West African Economic and Monetary Union (WAEMU)
Staff Report on Common Policies for Member Countries

The staff report on discussions with regional institutions of the West African Economic and Monetary Union is presented. The region faced a number of challenges in 2011, with the intensification of the political crisis in Côte d’Ivoire and a large increase in global food and fuel prices. A materialization of downside risks could require a monetary policy relaxation for the union and differentiated fiscal responses across member countries. The drought in the Sahel may also require a more active fiscal policy in the affected countries.


The staff report on discussions with regional institutions of the West African Economic and Monetary Union is presented. The region faced a number of challenges in 2011, with the intensification of the political crisis in Côte d’Ivoire and a large increase in global food and fuel prices. A materialization of downside risks could require a monetary policy relaxation for the union and differentiated fiscal responses across member countries. The drought in the Sahel may also require a more active fiscal policy in the affected countries.


1. 2011 was a challenging year for the WAEMU. Côte d’Ivoire experienced a political crisis and armed conflict for several months after the presidential election held in November 2010. This crisis was the culmination of a decade of political instability, which had a major impact on its development. The crisis ended in April 2011 when President Ouattara took control of the country, but it had a severe economic impact. Subsequently, the new government embarked on an ambitious investment-led recovery. The early part of 2011 was also marked by rising food and fuel prices, which have a major economic and social impact on WAEMU countries. The second half of 2011 was marked by a drought that affected severely cereal production in the Sahel countries.

2. This context has hindered the implementation of some of the recommendations made last year. Macroeconomic policies have been broadly in line with Fund advice, mostly in the context of WAEMU countries’ Fund-supported programs. However, progress on certain structural reforms has been slower than expected. In the financial sector, the priority of the authorities in 2011 was to contain the risk of a contagion from the Ivorian crisis, an objective that they successfully met. The situation in Côte d’Ivoire also prevented significant progress in the area of regional integration.


3. Regional growth in 2011 (0.8 percent) was affected by the Ivorian crisis and the drought in the Sahel countries. Côte d’Ivoire’s economic activity contracted sharply in early 2011 as a result of the crisis, which led to an estimated annual GDP decline of 5.8 percent despite the subsequent recovery (Figure 1). The drought had a large impact on cereal production in Burkina Faso, Mali, Niger, [and Senegal] with estimated declines ranging from 7 to 27 percent. As a result, growth in these countries was significantly curtailed. The shortfall in the production of these traditional food crops also exposes millions of persons to food insecurity.

Figure 1.
Figure 1.

WAEMU: Recent Economic Developments, 2007—2011 1

Citation: IMF Staff Country Reports 2012, 059; 10.5089/9781475502428.002.A001

Sources: IMF, African Department database, and Regional Economic Outlook database.1 Aggregate values for Sub-Saharan Africa exclude Nigeria, South Africa, and Zimbabwe.

4. Fuel and food prices had a significant impact on regional inflation. The surge in international fuel and food prices pushed inflation up to a peak in the spring of 2011. The subsequent easing of these prices was accompanied by a quick drop in year-on-year inflation, which was below 3 percent at year-end. On average, annual consumer price inflation is estimated at 3.8 percent in 2011.

5. The overall fiscal deficit (excluding grants) for the area as a whole widened in 2011. It is estimated to have increased from 5.5 percent of GDP in 2010 to 7.9 percent of GDP, mainly on account of the impact of the crisis in Côte d’Ivoire. Other factors include higher subsidies to the electricity sector in Senegal, the use of privatization revenue for investment projects in Mali, and lower tax revenue in Benin. Average public debt is estimated to have remained at about 42 percent of GDP in 2011.

6. The region’s current account deficit rose to 5.7 percent of GDP in 2011. This increase (from about 5 percent of GDP in 2010) partly reflects lower worker remittances, larger imports related to mining in Burkina Faso and Niger, and higher food and fuel prices. However, thanks to strong capital inflows, the union’s foreign exchange reserves increased and amounted to about six months’ imports (excluding intra-WAEMU trade) at end-2011.

7. Progress in the area of convergence was mixed in the recent period. Although all the countries met the inflation criterion in 2009, only a minority of them still did so in 2011, because of the increase in international food and fuel prices. Most of the countries did not meet the key criterion on the fiscal deficit in 2011. On the other hand, progress was made regarding the indebtedness criterion, as a result of the debt relief granted to Togo and Guinea-Bissau in the context of the HIPC Initiative and MDRI.

WAEMU: Compliance with Convergence Criteria, 2008-2011

(Number of countries violating)

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

Total fiscal revenues, excluding grants, minus total expenditures excluding foreign-financed investment expenditure. From 2009, total fiscal revenues plus budget support grants plus counterpart of HIPC/MDRI-related spending for both current and capital spending less current expenditure and capital expenditure financed by own resources.

8. Regional growth is expected to increase sharply in 2012 despite the deterioration in the international environment (Figure 2). The global slowdown in 2012 is expected to curtail growth, especially in countries most exposed to the advanced economies and notably to Europe (e.g., Côte d’Ivoire and Senegal). However, those same countries will benefit from strong domestic sources of growth, with the postcrisis recovery in Côte d’Ivoire, the increase in infrastructure investment, and the end of electricity outages, particularly in Senegal. Other domestic factors, such as new oil production facilities in Niger, are expected to boost regional growth, which could reach 7 percent in 2012 before easing in the medium term. With the global economic slowdown, international food and commodity prices would further decrease and help keep inflation around 3.5 percent in 2012, despite the impact of the drought on cereal prices in the affected countries.

Figure 2.
Figure 2.

WAEMU: Medium Term Outlook, 2010–2016 1

Citation: IMF Staff Country Reports 2012, 059; 10.5089/9781475502428.002.A001

9. The risks weighing on growth are to the downside. The main risk is that the external environment weakens further, particularly in the euro area if the debt crisis is not resolved quickly. Staff and the authorities discussed how the region would be affected if the downside scenario of the January 2012 World Economic Outlook (WEO) update materialized. There was broad agreement that the region’s trade exposure to Europe remained substantial, although on the decline. Trade, worker remittances, foreign direct investment, and the terms of trade would be the main channels of transmission to the WAEMU. The authorities also expressed concern that aid from traditional donors might be significantly reduced. The financial sector, however, is mostly domestically funded and therefore has only limited direct exposure to Europe. Overall, the impact on growth in the region would be substantial (about 1.5 percentage point, see Appendix I). Insecurity and sociopolitical risks in the area, as well as the impact of the drought in the Sahel countries, are other sources of uncertainty for the macroeconomic environment.


10. The area-wide fiscal deficit is expected to narrow somewhat in 2012 (Figure 3). This evolution would largely reflect the normalization of the situation in Côte d’Ivoire and the reduction of its deficit, which the crisis had substantially increased. The deficit in the rest of the region is also expected to shrink, although less markedly.

Figure 3.
Figure 3.

WAEMU: Fiscal Developments, 2010—2012

Citation: IMF Staff Country Reports 2012, 059; 10.5089/9781475502428.002.A001

Sources: IMF, African Department database, and Regional Economic Outlook database.1 Does not include HIPC and MDRI debt relief in 2010 for Guinea Bissau and Togo, which record their fiscal accounts on cash basis. Preliminary data for Cote d’Ivoire in 2011.

Domestic debt and cost of borrowing, 2011

Citation: IMF Staff Country Reports 2012, 059; 10.5089/9781475502428.002.A001

11. Monetary policy faced a challenging environment in 2011. The BCEAO had to manage the implications for the regional banking system of the Ivorian crisis, which led to the closing of Ivorian banks for several weeks. At the same time, inflation was rising. The BCEAO responded to these conflicting developments for monetary policy by maintaining its key interest rate at 4.25 percent while making large liquidity injections. It also coordinated, with the Ivorian authorities, the rollover (and eventual restructuring) of Ivorian debt. These measures helped prevent the crisis from spreading to other countries. Money supply continued to increase steadily, with year-on-year growth at about 13 percent in September 2011, reflecting a substantial increase in credit to the economy and to governments. Inflation eventually receded in the second half of 2011, confirming that the BCEAO’s approach was appropriate (Figure 4).

Figure 4.
Figure 4.

WAEMU: Monetary Policy and Inflation, 2007—2011

Citation: IMF Staff Country Reports 2012, 059; 10.5089/9781475502428.002.A001

Sources: BCEAO, IMF, African Department database, and Regional Economic Outlook database.1 Excess reserves as a percentage of required reserves.

T-bill rates1

Citation: IMF Staff Country Reports 2012, 059; 10.5089/9781475502428.002.A001

Source: BCEAO.1/ Simple average rates on 12-month T-bills.

12. Interest rates on government debt rose in early 2011 and subsequently eased. This pattern may reflect concerns about the impact of the crisis in Côte d’Ivoire and the impact of subsequent liquidity injections by the BCEAO. The level of interest rates at issuance across countries was highly correlated with the level of debt outstanding on the regional market.

Staff’s advice

13. The regional fiscal position strikes an appropriate balance between the need to increase public investment and fiscal sustainability considerations. Indeed, a number of countries in the region have set out to address their infrastructure gaps, particularly in energy and transportation, which represent major constraints to higher growth and faster poverty reduction. Reconstruction in Côte d’Ivoire will also require higher public investment. Finally, the drought is likely to require higher food security expenditures in Sahel countries. These temporary factors justify that the area-wide fiscal deficit will decrease only moderately in 2012 despite the expected sharp increase in growth.

14. The materialization of downside risks would likely require differentiated fiscal policy responses. While a monetary policy response might be needed for the region (see below), fiscal policy would have a key role to play in achieving the appropriate policy mix at the country level. Countries more affected by a further (temporary) global slowdown or by the drought may need to run higher deficits, provided they have enough fiscal space and financing available; those with limited or no space—such as the fragile states in the union—should try to mobilize more grants or concessional financing from the international community, In all cases, priority expenditure (e.g., for social safety nets and infrastructure investment) should be preserved to avoid exacerbating the economic and social effects of shocks.

15. Maintaining debt sustainability will require a reduction of fiscal deficits beyond 2012 in a number of countries. The area-wide public debt position would improve this year if, as currently expected, Côte d’Ivoire reaches the HIPC Initiative’s completion point. In most WAEMU countries, the risk of debt distress is low or moderate according to the latest debt sustainability analyses. However, this assessment assumes that countries with large fiscal deficits reduce them over the medium term. This would also allow these countries to reconstitute the fiscal buffers required to implement countercyclical policies in the future. Maintaining debt sustainability will also require strengthening debt management capacity.

16. The monetary policy stance remains appropriate, but a relaxation may be necessary if downside risks materialize. Inflation is expected to remain moderate for a number of reasons (e.g., output gap in Côte d’Ivoire, softening of international prices), and therefore the current monetary policy stance could be maintained in 2012. However, the possible impact on core inflation of the drought in the Sahel countries, and any inflationary pressure in Côte d’Ivoire if the recovery proves stronger than expected, must be closely monitored. Conversely, if a further global slowdown and decline in commodity prices occurs, monetary policy could be relaxed, and the BCEAO should stand ready to meet banks’ liquidity needs.

17. Developing the interbank market and improving liquidity management should remain priorities for the BCEAO. Monetary policy implementation is seriously hampered by the presence of excess liquidity. While this phenomenon has many complex reasons, an important one is the limited development of the interbank market. A deeper market would enable banks to trade liquidity and would greatly reduce the need for injections by the BCEAO; it would also foster the emergence of a benchmark rate for the conduct of monetary policy. Effective liquidity management will also require more accurate liquidity forecasts. A critical issue here is to improve the capacity to forecast net government positions with the banking system. This will require a coordinated effort by the BCEAO and country authorities. Indeed, governments have significant scope to improve the management of their own liquidity, including by setting up, with BCEAO assistance, single treasury accounts. Good progress has been made in the past year in modernizing the BCEAO’s tools for analyzing and forecasting inflation, but there is scope for pursuing these efforts further with IMF technical assistance.

Authorities’ views

18. The authorities broadly agreed with these recommendations. On fiscal policy sustainability, they expressed concern about the new risks raised by the rapid increase in domestic/regional borrowing (related to higher public investment and deficits in some countries) and emphasized the need for all member countries to persist with revenue mobilization efforts. Regarding the infrastructure gaps, they underscored that not only more investment was needed, but also that improving the quality of public expenditure was desirable.

19. The BCEAO expects the interbank market reforms to be implemented in 2012. Substantial progress has been made in developing a technical platform, which is being tested. The BCEAO also indicated that significant legal work had been required to prepare the introduction of repurchase operations among banks. Repos will allow for collateralization of operations, which is required to overcome the reluctance of certain banks to trade with other banks.


20. The real effective exchange rate is broadly aligned. The equilibrium approach, the macroeconomic balance approach and the external sustainability approach all suggest that the exchange rate is broadly in line with fundamentals for the region. Other indicators closely monitored by the authorities do not suggest any area-wide price-competitiveness problem either. Foreign exchange reserves have continued to increase, are managed prudently, and are adequate given shocks likely to affect the region (Box 1). A devaluation rumor spread in late 2011, possibly fed by concerns about the future of the euro expressed at the time by some analysts. Staff analysis suggests that devaluation is not required by fundamentals. Also, the crisis in the euro area does not affect directly the franc zone, which is fundamentally an arrangement with the French treasury.

WAEMU External Stability

The real exchange rate is broadly in line with the region’s fundamentals.

Both the nominal and the real effective exchange rate (NEER and REER) trended upward until end-2009, contributing to an erosion of price competitiveness. In 2010, however, the NEER and REER decreased markedly in the wake of the depreciation of the euro vis-à-vis third currencies. In 2011, both the NEER and the REER recorded a modest appreciation on average (less than 2 percent).

The REER was assessed in 2011 based on the three methodologies traditionally used by the Fund: the equilibrium real exchange rate (ERER) approach, the macroeconomic balance (MB) approach, and the external sustainability (ES) approach. The ERER approach estimates an equilibrium relationship between the REER, terms of trade, public consumption, the productivity differential, investment, and openness (see table for the coefficients of this relationship). The MB approach and the ES approach rely on current account norms. For the MB approach, the norm depends on underlying fundamentals such as the fiscal balance or demographics. In the ES approach, the current account norm stabilizes the net foreign asset position at a given level.

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All three methodologies suggest that the real exchange rate (and the current account) is broadly in line with its fundamentals. They indeed generate only small deviations from equilibrium, ranging from -2 percent (ERER approach) to +4 percent (ES approach).

The level of foreign exchange reserves looks adequate for the union as a whole.

Reserve adequacy is another important element in the assessment of external stability, because reserves are a way to insure against shocks. Reserves amounted to CFAF 7,445 billion (about $15 billion) at end-2011. By the traditional metrics of the coverage of imports (with more than 6 months) or broad money (60 percent), international reserves look ample. Reserves also cover close to 100 percent of short-term domestic liabilities.

A more recent approach to assessing reserve adequacy (see Dabla-Norris et al., 2011) relies on a cost benefit-analysis of holding reserves, taking into account country-specific vulnerabilities. On the one hand, reserves mitigate the impact of macroeconomic volatility; the higher this volatility, the larger the benefits of holding reserves. On the other hand, holding reserves has an opportunity cost, which is often measured by the difference between the rate of remuneration of these reserves and the domestic interest rates.

This approach suggests that in countries with a fixed exchange rate and facing significant volatility (e.g., because of the importance of commodities in their production and export structure), the optimal level of reserves may exceed 3 months of imports. Applied to the WAEMU’s actual data (see table below), the model suggest optimal levels ranging from 5 to 10 months, depending on the opportunity cost of holding reserves (with 4-5 percent probably constituting a credible range for the WAEMU).

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This is somewhat larger than for the full sample of low-income countries, and shows that external demand growth for the WAEMU was lower in the past 10 years than for other LICs because of the WAEMU’s higher exposure to the euro area. All these metrics, however, do not take into account the fact that the peg to the euro is guaranteed by the French Treasury. This guarantee constitutes an important risk mitigation factor.


Optimal Level of Reserves

(months of imports)

Citation: IMF Staff Country Reports 2012, 059; 10.5089/9781475502428.002.A001

21. Stress tests suggest that the regional banking sector is resilient but compliance with prudential regulation remains weak. It appears well capitalized on average, although about a third of the banks did not observe yet the new minimum capital requirement at end-2011. Nonperforming loans are high, at about 17 percent of all loans, although relatively well provisioned. Compliance with certain prudential norms remains low and some of these norms are not in line with international standards (e.g., on risk concentration). Stress tests confirmed that, on average, banks are vulnerable mainly to credit risk (Box 2).

22. The euro area crisis provides important lessons for the governance and stability of currency areas. The crisis has demonstrated the importance of: market flexibility, regional integration (including labor mobility), and the existence of fiscal space to facilitate adjustment to asymmetric shocks; fiscal discipline (and, ultimately, some form of fiscal integration); close monitoring of divergences in competitiveness and external balances (including with countries in the currency area); having an operational crisis management framework; and having an effective regional surveillance framework, including for the financial sector (see Appendix II). Given this experience, and keeping in mind some important differences between the euro area and the WAEMU, staff and the authorities initiated broad-ranging discussions on reforms that may strengthen the stability of the WAEMU.

Staff’s advice

23. The ongoing review of the convergence criterion on public debt is welcome. As indicated in the previous consultation, the ceiling of 70 percent of GDP may be too high given current debt ratios. It is also high compared with the sustainability thresholds estimated in empirical studies and used, for example, in the debt sustainability analyses conducted by the IMF and the World Bank. The most recent estimates made in the context of the 2012 review of the Debt Sustainability Framework suggest thresholds generally below 70 percent. These empirical thresholds should be seen as ceilings beyond which the probability of debt distress becomes significant, rather than optimal levels to target. They could inform the authorities’ ongoing review of the criterion.

24. More generally, the regional surveillance framework could be further strengthened. The recent introduction of new indicators to monitor real convergence and regional integration is. The scope, quality, and availability of economic and financial information in the union should be further enhanced. Recent efforts by the WAEMU Commission to centralize the information it collects and to coordinate and harmonize the region’s statistics systems are steps in the right direction. Implementation of the six new directives on public financial management should be completed as soon as possible. Their transposition into national legal frameworks, which should have occurred by end-2011 is expected in the first half of 2012. Implementation of the directives will help harmonize the rules on budget preparation, presentation, approval, execution, and control, and encourage efficient, transparent public financial management in all the member countries. It will also facilitate the conduct of regional surveillance. The move toward accrual-basis accounting will, in particular, make it easier to monitor domestic arrears.

WAEMU: Banking System Soundness

Available financial soundness indicators suggest that the banking system is generally healthy. The authorities’ assessment indicates that at end-2010, the WAEMU banks were on average well capitalized, with a risk-weighted capital adequacy ratio of 13 percent. Nonperforming loans (NPLs) stood at a high level (17 percent) and reflect to some extent legacy issues and the reluctance of banks to write down assets out of concern it could affect recoverey prospects. However, the rate of provisioning is relatively high (65 percent).

Stress tests were conducted by the mission to provide a more nuanced picture of vulnerabilities. These stress tests used the most recent data available for individual banks in each WAEMU country, which were provided by the authorities.1 The degree of detail and the quality of data varied significantly across countries.2 This limited staff’s ability to perform some stress tests and to analyze some of the results. For instance, to examine the role of the government in the banking sector or assess the influence of foreign banks, it would have been useful to have information on banks’ ownership in all countries. Similarly, it would have been useful to assess the macroeconomic risk stemming from banks’ high exposure to governments.3 Weaknesses in the bank data should also be kept in mind when interpreting the results. However, the exercise still provides useful insights, and staff welcomes the BCEAO’s willingness to share information and develop expertise in this area.

The stress tests suggest that the banking system is mostly vulnerable to credit risk. This reflects that banks are mostly involved in lending (at fixed rates) to governments and the private sector. Six shocks were tested based on three broad categories of credit risk (Table 1). Under the most damaging scenario, the cost of recapitalization to meet minimum capital requirements would remain limited (at most 1.5 percent of GDP, in Senegal). This reflects, to a large extent, the small size of the banking sector (and more generally financial intermediation) in the WAEMU.


Stress Test—Credit Risk

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Liquidity risks vary across countries. Liquidity shocks were applied by simulating a run on the banks for 10 consecutive business days, giving the banks no recourse to emergency funds (from other banks or from the central bank). The same daily rates of deposit flight were calibrated. Results show that some national banking systems (e.g., Mali, Senegal) are more liquid than others and would show high resilience to a run on deposits, while others would be comparatively more vulnerable (e.g., Benin, Guinea Bissau, Togo). Overall, however, the liquidity position is rather strong.

1 June 2011, except for Benin, Guinea-Bissau, Mali, and Niger (December 2010).2 NPL loans classification and required provisions data were not available for most of countries.3 In measuring capital adequacy, sovereign risk is weighted zero in the WAEMU, an issue which may need to be revisited in light of the recent Côte d’Ivoire crisis. Exposure to government contractors was not identifiable in the data provided and should be considered as a factor of sovereign risks.

25. Some aspects of the financial crisis prevention and resolution system could also be reinforced. The system was severely tested with the Ivorian crisis, whose impact on the rest of the region the authorities managed to contain. However, this success should not preclude exploring how to improve the system further. A number of measures could be considered on the prevention side. Transparency should be increased, in particular through the compilation and routine publication of financial soundness indicators. An early warning system could be established, with regular stress tests performed. From this perspective, while the provision of detailed information to staff to conduct such tests was welcome, the authorities should accelerate the establishment of an electronic platform for reporting by credit institutions, which would make the data available more quickly. Prudential regulation could be enhanced by aligning some rules with international best practices (see Appendix II), pushing banks to strengthen their credit risk analysis, and improving compliance with prudential rules. The latter will require allocating more resources to bank supervision, which should also be strengthened for banking groups operating in the union and in other regions The financial crisis management system can also be further improved, in particular by introducing a deposit insurance system in due course and strengthening of the regulator’s role in the bank resolution process.

Authorities’ views

26. The authorities welcomed the discussion on convergence criteria, and suggested that a broader review of fiscal criteria might be needed. The WAEMU Commission presented ongoing work on the issue, which illustrated that both the debt and the fiscal deficit criteria have a key role to play in preventing excessive debt accumulation. The WAEMU Commission underscored the need to find criteria that would achieve this goal, while leaving sufficient space to member states to address their development needs and conduct counter-cyclical policies when needed. The authorities welcomed the staff’s proposal to support their work in this area.

27. The authorities also broadly agreed with the need to explore how to strengthen the stability of the financial system. They welcomed the technical exchanges with staff on how to conduct stress tests. They indicated that prudential regulation would be reconsidered in their plan to move to Basel II, and that the resources of the Banking Commission would be increased substantially. Finally, the authorities said that they were considering the creation of a financial stability fund to address systemic crises, such as the one experienced recently in Côte d’Ivoire.


A. Maximizing the Benefits of Côte d’Ivoire’s Recovery Through Deeper Regional Integration

28. The end of the crisis in Côte d’Ivoire improves growth prospects for the region. Trade between Côte d’Ivoire and the rest of the region was severely affected by the 2011 crisis, and more broadly by a decade of political instability in the largest economy of the WAEMU. The flow of goods, services, and production factors is expected to rebound and especially benefit the landlocked countries. Over time, the entire area could become more attractive to foreign investors, especially if regional integration deepens (see Appendix III).

29. Regional integration remains limited. Nontariff barriers to intraregional trade persist in the union, but also at the West African level in the context of Economic Community of West African States (ECOWAS). Insufficient transportation and energy infrastructures are obstacles to reaping the full benefits of the common market.

Staff’s advice

30. The national and regional authorities need to accelerate regional integration to make the most of Côte d’Ivoire’s recovery. All barriers to intra-WAEMU trade, including non-tariff, import fees and export licensing, should be eliminated and labor mobility should be further facilitated. The elimination of obstacles to trade within the ECOWAS should also be pursued forcefully.

31. The study on the impact of an economic partnership agreement (EPA) between West Africa and the European Union should be completed as soon as possible. This study will assess the impact of such an agreement on businesses in the region and on public finances. It will be critical to prepare businesses for stronger competition and plan for a smooth tax transition. The WAEMU and the EU should then agree on the amount of financial support for the region during the transition.

32. The planned introduction of a fifth tariff band at 35 percent in the context of broadening the common external tariff to include all the ECOWAS countries is regrettable. This band will apply to products deemed sensitive on the basis of five relatively vague criteria (product vulnerability, economic diversification, regional integration, sectoral promotion, and producer effort). The adoption of these criteria, instead of the degree-of-processing criterion hitherto used in the WAEMU, reduces the consistency of the tariff from an incentives perspective. The fifth band may also lead to a substantial increase in the weighted average rate of the union’s tariff and have a negative impact on the efficiency of resource allocation in the region. The list of products subject to this tariff band should be as short as possible.

Authorities’ views

33. The authorities stressed the importance for the region of the recovery in Côte d’Ivoire and concurred on the need to accelerate regional integration. They hoped that Côte d’Ivoire would quickly reach the HIPC Initiative’s completion point and benefit from debt relief, which would support the recovery. They underscored that regional integration is one of the main purposes of the Regional Economic Program (PER). They have drawn lessons from the relatively slow and incomplete implementation of the PER’s first phase and made progress in preparing the second phase. The latter is scheduled for 2012 and will be reflected in the medium-term budgetary frameworks prepared by member countries.

B. Deepening Further the Financial Sector

34. Despite recent progress, the WAEMU financial sector remains shallow and access to financial services limited. Credit to the private sector amounts to only about 18 percent of GDP on average in the union. Although better information is needed concerning access to financial services, in particular through regular surveys, access is known to be low, with bank accounts held by only about 5 percent of the population. These ratios are low even by sub-Saharan Africa standards. Transactions on the regional interbank and stock markets are limited, and there is no secondary market in government securities. Although the banking system has excess liquidity, small and medium-sized enterprises experience difficulties in access to bank loans, with financing provided mostly to a few large enterprises and governments. Banks do limited maturity transformation (Box 3 and Appendix IV).

Staff’s advice

35. Financial sector deepening is desirable. It would help raise potential growth and reduce poverty. The 2008 Financial Sector Assessment Program (FSAP), and the authorities’ own analyses, diagnosed of the situation clearly and led to a series of recommendations. A number of measures have been implemented in recent years, but an acceleration of reform implementation is needed (Appendix V). The priority actions for 2012 should be to develop the interbank market, strengthen the public debt market, and review certain prudential rules that may excessively restrict access to credit, such as the transformation ratio. A more accommodating regulatory approach to financial innovation, at least in the early stages of development, could also be considered, to facilitate the diffusion of new financial services such as mobile banking.

Authorities’ views

36. The authorities saw further financial deepening as a priority. They noted that access to financial services in the region is greater if microfinance is taken into account. They reported a number of new reforms, for instance on securitization and the development of a mortgage market, as concrete steps within their remit to develop the financial system.

37. The authorities also emphasized the need to preserve financial stability. They see the government debt market as an illustration of the challenges of increasing financial depth while maintaining stability. This market has developed very quickly in recent years, and enabled governments to diversify their financing sources and to raise funds denominated in local currency in a relatively flexible and predictable way. However, this new kind of financing creates new challenges for all the stakeholders. Borrowers have to develop their capacity to manage debt with higher costs and shorter maturities. Investors need to develop their capacity to assess sovereign risk. For the institutions in charge of the market, the challenges are to improve the functioning of the market (for example, through better issuance predictability an coordination, as well as the creation of a secondary market, led by primary dealers) and to broaden participation to nonbank institutions and, over time, to nonresidents.

WAEMU: Financial Deepening Since 2006

The financial system in WAEMU has deepened since the last Financial Sector Stability Assessment (FSSA) was performed in 2008, despite the adverse impact of the global financial crisis. The ratio of broad money to GDP in the WAEMU increased from 24 percent in 2006 to 31 percent in 2010. In fact, all WAEMU countries experienced an increase, albeit at different rates (Mali too when 2011 is taken into account). In terms of annual percentage growth, Guinea-Bissau experienced the fastest rate, followed by Côte d’Ivoire, Togo, Benin, Burkina Faso, Niger, and Senegal (Figure 1). The ratio of domestic credit to the private sector to GDP, another measure of financial depth, recorded a similar evolution, with the highest annual growth rates in Guinea-Bissau, Niger, Benin, Togo, Côte d’Ivoire, and Senegal (Figure 2).

Figure 1:
Figure 1:

Broad Money (% of GDP)

Citation: IMF Staff Country Reports 2012, 059; 10.5089/9781475502428.002.A001

Source: World Development Indicators 2011, World Bank.
Figure 2:
Figure 2:

Domestic credit to private sector (% of GDP)

Citation: IMF Staff Country Reports 2012, 059; 10.5089/9781475502428.002.A001

Source: World Development Indicators 2011, World Bank.

The regional stock market registered modest growth during the period and remains small. Market capitalization as a share of GDP increased from 24 percent in 2006 to 31 percent in 2010, although the number of listed firms declined from 40 to 38. Liquidity in terms of the value of stocks traded as a share of GDP remained very low compared to other stock exchanges in the SSA and decreased marginally.

A very dynamic segment of the financial sector in recent years has been the government securities market. By end-2011 annual issuances of government securities represented almost 10 percent of GDP. The fastest growth was observed in 2009–11, when the issuances of government securities increased sixfold, both in nominal terms and as a share of GDP and tax revenue. Despite the growth in this segment, government borrowing in the regional market is mainly short term.

Despite the deepening in 2006–2010, the financial system in the WAEMU continues to be characterized by very low levels of financial intermediation, even when compared with countries which have similar levels of GDP per capita. For instance, the ratio of broad money to GDP was 38 percent in 2010 in sub-Saharan Africa on average (excluding WAEMU and South Africa; see Appendix IV), against 31 percent in the WAEMU.

C. Other Reforms to Improve Economic Efficiency

38. Nonprice competitiveness must increase for potential growth to rise. This requires firm action on several fronts to improve the quality of institutions and infrastructures, reduce factor costs, and deepen the regional market. Sectoral policies in the union, especially those designed to ensure energy security, the free flow of the workers, and investment in human capital, contribute to these objectives.

39. Tax harmonization has progressed swiftly since the establishment of the union in 1994, with on average about 75 percent of the tax revenue of member countries stemming from harmonized or coordinated taxes. This reflects a shared conviction at the national and regional levels that the proper functioning of the common market requires a certain level of tax harmonization.

40. Energy price subsidies remain significant in most countries. Although most countries have automatic adjustment pricing policies for petroleum products, these policies have not been fully implemented. Implicit subsidies vary by products and countries, and can be significant. In addition, price disparities in the region and with neighboring countries (e.g., Ghana, Nigeria) foster informal trade and arbitrage. Electricity price subsidies further affects the fiscal accounts.

Staff’s advice

41. Further tax harmonization could be considered in certain areas. A recent IMF technical assistance mission suggested a number of measures, for instance to prevent excessive tax competition among member states to attract foreign investment.

42. Work on the pricing of petroleum products should continue in a coordinated way at the regional level. This work could be done in the context of implementing the recommendations of the regional workshop organized by the WAEMU Commission with IMF support in August 2011. In particular, any subsidization in favor of petroleum products should take into account the need to prevent distortions in the common regional market and the incidence of the subsidy; in this regard, direct transfers are often more efficient and equitable than price subsidies.

Authorities’ views

43. The WAEMU Commission wishes to play a more active role in these areas. In tax harmonization, it already plays a major role in the dissemination of analytical and factual information to encourage countries to comply with regional directives and raise their awareness about the costs of noncompliance. The Commission expressed interest in continued TA from the Fund on these topics.


44. After a sharp decline in 2011, regional growth is expected to experience a rebound in 2012. Growth in 2011 was severely affected by the Côte d’Ivoire crisis and, to a lesser extent, by the drought in Sahel countries. Despite a weakening external environment, a strong postcrisis recovery in Côte d’Ivoire and other domestic factors are expected to lead to high regional growth in 2012. Regional inflation would remain moderate in 2012 and over the medium term.

45. The macroeconomic policy stance remains appropriate. The fiscal stance was looser in 2011, but the area-wide deficit is expected to narrow somewhat in 2012. These developments reflect, to a large extent, developments in Côte d’Ivoire. Maintaining fiscal sustainability in the medium term will require a further reduction of deficits beyond 2012. Monetary policy was appropriate in 2011 and remains so; contagion from the Ivorian crisis was prevented and inflation receded in the second half of the year.

46. Risks are to the downside and, should they materialize, could require a loosening of macroeconomic policies. A sharper than envisaged slowdown in the euro area could require a loosening of monetary policy and differentiated fiscal policy responses, because it could affect countries asymmetrically and fiscal space varies across countries.

47. The stability of the union could be strengthened given the euro area experience. At about six months of regional imports, reserves are adequate and staff estimates suggest there is no area-wide real exchange rate misalignment. Improvements to the regional surveillance framework should be explored, starting with the provision and publication of better and timelier data. The ongoing review of the convergence criterion on debt is welcome, and a broader approach to fiscal sustainability could be considered. Although stress tests and the recent crisis in Côte d’Ivoire suggest that the regional financial sector is well capitalized overall and highly liquid, its stability could be increased through better prudential regulation, better observance of prudential rules (which will require strengthening supervision), and a more formal crisis management framework.

48. Regional integration and financial sector deepening offer opportunities to raise the region’s potential growth. Côte d’Ivoire’s growth prospects are strong. The return of stability there could be a game changer for the whole region, but reaping the full benefits will require rekindling the regional integration agenda. Financial deepening would also help increase potential growth and inclusion. Progress was made in the past few years, but the financial system remains shallow. The authorities’ plans to make the interbank market operational and to broaden the government debt market in 2012 are important steps in the right direction. Other regional reforms aimed at improving nonprice competitiveness and increasing economic efficiency should be pursued, for instance in the area of tax harmonization and petroleum product pricing.

49. Although data are adequate for Fund surveillance purposes, transparency and information availability should be further improved. They help make policies and markets more effective. Staff welcomes the efforts initiated by the BCEAO and the WAEMU Commission and urges them to continue their actions vigorously and help make best practices more widespread within the union. The directives on public financial management should be implemented by WAEMU countries as soon as possible. Financial soundness indicators should be compiled and published routinely.

50. Staff welcomes the regional authorities’ interest in closer relations with the Fund, and will explore ways to assist them most effectively. It is proposed that regional discussions with the WAEMU authorities remain on the standard 12-month consultation cycle.

Table 1.

WAEMU: Selected Economic and Financial Indicators, 2008—2016

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Sources: IMF, African Department database; World Economic Outlook; IMF staff estimates.

The estimates for 2011 refer to annual change at end-Oct, with the beginning-of-period referring to end-Oct 2010.

Excluding intra-regional trade as estimated by BCEAO up to 2013.

Data up to 2010 are corrected for intra-regional trade discrepancies by BCEAO.

Gross official reserves divided by short term domestic liabilities (IMF definition). For 2011, the estimate refers to end-Oct.

Table 2.

Sub-Saharan Africa: Cross-Group Comparison, 2008—2016

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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 divided by (base money plus government deposits).

Table 3.

WAEMU: Selected National Accounts and Inflation Statistics, 2008—2016

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Sources: IMF, African Department database; and staff estimates.
Table 4.

WAEMU: Fiscal Balances, 2008—2016

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

Excludes net lending.

Table 5.

WAEMU: External Balances, 2008—2016

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

Includes intraregional trade

Table 6.

WAEMU: Government Debt, 2008—2016

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Source: IMF, African Department database.