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

This West African Economic and Monetary Union (WAEMU) IMF staff report focuses on common policies for member countries. The region continued to experience a strong upswing in 2013, and the immediate outlook is for further vigorous growth and moderate inflation. Delays in implementing reforms, at both the national and regional levels, are the principal medium-term risk. It highlights that with continued strong growth projected for the region, countries are encouraged to seek opportunities to strengthen fiscal sustainability while maintaining public investment efforts.

Abstract

This West African Economic and Monetary Union (WAEMU) IMF staff report focuses on common policies for member countries. The region continued to experience a strong upswing in 2013, and the immediate outlook is for further vigorous growth and moderate inflation. Delays in implementing reforms, at both the national and regional levels, are the principal medium-term risk. It highlights that with continued strong growth projected for the region, countries are encouraged to seek opportunities to strengthen fiscal sustainability while maintaining public investment efforts.

Robust Growth with Moderate Downside Risks

A. Recent Developments

1. The political and security situation in the region has stabilized, but remains fragile. The political situation has become more settled, with peaceful elections in Mali and Togo and further progress towards normalization in Côte d’Ivoire. Nevertheless, political stability could be tested with the upcoming elections in a number of member states, particularly in a context of high demand for better governance and higher living standards. The region also remains vulnerable to internal security breakdowns and spillovers from neighboring countries.

2. Regional growth remained strong and inflation moderate in 2013. After rebounding from 1.2 percent in 2011 to 6.6 percent in 2012, regional growth reached 5.5 percent last year. This performance was driven by the post-crisis recovery in Côte d’Ivoire, public investment efforts, good harvests in several countries, and the beginning of oil production in Niger. Growth was particularly strong in Côte d’Ivoire, at about 9 percent, but also exceeded 5 percent in Benin, Burkina Faso, and Togo. The economy remained weak in Guinea-Bissau, and the drought in the Sahel took a heavy toll on GDP growth in post-crisis Mali. Regional inflation decreased to 1.6 percent, thanks to lower food prices.

3. Despite a substantial increase in public investment in 2013, the area-wide fiscal deficit (including grants) stabilized at about 3 percent of GDP. The composition of spending shifted in favor of investment, while grants and tax revenue increased in most countries. Fiscal deficits decreased in all countries but Benin, Mali, and Niger. Public debt ratios declined in all countries but Burkina Faso, Niger and Senegal, and the average public debt ratio for the region recorded a small decline to about 39 percent of GDP.

4. Monetary policy was further eased. The BCEAO lowered the policy rates by 50 basis points in 2013 and increased liquidity injections as bank liquidity contracted and inflationary pressures remained moderate. Money growth remained moderate, at about 10 percent, as the decline of net foreign assets was offset by strong growth in credit to the economy. Bank lending rates recorded a small decrease.

5. The area-wide current account deficit continued to increase in 2013 mainly owing to higher public investment and a sharp decline in gold prices. The current account deficit (including official transfers) widened from 5.6 percent of GDP in 2012 to 6.7 percent in 2013. Imports of intermediate goods, equipment, and services were boosted by higher public investment in most countries. Gold exports, which now represent about 20 percent of total regional exports, dropped on account of falling international gold prices. The overall balance of payments recorded a slight deficit, which led to a small decline of official reserves to 4.7 months of next year’s extra-regional imports.

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Source: BCEAO, IMF, African Department database

6. The external position remains sustainable but vulnerabilities have increased (Appendix I). Despite an effective nominal appreciation of about 4.5 percent, the CFA franc appreciated only by 2.5 percent in real effective terms in 2013 owing to low inflation. Various analyses suggest that the real effective exchange rate remains broadly in line with regional fundamentals, and official reserves adequate, provided the current account deficit narrows in the medium term as projected. However, in light of recent trends, current account and reserves developments warrant close monitoring.

B. Outlook and Risks

7. With sustained reform implementation, growth would remain strong in 2014 and the medium term. It would exceed 6 percent in 2014, reflecting a substantial scaling up of investment in Côte d’Ivoire and Niger, and rebounding agricultural production in Mali. This favorable trend is expected to continue in the medium term, with growth exceeding 5 percent in most WAEMU countries. Such robust and lasting growth would mark a clear break with historical performance (Appendix II). Projections assume stabilization of political and security situations, and sustained implementation of growth-enhancing reforms and investment. Inflation would remain moderate at about 2 percent. The current account deficit would gradually decline after 2014, as gross investment would stabilize at a high level and start generating higher exports, boosting income and savings. The current account deficit would remain financed mostly through non-debt creating inflows (FDI and grants).

8. The outlook is subject to moderate downside risks (Risk Assessment Matrix). The main ones are sociopolitical instability and security issues, and delays in implementing growth-enhancing investments and reforms, at national and regional levels. Both would affect growth, with negative implications for poverty reduction and fiscal sustainability as suggested by alternative scenarios in recent debt sustainability analyses (Figure 2). Lower growth in both emerging and advanced markets2 would affect trade, remittances, foreign aid, and direct investment. It could also affect commodity prices, which have a significant impact on the WAEMU’s economies. Finally, the two WAEMU countries planning to tap international markets in 2014 could face higher financing costs should unconventional monetary policy exit lead to increased global financial market volatility.

Figure 1.
Figure 1.

WAEMU: Medium Term Outlook, 2010–20181

Citation: IMF Staff Country Reports 2014, 084; 10.5089/9781484341698.002.A001

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

Sensitivity of Public Debt to Lower Growth

Citation: IMF Staff Country Reports 2014, 084; 10.5089/9781484341698.002.A001

Source: IMF staff estimationNote: Projections are taken from 2013 DSAs of WAEMU countries (2012 DSA for Benin). The permanently lower growth scenario assumes that GDP growth is one standard deviation below the baseline divided by the square root of the length of the projections (i.e., around 0.4 percent below the baseline GDP growth on average).

Risk Assessment Matrix

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Coordinating Policies to Ensure Stability and Support Growth

A. Macroeconomic Policy Mix in 2014

9. The area-wide fiscal deficit (excluding Niger) would slightly decrease in 2014, despite a further scaling-up of investment. Niger’s deficit would temporarily increase substantially with government financing of a large project in the hydrocarbon sector. Fiscal consolidation would continue in higher-deficit countries (Senegal and Togo). Public investment is expected to increase in all countries, and in most of them the ratio of current expenditure to GDP would decline. The regional public debt ratio would remain stable at about 39 percent of GDP.

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Source: BCEAO, IMF, African Departement database.

Staff’s advice

10. The current mix looks appropriate and more stimulative policies are not required at this juncture. Monetary policy easing was justified in the past two years in light of favorable inflationary developments and prospects and uncertainty on the growth outlook. With growth now better entrenched, a worsening current account deficit and declining official reserves, a pause in the easing seems appropriate. As projections are for continued strong growth, countries are encouraged to seek opportunities to strengthen fiscal sustainability while maintaining public investment efforts and expanding social safety nets. Additional efforts to improve the quality of spending and revenue mobilization are required for this purpose. Should temporary downside risks materialize in 2014, automatic stabilizers (i.e., higher deficits driven by lower tax receipts) could be left to operate where financing is available. A more permanent shock to growth, however, would require adjustment.

Authorities’ views

11. The authorities broadly agreed with this assessment, but were more optimistic on the balance of risks. They were confident that with the return of political stability and security and ongoing reforms potential growth would be much higher than in the past. They concurred that preserving fiscal sustainability was of paramount importance, but also stressed the extent of development needs, which requires higher investment and social spending.

B. Monetary Policy Effectiveness

12. Monetary policy transmission is limited and asymmetric across countries. With limited capital mobility with the rest of the world, there is some scope for active monetary policy in the context of the exchange rate regime. Recent empirical work conducted by the BCEAO and staff suggests that changes in policy rates have a statistically significant impact on inflation, but the impact is small. This reflects a shallow financial system–with in particular an underdeveloped interbank market and no secondary market for government debt–and the absence of an exchange rate channel. The impact also differs across countries, reflecting differences in financial depth and concentration and limited financial integration in the region (Appendix III).

Staff’s advice

13. The reforms to develop the interbank and public debt markets need to be accelerated. They would help reduce the need for liquidity injections, improve liquidity transactions among banks, and set a reference interest rate for the conduct of monetary policy. Although significant progress has been made recently in modeling inflation and liquidity demand, more work is needed to understand better the channels of monetary policy transmission in the region and in individual countries. Better policy coordination with country authorities, in particular in projecting the net government position vis-à-vis the banking system and establishing a single treasury account in each country, would help strengthen liquidity management and monetary policy implementation. Finally, improvements in the quality, timeliness, and coverage of economic and financial data remain essential for the conduct of monetary policy. In particular, intra-annual indicators on economic and financial activity need to be further developed.

Authorities’ views

14. The authorities reiterated their intention to complete these reforms as soon as possible. They acknowledged that delays had been incurred in launching the electronic platform to auction and trade liquidity and government paper. They expected the launch by mid-2014, together with the introduction of collateralized operations on the interbank market and of primary dealers. The BCEAO also noted that banks’ increased demand for liquidity in the past two years would likely increase monetary policy effectiveness in the future. Efforts are ongoing to develop quarterly national accounts.

C. Fiscal Policy Coordination

15. The regional surveillance framework is being reviewed to improve fiscal policy coordination. The existing criteria and enforcement mechanism suffer from a number of shortcomings. For instance, the key criterion on the basic fiscal deficit3 has often been violated and after debt relief the debt criterion (with a ceiling of 70 percent of GDP) is no longer constraining and may now be high from a debt vulnerability perspective. In light of these issues, the WAEMU Commission has launched a review of the whole framework (Appendix IV). The review covers both the design of convergence criteria and incentives for complying with the rules. At the time of the mission, the WAEMU Commission had received a report from experts but had not yet formulated a reform proposal to submit to member states.

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Source: BCEAO, IMF, African Department database

Staff’s advice

16. The design of new criteria could follow a few simple principles. First, the ultimate objective should be specified. In staff’s view, this objective is fiscal sustainability, which is critical for the stability of the monetary union and exchange rate regime. Second, only criteria that are directly related to attaining this objective should be kept, to focus attention on critical issues. It could therefore be considered to keep only two or three criteria (out of the existing eight), for instance a debt criterion and a deficit criterion. Third, the mutual consistency of remaining criteria should be ensured as much as possible. For instance, a ceiling on the deficit should not be set at a level so high that it would likely lead in the medium term to a breach of the debt ceiling by most countries. From this perspective, relying on comprehensive debt sustainability analysis helps ensure consistency. Another option is to introduce “debt brakes”, which adjust the deficit ceiling based on past deviations from targets or the distance to the debt ceiling. Fourth, criteria should be kept simple, transparent, and easy to implement and monitor. Fifth, some tailoring of the fiscal rules at the national level should be allowed, as long as they remain consistent with the regional ones. For instance, countries with a high share of revenue coming from natural resources may wish to adopt a rule specifying how this revenue should be saved for a rainy day if prices for natural resources are high, or saved for future generations (because of the exhaustibility of the resources), or invested in public infrastructure. Sixth, any ceiling on debt and/or the deficit should not be construed as an optimal level. Staying away from the ceilings gives space to respond to shocks when needed.

17. Improving country ownership of the new rules is critical for compliance. International experience indeed suggests that incentive mechanisms are more effective at the national level. An inclusive approach to reforming the current framework should be the starting point, even if it means further delays. Regional rules, once agreed, could be transposed into national laws and fiscal frameworks, which would increase the cost of deviation for policy makers. Increasing transparency and communication on objectives and outcomes is also essential. National fiscal councils could be used, provided they are adequately staffed and independent. They would complement and reinforce the role of the WAEMU Commission in regional surveillance. Finally, national budget processes should be strengthened, for instance through the systematic use of medium-term fiscal frameworks.

Authorities’ views

18. The authorities concurred with many of the broad principles, but raised issues with a few staff proposals. The WAEMU Commission stressed that financial sanctions were unlikely to work and agreed with the need to have full ownership of the rules by country authorities. It intended to have an inclusive approach to the reform of regional surveillance. The Commission expressed doubts as to whether it would be possible to establish independent fiscal councils in member states. The Commission concurred with the need to have simple rules, and in this regard was of the view that the use of a cyclically-adjusted fiscal deficit was probably too complex at this juncture. It disagreed with staff’s earlier recommendation to lower the debt ceiling, arguing that it would constrain public investment and ultimately growth.

D. Other Areas for Policy Coordination

19. Progress in coordinating or harmonizing public finance management (PFM), debt management, and tax policy has been uneven recently.

  • The transposition of regional PFM directives into national laws, which should have been completed by end-2011, is way behind schedule.4

  • The regional market and to a lesser extent the international market have become an important source of government financing, raising new debt management challenges. Efforts are ongoing at the national level to build capacity. A regional debt agency was created and is now operational. It will focus on improving debt issuance coordination, providing advice to national authorities on debt management, and broadening the investor base.

  • Trade and tax policies are in principle highly coordinated, although actual application might not always been consistent. An agreement was found on a common external tariff (CET) for the Economic Community of West African States (ECOWAS), which is driven by ongoing negotiations with the European Union on an Economic Partnership Agreement (EPA).

Staff’s advice

20. Transposition and implementation of the PFM directives should accelerate. As mentioned above, better PFM plays an important role in ensuring fiscal sustainability. The WAEMU Commission should identify the reasons for the delays and communicate its findings and recommendations to the Council of Ministers.

21. The extension of the customs union to ECOWAS carries risks for tax coordination that need to be carefully considered. Ongoing efforts in the WAEMU to further harmonize tax policies (with technical support from the IMF) are welcome. A regional approach on specific issues, such as the taxation of investment and petroleum products, seems warranted to reduce distortions affecting the single market. Staff regrets that the new CET for ECOWAS raised external protection for WAEMU countries. In addition, the possibility given to each ECOWAS country to apply additional protection for a few years to 3 percent of tariff lines of its choice carries serious risks for the integrity of the tariff regime and the single market, and could jeopardize tax harmonization efforts in the WAEMU.

Authorities’ views

22. The authorities acknowledged delays and risks but pointed out a number of positive developments. The WAEMU Commission underscored that the technical work on the transposition of PFM directives was well advanced and should allow for substantial progress in 2014. While aware of the risks related to the new ECOWAS tariff, it stressed that it was still a significant achievement that would foster regional integration in West Africa. The authorities noted that the regional debt agency would contribute to building capacity in debt management.

Accelerating Financial Sector Reforms

23. Despite significant financial sector development in recent years5, financial depth, breadth, and access remain low. The financial sector remains bank-centered and, while financial depth is broadly in line with WAEMU countries’ structural characteristics, there is substantial scope to increase it further and improve access, as suggested by the experience of East African countries.6 The regional debt markets remain underdeveloped, particularly for private debt. Participation from foreign investors is very limited, unlike in neighboring Ghana and Nigeria, reflecting a range of issues (Appendix V). Mobile banking is on the rise, but penetration remains much lower than in East Africa.7 Microfinance continues to develop.

24. While the financial sector appears sound on average, vulnerabilities have increased. Banks are liquid and relatively well capitalized on average, but there is substantial heterogeneity among them. For instance, a quarter of banks do not meet the solvency ratios and some banks face serious difficulties in Benin, Côte d’Ivoire, Mali, and Togo; these difficulties, however, are country-specific and not systemic in nature. The main risk is the high concentration of lending, which partly reflects the lack of economic diversification; half of banks do not respect the single risk exposure ratio, despite it being much higher than international standards. Asset quality is also an issue, as illustrated by the high share of nonperforming loans. Finally, fast developing regional banking groups, some of which facing governance or financial challenges, raise new opportunities but also new risks.8

Respect of Key Prudential Norms by Country, end-June 2013

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Source: BCEAO

Staff’s advice

25. Reforms to develop and strengthen the financial system go in the right direction, but need to be accelerated. Weak transparency, underdeveloped judicial and business environments, limited financial skills, and suboptimal taxation regimes remain the main obstacles to financial sector development. The planned creation of credit bureaus is welcome, as it will help reduce information asymmetry. As mentioned above, ongoing reforms to develop the interbank and sovereign debt markets are a priority and should be completed as soon as possible; together with more active communication (including by the new regional debt agency) and further harmonization of financial product taxation, they will help make the regional market more attractive to foreign investors.

26. Ongoing efforts to strengthen supervision and the crisis prevention and resolution frameworks need to be accelerated too:

  • Bank supervision and regulation. Compliance with key prudential ratios remains insufficient and urgently needs to improve (Figure 4). Recent efforts to strengthen staffing and training at the Banking Commission are welcome and need to continue to allow for more frequent on-site supervision and improve the early identification of risks. Other measures should be considered to increase the credibility of the supervision framework, such as stronger and more systematic sanctions. Ongoing efforts to strengthen collaboration with other supervisors are also critical to improve the supervision of regional banking groups. The move to Basel II/III regulation—with IMF technical support—will be an opportunity to bring prudential rules closer to international standards. As this process is likely to take time, the authorities should consider in the meantime a tightening of certain rules, for instance on risk concentration and claims and provisioning classification, and fixing an early deadline for raising banks’ minimum capital requirement to CFAF 10 billion. Moving to consolidated reporting and supervision is also a priority.

  • Crisis prevention and resolution. To improve transparency and market discipline, the authorities should compile and publish financial soundness indicators on a regular and timely basis.9 They should also continue developing macro-prudential analyses, with regular stress tests and early-warning indicators. Bank resolution is a protracted process in the WAEMU, with the risk of increasing the ultimate cost borne by taxpayers. This reflects the division of responsibilities between a number of institutions at the regional and national levels. In this regard, while there is a single supervisor in the WAEMU, there is no single resolution framework. Staff recommends a reconsideration of this architecture to give more powers to the supervisor, in line with international best practice. Reducing the time a bank can spend in receivership is also desirable to force early decisions on restructuring or closing.

  • Resources. Adequate resources will need to be dedicated if this ambitious and important reform agenda is to be implemented in time. Staff also recommends close cooperation between regulators and supervisors.

Figure 3.
Figure 3.

WAEMU: Monetary Policy and Inflation, 2008–2014

Citation: IMF Staff Country Reports 2014, 084; 10.5089/9781484341698.002.A001

Sources: BCEAO, IMF, African Department database, and Regional Economic Outlook database.1 Excess reserves as a percentage of required reserves.
Figure 4.
Figure 4.

WAEMU: Financial Developments (2004–2013)

Citation: IMF Staff Country Reports 2014, 084; 10.5089/9781484341698.002.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.

27. The BCEAO has made substantial progress in improving its governance framework, but further strengthening of external audit is necessary. The last safeguards assessment was concluded in December 2013. The assessment found that the BCEAO continued to have a strong control environment and has, with the implementation of the 2010 Institutional Reform, enhanced its governance framework. Specifically, an audit committee was established to oversee the audit and financial reporting processes, transparency has increased with more timely publication of the audited financial statements, and the BCEAO is committed to IFRS implementation by end-2014. The assessment also identified some limitations in the external audit process and recommended that steps be taken to ensure its adequacy.

Authorities’ views

28. The authorities underscored the need to take a longer perspective on the assessment of the situation of certain banks and ongoing reforms. Recent efforts to strengthen the Banking Commission have been substantial, with a doubling of its supervisors last year. Banks have increased their capital in recent years, as the minimum capital was already raised a few years ago to CFAF 5 billion. The principle of raising it further to CFAF 10 billion has been agreed, and only the deadline needs to be determined now. The authorities also argued that banks facing problems were well known, circumscribed, and their issues being addressed. They were confident that their situation would improve substantially in 2014, and as a result observance of prudential norms would increase significantly. While admitting that concentration of lending was an important risk in the region, the authorities argued that lowering the concentration ratio would raise serious challenges, such as providing sufficient financing for key harvests in certain countries. They noted that important steps toward consolidated and cross-border supervision had been made in the past year, in particular with the Moroccan and Nigerian authorities, including regular information sharing and joint onsite inspections.

29. The authorities also stressed that many reforms were in the pipeline to address both financial development and stability issues. A deposit insurance scheme (pre-funded by banks’ contributions) and a payment guarantee scheme are expected to be launched in 2014. The deposit insurance scheme, once sufficiently funded, will likely contribute to faster bank resolution. Work is still ongoing on the financial stability fund, whose main goal would be to avoid possible debt payment incidents by sovereigns facing liquidity problems. A number of reforms will also contribute to financial development. Credit bureaus are expected to be operational in 2014 and will have a regional coverage. An agreement was found with banks on a list of free basic banking services. Work is ongoing on promoting and regulating Islamic finance, on a legal framework for leasing contracts, investment funds, and mortgage credits, and on better supervising the microfinance sector.

Regional Authorities’ Response to Staff Recommendations on Financial Sector Reforms

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Toward a More Dynamic and Resilient Economic Union

30. Numerous political, institutional, structural, and macroeconomic factors have prevented WAEMU countries from keeping pace with sub-Saharan Africa’s high-growth economies during the past two decades (Appendices I-II). Sociopolitical instability and security issues have been one of the main reasons behind this growth underperformance. Weak structural competitiveness, mainly resulting from challenging business and legal environments, infrastructure gaps, undeveloped financial sectors and weak institutional capacities, has been an important factor too. Finally, frequent asymmetric shocks and the limited availability and effectiveness of smoothing mechanisms have contributed to substantial economic volatility. Despite a common currency and, in principle, the free flow of goods and factors within the WAEMU, regional integration remains low. The recovery in Côte d’Ivoire starting in 2012 has boosted regional economic prospects. The key challenge facing the WAEMU will be to sustain this new-found momentum and translate it into sustained and inclusive growth.

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* Cabo Verde, Ethiopia, Ghana, Mozambique, Rwanda, Tanzania, and Uganda (Appendix II)Source: BCEAO, WAEMU Commission, IMF, African Department database. A network-based analysis is used to illustrate intraregional trade flows (Kireyev, 2014), that accounted for 12 percent of total trade in 2013.

Staff’s advice

31. Regional policies have an important role to play to sustain high growth and increase resilience in the medium term.

  • Accelerating regional integration. Deepening the single market could provide an additional impetus to growth. There are still important nontariff obstacles to the mobility of goods within the WAEMU, such as illicit road blocks and payments. Coordinated action is urgently needed to address these issues.

  • Improving structural competitiveness. There is substantial scope for coordinated action at the regional level, for instance in the area of transportation and energy infrastructure investment or to improve business and legal environments. A regional project on improving the business climate is a welcome development as it will help disseminate best regional practices and address issues requiring changes to regional policies. Accelerated implementation of the second phase of the Regional Economic Program (PER) is required on the infrastructure front.

  • Strengthening economic resilience. Further integration and more efficient stabilization mechanisms are needed to reduce the occurrence and impact of shocks, particularly asymmetric ones. Developing the financial system and improving access to it, and facilitating remittances flows, which are countercyclical and contribute significantly to external financing (Appendix VI), are priorities in this regard. More fiscal federalism could be considered in the medium term; for instance, staff estimates suggest that a system of temporary transfers, through a relatively small centralized fiscal risk-sharing mechanism, could provide significant income smoothing.

Authorities’ views

32. The authorities concurred with the need to pursue regional integration forcefully. They noted that full implementation of the PER is hampered by financing availability and they intended to step up their fund-raising efforts. They are also considering ways to channel remittances towards investment.

Staff Appraisal

33. Strong growth and low inflation are expected to continue in 2014, with moderate risks to the downside. Sustaining this performance over the medium term, however, will require ambitious growth-enhancing reforms, high quality public investment, and consolidation of the recent improvements in the regional political and security situation. In the short term, political stability could be tested with the upcoming elections in a number of member states, particularly in a context of high demand for better governance and higher living standards. Security issues in the Sahel constitute another short-term risk. Delays in implementing growth-enhancing reforms, at both the national and regional levels, are the principal medium-term risk.

34. Against these risks, the current macroeconomic policy mix looks appropriate and more stimulus is not required at this juncture. Monetary policy easing was justified in the past two years in light of favorable inflationary developments and prospects and uncertainty on the growth outlook. With growth now better entrenched, a worsening current account deficit and declining official reserves, a pause in the easing seems appropriate. As projections are for continued strong growth, countries are encouraged to seek opportunities to strengthen fiscal sustainability while maintaining public investment efforts and expanding social safety nets. Additional efforts to improve the quality of spending and revenue mobilization are required for this purpose.

35. Fiscal policy coordination needs to be improved. The ongoing review of the regional surveillance framework is welcome. Its ultimate goal should be to preserve fiscal and external sustainability. Convergence criteria should be reconsidered in light of this objective, which does not preclude leaving room for fiscal responses to shocks. Improving country ownership of the new rules will be critical for compliance. A highly participatory approach to the reform is therefore highly desirable.

36. Financial sector reforms go in the right direction but the pace of implementation needs to increase. Despite significant financial sector development in recent year years, financial depth, breadth and access remain low and hamper sustainable economic development and the effectiveness of macroeconomic policies. Reforms to develop the interbank and sovereign debt markets have incurred delays and should be completed as soon as possible. Banks’ compliance with key prudential ratios remains insufficient and urgently needs to improve. Recent efforts to strengthen staffing and training at the Banking Commission are welcome and need to continue. Stronger sanctions, and more broadly a strengthening of the role of the supervisor, should also be considered. As the welcome move to Basel II/III regulation is likely to take time, a tightening of certain prudential rules and fixing an early deadline for raising banks’ minimum capital requirement is recommended in the meantime. Ongoing reforms to improve the financial crisis prevention and resolution framework are welcome and will require adequate resources to be pursued in parallel.

37. Transparency, availability and quality of information need to improve. The BCEAO’s recent efforts to publish more information and analysis are welcome. Coordinated efforts involving national and regional authorities will be required to improve data quality, coverage, and timeliness.

38. Regional integration offers opportunities to increase resilience and growth, but recent developments in this area are a source of concern. More concerted efforts are required to develop regional infrastructure and improve the functioning of the common market. The enlargement of the customs union to ECOWAS, although potentially beneficial, has regrettably led to higher protection and raises risks for tax policy coordination and the integrity of the single market.

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

Table 1.

WAEMU: Selected Economic and Financial Indicators, 2010–2018

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

The estimates for 2013 refer to annual change at end-June, with the beginning-of-period referring to end-June 2012.

Fiscal data for 2014 reflect a strong increase in the fiscal deficit of Niger, following a new project in the hydrocarbon sector.

Excluding intraregional trade.

Data up to 2011 are corrected for intraregional trade discrepancies by BCEAO.

Gross official reserves divided by short-term domestic liabilities (IMF definition). The estimates for end-September 2013.

Table 2.

WAEMU: Selected National Accounts and Inflation Statistics, 2010–2018

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Sources: IMF, African Department database; and staff estimates.
Table 3.

WAEMU: Selected Fiscal Indicators, 2010–2018

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

2014 data for Niger reflect the impact of a new project in the hydrocarbon sector.

Excludes net lending.

Table 4.

WAEMU: Selected External Indicators, 2010–2018

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

Excludes intraregional trade.

Table 5.

WAEMU: Government Debt, 2010–2018

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Source: IMF, African Department database.