Statement by Mr. Sembene, Executive Director, and Mr. N’Sonde, Senior Advisor on West African Economic and Monetary Union March 26, 2018

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

1. Our WAEMU authorities are appreciative of the Fund’s constructive policy dialogue and the valuable technical cooperation that the Fund has maintained with the Union. The recent discussions held in Ouagadougou, Lomé, Abidjan, and Dakar were a welcome opportunity to benefit from staff’s perspectives on common policies of member countries.

2. The WAEMU authorities are of the view that sustaining the growth momentum and meeting their development objectives will require continuously supporting economic activity, strengthening social inclusion and increasing resilience to shocks, notably through carefully planned and sustainable public investment to overcome infrastructure bottlenecks, and efficient social protection schemes. In this connection, the insightful Selected Issues paper makes evidence of the need for the Union to invest in human and physical capital and promote trade, among others, with the view to accelerating growth and reducing poverty. At the same time, the authorities concur on the need for sustained implementation of a mix of macroeconomic policies aimed at rebuilding fiscal buffers and preserving external stability.

I. Recent Economic Developments and Outlook

3. The authorities broadly agree with the staff’s account of recent macroeconomic developments in WAEMU. The WAEMU continues to enjoy strong economic expansion relative to its peers. Preliminary estimates suggest that real GDP growth hovered around 6.5 percent in 2017 amid unfavorable terms of trade, security threats, and political turmoil in a number of countries. Increase in agricultural production, coupled with a rebalanced monetary policy stance, helped maintain the rate of inflation below 1 percent.

4. The aggregate fiscal position deteriorated slightly in 2017, largely on account of weaker-than-expected revenue performance and spending pressures emanating from aforementioned exogenous shocks and infrastructure development needs. While public debt has increased in nominal terms mostly due to large investments in infrastructure, it remained constant at 48 percent as a share of GDP given the strong growth performance and exchange rate developments. In addition, WAEMU countries continue to be assessed at either moderate or low risk of debt distress. Nevertheless, the WAEMU authorities continue to monitor closely fiscal and debt developments in member countries, stressing the importance of fiscal consolidation and coordination between regional and national policies.

5. In December 2016, the regional central bank (BCEAO) took steps to raise its policy rate and limit banks’ access to its credit facility to twice their regulatory capital level. These measures helped stimulate the interbank market, reduce banks’ demand for government securities and pressures on international reserves, and incentivize the financing of government deficits with external resources, thus paving the way for the recent issuance of Eurobonds by the two largest WAEMU sovereigns (Côte d’Ivoire and Senegal). Going forward, BCEAO continues to monitor closely liquidity pressures.

6. External account developments were adversely affected by the evolution of the terms of trade and imports related to members’ investment programs. At the same time, international reserves’ coverage at end-2017 increased moderately to 4.2 months from 4.0 months at end-2016. We also note staff assessment that the Union’s external position remains broadly in line with regional medium-term fundamentals

7. Going forward, the regional outlook is favorable. Medium-term growth is projected to remain above 6 percent with inflation maintained around 2 percent. Sound and timely policy implementation is expected to translate into gradual improvements in fiscal, debt, and external sector indicators, thereby contributing to strengthening further macroeconomic and external stability and safeguarding debt sustainability at the national and Union levels. s.

8. However, the staff report identifies a number of risks that must be closely monitored and promptly addressed should they materialize. These include spending pressures arising from social demands and security challenges; possible delays in revenue mobilization; delays in the implementation of structural reforms; and a deterioration in the external environment. They will build on their good track record of policy implementation, consistent with Fund advice and stand ready to take additional fiscal and monetary policy measures to preserve external stability if downside risks were to materialize.

9. The positive medium-term outlook described in the staff report is predicated on effective implementation by member countries of planned fiscal consolidation. In this regard, it is noteworthy that Fund-supported programs being implemented by all but one WAEMU member envisage to bring fiscal deficits in line with the regional convergence criterion of 3 percent of GDP by 2019. The authorities have also stated their commitment to make inroads in advancing their structural reform agenda which bodes well for their ability to reduce fiscal, debt and external vulnerabilities.

II. Policies and Reforms Looking Forward

Preserving Macroeconomic Stability and Debt Sustainability

10. The WAEMU authorities fully share staff’s view that growth-friendly fiscal consolidation is required to reduce public debt, alleviate pressures on monetary policy, and preserve external stability. Encouragingly, all but one of the eight WAEMU members are, at this juncture, on track to meet the regional convergence criterion of 3 percent of GDP by 2019. They agree with the recommendation that national authorities should steadfastly boost revenue and prioritize spending over the medium-term, with the view to safeguarding fiscal sustainability, while creating the needed fiscal space for priority infrastructure and social expenditures. It is their intention to continue raising awareness of national authorities on the need to pursue steadfast fiscal adjustment efforts and address fiscal risks arising from contingent liabilities in the public sector.

11. The central bank will maintain strict oversight of banks’ compliance with capital and liquidity requirements. In this regard, they have called upon banks facing liquidity shortages to increase their capital and liquidity buffers and reduce their portfolio exposure by mid-2018. The monetary authorities are committed to making the interbank money market more dynamic, building on current efforts to create a repo contract framework and the newly adopted Basel II/III prudential regime. This regime is expected to lead banks to improve balance sheets and their evaluation of credit risks. The BCEAO has expressed concerns about staff’s call for introducing differentiated discounts to governments securities pledged as collateral for central bank refinancing. In their view, this would not only undermine the central bank’s equal treatment principle when it comes to sovereign risk weights, but also exert undue direct influence on the credit risk taken by banks that acquire sovereign securities.

12. The BCEAO authorities continue to highly value staff advice towards deepening the interbank market and improving monetary policy transmission. To this vein, they look forward to continuing their close dialogue with staff, including on achieving an integrated bond market and broadening the investor base beyond the banking sector. Finally, BCEAO officials continue to stress the critical importance for national authorities and domestic stakeholders to comply with the regulations on repatriation of export proceeds, as this would greatly help consolidate external buffers.

Fostering financial stability and Inclusion

13. As previously reported, WAEMU countries have made encouraging progress on financial development and inclusion, notably through the promotion of mobile payments and the adoption in 2016 of the regional strategy for financial inclusion. Implementation of this strategy which is scheduled this year will benefit from donors’ financial and technical support. The authorities are also committed to keeping a close eye on the soundness of micro-finance institutions. The stability and profitability of the banking system is another source of optimism. The few undercapitalized banks in the Union have been asked by the regulatory authority to comply with their capital obligations by mid-2018, while the adequacy of their assets and resources is being closely monitored.

14. The regional banking supervisor, Banking Commission, has made considerable efforts to improve the effectiveness of its operations. While moving toward a more risk-based and consolidated approach to supervision, it has also begun consolidating supervision of cross-border financial groups. In addition, the resolution powers of the Banking Commission have been strengthened in late 2017, including through the commitment of all member countries to cooperate with it and respect its independent decision-making regarding resolution of banks.

15. The central bank is now endowed with a financial safety net to insure against systemic risks. This safety net includes a financial guarantee fund; a bank deposit guarantee scheme; and a bank resolution fund. The Committee for Financial Stability, comprising the central bank, the Banking Commission, and the financial market regulator (CREPMF), is tasked with assessing systemic risks and taking necessary measures to address them.

Sustaining Growth Over the Medium and Long-Term and Strengthening Regional Institutions

16. The WAEMU authorities acknowledge the need to tackle the impediments to growth by improving competitiveness, promoting economic diversification, and advancing regional integration. In this respect, strong reform efforts are being sustained by national authorities in the areas of business climate, governance, and infrastructure building and performance. To make further progress on these fronts, the authorities will build on ongoing efforts through a future community investment code and regional structural funds for infrastructure projects in the domains of energy, transport and agriculture.

17. BCEAO continues to maintain a solid internal control environment, as evidenced in the recent safeguards assessment. It has developed procedures in line with international practices as illustrated by the adoption of International Financial Reporting Standards (IFRS). It has also enhanced its selection criteria for external auditors while its audited financial statements are published on a timely basis.

18. The WAEMU Commission continues to work toward strengthening its capacities, including in the area of statistics. In this endeavor, they will welcome Fund technical assistance.

III. Conclusion

19. The authorities see no room for complacency especially in view of the challenges facing the region, including those related to oil price developments, security threats, and political economy factors. They will continue to carefully monitor developments at national and regional levels, standing ready to make the necessary policy adjustments to preserve macroeconomic and external stability.