West African Economic and Monetary Union: Common Policies of Member Countries—Press Release; Staff Report; and Statement by the Executive Director for the West African Economic and Monetary Union
Author: International Monetary Fund. African Dept.
Publication Date:
01 Apr 2016
eISBN:
9781513535944
Language:
English
Keywords:
ISCR; CR; authority; outlook; terms of trade development; bank; growth prospect; refinancing; WAEMU growth; WAEMU directive; WAEMU securities market; WAEMU policymaker; pan-African bank; excl. intra-WAEMU imports
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Context. The region continues to experience strong growth in 2015, and the immediate outlook is positive. Inflation is projected to remain low, reflecting the exchange rate peg and positive terms of trade developments. However, risks are on the downside. In the short term, security risks remain high. In the medium term, weaker trading partner growth, tighter global financial conditions, sluggish structural reforms, and difficulties delivering on the planned fiscal consolidation could weaken growth prospects.

Abstract

Context. The region continues to experience strong growth in 2015, and the immediate outlook is positive. Inflation is projected to remain low, reflecting the exchange rate peg and positive terms of trade developments. However, risks are on the downside. In the short term, security risks remain high. In the medium term, weaker trading partner growth, tighter global financial conditions, sluggish structural reforms, and difficulties delivering on the planned fiscal consolidation could weaken growth prospects.

Context

1. Economic growth has been strong in recent years, but reforms to sustain momentum and make it more inclusive have been sluggish. The region’s recent period of high growth benefitted from a post-conflict catch-up effect in Cote d’Ivoire and from scaled-up infrastructure investment in the region. However, the business environment remains unattractive, competitiveness is weak, and structural transformation and economic diversification have been modest. Poverty, unemployment, and income and gender inequalities remain high (Figure 1).

Figure 1.
Figure 1.

WAEMU: Trends in Poverty and Inequality1

Citation: IMF Staff Country Reports 2016, 096; 10.5089/9781513535944.002.A001

1/ Prepared by Stefan Klos and Monique Newiak

2. The security situation remains fragile. As illustrated by the recent terrorist attacks in Burkina Faso and Mali, terrorist activities remain a major challenge in the region.

3. Implementation of the 2015 Article IV consultation recommendations by the regional authorities has been good but action at the national level sluggish. The BCEAO and the Banking Commission have made progress in modernizing the financial sector and strengthening the regulatory framework. Key reforms include raising the minimum share capital for credit institutions, accelerating the pace of the transposition of Basel II and III norms into the regulatory framework, promoting the establishment of credit bureaus, and putting in place a bank crisis resolution mechanism and a deposit guarantee fund. The BCEAO and the Banking Commission have also enhanced the supervision of cross-border banks, notably through the organization of supervisory colleges for the two WAEMU-based pan-African banks. Efforts have also been made to further develop financial markets to strengthen the transmission mechanism of monetary policy. The WAEMU Commission has continued to help countries transpose and implement the WAEMU directives. However, at the national level, while some efforts have been made to improve the business climate, there was no progress on fiscal consolidation. Budget deficits have increased from 3.4 percent of GDP in 2014 to 4.6 percent in 2015 with deficits falling in only two out of eight WAEMU member states.

Recent Economic Developments, Outlook and Risks

A. Recent Developments

4. Growth remains robust and inflation subdued. While average economic growth in Sub-Saharan Africa has been slower than expected, reflecting weak commodity prices and difficult financing conditions, economic activity in the WAEMU remained strong. Regional real GDP growth is estimated to have reached 6.4 percent in 2015, driven by ongoing infrastructure investments, solid private consumption, and favorable agricultural campaigns. Inflation remained subdued reflecting the exchange rate anchor and positive terms of trade developments.

5. The fiscal deficit widened further. The overall fiscal deficit has largely been driven by ongoing large public investment programs. It is estimated to have reached 4.6 percent of GDP in 2015 up from 3.4 percent in 2014. This deterioration brings the regional deficit more than 2 percentage points higher than the average of the last 10 years.

6. The current account deficit remains large in spite of lower energy prices. The drop in oil prices has lightened the energy bills for all WAEMU countries while cocoa and groundnut prices have remained buoyant, thereby improving the trade balance, notably of Cote d’Ivoire, the largest economy in the region. However, the surge of imports, associated with public investment and private consumption has partly offset the impact of lower energy bills. Thus, the region’s overall current account deficit has improved somewhat from 6.1 to 5.6 percent of regional GDP. Gross international reserves (GIR) have slightly increased, supported by a stricter implementation of the obligation to repatriate export receipts (Figure 2). The net foreign asset (NFA) position of commercial banks, however, has continued to deteriorate. This appears to reflect commercial bank sales of foreign currency to meet client needs, exceeding corresponding purchases from WAEMU central banks or from exporters.

Figure 2.
Figure 2.

WAEMU: Recent Economic Developments

Citation: IMF Staff Country Reports 2016, 096; 10.5089/9781513535944.002.A001

7. The external position is sustainable but vulnerabilities remain. Model-based assessments indicate that the current account and real effective exchange rate are broadly in line with fundamentals. Regional reserve coverage, even after assuming that BCEAO reserves would be used to replenish commercial banks’ NFA drawing, remains adequate—provided the current account deficit stabilizes over the medium term (Text Table 1)—according to traditional metrics and under the zone’s monetary arrangement with France.1

Text Table 1.

WAEMU: Selected Macroeconomic Indicators; 2014–20

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WAEMU: External Stability Assessment and Competitiveness

The WAEMU external position remains stable. The regional current account deficit is estimated to have improved moderately in 2015. Contingent on fiscal consolidation and rising exports, the current account balance is expected to stabilize at above 6 percent of GDP and be fully financed over the projection period. Reserves coverage remains broadly adequate according to traditional metrics. EBA-based analyses (“EBA-lite”) suggest that the real effective exchange rate (REER) remains broadly in line with fundamentals. Survey-based indicators of structural competitiveness show improvement, but indicate significant structural bottlenecks.

BOP developments. The regional current account deficit (including grants) has continued to decrease from 6.1 percent of GDP in 2014 to at 5.6 percent of GDP in 2015 reflecting more favorable terms of trade. Current and capital transfers have declined slighly by about about 0.2 percentage point to about 5.5 and 1.7 percent of GDP, respectively. The current account deficit is expected to increase to 6.4 percent of GDP in 2018, owing to important investment-related imports, and remain at this level over the medium term. FDI and capital transfers are expected to remain the main source of external financing.

Exchange rate assessment. The External Balance Assessment1 (EBA-lite)2/ provides a current account benchmark based on the WAEMU’s fundamentals relative to the rest of the world adjusted by a policy gap (the region’s policies relative to an optimal level and relative to the rest of the world). Results do not indicate significant misalignments of the real effective exchange rate for the region. The results suggest that the real effective exchange rate overvaluation ranges between 0.7 and 5.3 percent, which means that the real exchange rate can be considered as broadly in line with the region’s fundamentals given the margins of uncertainty of such estimations.

Summary: Real Effective Exchange Rate Assessment

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“ + ” overvaluated

short term incl. grant

External sustainability, the current account balance at end-projection

Reserve adequacy. Regional gross international reserves increased in CFAF terms from 7,033 billion (US$14.2 billion) at end 2014 to 7,487 billion (US$11.7 billion) at end 2015 covering 4.5 months of extra-regional imports, about 63 percent of the regional broad money, and 80 percent of short-term debt. Reserve coverage is projected to stabilize at around 5 months of extra-regional imports over the medium term. The level of reserve is broadly adequate according to traditional metrics.

Competitiveness. Despite progress, competitiveness remains weak and has deteriorated since 2004 (Figure 3.4, page [22]); the region continues to lag behind its African and Asian benchmark countries (such as Ghana, Rwanda, and Tanzania—Figures 3.1-3.3) in terms of structural competitiveness. To sustain growth, the region will need to integrate into and move up the global value chains. Necessary reforms include improving investment efficiency to ensure that infrastructures are productivity-enhancing and strengthening the business climate. In particular, difficulties in registering property, dealing with construction permits, getting credit and electricity, paying taxes, and protecting minority investors pose particular challenges to firms and result in higher relative prices of WAEMU products.

1/ Phillips S. et al., 2013. “The External Balance Assessment (EBA) Methodology.” IMF Working paper, 13/2722/ IMF, 2016. “Methodological Note on EBA-lite” (forthcoming)

B. Outlook and Risks

8. The outlook remains positive (Text Table 1). Over the projection period, growth should remain above 6 percent, owing to continued strong domestic demand and stronger agricultural production. Meanwhile, inflation is expected to remain subdued over the medium term. The overall fiscal deficit should gradually decrease while total public debt is projected to stabilize at moderate levels (about 40 percent of GDP). The current account deficit (including grants) would stabilize slightly above 6 percent of GDP over the medium term because of fiscal consolidation and rising exports. FDI and capital transfers are expected to remain the main source of external financing. Reserve coverage would remain stable.

9. The outlook is subject to significant downside risks.

  • The projected economic growth assumes the realization of reforms to spur private investment. In particular, growth in most WAEMU countries anticipates progress in the efficiency of infrastructure investment, reforms of the energy sector, a more inclusive financial sector, and improvements in the business climate. If structural reforms fail to materialize, growth prospects could falter.

  • Fiscal consolidation is required to maintain macroeconomic stability and thus the sustainability of the currency peg.

  • Security-related risks remain high in several countries. Islamist groups remain active in Mali and Niger with potential spillovers to neighboring countries. Beyond the immediate human toll, security issues would affect economic activity, strain budgets and undermine foreign investment to the region.

  • On the external side, a further slowdown in global growth, and/or tighter global financial conditions, could affect macro-fiscal stability, foreign direct investment, and other external flows (Box 2). Lower cocoa and groundnut prices would also adversely affect exports. Overall, external growth shocks could reduce WAEMU growth by up to 1.5 percentage point (see Table 9 WAEMU Risk Assessment Matrix).

WAEMU: Risks for the Regional Economic Outlook

We estimate the possible effects of identified domestic and external downside risks on the WAEMU outlook (See companion Selected Issues Paper). First, we simulate the impact of (i) country-specific delays in structural reforms and (ii) tighter or more volatile global conditions which would result in higher financing costs for governments and (iii) we model the impact of a growth slowdown in key advanced economies, China, and Nigeria. Results show that the materialization of these risks would reduce real aggregate WAEMU GDP growth by up to 1.5 percentage points through different channels.

  • Delays in structural reforms. For most WAEMU countries, growth projections under the baseline scenario assume the realization of growth-enhancing structural reforms including improvements in PFM, better incentives for private sector activity, higher investment efficiency etc. Country assessments of a delay in those reforms show substantially lower domestic investment growth coupled with less external financing, reflecting mainly a significant reduction in private and foreign investment due to a less favorable business climate. This scenario would result in a lower WAEMU economic growth by about 1–1.5 percentage points compared to the baseline scenario.

  • Tighter global and, therefore, regional financing conditions in 2016–17. While regional exposure to global financial markets remains limited, increased financing costs could affect the region through higher regional risks premia and availability of external and regional financing. Overall, WAEMU growth could be reduced by about 0.6 percentage points compared to the baseline scenario, owing to lower private investment.

  • Lower growth in key advanced economies. Result show that a 1-percentage point lower growth in key advanced economies would reduce WAEMU real GDP by about 0.8 percent after two years and about 1 percent at the peak after five years.

  • Lower growth in China. A slowdown in China would directly affect regional exports and investment flows. WAEMU countries could also be affected through cross-border spillovers from the Euro area and other emerging market partners. A 1-percentage point lower growth in China would lower WAEMU real GDP by about 0.5 percent in the short term. It is worth noting that the effects of a lower growth in China have increased over time, and also become more heterogeneous across all countries. Finally, lower growth, driven by a slowdown in the manufacturing sector has significant spillover effects suggesting a potential important role of China rebalancing process on the region.

  • Lower growth in Nigeria. Spillovers from Nigeria are the lowest: a 1-percentage point lower growth in Nigeria would reduce WAEMU real GDP by only 0.2 percent after 3-4 years.

A01ufig1

Impact of Shock Scenarios on WAEMU Growth

(percentage point deviation from the baseline)

Citation: IMF Staff Country Reports 2016, 096; 10.5089/9781513535944.002.A001

Aggregate numbers hide diverse situations across countries: the impact of shocks is larger in countries with higher trade openness (Benin, Senegal, and Burkina Faso) and benefitting from higher investment levels from China (Niger and Togo). Transit and informal trade are major spillover channels of regional shocks (Benin, Togo) while regional linkages increase through rapidly growing cross-border banks.

Table 1.

WAEMU: Selected Economic and Financial Indicators, 2012–20

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

Year on year change, end December; for 2014 year on year change, end November.

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).

Table 2.

WAEMU: Selected National Accounts and Inflation Statistics, 2010–20

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

WAEMU: Selected Fiscal Indicators, 2012–20

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Table 4.

WAEMU: Selected External Indicators, 2010–20

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Sources: IMF, African Department database; and staff estimates.
Table 5.

WAEMU: Government Debt, 2012–20

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Source: IMF, African Department database.
Table 6

WAEMU: Monetary Survey, Dec. 2011–Sept. 2015

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Source: IMF, International Financial Statistics.