West African Economic and Monetary Union: Selected Issues

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Trade and Revenue Implications of Ecowas Common External Tariffs on Waemu Member States1

This note quantifies the macroeconomic effects of a replacement of the WAEMU common external tariff (CET) with the ECOWAS CET in WAEMU member states. It presents stylized facts on the current tariff system and trade in the region, provides estimates on the trade and fiscal implications of the tariff changes for each WAEMU country, and quantifies the dynamic effects of the tariff change on trade and real GDP. The results suggest that the tariff change could increase WAEMU imports from other ECOWAS countries but decrease imports from the rest of the world. The government revenue effects vary widely, ranging from a loss in most countries by up to 2½ percent of current revenue to an increase in a few countries by up to 3 percent. The changes also have dynamic impacts on trade and GDP.

A. Introduction

1. The Common External Tariff (CET) for ECOWAS was adopted at a Heads of State Summit in October 2013 in Dakar became effective in January 2015. As a consequence of the CET, WAEMU countries, a subset of ECOWAS countries, are subject to a new tariff structure: Currently WAEMU countries (all members of the ECOWAS), impose tariffs within the range of 0 to 20 percent on goods from all non-WAEMU countries, including ECOWAS countries, with a simple average import tariff of about 12 percent. After adopting the CET, WAEMU countries will eliminate tariffs on goods from all ECOWAS countries, but tariffs on products from non ECOWAS-members will increase. The revenue implications of this policy change could be significant, as many WAEMU countries rely heavily on import duties (Figure 1, chart 3).

Figure 1.
Figure 1.

WAEMU: Stylized Facts: Trade within ECOWAS

Citation: IMF Staff Country Reports 2015, 101; 10.5089/9781475567595.002.A006

2. This note. While the literature on trade agreements in West Africa is vast, the revenue effects of the CET implementation have not been quantified. This note contributes to the existing research by estimating the revenue implications of the implementation of ECOWAS CET on WAEMU member states. First, the note provides a stock-taking of the current tariff structure in the WAEMU, current intra and extra-ECOWAS trade flows, and a description of the implied changes to the tariff structure with the ECOWAS CET. Second, it estimates the elasticity of import demand for individual members of the WAEMU. Finally, a partial equilibrium framework is used to assess the potential trade and revenue effects of the tariff change.

3. Caveats. Due to data limitations, this note focuses on aggregate effects under simplified assumptions on supply and consumption responses. It excludes effects from informal activity in the empirical analysis. Additional research, such as a simulations using product categories and accounting for the informal economy could give a more differentiated picture of the effects of the policy changes. The effects of ECOWAS countries moving closer to a single market which could benefit WAEMU countries are not quantified in this note.

B. Stylized Facts on Trade and Tariffs within WAEMU and ECOWAS

4. Trade between WAEMU countries and the rest of ECOWAS is rather low. The WAEMU’s intra-regional trade and trade with the rest of ECOWAS remain weak, with some variation across countries. Burkina Faso, Guinea-Bissau and Mali are the only WAEMU countries for which intra-WAEMU imports constitute more than one fifth of the total import value, and only Côte d’Ivoire, Niger and Senegal import close or more than 10 percent from non-WAEMU ECOWAS countries (Figure 1, chart 1). Trade balances between the WAEMU and the rest of ECOWAS thus remain low, with only Guinea-Bissau individually showing a trade surplus with the rest of ECOWAS of almost 7 percent of its GDP.

5. WAEMU countries in general rely heavily on import duties (Figure 1, chart 3). Import duties constitute a substantial source of revenue for WAEMU countries, with import duties representing at least 8 percent of total government revenue in any WAEMU country over the period 2000-2013. In 2013, import duties represented at least 13 percent of total government revenue in all WAEMU countries, with the highest share of 34 percent in Benin. With the exception of Côte d’Ivoire, more than half of imports to any WAEMU country face a tariff rate of 10 or 20 percent.

6. The introduction of the ECOWAS CET would eliminate tariffs on the WAEMU’s import from other ECOWAS countries but increase tariffs on imports from the rest of the world. The ECOWAS CET is organized in five bands. The first four bands are taken from the WAEMU CET (see Table 1). However, the ECOWAS CET includes a fifth tariff band of 35 percent for specific goods for economic development, which implies a customs tax increase for WAEMU countries and a reduction for non-WAEMU ECOWAS countries, such as Nigeria and Guinea.

Table 1.

WAEMU: Structure of ECOWAS and WAEMU CET2

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Source: Ofei and al. (2014) and WAEMU Commission.

C. Partial Equilibrium Effects of Changes in the Tariff Structure

Import Responsiveness to Price Changes in WAEMU

7. To quantify each WAEMU member country’s import responsiveness to price and tariff changes, the price elasticity of the volume of trade is estimated in a first step. To this end, an import function is postulated in which the quantity of imports depends on the price of imports, the price of other domestic consumable commodities, and domestic income. Controlling for further determinants of imports, the following relationship is estimated econometrically

In(Mt)=β0+β1InPtmCPIt+β2In (TAXMt)+εt,

in which in each year t, Mt is the import volume index, PtmCPIt is the ratio between the import price index and Consumer Price Index, TAXMt, is the level of import duties, and GDP is the real GDPt level (constant 2005 prices). β0, β1, β2, β3, and εt represent a constant, the price elasticity of import demand, the income elasticity of import demand, the elasticity of import to collected duties revenue, and the error term, respectively. The estimated import demand elasticities are presented in Tables 2 and 3.

Table 2.

WAEMU: Price Elasticities of Imports –Individual Countries

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***; **; * significant at 1, 5, and 10 percent level, respectively Heteroskedasticity corrected by White (1980) estimatorSerial Correlation corrected by Cochrane-Orcutt (1949) estimator
Table 3.

WAEMU: Price Elasticity of Imports

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***; **; * significant at 1, 5, and 10 percent level, respectively Panel corrected standard errors (control for heteroskedasticity/ cross sectional dependence)Serial correlation corrected by Prais Wintsen (1954) estimator with panel specific ar1 coefficient.

8. The price elasticity of import demand varies strongly across WAEMU countries. The results indicate that the percent decrease in import demand due to a one percent change in the import price varies from about 0.2 (in Côte d’Ivoire) to 2.4 (in Benin), with an average of about 0.4 for the WAEMU region as a whole. The high elasticity in Benin may be explained by the informal re-exports of Benin to Nigeria estimated to represent 50 percent of imports going through the Port of Cotonou (see Box 2).

9. The change in the tariff structure is expected to increase the WAEMU’s imports from other ECOWAS countries, but decrease its imports from the rest of the world. The trade effects are estimated using the methodology described in Box 1. With the exception of Togo, for which the share of non-ECOWAS imports in total imports is very high, trade creation is estimated to be larger than trade diversion in all WAEMU countries. In other WAEMU countries, the tariff change would imply an increase in imports from non-WAEMU ECOWAS countries by approximately 6 percent, with the highest increase of 52 percent in Benin (Figure 3, chart 1). The increase in the average tariff for non-ECOWAS countries is estimated to slightly reduce WAEMU countries’ imports from the rest of the world, with imports decreasing by less than 0.2 percent for most WAEMU countries, and the highest effect of a ¾ percent decrease expected in Benin (Figure 3, chart 3).

10. The estimated trade effects of tariff elimination should be considered as the upper bound of the potential effects. Similarly to the effects after the introduction of the WAEMU CET, trade creation may be lower because some non-tariff barriers may remain in place after the implementation of the ECOWAS CET. Trade diversion may also be lower because some WAEMU imports from non-ECOWAS countries have no substitute in other ECOWAS countries, so that the decrease in imports from non-ECOWAS countries could be lower than the effect estimated in this note.

WAEMU: Assumptions and Analytical Framework

Assumptions. The world is divided in three blocks which WAEMU countries import from: WAEMU countries, other ECOWAS countries which are not member of WAEMU (rest of ECOWAS) and the Rest of the World. The supply of products to the WAEMU has perfect supply elasticity (overall supply to WAEMU countries for products is infinite at a given price). In each WAEMU’s country, local consumers substitute imperfectly products from these regions, but all products from the three alternative sources are equally substitutable. The elimination of tariffs within ECOWAS is assumed to have negligible competition effects between intra-WAEMU exports to a given WAEMU country.

Trade creation refers to the substitution of domestic production by imports from the rest of ECOWAS resulting from tariff elimination. Trade creation between WAEMU country i and the rest of ECOWAS is

TCi,RECOWAS=Mi,RECOWASηim[τWAEMU1+τWAEMU],

in which Mi,RECOWAS is the value of imports from RECOWAS by country i, τWAEMU is the WAEMU’s CET average tariff and ηim is the import demand elasticity.

Trade diversion is the substitution of imports from the rest of the world by imports from rest of ECOWAS, resulting from the elimination of tariffs between WAEMU and RECOWAS countries. It is defined by:

TDi,RECOWAS=TCi,RECOWASGDPiMi,ROW.

Other trade effects. The ECOWAS CET against non-ECOWAS members is higher than those applied initially by the WAEMU CET to non-ECOWAS countries. The implementation of the ECOWAS CET by the WAEMU thus eliminates their tariff against other ECOWAS countries but increases their tariff against non-ECOWAS countries. It may thus lead to a trade loss within WAEMU countries and the rest of the world. This other trade effect (OTE) is the change in WAEMU country i’s demand for import from non-ECOWAS country j resulting from the increase in tariff associated with the adoption of ECOWAS CET. The OTE can be written as:

OTEi,ROW=Mi,ROWηim[τECOWASτWAEMU1+τWAEMU],

where Mi,ROW is the value of imports from the Rest of the world (ROW) by the country i, τECOWAS is the average tariff of ECOWAS’s CET, τWAEMU is WAEMU’s CET average tariff and ηim is the import demand elasticity of country i.

The overall net trade effect can then be computed as

NTEi=TCi,RECOWAS+TDi,RECOWAS+OTEi,ROW.

Revenue Implications of Tariff Changes

11. Based on the projected trade effects, the revenue implications are estimated. The change in revenues in the WAEMU would be the combined effect of changes in tariff income from imports from non-ECOWAS countries (higher tariff vs. lower import value) and tariff income from non-WAEMU ECOWAS countries (lower tariff vs. higher import value):

ΔRi=[Mi,ROWTDi][τECOWASτWAEMU][Mi,RECOWAS+TDi,RECOWAS]τWAEMU

In this equation, Mi,ROW and Mi,RECOWAS represent the value of imports from non-ECOWAS countries and non-WAEMU ECOWAS by country i, respectively. TDi,RECOWAS is the trade diversion from the non-ECOWAS countries to non-WAEMU ECOWAS countries. τECOWAS and τWAEMU are the average tariffs of the ECOWAS CET and the WAEMU’s CET, respectively.

Figure 2.
Figure 2.

WAEMU: Trade and Revenue Implications of the Tariff Change

Citation: IMF Staff Country Reports 2015, 101; 10.5089/9781475567595.002.A006

12. The changes in tariffs could have ambiguous effects on revenue across WAEMU countries. The elimination of tariffs on imports from other ECOWAS countries would decrease government revenue. However, the tariff increase for products from the non-ECOWAS countries could have a positive impact on revenues. Based on the assumptions in Box 1 and the preceding paragraph, revenues in Benin, Burkina Faso, Cote d’Ivoire, Niger, and Senegal could decrease by ½ to approximately 2½ percent from their 2013 level (Figure 3, chart 4). However, consistently with current trade profiles implying a low share of imports from non-WAEMU ECOWAS countries, revenues could increase by ½ to 3 percent in Guinea-Bissau, Mali, and Togo.

13. Data limitations prevent accounting for informal trade in the WAEMU. The decrease in government revenue may be higher in some countries if informal trade is taken into account. For instance, this may be the case in Benin where informal re-exports to Nigeria are estimated to contribute 2 percent of GDP to fiscal revenue (Box 2). The implementation of the ECOWAS CET is more likely to imply a stronger fall in imports for re-exports and hence the re-exports, implying a loss in import duty revenue as well as VAT revenue. Due to trade policy restrictions, Beninese importers can only reach the Nigerian market by declaring imported goods for domestic consumption, paying the VAT and re-exporting informally the goods to Nigeria.

WAEMU: Revenue Impact in Benin

The estimated revenue impact related to trade liberalization is much stronger in Benin than in other WAEMU countries due to Benin’s unique trade patterns dominated by informal trade with neighboring Nigeria. This Box provides more details on such trade and the potential revenue impact.

Benin’s trade with Nigeria mainly takes the form of informal re-exports to Nigeria due to trade restrictions on certain products. The proximity to Nigeria and a relatively porous border has made Benin the preferred platform for importing certain goods that Nigeria imposes outright bans or prohibitive tariffs. These products include frozen poultry, rice, used cars, and textiles. It is estimated that about 50 percent of imports going through the Port of Cotonou are destined for Nigeria. Overall, at least 20 percent of Benin’s GDP is generated through informal trade (World Bank, 2014).

These re-export activities are a significant source of tax revenue for Benin. The Beninese authorities reached an agreement with the Nigerian government to not re-export certain goods, so that the only way for Beninese importers to reach the Nigerian market is to first declare imported goods for domestic consumption, pay the VAT, and then re-export the goods informally to Nigeria. According to Geourjeon et al. (2008), the tax revenue gain stemming from this activity could be about 2 percent of GDP or 14 percent of total tax revenue. This highlights Benin’s fiscal dependence on informal re-export activities with Nigeria.

Trade liberalization in Nigeria would thus result in significant revenue losses in Benin. Based on customs data from 2009 to 2012, the impact of a full trade liberalization scenario in Nigeria is estimated to result in a revenue loss of at least 2 percent of GDP (Sola et al., 2013, FAD TA mission).

A06ufig02

Revenue Implications of a Full Liberalization of Nigeria’s Trade Regime1

(2011, In Percent of GDP)

Citation: IMF Staff Country Reports 2015, 101; 10.5089/9781475567595.002.A006

1 The tax revenue after liberalization is estimated based on the assumptions that potential losses due to full liberalization of Nigeria’s trade regime are distributed as 1/3 for customs revenue and 2/3 for goods and services tax revenueSources: IMF Staff estimates; and Beninese authorities.

References

  • World Bank (2014), “Benin Diagnostic Trade Integration Study (DTIS) Update: From rents to competitiveness’’.

  • Geourjon, A-M, Chambas, G and Laporte, B, 2008, “République du Bénin. Modernisation du système fiscal. Orientations et stratégie de réformes”, IMF, September.

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  • Sola, S., Parent, G., Russell, J., Ould Boilil, A and Barker, G., 2013, ”‘République du Bénin. Bilan des reformes et poursuite du renforcement de l’administration douanièreFAD, June.

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1

Prepared by William Gbohoui (University of Montreal), Karim Barhoumi, Larry Cui and Monique Newiak (all AFR).

2

Structure of the ECOWAS CET as in the version agreed upon by the region’s ministers in Praia in March 2013; details on the tariff bands applied to each tariff line are shown in WAEMU Regulation 23/2002/CM/UEMOA.

West African Economic and Monetary Union: Selected Issues
Author: International Monetary Fund. African Dept.