West African Economic and Monetary Union: Common Policies for Member Countries—Press Release; Staff Report; and Statement by the Executive Director for the WAEMU

Common Policies for Member Countries - Press Release; Staff Report; and Statement by the Executive Director for the WAEMU


Common Policies for Member Countries - Press Release; Staff Report; and Statement by the Executive Director for the WAEMU

Context: Robust Growth but Increasing Vulnerabilities

1. The WAEMU has been one of the fastest growing regions in sub-Saharan Africa (SSA) in recent years. Despite lower terms of trade, social tensions, and security challenges within the region, the WAEMU’s real GDP growth rate is estimated to have exceeded 6 percent in 2017 with subdued inflation for the sixth consecutive year, compared to an average of 3.7 percent for SSA.


Real GDP Growth


Citation: IMF Staff Country Reports 2018, 106; 10.5089/9781484352809.002.A001

2. Internal and external imbalances widened despite monetary policy tightening. Sustained public spending, notably to address infrastructure gaps, has supported domestic demand but also contributed to fiscal and external current account deficits and rising public debt burdens. Tighter monetary policy by the BCEAO1 helped curb banks’ holdings of public securities, and the ensuing pressures on the regional debt market were eased by a shift towards external financing of fiscal deficits. Macroeconomic imbalances maintained pressures on international reserves, which nonetheless recovered part of their 2016 drop owing to sizable Eurobonds issues.


Fiscal and External Indicators

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 106; 10.5089/9781484352809.002.A001

3. Policies have been broadly in line with past Fund advice, although implementation in some areas has lagged (Annex I). The curbing by the BCEAO of its refinancing in 2017 boosted activity on the interbank market. Important steps were also undertaken to promote financial stability, including through the move to Basle II/III prudential standards, the introduction of a new banking chart of account and a new framework for the resolution of ailing banks, and the completion of stress tests. Nonetheless, conditions in the banking system remain somewhat challenging. Credit and concentration risks are important and the gross non-performing loan ratio remains high while some troubled banks remain unresolved. At the national level, there has been no progress on fiscal consolidation. In addition, limited improvements in the business climate continue to hamper the region’s competitiveness and private sector development.

Recent Economic Developments, Outlook and Risks

A. Recent Developments

4. Economic activity remained strong though vulnerabilities persist:

  • Strong economic growth continued in 2017. Despite unfavorable terms of trade, social tensions, and security challenges, WAEMU’s economic growth is estimated at 6.5 percent in 2017, driven mainly by domestic demand, including public investment. Growth was above the regional average in Côte d’Ivoire, the WAEMU’s largest economy, and the lowest in Togo partly due to the adverse impact of social tensions.

  • Inflation has remained subdued. The low inflation in 2017 of 0.8 percent benefitted from higher domestic agricultural production.

  • Fiscal deficits remained high. The aggregate fiscal deficit (on a commitment basis) is estimated at 4.7 percent of GDP in 2017, compared to 4.5 percent of GDP in 2016. The widening deficit reflected the fiscal accomodation by Côte d’Ivoire in response to terms-of-trade and social shocks, but also difficulties by WAEMU governments to raise revenue yields and contain public expenditure amidst large development needs.

  • The interest cost of public debt rose. The public debt burden at end-2017 is estimated to have remained at its end-2016 level of about 48 percent of GDP, as the contribution of the fiscal deficits was offset by the impact of strong nominal GDP growth and valuation effects due to the appreciation of the Euro (to which the CFAF is pegged) relative to the U.S. dollar. Interest payments as a share of revenue, however, rose to an estimated 8.6 percent in 2017 (from 8.1 percent in 2016). This said, the latest DSAs for WAEMU countries show that risks of debt distress have remained either low (Senegal) or moderate (all other WAEMU members) since the 2017 Article IV regional consultation.

  • Monetary policy was tightened. In December 2016, the BCEAO doubled the spread between its policy rate and the marginal credit facility rate (to 200 basis points) and limited banks’ access to its credit facility to twice their regulatory capital. However, in March 2017 the BCEAO lowered the bank required reserves ratio from 5 percent to 3 percent, which eased liquidity constraints somewhat. Overall, monetary policy was tightened by the BCEAO’s actions as indicated by the interbank market rate hike. These actions also stimulated the interbank market, reduced banks’ appetite for government debt, and contributed to the decisions by the two largest WAEMU sovereigns to tap the Eurobond markets for deficit financing. These Eurobond issues together with the one by the BOAD, contributed to a 10.3 percent growth in net foreign assets, while the growth of broad money (M2) slowed to 7.5 percent in 2017 (from 10.7 percent in 2016). Since September 2017, however, renewed liquidity pressures have pushed up the interbank market rate and maintained the average refinancing rate at the ceiling of the BCEAO’s policy corridor.

  • The external current account deficit widened in 2017. Reflecting deteriorated terms-of-trade and public saving-investment balances, the current account deficit (including grants) is estimated to have reached 6 percent of GDP in 2017. Nonetheless, the EBA-lite assessment shows that WAEMU’s real exchange rate is broadly in line with fundamentals despite the strengthening of the Euro (and thus the CFA franc) against the U.S. dollar and deteriorated terms-of-trade (Annex II).

  • External buffers have increased somewhat due to sizable Eurobond issues. External reserves increased by CFAF 655 billion (US$1.2 billion) to reach CFAF 7,184 billion (US$13.1 billion) at end-2017. This increase made up for about two thirds of the CFAF 993 billion loss incurred in 2016, as the bulk of net capital inflows in 2017, including US$3.1 billion in net proceeds from the Eurobonds issued by Côte d’Ivoire, Senegal and the BOAD helped to finance the wider external current account deficit. External reserves’ cover of prospective extra-regional imports of goods and services is estimated to have increased from 4.0 months at end 2016 to 4.2 months at end 2017.


Real GDP Growth in 2017


Citation: IMF Staff Country Reports 2018, 106; 10.5089/9781484352809.002.A001


Gross International Reserves (Billions of CFAF)

Citation: IMF Staff Country Reports 2018, 106; 10.5089/9781484352809.002.A001

Figure 1.
Figure 1.

WAEMU: Recent Economic Developments

Citation: IMF Staff Country Reports 2018, 106; 10.5089/9781484352809.002.A001

Sources: BCEAO; and IMF staff calculations.
Figure 2.
Figure 2.

WAEMU: Recent Financial Sector Developments

Citation: IMF Staff Country Reports 2018, 106; 10.5089/9781484352809.002.A001

Sources: WAEMU authorities; and Global Mobile Money Dataset.

B. Outlook and Risks

5. The medium-term outlook is positive, but hinges crucially on planned fiscal consolidation and decisive implementation of structural reforms by member countries. The region’s GDP growth is projected to stay above 6 percent with continued low inflation over the medium term. The baseline projections reflect the commitments by all WAEMU countries, except Niger, to lower their fiscal deficits to within the WAEMU’s convergence criterion of 3 percent of GDP by 2019 in the context of Fund supported programs.2 As a result, the aggregate fiscal deficit for the currency union would decline to 4 percent of GDP in 2018 and 2.9 percent in 2019, allowing public debt to decrease to 45.8 percent of GDP over the medium term. After rising in 2018 due to unfavorable terms-of-trade and public investment drives, the external current account deficit is projected to gradually decline over the medium term, reaching about 5 percent of GDP by 2022 (Figure 3).

Figure 3.
Figure 3.

WAEMU: Medium-Term Prospects

Citation: IMF Staff Country Reports 2018, 106; 10.5089/9781484352809.002.A001

Sources: BCEAO; World Economic Outlook; and IMF staff calculations.

6. External reserves would recover, but remain somewhat below optimal levels. Assuming that the current account deficit continues to be financed by FDI and other investments, international reserves are projected to gradually increase to 4.6 months of imports by 2022. Over the medium term, the ratio of external reserves to base money would remain well above the 20 percent threshold required by the monetary arrangement with France. Staff estimates suggest that WAEMU external reserves should ideally be within a range of 5 to 7 months of prospective extra-regional imports of goods and services (Annex III).

7. Risks to the outlook are mainly on the downside and their materialization could jeopardize the growth momentum and external viability (Annex IV):

  • Fiscal consolidation delays. Risks of fiscal slippages in several WAEMU countries reflect spending pressures from social demands and security concerns, as well as slower-than-projected pace of revenue mobilization. Further slippages in fiscal consolidation plans would raise public debt and servicing costs and widen the external current account deficit, potentially jeopardizing external stability. Staff simulations indicate that if national fiscal deficits remained at their 2017 levels, foreign reserves would fall to less than two months of imports by 2022, compared to the baseline projection of 4.6 months (text chart). It is therefore important to respond promptly to any emerging fiscal slippage with steps to reinforce budget management and accelerate revenue mobilization. Such slippages could also require steps to tighten monetary policy and adjust the external-domestic financing mix with a view to limiting the risks of tensions on the regional sovereign debt market.

  • Delays in the implementation of the structural reforms could hamper the private sector from playing a larger role as the engine of growth.

  • Persistent security problems in the region could weaken fiscal positions, reduce foreign direct investment and delay the implementation of major projects.

  • Higher international oil prices would adversely impact the external current account as the WAEMU is a net oil importer. The impact on inflation and budget deficits would depend on how much the oil price increase is passed through to domestic petroleum prices.

  • A tightening of financing conditions at the international level and a slowdown in world growth could also affect the economies of the region. The WAEMU’s exposure to global financial markets has increased due to Eurobond issuances by its two largest countries and the BOAD. Monetary policy normalizations in Europe and USA could translate into higher regional risk premia and reduced external financing. The latter could compound reserves pressures, as would lower-than-projected exports. In addition, a materialization of downside risks to the current global recovery could hamper growth in the WAEMU through the terms-of-trade, remittances, and FDI channels.


Gross International Reserves

(Months of Next Year’s Imports)

Citation: IMF Staff Country Reports 2018, 106; 10.5089/9781484352809.002.A001

8. Authorities’ views: The regional authorities broadly agreed with staff views on the outlook and risks. They were particularly concerned about potential fiscal slippages—owing to pressures from security spending and lackluster revenue mobilization—and their impact on reserves and public debt sustainability. The authorities noted the vulnerability of the WAEMU to adverse changes in climatic conditions, given the importance of the primary sector activities in member countries. They agreed that, should downside risks materialize, fiscal adjustment and further monetary policy tightening, along with adjustment in the external/domestic financing mix, will be required to preserve external viability. Staff and the regional authorities concurred on the need to step up efforts to rebuild policy buffers to avoid the need for abrupt policy responses, should downside risks materialize.

Policy Discussions

Sustaining the growth momentum and the currency peg will require continued macroeconomic stability, anchored on credible fiscal consolidation, appropriate monetary policy, and accelerated structural reforms to promote financial stability and competitiveness.

A. Macroeconomic Policies: Sustaining the Growth Momentum While Preserving Debt Sustainability and External Stability


9. The growth momentum of recent years has been accompanied by an erosion of policy buffers. Growth has been largely driven by domestic demand, particularly public investment. As a result, internal and external balances have been widening. Securities challenges within the region combined with wage demands have increased pressures on government spending, while the fiscal space has remained limited and public debt service has increased in several member countries. The persistence of large fiscal and external current account deficits has maintained pressure on foreign exchange reserves.

Staff’s Recommendations

10. International reserves should increase to provide higher buffers against shocks. The recovery in reserves in 2017 masks continued underlying pressures on reserves, which would have continued their slide that started in 2016 were it not for the extraordinary level of Eurobond issues in 2017. This warrants a reinforced effort to strengthen external competitiveness through structural reforms and reduce fiscal imbalances to build reserves towards at least 5 months of import cover.

11. Growth-friendly fiscal consolidation is needed to lower public debt and lift pressures on monetary policy and reserves. Effective fiscal consolidation is essential to preserving external viability over the medium term. It must also be supported by a more comprehensive accounting for risks to fiscal and debt sustainability, stronger regional surveillance efforts, and improved debt management. Staff urged the authorities to pursue the following policy priorities:

  • Building fiscal space: Governments should bolster revenues and prioritize spending to meet the WAEMU fiscal deficit criterion of 3 percent of GDP by 2019 and beyond while creating fiscal space for priority infrastructure and social spending. In the event of deviations from current program targets, additional fiscal measures would be needed. Tax policy measures could include hiking rates on excises, VAT on exempted products and real property tax, and reducing the scope for tax exemptions. Spending measures could include bringing wage bills within 35 percent of domestic revenue (WAEMU convergence criterion) and better targeting subsidies and social assistance to protect the most vulnerable. Several key WAEMU convergence criteria remain unobserved, and current projections suggest that breaches will persist for second-order criteria in most countries over the medium term. The mission encouraged the WAEMU Commission to increase dissemination of the Union countries’ convergence criteria efforts and bring its views of fiscal risks to the attention of the next meeting of the WAEMU Head of States.

  • Capturing fiscal risks: Governments should expand the fiscal account coverage and implement the WAEMU Directive on the transition to the GFSM 2001 fiscal reporting standards. There is also a need to better capture contingent liabilities arising from troubled public entities, including banks, and from increasing recourse to PPPs.3

  • Increasing the efficiency of public investment: WAEMU member governments should improve public investment management, focusing on priority areas identified by recent PIMA missions, such as the planning and selection of public-private partnerships, the preparation of multiyear budgeting, the effectiveness of project appraisal and selection, the monitoring of project during implementation, and the accounting of infrastructure assets.4

  • Strengthening debt coverage and management: With rising public debt in recent years, the authorities should closely monitor all public contracted and guaranteed debt, including by widening coverage to state-owned enterprises and refraining from pre-financing operations. WAEMU sovereigns should continue to seek the best possible terms on new borrowings, with a view to limiting debt service costs and FX risks. Issuing Eurobonds in euros (to which the CFA franc is pegged), including for liability management, would lower FX risks. While not a substitute for the criticality of lowering the fiscal deficits to improve the regional FX reserves, Eurobonds could contribute to the latter.

Text Table 1.

WAEMU: Number of Countries Violating Convergence Criteria 2015–22

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Sources: WAEMU; BCEAO; and IMF staff estimates and projections.

12. While national fiscal policies must deliver the necessary deficit reductions, monetary conditions should be tightened if external pressures persist:

  • The BCEAO should stand ready to further tighten monetary policy in case the pressures persisted on the money market and on foreign exchange reserves.

  • The BCEAO should steer liquidity based on autonomous factors5 while gradually reducing the banking system’s dependence on central bank refinancing. It must also monitor closely some banks that engaged in the sovereign debt carry trade and in need of significant deleveraging, while raising their capital and liquidity buffers. However, with an underdeveloped secondary debt market, those banks may find it difficult to reduce rapidly their sovereign exposures, which could effectively prevent a rapid retraction of central bank liquidity.

13. The BCEAO should further improve the functioning of the interbank money market. Transaction volumes on this market remain small even after having doubled in 2017. Some reforms underway such as the creation of a repo contract framework should help develop a more dynamic market on which liquidity would be actively transacted between banking groups. Importantly, the new Basel II/III prudential regime should improve balance sheets and the evaluation of counterparty credit risks, which would stimulate interbank transactions. In the future, the BCEAO should calibrate its liquidity injections depending on the interbank market situation and steer the average interbank rate into its monetary policy corridor.

14. To improve monetary policy transmission and support the development of the interbank market, the authorities should eliminate the current fragmentation of the debt securities market. Sovereign issues are currently supervised and deposited in two separate market clusters, depending on their issuance mode, i.e., auction or syndication (Annex V). Achieving an integrated bond market and the fungibility of securities for each issuer would help develop active secondary trading, which is essential in turn to get robust yield curves and to price sovereign risks. It would be vital also to broaden the investor base, notably to non-bank institutional investors who could contribute further depth and market liquidity. Staff suggested that the BCEAO consider applying different discounts to government securities pledged as collateral for central bank refinancing, based on an assessment of each sovereign’s credit risk. Such risk could be determined based on debt sustainability and WAEMU convergence criteria.

Authorities’ Views

15. The regional authorities concurred that widening macroeconomic imbalances have been fueled by high fiscal deficits. They therefore intend to keep alerting member governments of the need for an effective implementation of their fiscal adjustment plans in line with regional convergence criteria. The regional authorities however also pointed to the significant implementation risks of these plans, and underscored the important role of current IMF supported programs in helping reduce such risks. The authorities concurred on the need to better capture fiscal risks and noted with satisfaction the recovery of international reserves in 2017 while acknowledging that this was made possible by issuances of Eurobonds. The BCEAO agreed that external buffers need to be consolidated over the medium, and indicated that achieving this objective would depend on the effectiveness of its efforts to improve compliance with the regulations on repatriation of export receipts.

16. The BCEAO broadly agreed with staff on the need for monetary policy adjustment in case of renewed pressures on the money market or reserves. Notwithstanding the current low inflation environment, the BCEAO concurred with staff that renewed pressures on external reserves or sustained excess demand for refinancing would warrant monetary policy action. To help ease liquidity tensions in the money market, the BCEAO strongly called upon banks exhibiting liquidity shortages to increase their capital and liquidity buffers while appropriately deleveraging by mid-2018. The BCEAO had reservations about the suggested application of different discounts to government securities pledged as collateral for central bank refinancing for two main reasons. First, it considered that this would be inconsistent with the principle under current prudential regulations which treats equally member governments on sovereign risk weights. Second, it argued that the BCEAO would overstep its role by applying differentiated discounts to government securities pledged by banks for central bank refinancing, noting that each bank needed to undertake its own assessment of sovereign risk of member states, based on economic and financial information available before each government security issuance. The BCEAO thus considered that it should not directly influence the credit risk taken by banks when purchasing government securities.

B. Promoting Financial Stability and Inclusion


17. Progress has been made by WAEMU countries on financial development and inclusion, although they still lag their peers. Mobile payments have picked up in recent years and should help large segments of the population participate in the market economy. Monitoring committees were put in place at the national and regional levels in 2017 for implementation of the regional strategy for the promotion of financial inclusion approved in June 2016 by the WAEMU’s Council of Ministers. The implementation of this strategy is expected to benefit from financial support from bilateral and multilateral donors starting in 2018, as well as technical assistance from the World Bank.

18. The banking system is stable and profitable overall, though there are pockets of vulnerabilities.6 The overall capital adequacy ratio (CAR) for the sector under Basel I was 11.4 percent at mid-2017, indicating that large groups are stable and sound. However, some banks remain under-capitalized, while several smaller banks had not met the minimum social capital of FCFA 10 billion required at end-June 2017. The authorities have asked banks to comply with their capital obligations at end-June 2018, and are closely monitoring some of these banks, expected to rebalance their assets and resources by raising additional capital and/or deleveraging.

19. The quality and funding structure of assets exhibit weaknesses. Banks’ exposures to sovereign debts have been often funded on short-term central bank refinancing, exposing banks to the risk of tighter monetary conditions. Banks also exhibit a high risk concentration, with exposures to top 5 borrowers reaching 90 percent of equity at end-June 2017. At 15 percent of total loans at end-June 2017, gross NPLs remain elevated, although they are covered by provisions for two-thirds. Stress-tests run by the BCEAO have confirmed that equity would be adversely affected in the event of a strong shock on credit quality. In addition, a few non-profitable banks, mostly public institutions, report negative equity. Two state-owned banks in Togo and a private one in Guinea Bissau are of national systemic importance and should be resolved.

20. The regional supervisory authorities (Banking Commission) are implementing essential financial reforms.

  • Prudential regulation has moved to Basel II/III standards in January 2018, with changes phased in over a five-year period, which would bring a more risk-sensitive and better quality capital coverage. Banks should have capital in excess of 8.6 percent of risk-weighted assets at end-2018. Banks have been prepared by policymakers and supervisors to ensure compliance.

  • Bank supervision is shifting to a more risk-based and consolidated approach. The Banking Commission is adopting new criteria in line with Pillar 2 of Basel standards. It has launched the consolidated supervision of cross-border groups and has readied its tools to that end.

  • The Banking Commission has been endowed with new resolution powers in late 2017. The amendment to the Banking Commission’s Statutes ensures that all member countries are committed to cooperate with this institution, based on its independent resolution decision-making. That should permit actual progress on the resolution of banks with persisting negative equity.

21. The authorities are rolling out a financial safety net to protect against systemic risk. This safety net includes: (i) a financial guarantee fund to ensure settlement finality for the interbank payment clearing system; (ii) a bank deposit guarantee scheme funded by deposit institutions; and (iii) a bank resolution fund, which should be backed by a creditor bail-in mechanism. The assessment of systemic risks has started and a committee for financial stability includes the BCEAO, the Banking Commission and the financial market regulator (CREPMF7).

Staff’s Recommendations

22. Staff emphasized that policymakers should:

  • Bring vulnerable banks to deleverage and strengthen their capital and liquidity buffers. The refinancing of sovereign bonds has somewhat constrained monetary policy in 2017. Hence, the authorities should recreate room for monetary policy to backstop financial stability. To that end, they should use bank supervision and resolution tools to improve balance sheets and resolve fragile banks.

  • Bring banks to diversify their bond portfolios, to contain risk concentration. Risk diversification would reduce systemic risk, improve sovereign risk pricing and stimulate trading liquidity.

  • Ensure that microfinance institutions are closely supervised, and that prudential safeguards are established, notably to protect client funds that are entrusted with payment service providers. Given that the micro-finance sector consists of about 630 institutions, with deposits and loans equivalent to about 6.5 percent of banking sector aggregates, it is critical that risks be brought under effective supervision.

  • Promote financial inclusion including through lower financial service costs, and by promoting financial literacy and financial consumer credit protection. Closely supervise microfinance institutions and ensure that prudential safeguards are established, notably to protect client funds entrusted to mobile payment service providers.

  • Strengthen AML/CFT supervision to ensure compliance with preventive measures, in particular, those related to domestic politically-exposed persons, and implement dissuasive sanctions for breach of compliance.

Authorities’ Views

23. The authorities agreed with the staff that bank weaknesses should be addressed to ensure financial stability. They noted that the new prudential regulation and supervision regime should help strengthen the banking sector’s resilience, through improved asset quality and a stronger capital base. The authorities also underscored their current close monitoring of banks that should deleverage rapidly and strengthen their capital and liquidity buffers. They further considered that the Banking Commission’s new bank resolution powers will permit addressing effectively the situation of ailing banks. They reiterated their commitment to promote financial inclusion and closely monitor micro-finance institutions. The authorities also noted their commitment to continuing to make the 2015 AML/CFT law operational, as reflected in September 2017 instructions requiring banks to set up efficient information systems to ensure the traceability of financial operations and setting thresholds for the declaration of cash payments and transactions.

C. Fostering Sustainable Growth

24. Sustaining the growth momentum will require efforts to improve competitiveness and promote diversification. Medium-term growth will continue to be driven by domestic demand but with an increasing role of private investment as fiscal consolidation takes hold and the business climate improves with structural reforms.8

  • Background. Survey-based indicators show that regional structural competitiveness improved in 2017, but less than in other African and Asian benchmark countries with strong growth (Annex II). The WAEMU region scores low in 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. In addition, governance indicators remain weak while logistics performance needs improvements. Despite high public investment spending during the past decade, the infrastructure gap remains important compared to other regions, reflecting large initial gaps as well as low public investment efficiency.

  • Policies. Improving competitiveness and resilience to shocks and sustaining the recent growth performance in the WAEMU would require efforts to maintain macroeconomic stability, improve trade performance, promote efficient public and private investments, and lower costs of inputs such as transport and electricity. The national authorities should take steps to improve the efficiency of public investments as well as the investment climate by easing the above-noted impediments to doing business. At the regional level, the WAEMU Commission is taking steps to enhance the effectiveness of regional structural funds in cross-border infrastructure projects.

Authorities’ Views

25. The authorities broadly agreed with staff’s views. They highlighted ongoing efforts through regional structural funds for projects covering energy, transport, and agriculture, as well as the preparation of a community investment code to improve the business climate and competitiveness, and reduce the infrastructure gap.

Other Issues

26. A safeguards assessment of the BCEAO is substantially complete. The 2018 assessment, conducted on a four-year cycle for regional central banks, found that the BCEAO continues to maintain a strong internal control environment. Key recommendations from the last assessment in 2013 have been implemented. The bank adopted International Financial Reporting Standards (IFRS) in 2015 and the selection criteria for the external auditors has been strengthened. The audited financial statements in the period since the last assessment have had unmodified (clean) audit opinions and are published on a timely basis.

27. It is important to further strengthen the quality, timeliness, and dissemination of economic statistics. Progress was made in recent years as illustrated by the dissemination of WAEMU countries’ data on the Open Data Platform developed by the African Development Bank in collaboration with the Fund and Senegal’s adherence to the SDDS in late 2017. However much remains to be done, notably to improve consistency between national and regional data and address weaknesses of balance of payment data. Staff underscored the need to accelerate the transition of all WAEMU member-countries to the GFSM 2001 fiscal reporting, which would facilitate the compilation of consolidated public finance data, including the public sector’s borrowing requirement for the currency union.

Staff Appraisal

28. Economic activity remained strong in 2017 but vulnerabilities persist. Real GDP growth exceeded 6 percent for a sixth year in a row but continued to be driven mainly by public spending, notably to address infrastructure gaps, contributing to widening fiscal and external current deficits. The recovery in reserves in 2017 masks continued underlying pressures, and reserves would have sustained their slide that started in 2016 were it not for the extraordinary level of Eurobond issues in 2017.

29. The medium-term outlook remains positive but subject to significant downside risks. The current growth momentum could be sustained over the medium term but hinges crucially on planned fiscal consolidation and the decisive implementation of structural reforms. Further delays on these two fronts would jeopardize debt sustainability and external viability. Other downside risks to the outlook relate to terms of trade and weather shocks, a global growth slowdown, tighter international financing conditions and worsening of the security situation. Timely and well-coordinated national and regional policy responses are needed to build policy buffers to mitigate the impact of the materialization of these risks.

30. Fiscal consolidation is essential to lower public debt and lift pressures on monetary policy and reserves. Governments should bolster revenues and prioritize spending to meet the WAEMU fiscal deficit criterion of 3 percent of GDP by 2019 and beyond while creating fiscal space for priority infrastructure and social spending. Effective fiscal consolidation must also be supported by an assessment of risks to fiscal and debt sustainability related to below-the-line operations or contingent liabilities, more effective regional surveillance efforts, and improved debt management.

31. While national fiscal policies must deliver the necessary deficit reductions, monetary conditions should be tightened if the external position weakens. The BCEAO should stand ready to further tighten monetary policy if pressures persist on the money market and on foreign exchange reserves. Meanwhile, it should steer liquidity based on autonomous factors while gradually reducing the banking system’s dependence on central bank refinancing.

32. Developing the interbank and the debt securities markets is important to improve monetary policy transmission. The BCEAO could further promote the development of interbank transactions by continuing to gradually mop up liquidity and promote banks’ balance sheet repair. The interbank market would be stimulated by the availability of more information on counterparty risks and the development of repo transactions, based on public debt securities. Such transactions would in turn be facilitated by the development of secondary trading of debt securities, including by eliminating market segmentation between the auction and syndication modes of issuance.

33. Improving financial stability remains essential, including to create more room for monetary policy actions. The appropriate phasing and effective enforcement of the new prudential rules aligned with Basle II/III principles should help consolidated banks’ balance sheets and address vulnerabilities. The authorities should bring all undercapitalized banks to meet capital requirements by June 2018, and are encouraged to use their new bank resolution powers as needed after that deadline.

34. The promotion of financial inclusion remains a priority. Staff encourages the authorities to implement the regional strategy adopted to this end, while paying due consideration to financial stability and money-laundering and terrorism financing risks.

35. Sustaining the growth momentum will also require addressing structural impediments to private investment, competitiveness and diversification. Efforts will be needed to raise public investment efficiency and improve the business environment.

36. Efforts to improve the quality, coverage and timeliness of regional data should be sustained. Senegal’s adherence to the SDDS in late 2017 illustrates the progress recently achieved in this area. More needs to be done however, in particular regarding external sector and public finance statistics.

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

Table 1.

WAEMU: Selected Economic and Social Indicators, 2014–22

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

Year on year change, end December.

Excluding intraregional trade.

Gross official reserves divided by short-term domestic liabilities (IMF definition).

Table 2.

WAEMU: Selected National Accounts and Inflation Statistics, 2014–22

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

Sub-Saharan Africa: Cross-Group Comparison, 2014–22

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

Central African Economic and Monetary Community (CEMAC).

Including Nigeria and South Africa.

Table 4.

WAEMU: Selected Fiscal Indicators, 2014–22

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

Excludes net lending.

Table 5.

WAEMU: Balance of Payments, 2014–22

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Source: IMF, African Department database
Table 6.

WAEMU: Government Debt and Debt Service, 2014–22

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Source: IMF, African Department database.

Debt service payments for 2017 reflect debt relief on Guinea-Bissau’s arrears with Taiwan.