West African Economic and Monetary Union: Staff Report on Common Policies of Member Countries
Author: International Monetary Fund. African Dept.
Publication Date:
26 Apr 2017
eISBN:
9781475596120
Language:
English
Keywords:
ISCR; CR; WAEMU Commission; broad money; WAEMU convergence criterion; authority; interbank market; WAEMU deficit target; BCEAO policy rate; BCEAO refinancing; BCEAO governor; Government debt management; Fiscal consolidation; West Africa
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The WAEMU region has experienced strong growth over the last five years but vulnerabilities have increased. Public debt is on the rise and external buffers have shrunk. Good progress has been made in upgrading the financial sector regulatory framework but significant pockets of vulnerability remain. The outlook remains positive, provided macroeconomic stability and strong resolve to improve the business environment and promote private investment are maintained. Downside risks stem from a sharper slowdown of economic growth, tighter international financing conditions, delays in implementing fiscal consolidation, sluggish structural reforms as well as a sustained decline in cocoa prices. In addition, security threats remain significant.

Abstract

The WAEMU region has experienced strong growth over the last five years but vulnerabilities have increased. Public debt is on the rise and external buffers have shrunk. Good progress has been made in upgrading the financial sector regulatory framework but significant pockets of vulnerability remain. The outlook remains positive, provided macroeconomic stability and strong resolve to improve the business environment and promote private investment are maintained. Downside risks stem from a sharper slowdown of economic growth, tighter international financing conditions, delays in implementing fiscal consolidation, sluggish structural reforms as well as a sustained decline in cocoa prices. In addition, security threats remain significant.

Context: Robust Growth but Growing Vulnerabilities

1. The WAEMU region has experienced solid growth over the last five years but vulnerabilities have increased, and challenges remain significant. The region’s economy grew rapidly (on average 6.3 per annum), largely driven by high public investment. Inflation remained subdued, well below the 3 percent convergence criterion. However, public debt rose while external buffers shrank. Reserve coverage sharply declined in 2016, falling below 4 months of imports. While the macroeconomic environment has been stable for several years, slow progress in structural reforms and regional integration has held back private investment, keeping poverty and unemployment high. The business environment remains relatively unattractive, intra-regional trade is low and the region has been slow to diversify and integrate into global value chains.

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WAEMU: Real GDP Growth

(Percent)

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

2. Policies have been broadly in line with past Fund advice, although implementation in some areas has lagged. The BCEAO1 took measures to activate the interbank market and enhance monetary transmission mechanisms. In particular, the Central bank increased its lending facility rate from 3.5 to 4.5 percent spread, and announced that the recourse to its lending facility will be capped at twice banks’ capital starting June 2017. Important steps were also undertaken to promote financial stability. These reforms include the adoption of Basel II and III capital standards, and the introduction of consolidated supervision. Nonetheless, conditions in the banking sector remain challenging. Credit and concentration risks are important and the ratio of gross NPLs to total loans is still relatively high while the situation of several troubled banks remains unresolved. At the national level, there has been no progress on fiscal consolidation and little improvement of the business climate. Strengthening the capacity of the WAEMU Commission in helping countries improve revenue collection and public financial management is overdue.

Recent Economic Developments, Outlook and Risks

A. Recent Developments

3. Economic activity has remained strong but vulnerabilities have increased. On the positive side, economic growth was robust and inflation subdued. However, as GDP growth was driven by domestic demand and notably public investment, fiscal and current account deficits remain high, and public debt is on the rise.

  • Economic growth was robust in 2016. Real GDP growth is expected to have reached 6.2 percent in 2016 (Table 1), underpinned by robust and resilient domestic demand. Growth was particularly strong in Cote d’Ivoire and Senegal, the two largest economies of the Union. In contrast, growth was lower than expected in Benin, reflecting, at least partially, spillovers from the difficult macroeconomic situation in Nigeria.

  • Inflation has been low. Headline inflation remained subdued, at about 0.4 percent on average in 2016 due to continued solid agricultural production and low oil prices.

  • Fiscal consolidation was deferred again and deficits remained high. As in recent years, planned fiscal consolidation was deferred in 2016 and most countries further scaled up public investment. Preliminary data suggest an overall fiscal deficit of 4.5 percent of GDP in 2016, higher than initially planned (4 percent). Only in Burkina Faso, Niger, and Senegal fiscal deficits are below or at initial targets in 2016.

  • Monetary policy tightened. Credit to the public sector expanded much faster (43.8 percent) than credit to the private sector (9.7 percent). However, money growth remained moderate (10.2 percent), as net foreign assets declined. The BCEAO decided on December 6, 2016 to widen the spread between the minimum bid rate for the open market refinancing operations (its de facto policy rate) and the credit facility rate to 200 basis points. The minimum bid rate was kept unchanged at 2.5 percent but the lending facility rate was increased from 3.5 to 4.5 percent. The BCEAO also decided to limit access to refinancing by banks to a maximum amount of twice a bank’s capital.2 The increase in the lending rate has tightened monetary conditions and led to higher interbank activity. However, on March 1, 2017, the Monetary Policy Committee (MPC) decided to reduce the reserve requirement (RR) ratio to 3 percent of deposits (from 5 percent). The reduction in the RR ratio should provide additional liquidity and reduce the need for refinancing, but will weaken somewhat the benefit expected from the December 2016 decisions.

  • External buffers have shrunk significantly. The exchange rate appears broadly in line with fundamentals (Annex I). A deterioration in the current account deficit (by 0.3 percentage point in 2016) and a reduction in the financial account surplus (1 percentage point) contributed to lower regional reserves sharply by CFAF1000 billion (about $2 billion) to 3.7 months of imports in 2016 (from 4.5 months in 2015) or 54 percent of regional broad money, and 78 percent of short-term debt. Large fiscal deficits in 2016 were likely a key factor behind the current account deterioration. The factors contributing to the weaker financial account are not fully understood, at this stage, and warrant close monitoring.

  • Public debt is on the rise. High fiscal deficits have led to an increase in public debt from 43.9 percent in 2015 to 45.9 percent in 2016. Although staff analysis suggest that the level of debt is still sustainable (Annex II), the increasing reliance on non-concessional loans has heightened debt vulnerabilities.

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Real GDP growth in 2016

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

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Fiscal Deficits in 2016

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

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Normalized interbank market balance

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

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WAEMU Reserves

(bn Euro)

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

Source: BCEAO and staff calculations
uA01fig06

Reserves in months of imports

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

Table 1.

WAEMU: Selected Economic and Financial Indicators, 2012–21

article image
Sources: IMF, African Department database; World Economic Outlook; World Bank World Development Indicators; IMF staff estimates.

Year on year change, end December;

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).

Figure 1.
Figure 1.

WAEMU: Recent Economic Developments

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

Source: BCEAO and staff calculation.

B. Outlook and Risks

4. The outlook hinges on country-level fiscal consolidation. Under the baseline, growth is projected to stay above 6 percent over the medium term assuming accelerated reforms to improve the business environment and promote private investment, enhanced technical capacity, and better accountability and governance in member countries. Inflation would remain low on account of continued solid agricultural production. The overall fiscal deficit of the region would increase to 4.7 percent of GDP in 2017 before declining to 3 percent in 2019, in line with the WAEMU convergence criterion, if governments implement their fiscal consolidation plans.3 The current account deficit is expected to widen in 2017, reflecting continuous public investment efforts—related imports of intermediated goods and equipment—and less favorable terms of trade. Increasing FDI—especially for large investment projects in Niger, Burkina Faso, and Senegal—and other investment are expected to fully finance the current account deficit in 2017. Over the medium term, country goals for fiscal consolidation and assumed steps to improve external competitiveness are projected to gradually reduce the current account deficit to 5.3 percent of GDP by 2021. FDI with capital grants are expected to remain the main sources of its financing. Public debt would start declining from 2018 in relation to GDP, while international reserves are projected to increase to 4 months of next year’s imports by 2019 (up from 3.5 months’ cover at end-2017).

5. The reserve buffer would remain below optimal levels. The current and projected medium-term reserve cover is above the thresholds required by the zone’s monetary arrangement with France.4 However, reserve cover would remain below the optimal buffer against external shocks, estimated by staff as corresponding to a reserve cover of 5 to 12 months of imports—depending on the interest rate differential with the rest of the world (Dabla Norris et al., 2011).

Text Table 1.

WAEMU: Selected Macroeconomic Indicators; 2013–21

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

6. This outlook is subject to substantial downside risks that could—in particular, in the current context of a limited room for maneuver—reduce regional economic growth down to 1.5 percent over the medium term (RAM).

  • Recurrent delays in fiscal consolidation pose increasing risks to the outlook. The current baseline scenario contemplates a slight increase in deficits in 2017 (4.7 percent of GDP compared to 4.5 percent in 2016). This represents a clear deterioration with respect to expectations at the time of the 2016 Article IV, when the deficit was projected at 3.4 percent of GDP in 2017. Given upward revisions to the 2017 fiscal deficits, country plans for substantial fiscal consolidation in 2018 and beyond are appropriate to preserve debt sustainability and external stability. Planned fiscal consolidation has been repeatedly deferred in recent years, and there are risks of fiscal slippage in 2017 and beyond. Sustained departures from the planned fiscal paths would eventually put debt sustainability and the currency coverage at risk. Staff simulations suggest that if fiscal deficits remained at the levels observed in 2016 for another five years, the GIR coverage could fall to 2 months of imports by 2021. Given this analysis, it would be important to respond promptly to any emerging fiscal slippage with steps to reinforce budget management. This could also require parallel steps to tighten monetary policy and adjust the external/domestic financing mix.

  • Lack of progress in raising public investment efficiency and advancing private-sector friendly structural reforms could slow down the growth momentum. With many countries undertaking large infrastructure investments, a delay in PFM reforms and inefficient investment could worsen debt, fiscal and external sustainability, with negative implications for growth and poverty reduction. Over the medium term, growth cannot indefinitely continue to depend primarily on public investment. Without structural reforms to improve the business climate and access to finance—and, therefore, without a pick-up in private investment and improvement of competitiveness—the domestic and external stability of the region could significantly weaken.

  • The region is also not immune to rising uncertainty in the global economy. Retreat from cross-border integration, a significant slowdown in emerging market growth, and structurally weak global growth could reduce foreign aid, financing, remittances, and exports, and, thus, undermine the macro-financial stability of the WAEMU. While some upside risks could result from a further strengthening of the U.S. dollar (i.e., increase revenues of certain exports), a stronger US dollar would also increase the sovereign debt burden of countries with unhedged dollar exposures and the overall cost of imports. Tighter. financing conditions at the international level would also affect the availability and cost of external financing for the region. Staff simulations show that a slowdown in global growth (of 0.5 percent) coupled with a fall in commodity prices (20 percent), including cocoa, one of the region’s major exports, could reduce regional growth to under 2 percent by 2019, that is, 4 percentage points lower than the baseline projections.5

  • Security-related risks remain high in the region. Beyond the immediate human toll, security issues would put further pressure on national budgets, reduce external financing, and likely result in substantial delays in implementing major investment projects.

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External Sustainability in the Absence of Fiscal Consolidation: Impact on Official Reserves

(in months of imports)

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

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Real GDP: Outlook Risks

(Percent)

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

Source: IMF staff projections.

7. Authorities’ views: The authorities broadly agreed with staff views on the outlook and risks. They were particularly concerned by the drop in cocoa prices and potential fiscal slippages in 2017. They also pointed out that informal trade is an underestimated spillover channel of regional shocks and that the impact of a slowdown in Nigeria could have significant impact on some members (Benin, Togo). The authorities agreed that, should the above-mentioned downside risks materialize, further monetary policy and fiscal tightening, along with adjustment in the external/domestic financing mix, will be required to preserve external stability. There was agreement between staff and the authorities on the need to step up efforts to rebuild policy buffers and resilience in order to avoid the need for abrupt policy responses, should downside risks materialize.

Policy Discussions

Against the background of the sharp drop in reserves in 2016, sustaining the current growth momentum would require a stable macroeconomic environment anchored around prudent fiscal and monetary policies and accelerated structural reforms to promote financial stability and inclusion, improve the business environment, and boost competitiveness and diversification.

A. Macroeconomic Policies: Meeting Development Needs While Preserving Debt sustainability and External Stability

Risks to public debt sustainability and external stability have risen, calling for a well-articulated path toward a sustainable fiscal position, increased coordination and consistency between national fiscal policies and regional monetary policy, and improved debt management.

Background

8. Vulnerabilities have increased. Public debt is on the rise and regional reserves have dropped. The decline in reserves results from several factors. First and foremost, delays in fiscal consolidation in most member countries, the BCEAO’s accommodative refinancing policy, and weak mobilization of external financing. Fiscal deficits remained high in most member countries, and in the context of reduced external financing, the regional public debt market was the major source of financing in 2016. The increased reliance on domestic financing contributed to the deterioration of the external position due to the high import content of public capital expenditure. Second, commercial banks had more recourse to the BCEAO for their foreign exchange needs, owing to simplified and faster administrative procedures. Meanwhile, the overall repatriation rate of export receipts continued its increasing trend of recent years, suggesting that capital flight did not play a role in the decline in reserves.

Staff’s recommendations

9. International reserves should increase to provide higher buffers against shocks. Reserve cover would remain below optimal levels on existing policies. This warrants a reinforced effort to strengthen external competitiveness through structural reforms and/or further strengthen fiscal balances to build reserve cover towards at least 5 months of import cover.

10. Growth-friendly fiscal consolidation is needed to reduce public debt and lift pressure on monetary policy and reserves. The BCEAO and the WAEMU Commission should convey forcefully to member governments the need to stick to their planned current fiscal consolidation paths, which lead to an overall regional fiscal deficit of 3 percent of GDP in 2019, in line with the WAEMU convergence criteria. Fiscal plans for 2017 and 2018 need to be consistent with that target. Achieving this goal while filling the gap in infrastructure investments and creating more room for social protection will require steadfast implementation of reforms to enhance revenue mobilization, contain current expenditure, improve public financial management, increase public investment efficiency and strengthen debt management. Strengthened regional institutions are needed to help achieve these objectives and enforce fiscal targets. Focus should be on:

  • Expanding fiscal space: Progress has been made in recent years to improve revenue collection, but more remains to be done to meet the WAEMU convergence criterion of 20 percent of GDP by 2019. In particular, the WAEMU Commission could help (i) strengthening revenue administrations and ensuring taxpayer compliance; (ii) further broadening the tax base, including by attracting informal firms to the formal sector and accelerating property tax reforms; (iii) improving the exchange of information between tax and customs administrations and effectively implementing the common tariff; and (iv) reducing tax expenditure, and adopting and implementing regulations to limit base erosion and profit shifting by multinational corporations. Room exists to improve the composition and the quality of spending. Public wage bills should be kept below 35 percent of domestic revenue (WAEMU criterion) and subsidies and social assistance should be well-targeted to protect the most vulnerable. Several key WAEMU convergence criteria remain unobserved in the majority of member countries, and current projections suggest that breaches will persist in several countries over the medium term (Text Table 2). Technical assistance from the IMF and other development partners can help countries with the reform implementation.

  • Improving public investment. The WAEMU Commission and the BOAD should help countries build capacity and improve the overall planning, programming, budgeting, monitoring and evaluation of projects.

  • Promoting public-private partnerships (PPPs). The authorities should fully explore concessional financing options before considering non-concessional resources and private sector participation. In a context of limited resources, further development of alternative forms of financing, such as PPPs, is needed to support infrastructure investment. PPPs, if appropriately planned and managed, could help provide financing for much-needed infrastructure investment. However, PPPs carry some fiscal risks, particularly as regards pricing and contingent liabilities. It is crucial that country authorities put in place the appropriate legal and institutional frameworks as well as adequate accounting and reporting frameworks to promote efficiency and manage risks.

  • Enhancing debt management: The WAEMU Commission should continue to help countries improve debt management capacity. Coordination between countries, particularly with respect to the issuance of Eurobonds, may be needed to limit debt rollover risks. The WAMU Securities Agency (UMOA–Titres) could help ensure such coordination.

Text Table 2.

WAEMU: Number of Countries Violating Convergence Criteria, 2015–21

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

11. While fiscal policy should be the first line of defense, the BCEAO should stand ready to tighten monetary conditions if pressures on external reserves continue. Staff welcomed the December 2016 decision of the Monetary Policy Committee of the BCEAO to increase its credit facility rate and tighten access to the refinancing window (Box 1).6 These measures could support the reserve cover by increasing the cost of domestic resources and pushing governments to limit their fiscal deficits and recourse to financing in the regional market. Staff recommended keeping monetary policy on hold as the impact of recent measures feeds through the economy. However, should international reserves continue to decline, additional monetary policy measures would be necessary, for example by raising the BCEAO policy rate or further widen its interest rate spread.

WAEMU: Monetary Policy Framework

The BCEAO relies on:

  • Two types of open market operations: refinancing for seven days and twenty-eight days (respectively each week and each month to banks subject to the reserve requirement) allocated at variable rates; the minimum bid rate which the BCEAO considers as its policy rate (currently 2.5 percent). The intended allotment is normally calibrated based on the BCEAO’s forecast of the liquidity needs during the maturity of the operations.

  • Two types of standing lending facilities: refinancing 1 to 7 days or for 90 to 360 days against government securities and credit claims with maturities ranging from 5 to 20 years at the demand of the banks. The facilities are priced 200 basis points above the policy rate. Starting in June 2017, recourse to the lending facility will be capped at twice the counterparty’s capital.

Until December 2015, the BCEAO steered short-term rates close to its minimum bid rate. The calibration of the allotment, based on the outstanding refinancing and the expected change in autonomous factors, satisfied most demand for refinancing and the auction weighted average rate hovered at around five basis points above the minimum bid rate. As refinancing fully accommodated the demand from banks (including for excess reserves1) and provided a high certainty with regard to the roll-over of outstanding loans, it reduced the need for interbank transactions.

At End-December 2015, the BCEAO stopped accommodating the demand for excess reserves. Since end-2015, the BCEAO levelled off its refinancing to gradually reduce the allotment toward the liquidity need arising from autonomous factors and the reserves requirement, thereby discontinuing the accommodation of the demand for excess reserves.

At End-December 2016, the BCEAO increased the spread between the minimum bid rate at its open market refinancing operations and the lending facility from 100 to 200 basis points. Consequently, the refinancing weighted average rate has increased by more than 100 basis points. This result combined with the December 2015 decision are expected to boost the interbank market.

uA01fig07

Oversubscription at the BCEAO 7-day Refinancing Operations

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

Source: BCEAO.
uA01fig08

Weighted Average Rate of the 7-day Refinancing Operations

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

Source: BCEAO.
1 The demand for excess liquidity is due to market segmentation and incompressible reserves in addition of the autonomous factors.

12. The BCEAO should improve its monetary policy effectiveness. The banking system is segmented between a few large international banks, pan-African groups, and small local banks which undermines market development and monetary policy transmission. The large international banks hold most excess liquidity but do not use it to buy government securities and trade only within their groups. 7 As a result, the interbank market is shallow. The BCEAO is the leading source of refinancing. The increase in the BCEAO’s credit facility rate in December 2016 and the tighter access to its refinancing window has prompted a sharp increase in transactions on the interbank market. Reforms will require:

  • Energizing the interbank market. Efforts should be made to establish an interbank reference rate, and stimulate repurchase (repo) operations, including by better aligning the local legal framework for repo operations with international standards. The effective implementation of the new prudential framework (including capital requirements in accordance with Basel II/III) should help reduce counterparty credit risk and enhance confidence in the interbank market.

  • Further improving liquidity management: The BCEAO should calibrate its open market operations based on market liquidity needs arising from the autonomous factors and the reserve requirement (which level should be adjusted to provide enough buffer above the banks’ incompressible balance).

  • Developing healthy financial markets. The limit imposed on banks’ access to refinancing in December 2016 appears to have slowed transactions in the regional public debt market In that context, strong resolve is needed to make government paper more attractive for other institutional investors such as pension and insurance funds and for international investors. In particular, an active debt management allowing for the development of a risk-free yield curve would support both monetary policy transmission and the development of the capital market Other actions include (i) establishing individual ratings for all member countries; (ii) merging or linking the two existing clearing and depository systems (one for auction-based issues and another for syndication based-issues); (iii) allowing brokerage institutions (SGIs) to be full-fledged actors in the auction market;8 and (iv) harmonizing the tax treatment of government securities throughout the region and eliminating tax distortions discriminating against non-resident investors. Over time the BCEAO should move to a full interest rate corridor system, which will promote secondary market development and improve monetary transmission channels.

Authorities’ views

13. The WAEMU Commission and the BCEAO agreed that coordination and consistency between national fiscal policies and regional monetary policy is essential to contain vulnerabilities, and preserve macroeconomic stability and the growth momentum. They acknowledged, however, the important challenges involved in getting member countries to adhere to their fiscal consolidation plans. They believed that recent monetary policy decisions would encourage countries that have the capacity to rely more on external financing. Staff agreed, but underlined that while this could stem pressure on international reserves in the short run, in the medium term, fiscal deficits need to be reduced to preserve the external position. While agreeing to convey this message to member governments, the BCEAO underscored that the IMF should play an important role in improving consistency between national fiscal policies and regional monetary policy as, with Fund programs in most WAEMU countries, fiscal policy was largely determined by Fund-agreed targets. The authorities saw no need to tighten monetary policy further at the moment. Nevertheless, they were committed to take further monetary policy action should external reserves decline further. The BCEAO also indicated they would pursue their efforts to improve compliance with the regulations requiring 80 percent repatriation of export receipts.

14. The BCEAO broadly agreed with staff on the need for strengthening the effectiveness of monetary policy. They believed that recent monetary policy decisions to widen the interest rate corridor and limit access to refinancing would help improve liquidity management and boost the interbank market. The authorities pointed out that further progress on financial market deepening is a continued priority. The BCEAO would seek technical assistance from the Fund as needed.

B. Promoting Financial Stability and Inclusion

The recent improvements to the regulatory framework represent a commendable progress. Efforts are, however, needed to address the current pockets of vulnerability in the banking system by enforcing existing prudential regulations and adequately preparing for the effective implementation of the upgraded regulatory framework. Fostering financial inclusion and deepening will also be critical.

Background

15. A set of ambitious regulatory reforms was adopted by the regional Council of Ministers in June 2016. These new regulations included the adoption of Basel II and III capital standards, the introduction of consolidated supervision (including over WAEMU-based financial holding companies), and the tightening of the large exposure limit. The Basel II and III regulations introduced capital requirements for operational and market risks and increased the minimum requirements to 9 percent.9 The regulations also included capital buffers and surcharges (mainly a common equity capital conservation buffer of 2.5 percent). In addition, the single large exposure limit was reduced to 25% of banks’ Tier 1 capital.10 Transitional implementation arrangements were also introduced spanning from 2018 until 2022. In addition, the council of ministers adopted a decision giving the BCEAO and the Banking Commission the power to regulate and supervise financial holding companies on a consolidated basis.11 Other measures include (i) the adoption of a new banking chart of accounts; and (ii) the reorganization of the Banking Commission to integrate the monitoring of crisis resolution processes and supervision of large microfinance institutions and other specialized institutions such as mobile money firms.

16. The BCEAO has continued to enhance the supervision of Pan-African banks. In particular, it organized in 2016 supervisory colleges for the two WAEMU-based Pan-African banks, and the BCEAO participated in supervisory colleges organized by home supervisors of Moroccan, Nigerian and Central African banking groups having subsidiaries in the region.

17. Conditions in the banking sector remain challenging. The current rules—despite being less strict than the newly introduced ones—are not effectively enforced. Only 57 out of 102 banks comply with the minimum share capital of CFA 10 billion at end-June 2016.12 In addition, the current capital adequacy of the regional banking sector remains relatively weak at 9.6 percent in June 2016, which signals that banks would need significant reinforcement in their capital levels to meet the new stricter requirements that will be phased in starting January 2018. Four banks (mainly state-owned) are under temporary administration and 14 banks remain under closer supervisory scrutiny, accounting for around 16.1 percent of the banking sector assets at end-June 2016. Credit and concentration risks are important and the ratio of gross NPLs to total loans is still relatively high at 15.6 percent at end-September 2016. In addition, around 40 percent of banks are in violation of the relatively soft single large exposure limit at the same period.

uA01fig11

Compliance of banks with Key Prudential Limits

Citation: IMF Staff Country Reports 2017, 099; 10.5089/9781475596120.002.A001

18. Dealing with weak and problem banks is also hampered by the lack of an effective resolution regime and weak financial safety nets. Resolution of troubled banks is often delayed and challenged in part due to the shared powers with national authorities. A new deposit insurance fund (FGD) was established but major milestones remain to be completed before it becomes operational.13 Authorities hope that these actions would be completed in 2017. In addition, the Council of Ministers has approved in 2015 the establishment of a resolution framework and has mandated the BCEAO Governor to propose the practical modalities and functions of such a resolution regime. Authorities indicated that they are currently amending the Annex to the Convention establishing the Banking Commission to introduce, among others, resolution clauses that would include designating a regional resolution authority and establishing a resolution fund.

19. The strong link between banks and sovereigns remains a concern. About 27 percent of bank assets consist of government securities. As shown in Annex III, the demand for BCEAO refinancing can be at least partially explained by increased investment in sovereign securities.

20. Despite the progress made in recent years to improve financial inclusion and development, WAEMU countries still lag behind benchmark countries. Access to finance and utilization of financial services remain low especially for the most vulnerable parts of the population. The Council of Ministers approved in June 2016 a framework for a regional strategy promoting financial inclusion as well as an associated action plan and budget for this strategy. This five-year strategy aims at expanding access and use of financial services and products to 75 percent of the WAEMU adult population.

Staff’s recommendations

21. Enforcing existing prudential regulations, preparing for the effective implementation of the new regulations, and enhancing the financial safety nets should be a priority. In order to achieve these objectives, reforms should focus on:

  • Further strengthening bank supervision: this calls for (i) upgrading supervisory tools in order to implement risk-based supervision (assessing the risk profile of banking institutions, enhancing the bank rating system, conducting stress tests, automating reporting tools and procedures, etc.); (ii) strengthening AML/CFT supervision, including by implementing dissuasive sanctions for breach of compliance with preventive measures related to domestic politically-exposed persons; (iii) taking the needed preparatory steps to implement consolidated supervision of banking groups (including those structured under holding companies); (iv) implementing the new reporting framework and improving the Banking Commission information system; and (v) strengthening supervisory capacity and resources.

  • Ensuring that the new prudential framework is effectively enforced within the set timeframe: it is important to ensure that the banks take the measures and actions needed to cover their capital needs when the new prudential framework enters into force. Prompt action is also needed to finalize the draft instructions and circulars related to the new prudential framework, and authorities should continue their engagement with various stakeholders, including banks, to explain the main requirements of the new regulations and address any implementation issues.

  • Continuing efforts to strengthen cross-border supervision of banking groups: it is important in this respect to continue organizing supervisory colleges of large cross-border banking groups and reinforce cooperation agreements and joint supervisory activities with foreign supervisory authorities.

  • Making the Deposit Guarantee Fund (FGD) fully operational and establish an effective regional bank resolution framework: the authorities should ensure that the regional bank resolution framework that is currently being developed is in line with international standards and principles, particularly those issued by the Financial Stability Board. The annex to the Convention governing the Banking Commission should be amended without delay to incorporate provisions enabling the Commission to act as a resolution authority (as provided by the regional Council of Ministers in July 2015) with adequate resolution powers, and establishing a bank resolution fund.

  • Acting to further promote financial inclusion: the necessary steps should be taken to fully implement the regional action plan and strategy for financial inclusion adopted by the regional Council of Ministers in June 2016. This will require, inter alia, a reduction of the cost of financial services, strengthening of the legal framework and the business environment, and improved financial education and protection for financial consumers.

Authorities’ views

22. The authorities agreed with the thrust of staff views on financial stability and stressed that they will continue their reforms to upgrade financial sector regulation and supervision. They underscored that recent reforms, including the adoption of Basel II and III capital framework, will enhance the resilience of banks against potential shocks and vulnerabilities. The BCEAO also indicated that the introduction of credit bureaus and the plan to reduce large exposure limits will reduce credit and concentration risks. The BCEAO fully agreed that the resolution authority should be endowed with the necessary powers and independence.

C. Fostering Sustainable Growth

Promoting competitiveness and diversification would help contain vulnerabilities and sustain high growth.

23. Accelerating the pace of reforms and fostering regional integration are important to improve competitiveness and resilience of the region. Survey-based indicators indicate very limited progress in improving structural competitiveness compared to African and Asian peers. The region scores low in the business climate and global competitiveness indicators with significant obstacles persisting in, for instance, registering property, dealing with construction permits, getting credit and electricity, paying taxes, and the availability of infrastructure, technology, and specialized labor. Infrastructure gap remains important, and public investment efficiency is limited (IMF, 2015), resulting in high costs of communication, transport and electricity and a challenging business and investment climate. To increase competitiveness and improve resilience to the shocks—but also integrate into and move up the global value chains—the region will need to close rapidly structural reforms and investment gaps, and foster regional integration. Coordinate and decisive policy actions at both regional and national levels are essential to this end.

Authorities’ Views

24. The authorities agreed with the thrust of staff’s recommendations. They highlighted ongoing efforts to address infrastructure gaps, reduce the cost and alleviate the burden of doing business, promote financial inclusion and deepening, and strengthen human capital.

Other Issues

25. The latest safeguards assessment of the BCEAO, conducted in 2013, found a continuing strong control environment. All recommendations from the assessment have been implemented. These include strengthening the external audit arrangements by appointment of an international firm with ISA experience for the audits of FY 2015–17, reinforcing the capacity of the audit committee with external expertise to oversee the audit and financial reporting processes, and adoption of IFRS starting with the financial year 2015.

26. It is important to further strengthen the quality, timeliness, and public availability of economic statistics. Progress has been made in recent years, but there is still a need for better and more timely data, notably external sector statistics. Staff pointed to the need to develop a framework of macroeconomic, vulnerability and risk indicators to enhance the regular surveillance of economic developments in the Union. Staff encouraged the BCEAO to report timely official reserves for the monetary union to avoid delays in the forthcoming subscription by Senegal to the Special Data Dissemination Standards (SDDS).14

Staff Appraisal

27. Economic activity remains strong but vulnerabilities have increased. Real GDP growth exceeded 6 percent for the 5th year in a row, and inflation has remained subdued. However, fiscal consolidation was deferred again and deficits remain high, further pushing up public debt. The external position is broadly consistent with regional fundamentals and desirable policy settings. Reserve coverage declined sharply in 2016, reflecting larger than expected fiscal deficits, fueled by continued expansion in public infrastructure spending, and lower-than-expected external financing.

28. The outlook is positive but remains subject to significant downside risks. Growth is expected to remain around 6 percent. But risks to the outlook include global uncertainties, further slippages in fiscal consolidation plans, sluggish structural reforms, as well as a sustained decline in cocoa prices. Security-related risks remain high in the region. These risks could—in particular in the current context of a limited room for maneuver—dampen growth and require quick policy responses.

29. A well-articulated path toward a sustainable fiscal position and enhanced coordination and consistency between national fiscal policies and regional monetary policy are crucial to reduce vulnerabilities, maintain macroeconomic stability and sustain the growth momentum. The 2017 fiscal deficits are not compatible with medium-term external stability. Member countries need to stick to their current budget deficit reduction plans. The focus should be on reforms to enhance revenue mobilization and contain current expenditure to expand space for development needs. More attention will need to be paid to debt management and to the quality rather than the quantity of public investment. Further development of alternative forms of financing, such as PPPs, is also needed to support infrastructure investment. The BCEAO should stand ready to tighten monetary policy if pressures on external reserves continue.

30. The December 2016 decisions of the Monetary Policy Committee of the BCEAO to increase its credit facility rate and tighten access to the refinancing window are welcome. These measures are expected to affect primarily banks involved in government securities carry trade financed with BCEAO refinancing. They should increase the cost of government borrowing in the regional market and encourage banks to reconsider their risk policy and participate more in the interbank market. This would help reduce market segmentation, which has been a main cause of excess liquidity. However, while the March 1, 2017 decision to reduce the reserve requirement ratio should provide additional liquidity, it will weaken somewhat the benefit expected from the December 2016 decisions. Further progress to improve liquidity management, energize the interbank market, and deepen financial markets will help enhance monetary transmission mechanisms.

31. Financial stability and deepening should remain top priorities. Staff commended the authorities for the ambitious set of regulatory reforms adopted in June 2016, to modernize the financial sector. Key reforms included adopting Basel II and Basel III capital standards and introducing consolidated supervision of cross-border banks. The authorities should continue these efforts by enforcing existing prudential regulations, preparing implementation of upgraded prudential framework and consolidated supervision; making the financial safety net (FGD) operational and developing an effective regional bank resolution regime.

32. Efforts to enhance financial inclusion should be intensified. In particular, implementation of the regional action plan and strategy for financial inclusion needs to be accelerated. Reforms should focus on lowering the cost of financial services, strengthening the legal framework and judicial processes, enhancing the business environment, and boosting the development of mobile banking, while paying due consideration to financial stability and anti-money laundering issues.

33. Addressing structural constraints to promote private investment, competiveness and diversification will help secure sustainable and inclusive growth. Structural reforms should focus on improving the business environment, reducing barriers to regional trade, including cumbersome administrative procedures, and enhancing regional infrastructures.

34. The quality, coverage and timeliness of regional data need to improve. Staff encouraged the authorities to pursue efforts to enhance economic statistics, in particular, external sector statistics and financial soundness indicators.

35. The discussions with the WAEMU authorities will be on the 12-month cycle in accordance with Decision No. 13656-(06/1), as amended.

Table 2.

WAEMU: Selected National Accounts and Inflation Statistics, 2012–21

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

WAEMU: Selected Fiscal Indicators, 2012–21

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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 which is reflected in net lending (included in the government total expenditure in this table).

Excludes net lending.

Table 4.

WAEMU: Balance of Payment, 2011–21

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Source: IMF, African Department database

Excludes revaluation differences for 2015.

Table 5.

WAEMU: Government Debt, 2012–21

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Source: IMF, African Department database.