West African Economic and Monetary Union (WAEMU)
Staff Report on Common Policies for Member Countries
Author: International Monetary Fund. African Dept.
Publication Date:
03 Apr 2013
eISBN:
9781484368688
Language:
English
Keywords:
ISCR; CR; deficit; financial system; authority; WAEMU Commission; WAEMU country; broad money; government paper; government intervention; Government debt management; West Africa; excess reserves
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Military coups that occurred in Guinea-Bissau and Mali caused economic disruption in the WAEMU countries. Regional policies have been in line with the recommendations, and growth is expected to remain robust, risks are on the downside, and the macroeconomic policy is appropriate. Preserving debt sustainability and stability of the Union in the medium term requires better coordination of fiscal policies. Development of the financial system, and strengthening of the regulatory and supervisory framework is necessary to address existing and new risks.

Abstract

Military coups that occurred in Guinea-Bissau and Mali caused economic disruption in the WAEMU countries. Regional policies have been in line with the recommendations, and growth is expected to remain robust, risks are on the downside, and the macroeconomic policy is appropriate. Preserving debt sustainability and stability of the Union in the medium term requires better coordination of fiscal policies. Development of the financial system, and strengthening of the regulatory and supervisory framework is necessary to address existing and new risks.

Introduction

1. The WAEMU faced new political and security challenges in 2012. Military coups occurred in Guinea-Bissau and Mali and caused economic disruption in these countries. The northern part of Mali was taken over by terrorist groups, which led to large refugee flows to neighboring countries and triggered a military intervention to restore territorial integrity. On the upside, the sociopolitical situation in Côte d’Ivoire improved significantly, and a peaceful and democratic changeover took place in Senegal.

2. Regional policies last year have been broadly in line with the 2012 consultation’s recommendations, although reform implementation has been somewhat slower than expected. This is the case in the financial sector (e.g., the launch of key reforms to deepen the interbank market has been delayed to 2013) and in the area of regional integration (reflecting the security situation in Mali). Macroeconomic policies at the country level have also been consistent with Fund advice, generally in the context of Fund-supported programs.

Recent Developments, Outlook, and Risks

3. Regional economic activity rebounded in 2012. After a large decline in 2011 to about 1 percent because of the drought in the Sahel and the post-electoral crisis in Côte d’Ivoire, regional growth is estimated to have reached 5.8 percent in 2012. Growth was driven mainly by the post-crisis recovery in Côte d’Ivoire, the rebound of agricultural production in a number of countries, and the start of oil production in Niger. A few countries faced inflationary pressures, mainly on domestic prices for food and petroleum products. Nevertheless, average regional inflation remained low, at about 2.5 percent (Figure 1).

Figure 1.
Figure 1.

Recent Economic Developments 2007–20121

Citation: IMF Staff Country Reports 2013, 092; 10.5089/9781484368688.002.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. The area-wide fiscal deficit stabilized around 4 percent of GDP in 2012, while the overall debt situation improved thanks to debt relief to Côte d’Ivoire (Figure 2). Compared with 2011, fiscal deficits increased in Burkina Faso, Niger, and Togo, stabilized in Côte d’Ivoire, and decreased in the other countries. With Côte d’Ivoire reaching the HIPC Initiative’s completion point in 2012, all WAEMU countries have benefited from substantial relief on their external debt. The average nominal debt for the region now stands at about 40 percent of GDP. All countries have public debt ratios substantially below the 70 percent of GDP ceiling set by the regional surveillance framework; they also have low or moderate ratings for the risk of debt distress according to recent debt sustainability analyses (DSAs), reflecting prudent fiscal policies and sustained growth (Appendix I). Countries have tended to re-accumulate debt in the wake of debt relief, but generally in line with expectations and there has been no indication of a major deterioration of the debt sustainability outlook in the WAEMU. However, the composition of financing has changed, with increasing reliance on domestic debt with higher interest rates and shorter maturities to supplement concessional external financing, which raises new debt management challenges. This trend is likely to continue as aid prospects are not favorable.

Figure 2.
Figure 2.

Fiscal Developments, 2010–2012

Citation: IMF Staff Country Reports 2013, 092; 10.5089/9781484368688.002.A001

Sources: IMF, African Department database, and Regional Economic Outlook database.

5. Monetary policy was eased modestly in 2012. Despite relatively strong growth of credit to the private sector and government, money growth remained moderate in 2012 (at about 8 percent year on year) because of a significant contraction in net foreign assets (NFA). In a context of continued moderate inflation and a sharp contraction in autonomous factors of bank liquidity (related, to a large extent, to the evolution of NFA) leading to pressures on interest rates, the BCEAO injected substantial amounts of liquidity to banks which has stabilized excess reserves. It also cut the policy rates by 25 basis points to respectively 3 and 4 percent and lowered the reserve requirement ratio to from 7 to 5 percent (Figure 3).

Figure 3.
Figure 3.

Monetary Policy and Inflation, 2007–2012

Citation: IMF Staff Country Reports 2013, 092; 10.5089/9781484368688.002.A001

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

6. The region’s current account deficit widened significantly in 2012. This outcome reflects a number of exceptional factors, such as higher imports of intermediate and capital goods by Côte d’Ivoire related to reconstruction efforts, Burkina Faso and Niger for mining and hydrocarbon projects, higher food imports to make up for the impact of the 2011 drought, and unfavorable terms of trade. The higher current account deficit, combined with temporary delays in repatriating export proceeds (mostly by Côte d’Ivoire), led to a deficit in the overall balance of payments and a decline of official reserves. Nevertheless, at about 5 months of regional imports and 98% percent of short-term domestic liabilities, reserves remain adequate. Updated staff estimates indicate that the level of the real effective exchange rate is broadly in line with the region’s fundamentals (Appendix II).

7. Growth is expected to remain robust in 2013 and the medium term, at about 6 percent (Figure 4). It will be driven this year by a large increase in public investment and crowding in of private investment in post-crisis Côte d’Ivoire, continued mining and hydrocarbon sector investment in Burkina Faso and Niger, infrastructure investment in Senegal, and a further recovery in agriculture. Growth would remain high in the medium term under the assumption of full implementation of growth-enhancing policies, including policies aimed at closing the region’s infrastructure gaps. Inflation would remain below 3 percent. The current account deficit is projected to remain large in 2013, but would gradually decline in the medium term as Côte d’Ivoire’s reconstruction needs subside.

Figure 4.
Figure 4.

Medium Term Outlook, 2010–20171

Citation: IMF Staff Country Reports 2013, 092; 10.5089/9781484368688.002.A001

Sources: IMF, African Department database, and Regional Economic Outlook database.1 Aggregate values for Sub-Saharan Africa exclude Nigeria, South Africa, and Zimbabwe.2 Historical series based on BCEAO data, projections based on Regional Economic Outlook database.

8. The outlook is subject to a number of downside risks (Risk Assessment Matrix). The economic impact on other countries of the crises in Mali and Guinea-Bissau has been moderate so far because of limited interconnectedness in the region (Appendix III). While the situation in Mali is evolving towards restoration of territorial integrity, the region may face broader political stability and security issues if terrorist activity were to spread and the perception of insecurity extended to neighboring countries, with a negative impact on public finances, risk perception by investors, and ultimately growth. Another downside risk is whether public policies needed to reach the projected growth rates, which are high by historical standards, will be fully implemented. Failure in this area would reduce significantly growth prospects with implications for poverty reduction and fiscal sustainability as suggested by recent DSAs (see Figure 5). The main risks related to the international environment include a possible intensification of the euro area crisis, which could affect exports, remittances, foreign direct investment, and official assistance. WAEMU countries also remain vulnerable to negative shocks to international food and fuel prices.

Figure 5.
Figure 5.

Sensitivity of Public Debt to Lower Growth

Citation: IMF Staff Country Reports 2013, 092; 10.5089/9781484368688.002.A001

WAEMU: Risk Assessment Matrix

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Improving Effectiveness of Policies Through Better Coordination

A. Macroeconomic Policy Mix in 2013

9. Fiscal consolidation is expected in 2013 in countries with higher deficits. In Burkina Faso, Côte d’Ivoire, Senegal and Togo overall fiscal deficits are projected to decrease, while they would remain broadly stable at relatively low levels in Benin, Guinea Bissau, and Mali. Only Niger would record a large increase in its fiscal deficit, reflecting spending related to a new large project in the hydrocarbon sector. The area-wide deficit would remain broadly unchanged at about 4 percent of GDP in 2013; excluding Niger, it would decrease.

Staff’s advice

10. The current macroeconomic policy mix is appropriate, but the authorities should stand ready to respond to possible adverse developments. The planned fiscal consolidation in the countries with higher deficits is warranted given the projected high growth. In the medium term, these countries should continue reducing their fiscal deficits, which would preserve debt sustainability and reconstitute fiscal space needed for countercyclical policy. This will require additional efforts on revenue mobilization and improving the quality of public spending. The monetary policy stance has been adequate too, taking into account the outlook for inflation, which remains largely determined by non-monetary factors (e.g., exchange rate fluctuations, terms of trade, shocks affecting agricultural production), and the constraints imposed by a shallow financial system. Should downside risks materialize, automatic stabilizers (i.e., higher deficits driven by lower tax receipts) could be left to operate where financing is available, and monetary policy could be loosened. Country debt management should be strengthened to address risks arising from higher recourse to market financing. More coordination in this area would reduce rollover risk.

11. The effectiveness of monetary policy can be improved through a range of measures. The BCEAO should continue strengthening inflation and liquidity forecasting. Further analysis of the monetary policy transmission channels is also desirable, as is better coordination with governments, which will facilitate liquidity management. Improving the quality, availability, and timeliness of macroeconomic and financial information would also facilitate the conduct of monetary policy. However, in the absence of more developed financial markets, the transmission of monetary policy signals remains weak. Only the bank lending channel is relatively active, while the interest rate and the asset price channels remain constrained by the shallowness of the financial system. The development of the interbank and the government debt markets therefore remains critical for strengthening the effectiveness of monetary policy. More developed financial markets would also allow banks to trade liquidity more actively, limiting the need for liquidity injections by the BCEAO and allowing for the emergence of an interbank rate that would provide highly valuable information for the conduct of monetary policy.

Authorities’ views

12. The authorities broadly agreed with the assessment of the policy mix. They stressed that member countries were facing large public investment requirements to reduce infrastructure gaps and improve the provision of social services. Addressing these needs, while preserving fiscal sustainability, would require expenditure rationalization. Monetary policy’s best contribution to a growth-friendly environment would be to ensure macroeconomic stability.

13. The BCEAO was confident that major reforms to deepen the interbank market would be launched by mid-2013. These reforms include the introduction of collateralized operations (repos) to address the reluctance of liquid banks to lend to illiquid ones; the rollout of an electronic platform to auction and trade liquidity and government paper (“application Trésor”); and the introduction of primary dealers, which should accelerate the development of the secondary government debt market. The BCEAO also stressed that the imminent establishment of a regional debt agency, with the main mission to advise treasuries, improve issuance coordination, and contribute to the development of the government debt market, would facilitate liquidity management.

B. Responding to Shocks While Preserving Sustainability

14. Observance of the key fiscal convergence criterion remains limited, suggesting a need to reconsider the regional surveillance framework. The criterion on the basic fiscal balance was missed by 5 of the 8 countries in 2012, and is likely to be missed again in 2013 by the largest two economies (Côte d’Ivoire and Senegal). This criterion has rarely been met by a majority of member countries, raising the question of its relevance and credibility. Following debt relief, the debt criterion is now met by all countries (Text Table 1).

Text Table 1.

WAEMU: Number of Countries Not Observing Convergence Criteria, 2009–2012

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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.

15. The frequency and asymmetry of shocks in the region are still high. Business cycle synchronization within the WAEMU and between the WAEMU and the euro area remains limited (Appendix IV). Nevertheless, WAEMU countries are highly susceptible to various exogenous shocks, many of them asymmetric. Staff analysis suggests that shock absorption–the smoothing of the impact of GDP fluctuations on consumption–has been much more limited than in other monetary areas. The limited scope for, and effectiveness of, monetary policy suggest that fiscal policy has in principle an important role to play in addressing both symmetric and asymmetric shocks.

Staff’s advice

16. Preserving debt sustainability and the stability of the Union in the medium term will require better coordination of fiscal policies. The experience of the euro area has shown that fiscal discipline in each member of a monetary union is critical for the stability of the union. At the same time, this discipline could be weakened by externalities, such as a non-credible no-bailout commitment. Staff analysis suggests that market discipline is limited in the WAEMU, and while it may improve with the development of the market, is likely to remain insufficient in the next few years (Appendix V). A strengthening of the regional surveillance framework is therefore desirable. Any new or modified rules should be relevant to the overarching objective–preserving the stability of the Union. They should be also easy to interpret, implement, and monitor, given administrative and technical capacity limitations.

17. Both the design of the main convergence criteria and their enforcement could be reconsidered. The criterion on nominal public debt could be lowered to reduce the risk of debt distress. Based on recent empirical research by the IMF and the World Bank, a threshold closer to 50 percent of GDP applied to a comprehensive definition of public debt would seem more appropriate. This threshold should be seen as a ceiling, not as an optimal debt level. A criterion on the overall fiscal deficit would allow better control of debt accumulation than the current basic balance, which excludes foreign-financed capital expenditure.1 The ceiling for the deficit would need to be consistent with preserving fiscal sustainability, while leaving room for countercyclical policies. It should also take into account that the timing of some expenditures, such as donorfinanced projects, is not entirely within the control of the authorities. While a cyclically-adjusted balance has been introduced in the euro area surveillance framework, its use in the WAEMU seems premature given data limitations and difficulties in identifying clearly cycles. However, even better designed rules may not lead to expected outcomes if they are not properly implemented. A first step should be a strengthening of the monitoring, and increased transparency and dissemination of regional and national fiscal outcomes.

Authorities’ views

18. The WAEMU Commission agreed that a comprehensive review of the regional surveillance framework was needed. Convergence is unlikely to be achieved by the (several times postponed) deadline of end-2013. The Commission will shortly launch a comprehensive study on the surveillance framework and desirable reforms, which is expected to be ready before end-2013. It expressed interest in continuing the close dialogue with staff on these issues.

C. Other Areas for Policy Coordination

19. Transposition of the WAEMU directives on national public financial management is lagging. The directives harmonize the rules for the preparation, submission, approval, execution, budget control, and encourage efficient and transparent management of public finances in all countries of the Union. To date, only Senegal has completed the transposition of all directives. Staff and the regional authorities agreed that national authorities should complete transposition as soon as possible and start working on implementation.

20. Further coordination of tax policies is desirable to increase revenue and reduce tax competition. Staff and the WAEMU Commission saw scope for further coordination in the following areas: the introduction of a unified methodology for the assessment of tax expenditure; a strengthening of the surveillance of countries’ compliance with WAEMU directives; implementation of the VAT (to better ensure neutrality) and corporate income tax; tax incentives for investment; mining taxation; the transition to a tax system less dependent on customs duties; and the implications for tax harmonization efforts of extending the common external tariff to ECOWAS. The WAEMU Commission will benefit from IMF TA in some of these areas. Work on taxation and pricing of petroleum products should also be pursued in a coordinated manner at the regional level.

21. Information quality and availability need to improve. Efforts at all levels to improve data quality, coverage, and timeliness should continue. The data should be widely shared at the national and regional levels between the authorities and with the public. This is critical for the design and effective implementation of national and regional policies, and more generally for the efficient functioning of markets. Staff welcomes the recent strengthening of the mechanism to monitor annually implementation of regional policies at the national level and encourages publication of its results.

Deepening and Strengthening the Financial Sector

22. The financial system in the WAEMU remains largely bank-based.2 The regional interbank, debt, and equity markets are underdeveloped, with the exception of the market for government debt, which has expanded fast recently. Microfinance has developed quickly too in some countries and helped improve financial inclusion, but the sector remains small compared to banking. On average, the banking system is liquid and well capitalized, although the situation varies substantially across banks and countries (Figure 6). Lending concentration is high in all countries of the region, and quality of assets, as reflected in high gross NPLs, represent the main risk. The exposure of banks to WAEMU sovereigns has increased rapidly, with the development of the regional market; their broader exposure to the public sectors is also substantial. Compliance with prudential norms remains low for a number of ratios, and some of these norms are not in line with international standards. The interconnection between the various segments of the financial system is low but increasing.

Figure 6.
Figure 6.

Financial Soundness

Citation: IMF Staff Country Reports 2013, 092; 10.5089/9781484368688.002.A001

Sources: BCEAO, IMF, African Department database, and Regional Economic Outlook database.Note: The transformation ratio (stable resources/M&L term loans) was lowered from 75 percent to 50 percent early 2013, the data reported for 2012 takes the 50 percent into account.

23. Financial depth has increased in recent years but remains low. A benchmarking exercise conducted on the countries of the region suggests that the limited depth of the banking system reflects these countries’ structural characteristics, while financial markets look particularly underdeveloped from this perspective (Figure 7). Further development of the financial sector would facilitate the financing of growth, improve financial inclusion and the ability of firms and households to cope with a volatile environment, and increase the effectiveness of macroeconomic policies (Box 1).

Figure 7.
Figure 7.

Selected Indicators on Financial Sector Depth

Citation: IMF Staff Country Reports 2013, 092; 10.5089/9781484368688.002.A001

Source: FinStats database, staff calculations

Staff’s advice

24. Further development of the financial sector requires resolute action on several fronts. As pilot studies on Benin and Senegal have shown, obstacles to financial development include insufficient transparency and informational asymmetries, weak business environment and legal and judicial frameworks, unfavorable taxation regimes for financial operations, regulatory and supervision issues (including issues related to the division of responsibilities in a monetary union) and lack of financial skills. Staff urged the authorities to complete ongoing reforms to develop the interbank market and deepen the market for government debt (above), but also encouraged them to avoid distortions (e.g., in terms of taxation), which would affect the development of private debt and equity markets. Staff welcomed the authorities’ efforts to reduce information asymmetries (e.g., through the planned creation of credit and guarantee bureaus) and to facilitate access to, and lower transaction costs on, the regional stock exchange (e.g., through the introduction of ratings, the reduction of various fees and the planned new market for small and medium sized companies).

Financial System Shallowness and Macroeconomic Policies

The pilots on strengthened financial sector surveillance showed that the limited development of the financial system is a constraint on the scope for, and effectiveness of, macroeconomic policies.

Constraints on fiscal policies.

• Limited scope for counter-cyclical fiscal policies. While the regional market has developed substantially, there are limits to the amounts governments can raise on it. This is a significant constraint since fiscal policy is the main instrument to address asymmetric shocks, which are frequent in the region.

• High liquidity (rollover) risks. As most public debt is short-term, it needs to be regularly rolled over, which may be challenging in certain circumstances. Senegal faced such difficulties ahead of the 2012 presidential election. This situation also reflects the fact that the investor base—composed mainly of banks—is relatively narrow.

• High borrowing cost, because of low liquidity and limited economies of scale. For instance, the yield at issuance for Senegalese bonds with maturities of three to five years was in the 7–9 percent range in the first half of 2012, while average inflation was around 2 percent.

• Limited scope for investment financing, as governments cannot easily raise long-term financing.

Constraints on monetary policy. In a currency area, monetary policy is generally better suited to address symmetric shocks. Under the fixed exchange rate arrangement, the BCEAO has some scope for active monetary policy in the short-to-medium term, as capital mobility is limited. However, the transmission of monetary policy is hampered by the limited depth of financial markets, which affects the effectiveness of most channels of transmission, and the absence of the exchange rate channel given the fixed exchange rate regime.

• The bank lending channel seems the only relatively effective transmission channel. Changes in the BCEAO policy rates do affect credit to the private sector, although the impact is more limited than in countries with more developed financial systems (Appendix IV).

• The interest rate channel seems largely ineffective. There is little evidence of a statistically significant impact of policy rates changes or liquidity injections on the short-term T-bill and the interbank market rates. This could reflect the limited development of the interbank market, the absence of a secondary government debt market, and large excess liquidity.

• The asset price channel is constrained by the limited development of financial markets.

25. Development of the financial sector and strengthening of its supervision should go together. Strengthened bank supervision is needed for earlier identification of risks and increased compliance with prudential norms. The emergence of regional banking groups requires the development of supervision on a consolidated basis and strengthening of cooperation with banking supervisors in countries where these groups operate. The increasing exposure of banks to sovereigns is also a risk which needs to be recognized, including through a non-zero weight on government paper in capital adequacy calculations. Micro-prudential regulation should be revised to bring certain prudential standards closer to international best practice, for example on risk concentration, classification of claims and provisioning, while taking into account the regional context.

26. The financial crisis prevention and management framework could also be strengthened. Crisis prevention requires greater transparency, including through the regular and timely compilation and publication of financial soundness indicators for all member countries. Regular stress tests would be a welcome step toward the introduction of an early warning system. Staff sees scope for improving the bank resolution framework, which would reduce the budgetary cost of government intervention. Staff underscored the importance of swift action in this area, including by giving broader powers to the supervisor and close collaboration with other supervisors in the case of cross-border groups.

Authorities’ views

27. The authorities concurred with the need to develop further the financial sector and shared the analysis on the main obstacles. Improving the financing of the economies and financial inclusion are seen as priorities. Financial sector development will also help absorb the impact of shocks, including by making monetary policy more effective. A comprehensive action plan to develop the financial system was devised and endorsed by heads of state in 2012 and is now being implemented; it involves the national and regional authorities. The WAEMU authorities are also exploring with the CEMAC’s options to increase financial integration between the two unions.

28. Work is ongoing, or will be launched shortly, to address the stability issues raised by staff. The resources of the Banking Commission have been significantly increased, and staff is being trained on a number of issues (risk-based supervision, bank resolution), including through Fund TA. With regards to prudential rules, the BCEAO reported that the transformation ratio linking long-term assets to long-term resources, which had long been seen as constraining excessively the provision of medium- and long-term credit, was loosened in December 2012. At the same time the ratio on portfolio structure (requiring a certain proportion of rated assets on bank balance sheets) was discontinued. The BCEAO reiterated its intention to move to Basel II in the next few years and expressed interest in Fund TA in this area. The authorities are also developing their macroprudential analysis, with ongoing work on early warning indicators and a map of risks in the whole financial system. They welcomed the stress-testing exercise conducted jointly with staff and intend to develop their expertise in this area. Work is also well advanced on a deposit insurance scheme and a financial stability fund, whose main goal would be to avoid possible debt payment incidents by sovereigns facing liquidity problems.

Increasing Growth and Competitiveness Through Regional Integration

29. Regional integration remains limited. There are significant impediments to good labor and capital mobility. Nontariff barriers and inadequate transportation and energy infrastructure remain obstacles to reaping the full benefits of the common market. A recent study commissioned and endorsed by franc zone finance ministers suggested that the growth gains from further integration could be substantial.3

30. Nonprice competitiveness problems continue to affect growth in WAEMU countries, which has been sub-par. The 2010-13 Doing Business Reports show a deterioration in the average WAEMU rankings, most of which are in the lowest quartile of the distribution (Text Table 2). In addition todeveloping the financial sector, improving institutions, governance, infrastructure, and trade integration could contribute to increasing competitiveness and raising the region’s growth potential. Stronger and sustainable growth, including in agriculture, and greater attention to inclusiveness in the design of growth strategies and policies will allow faster reduction of poverty incidence, which remains high in the region.

Text Table 2.

WAEMU: Doing Business Indicators

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Adjusted for data corrections and comparability.

Source: World Bank, Doing Business Indicators, 2010-13.

Staff’s advice

31. The integration agenda needs to be reinvigorated. The regional authorities could build on the momentum generated by the recent franc zone study to develop a plan for coordinated action on removing all barriers to intra-WAEMU trade, implementing fully the common external tariff (CET), coordinating further tax and customs practices, facilitating labor mobility, and developing regional structural policies.

32. Staff encouraged the authorities to preserve the integrity of the CET and common market. In the absence of an agreement in the negotiations between ECOWAS and the European Union on an Economic Partnership Agreement (EPA), the interim EPA of Côte d’Ivoire could enter into force in early 2014. This could seriously affect free trade within the WAEMU and the CET. Staff reiterated its concerns regarding the introduction of a new tariff band of 35 percent in the context of the extension of the CET to ECOWAS, potentially covering a large number of products, which would lead to an increase in the overall tariff protection.

Authorities’ views

33. The WAEMU Commission was confident that the second phase of the Regional Economic Program would accelerate integration. It stressed that many lessons were learned from the first phase with regards to the selection and implementation of projects. It indicated that fundraising efforts were stepped up in recent months to ensure full financing of the program. The Commission also reported on its plans to enhance the identification and dissemination in the region of the best-practice business approaches adopted by single countries. On EPA issues, it expressed concern about the risks to free trade within the WAEMU and the CET should an agreement not be found with the European Union.

Staff Appraisal

34. Growth is expected to remain robust in 2013. It will be driven by continued post-crisis recovery in Côte d’Ivoire, mining and infrastructure investment in a number of countries, and strong output in agriculture. Growth would remain strong in the medium term under the assumption of full implementation of growth-enhancing policies. Inflation would remain moderate.

35. Risks are on the downside. While the situation in Mali is evolving fast toward a restoration of territorial integrity, broader political stability and security issues could arise for the region, with a negative impact on public finances, risk perception by investors, and ultimately growth. Another downside risk is whether the policies needed to reach the projected growth rates, which are high by historical standards, will be fully implemented. Failure in this area would reduce significantly growth prospects with implications for poverty reduction and fiscal sustainability.

36. The macroeconomic policy mix is appropriate. The planned fiscal consolidation in the countries with higher deficits is warranted in light of the projected high growth and the need to reconstitute policy buffers. The modest easing of monetary policy in 2012 has been appropriate, taking into account the outlook for inflation. Official reserves remain adequate, even though their recent decline requires close monitoring. Should a temporary downside risk materialize, automatic stabilizers could be left to operate where financing is available, and monetary policy could be further loosened. Debt management needs to be strengthened at the country level and better coordinated.

37. Preserving debt sustainability and the stability of the Union in the medium term will require better coordination of fiscal policies. The regional authorities’ intention to conduct a comprehensive review of their regional surveillance framework is therefore welcome. Convergence criteria on public debt and the fiscal deficit need to be reconsidered, and implementation of the framework strengthened to increase adherence and traction.

38. Further development of the financial system is desirable; a strengthening of the regulatory and supervisory framework is necessary to address existing and new risks. Financial development will help raise growth, mitigate the impact of volatility, increase inclusion and improve the effectiveness of macroeconomic policies. Completing ongoing reforms that will allow the development of the interbank market and secondary government debt market is critical. Although banks on average seem relatively well capitalized and liquid, there is substantial heterogeneity among them, with high lending concentration and uneven asset quality being the main risks. Banks are also increasingly exposed to sovereigns in the region and more generally to the public sector. Finally, the emergence of regional groups raises new risks to address. Observance of prudential rules needs to improve, and some of the rules need to be brought closer to international standards. Staff welcomes the authorities’ ongoing efforts to strengthen bank supervision and improve bank regulation. Ongoing work to strengthen the financial crisis prevention and resolution framework is also welcome.

39. Nonprice competitiveness problems affecting growth require concerted regional and national efforts. Beyond developing the financial sector, improving institutions, governance, infrastructure, and trade integration are needed. The area-wide real exchange rate appears to be in line with fundamentals.

40. Transparency and availability of information need to improve. Efforts at all levels to improve data quality, coverage, and timeliness should continue. The data should be widely shared at the national and regional levels between the authorities and with the public.

41. It is proposed that the discussions with the WAEMU authorities remain on the standard 12-month consultation cycle.

Table 1.

WAEMU: Selected Economic and Financial Indicators, 2009–2017

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

The estimates for 2012 refer to annual change at end-Sep, with the beginning-of-period referring to end-Sep 2011.

Fiscal data for 2013 reflect a strong increase in the fiscal deficit of Niger following a new project in the hydrocarbon sector.

Excluding intra-regional trade.

Data up to 2011 are corrected for intra-regional trade discrepancies by BCEAO.

Gross official reserves divided by short term domestic liabilities (IMF definition). For 2012, the estimate refers to end-Sep.

Table 2.

Sub-Saharan Africa: Cross-Group Comparison, 2009–2017

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

Central African Economic and Monetary Community (CEMAC).

Including Nigeria and South Africa.

Table 3.

WAEMU: Selected National Accounts and Inflation Statistics, 2009–2017

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

WAEMU: Fiscal Balances, 2009–2017

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

2013 data for Niger reflect the impact of a new project in the hydrocarbon sector.

Excludes net lending.

Table 5.

WAEMU: External Balances, 2009–2017

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

Excludes intraregional trade