was established in September 2010 and has already made important decisions such as the clear adoption of inflation targeting policy and the setting of an objective of 2 (±1) percent over a 24-month horizon. Transparency is being strengthened by the detailed press release following MPC meetings. Moreover, the work of the MPC has had a positive impact in terms of demand for more analysis and research, including in new areas, which will help better understand and remove impediments to the development of the financial sector.

Cognizant of the key role of the banking sector in supporting growth, my authorities are working on many other fronts to help build strong banks in the region with the view to enhancing lending activity. Thanks to efforts in harmonization of practices within the ECOWAS, there is more diversification of the banking sector with non-traditional banks opening branches in the WAEMU region. The authorities concur with staff that there is a need of new legislation to facilitate and broaden types of collateral required from borrowers. New instruments will be introduced in the existing institutional framework, which should help better inform banks on clients and boost lending to the private sector, especially SMEs.

As regards competitiveness, my WAEMU authorities agree with staff that in 2010 the REER appeared broadly in line with economic fundamentals. My authorities are committed to implementing needed supply side reforms to maintain price competitiveness. As regards non-price competitiveness, my authorities will continue to help member countries improve governance and the business environment within the region, especially by pushing for one-stop shops for business registration. An investment code for the Union is being finalized and should be adopted by end-2011. My authorities intend to launch discussions on a private sector development strategy in 2012, and a policy framework for public-private partnerships is planned for 2012–13.

In the same vein, my authorities have unveiled plans to close the infrastructure gap and address the issue of energy shortages within the region. Many transnational roads are under construction, such as the Bamako-Dakar highway which should be operational at end-2011. Regarding the energy sector, a regional fund for the financing of projects has been set at the West African Development Bank. Its primary objective is to prevent the WAEMU countries from experiencing electricity outages in2011. Over the medium term, it should serve as basis for a broader solution to the global energy problem within the region.

Overall, we concur with staff that a major binding constraint to growth is the lack of sufficient and cost-effective infrastructure, especially in electricity supply, road transport, and ports. My authorities strongly believe that there is an urgent need to address those binding constraints; and this will need some fiscal easing, at least in the short run. The debate on how to strike the right balance between growth-enhancing investment and concerns of debt sustainability should be conducted thoughtfully and long-term yields be emphasized. Otherwise, there is the risk of falling into a vicious circle, with slow growth and widespread poverty.

Conclusion

The WAEMU member countries have made significant inroads on the path of economic integration. Most individual countries display a stronger macroeconomic framework today than years before, and have built good track records of reform implementation. The institutional framework of the Union has undergone major changes and its continuous improvement has helped better coordinate domestic policies. Overall, the WAEMU policy instruments have contributed to weather well the food and fuel crisis followed by the global financial turmoil. Growth prospects remain favorable and should gain momentum with the expected settlement of the post-election crisis in Côte d’Ivoire.

Exogenous shocks, paired with domestic political and economic turmoil, are the costly reminders of the challenges still facing the construction of the WAEMU as a viable economic space capable of generating greater prosperity for its populations. My authorities are fully committed to tackling this daunting challenge to which the contribution of the international community is well appreciated.

West African Economic and Monetary Union: Staff Report on Common Policies of Member Countries—Regional Consultation on Economic Issues and Policies—Staff Report, Public Information Notice Informational Annex, Staff Statement, Executive Director’s Statement
Author: International Monetary Fund