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

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


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

Background, Outlook and Risks

1. The WAEMU has remained on a strong growth trajectory. The region continued to exhibit one of the fastest growth rates in Africa in 2018—estimated above 6 percent for the 7th year in a row—fueled by buoyant domestic demand despite adverse terms-of-trade shocks and persistent security concerns in some member-countries (Table 1). Inflation stayed low reflecting the peg to the Euro, continued ample agricultural production and limited pass-through of higher world oil prices. Fiscal consolidation efforts are estimated to have reached ½ percentage point of GDP in 2018, with the fiscal deficit narrowing to 3.8 percent of GDP.

Table 1.

WAEMU: Selected Economic and Social Indicators, 2015–23

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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).

2. Meanwhile, external reserves increased, underpinned by Eurobond issuances. Despite the pull from a wider external current account deficit, reserves reached 4.3 months of imports of goods and services (or 32.2 percent of M2) at end-2018, up from 3.9 months of imports (or 29.4 percent of M2) at end-2017. Beyond better enforcement of export-receipt repatriation requirements, this improvement was largely due to sizeable Eurobond issues from Côte d’Ivoire and Senegal—equivalent to 1.1 months of imports in net terms,1 partly compensated by shortfalls in other sovereign external financing. The external reserve import cover of 4.3 months remains below the 5–8-month range estimated as adequate for the WAEMU (Annex 1).


Gross International Reservess (GIR) and Eurobond Issues

(Months of Imports)

Citation: IMF Staff Country Reports 2019, 090; 10.5089/9781498305907.002.A001

Sources: BCEAO, and Fund Staff estimates.

3. Notwithstanding a firmer monetary policy since early 2017, liquidity pressures in the regional financial system were temporarily eased by Eurobond issues. Between early 2017 and end-2018, the BCEAO reduced its refinancing volume to banks by about 24 percent. Regional liquidity nonetheless gradually improved in the wake of Eurobonds issued by Côte d’Ivoire and Senegal—equivalent to 87 percent of the WAEMU’s aggregate fiscal deficit in 2018—which led to a substantial reduction in sovereign bonds issuance on the regional market. As a result, the average rate at the BCEAO weekly refinancing auction, which had remained at its 4.5 percent ceiling from November 2017 to June 2018, declined to below 3 percent. It crawled back up to its 4.5 percent ceiling in late 2018, though, on the back of seasonal liquidity needs.

4. This positive dynamic has nonetheless come with persistent vulnerabilities.

  • The public debt burden has steadily risen in recent years. It rose by 17½ percentage points of GDP over the last 5 years to reach 52½ percent at end-2018. Below-the-line budget operations (i.e. quasi-fiscal operations of state-owned enterprises, operations from extrabudgetary funds and the realization of contingent liabilities), estimated to have averaged 1.2 percentage points of GDP annually, have also weighed on debt accumulation.2 In parallel, debt servicing costs rose substantially, from 20¾ percent of revenue in 2015 to 33 percent in 2018, and interest payments from 6.7 percent to 9.1 percent of revenue. While the latest sustainability analyses (DSAs) for WAEMU countries show that risks of debt distress have remained unchanged since the 2018 regional consultation, the room for maneuver within applicable thresholds has shrunk.

  • The external current account deficit slightly deteriorated in 2018. It is estimated to have widened from 6.6 percent of GDP in 2017 to 6.8 percent in 2018. Its high level is underpinned by strong capital spending and unfavorable terms-of-trade, including higher global oil prices in 2018, the impact of which is estimated at 0.6 percentage points of GDP in 2018.


Fiscal and Debt Indicators, 2012–2018

(In Percent of GDP)

Citation: IMF Staff Country Reports 2019, 090; 10.5089/9781498305907.002.A001


Contributions to increase in public debt, 2013–2018

(Annual averages, in percent of GDP)

Citation: IMF Staff Country Reports 2019, 090; 10.5089/9781498305907.002.A001


Drivers of the Current Account Deficit, 2012–2018

(In Percent of GDP)

Citation: IMF Staff Country Reports 2019, 090; 10.5089/9781498305907.002.A001


Net Oil Imports in Percent of GDP and Terms-of-Trade Index, 2012–2018

Citation: IMF Staff Country Reports 2019, 090; 10.5089/9781498305907.002.A001

5. WAEMU member countries consolidated their fiscal position in 2018. The aggregate fiscal deficit declined by ½ percentage point of GDP to an estimated 3.8 percent of GDP in 2018, mainly on account of lower public capital spending. This effort was a positive step towards reaching the regional fiscal deficit convergence criterion of 3 percent of GDP by 2019.

6. Significant efforts were made to meet new banking solvency requirements but pockets of weaknesses remain in the sector.

  • Important reforms were implemented in 2018 in the banking sector, most notably the move to Basel II/III prudential standards (with a 5 year-phasing period), new bank accounting rules, banking supervision based on a risk-sensitive consolidated approach to groups, and steps to operationalize the new resolution framework for the Banking Commission. The BCEAO has run more demanding stress-tests exercises to assess the resilience of the sector in the last two years.

  • In terms of performance, banks were able to sustain strong credit growth in 2018, estimated at 8 percent, though at a slightly less strong pace than in 2017, possibly reflecting adjustments to new prudential rules. The sector’s capital base was increased significantly (by 360 billion FCFA over the first 9 months of 2018), with the ratio of capital to risk-weighted assets (CAR) at 10.0 percent under Basel II/III at end-June 2018, above the 8.625 percent required for end-2018. Nonetheless, a fifth of the banks, accounting for 16 percent of total assets were below that minimum at end-June 2018, while five of them still failed to meet the CFAF10 billion minimum capital requirement set in 2017—three of which are large in their country.

  • The banking sector remains subject to concentration, credit and liquidity risks. A quarter of the banks do not meet the new and tighter applicable norm for division of risks. Non-performing loans (NPLs) remained high, at 12.9 percent of total loans at end-June 2018, although they have been declining and provisioning covers 2/3 of them. Despite gradual deleveraging, banks’ reliance on BCEAO refinancing was still equivalent to about 40 percent of their sovereign bonds exposure at end-2018 (down from a peak of 54 percent in 2016), reflecting the banking system’s structural liquidity deficit.

7. Policy implementation has been broadly in line with past Fund advice (Annex II). Important steps were taken to backstop financial stability. While these changes have started to influence bank strategies and financial positions, some challenges remain. At the national level, fiscal consolidation occurred in 2018, but it needs to be accelerated in 2019 to bring the aggregate fiscal deficit to the 3 percent of GDP regional norm. Banks’ reliance on BCEAO refinancing has declined but remains elevated, still constraining somewhat monetary policy.

8. The medium-term outlook remains positive but critically hinges on reform implementation. Medium-term regional growth is projected to stay above 6 percent, as national fiscal consolidation plans (including elimination of below-the-line operations) are expected to gradually restore external buffers while structural reforms to improve competitiveness would unlock private investment and private sector-led growth. The external current account deficit is projected to converge back to 5 percent of GDP over the medium term—including as new oil and gas production comes on stream in Senegal—and international reserves would reach 4.8 months of imports by 2023. An EBA-based assessment suggests that the WAEMU’s external position is moderately weaker than implied by current fundamentals and desirable policies, which would be addressed as fiscal consolidation and structural reforms materialize (Annex I).

9. Risks are tilted to the downside (RAM, Annex III). Slippages in fiscal consolidation and significant extra-budgetary spending could further increase public debt and servicing costs, crowd-out credit to the private sector, and put renewed pressures on external reserves. Slower-than-expected structural reforms, larger imports or lower capital inflows could also undermine the projected external buffer consolidation. A persistent aggravation of insecurity would strain governments’ budgets, undermine investment, and hamper growth. As the growth dividends have been slow to trickle down to the population, insufficient progress in improving inclusiveness could undermine social stability and support for reforms that are essential to sustain the growth momentum. On the external side, a weaker-than-expected global recovery could also hamper WAEMU’s growth through terms-of-trade, remittances, and FDI channels. Exposure to global financial markets has risen due to Eurobond issuances, and monetary policy normalizations in Europe and USA could lead to higher risk premia and lower external financing for WAEMU sovereigns, which would also weigh on the external reserve position. The prevalence of these risks further justifies the need for effective policy implementation, as a way to build policy buffers in case of materialization of these risks.

Authorities’ Views

10. The regional authorities broadly agreed with staff views on the outlook and risks but considered the real effective exchange rate to be close to equilibrium. Their growth projections for 2019 and the medium-term were somewhat more optimistic than those of staff. The authorities concurred that policy implementation was paramount to sustain the favorable outlook and that risks were tilted to the downside but considered these risks to be mainly exogenous rather than related to national or regional policies. The authorities noted the WAEMU’s vulnerability to adverse changes in weather conditions, given the importance of the primary sector in member-countries, and were particularly concerned with security-related shocks, terms-of-trade volatility, tighter foreign financing conditions and lower global growth. Based on their own tools, derived from the macroeconomic balance and external sustainability approaches, they estimated the real effective exchange rate to be close to equilibrium.

Policy Discussions

The discussions centered on key policies needed to maintain the region’s strong growth momentum in a sustainable way, which requires a shift toward more private sector-led growth. Credible fiscal consolidation will be critical to preserve external stability; reforms to deepen financial markets, proactive banking supervision, and a more effective monetary policy transmission are needed to support the private sector-led growth. Regional initiatives can contribute to the promotion of competitiveness and inclusiveness.

A. Ensuring Durable Fiscal Consolidation to Support External Stability

11. Adherence to the regional convergence criterion of 3 percent of GDP for the budget deficit in 2019 and beyond is paramount. All WAEMU member-countries have committed to this target in their Fund-supported programs (with Niger for 2020). Under the baseline scenario, which also assumes the elimination of below-the-line operations, these fiscal policies are consistent with macroeconomic stability. Based on recent trends in broad money growth as well as central governments’ borrowing needs and external financing plans, there would still be room for bank credit to the private sector to grow by 8.3 percent in 2019 (broadly in line with nominal GDP growth), while the import cover of external reserves would inch up. By contrast, deviations from the baseline, whether due to shortfalls in external financing, fiscal slippages and/or significant below-the-line operations, could undermine private sector credit growth or external buffers. As an illustration, if banks had to satisfy an additional 1 percent of GDP of public borrowing needs in 2019, projected growth of bank credit to the private sector would be reduced to 4.7 percent, suggesting some crowding-out. Alternately, if additional public borrowing requirements of a similar magnitude were to persist over the medium term without squeezing private sector credit growth, they could lower projected external reserves’ import cover to about 2 months and increase public debt to 57.5 percent of GDP by 2023.

12. In that context, fiscal assessments need to better integrate below-the-line operations. The WAEMU Commission, along with national governments, should improve the analysis, management, and disclosure of fiscal risks, including by better measuring below-the-line operations (in particular, stemming from quasi-fiscal activities of some public entities, losses by state-owned enterprises, or increasing recourse to PPPs), expanding the coverage of fiscal accounts and implementing the regional directive on the transition to GFSM 2001 reporting standards. Furthermore, it should complement its annual assessment of member-countries’ five-year convergence plans by testing the realism of their underlying assumptions and macroeconomic consistency via quantitative sensitivity analysis. More systematic information should entice national authorities to curb those operations and address them through provisions in the budget.

13. The surveillance framework could be upgraded to better contain risks to debt sustainability. The current public debt ceiling of 70 percent of GDP in the regional surveillance framework was set when most WAEMU countries primarily relied on concessional financing. However, with the growing recourse to non-concessional borrowing, this threshold now appears to exceed for several countries the level that would preserve the current risk of debt distress as set under the IMF/World Bank’s Debt Sustainability Framework.3 Therefore, to preserve its early warning role, there would be merit in lowering the debt convergence criterion to around 60 percent of GDP. To better account for the degree of debt concessionally, as well as foreign exchange and liquidity risks, the WAEMU Commission could usefully complement its assessment of the debt convergence criteria with full-fledged DSA.

14. Greater progress on domestic revenue mobilization is needed to generate space for development spending even in a context of fiscal consolidation. The average tax revenue to GDP ratio in the WAEMU is estimated at 15.9 percent in 2018, only 1 percentage point higher than a decade earlier, when analysis for the Sub-Saharan African region suggests a potential for an additional 3½-5 percent of GDP of tax revenues. To this end, revisions of regional tax directives should give priority to curbing countries’ tax exemptions, in particular through incentives in investment and sectoral codes. Better implementation by national authorities of regional directives on tax policy is critical, as is harmonization of national tax data to improve the effectiveness of the WAEMU Commission’s surveillance functions (Annex IV). Consideration could also be given to upgrading the status of the tax revenue to GDP ratio under the regional surveillance framework, from a second-order to a first-order convergence criterion.

Authorities’ Views

15. The authorities concurred that national governments must decisively implement their plans to bring deficits down to at most 3 percent of GDP from 2019 onwards. The WAEMU Commission pointed to sizeable implementation risks, underscoring the mitigating role of IMF supported programs. The BCEAO was more concerned about risks to the composition of fiscal consolidation, which could be over-focused on capital spending cuts. They also stressed that some member countries faced idiosyncratic shocks—including related to security—that needed to be addressed without jeopardizing the common fiscal consolidation effort. Finally, the regional authorities were cognizant that more efforts were needed to improve domestic revenue mobilization, pointing in particular to widening the tax base and limiting exemptions.

16. The authorities acknowledged the need to curtail below-the-line operations, although they were surprised by their extent in the recent past. They viewed extending the budget coverage to the general government by implementing the WAEMU directives on public finance management as a way to address this matter, while an improved communication strategy could also be leveraged. Below-the-line operations were recognized as a concern, though the authorities’ perception was that their size was not as significant as in staff estimates; they stressed the need to better link the aggregate number to specific operations to curb the practice. There was mixed appetite to lower the debt ceiling criteria, but the WAEMU Commission signaled that the issue could be discussed during the upcoming review of the regional surveillance framework and also concurred that greater use of DSA could help better assess countries’ debt sustainability.

B. Enhancing Monetary Policy and Financial Stability to Support Private-Sector-Led Growth

17. The current monetary policy stance appears appropriate but the BCEAO should stand ready to tighten in case reserves deteriorate. For now, with external reserves projected to increase gradually over the medium-term, the stance is appropriate. Still, external reserves benefitted from large Eurobond issuances in 2017–2018, while buoyant domestic demand contributed to a wider current account. Cognizant of these risks, the BCEAO should tighten its stance if the reserve import-cover ratio were to decline for several months or abruptly move below 3 months, by relying mainly on quantitative measures (refinancing window and/or reserve requirement) initially and potentially on rates increases. Moreover, the BCEAO should provide refinancing cautiously to avoid a repeat of the 2016 build-up in bank leverage—with proactive banking supervision instead prompting an increase in capital and other stable resources to address the structural liquidity deficit of the banking sector.

18. More active and liquid secondary debt and interbank markets are key for the development of WAEMU financial markets and enhanced monetary policy transmission.

  • Large bank sovereign exposures are weighing on some bank balance sheets, exposing them to the risk of roll-over financing at tighter conditions, and the shallowness of the secondary bond market makes prompt bank deleveraging difficult. Notwithstanding slightly increased bond transactions among banks in 2018, structural impediments to the deepening of the bond market remain. A move to an integrated market supervision and a single Central Securities Depositor would allow all issues of the same maturity from a specific sovereign to be traded as part of the same pool, regardless of whether they were issued by auction or syndication. That would in turn favor participation by non-bank investors who depend on market liquidity.

  • Partly due to limited information on counterparty risks, the interbank market has also been shallow, with liquid banks maintaining excess reserves at the BCEAO and lending mostly to same group affiliates. While the interbank market is not a substitute to the strengthening of structural bank liquidity, a deeper market could help reduce overreliance on the BCEAO when temporary liquidity needs arise. The development of repo transactions based on sovereign bonds should help increase volumes and deepen the market. More generally, the strengthening of overall bank balance sheets and increased transparency on individual bank situations, would improve the willingness of banks to transact short-term liquidity. The BCEAO should eventually calibrate its liquidity supply to steer the interbank rate back into the monetary policy corridor.

  • Staff encouraged the BCEAO to consider differentiated haircuts to sovereign securities used by banks as collateral for central bank refinancing. Such a mechanism could help protect the central bank’s balance sheet (e.g. from interest rate and credit risks), guide bank risk diversification, and instill greater fiscal discipline through better risk pricing.4

19. The new prudential regime and its associated risk-based supervision framework should allow for stronger bank balance sheets through proactive supervision. That should reduce segmentation where detrimental, foster confidence in the banking sector and allow it to better finance private sector-led growth.

  • The move to the new prudential regulation aligned to Basel II/III and new bank accounting standards proceeded smoothly in 2018. Banks will have to continue to increase capital to meet the 11.5 percent CAR targeted at end-2022 (from a mimimum of 8.625 percent at end-2018). Weak banks should be rapidly restructured, and the Banking Commision has the powers to require needed adjustments. Those weak banks will need to raise more capital by mobilizing additional shareholder resources, reducing the distribution of dividends and/or streamlining their asset portfolios.

  • The supervisor should ensure that bank concentration risks are gradually reduced, as prudential norms are tightened—with individual risk limits reduced from 75 percent of bank equity under Basel I to 25 percent in 2022 under Basel II/III. Banks have started to address their NPLs, which declined in the first half of 2018 despite more stringent classification and provisioning rules. Likewise, the forthcoming calibration of liquidy ratios under Basel II/III should contribute to improving structural liquidity.

  • The Banking Commission has also started to assess cross-border groups on a consolidated basis and to review banks’ behavior based on specific risk patterns. Banking groups’ supervision should be further improved through the Colleges of Supervisors and the preparation of recovery plans.

20. The Commission Bancaire should urgently take all needed resolution actions in collaboration with national authorities where needed.

  • The operationalizing of the new resolution framework, started in early 2018, should be rapidly finalized.

  • Current cases of ailing banks must be resolved promptly, as these banks have had substantial negative equity. This would not require the finalization of the new resolution framework, as the current supervisory regime already provides the necessary instruments to design and carry out corrective actions in close cooperation with national authorities and ensure orderly resolution.

  • In addition, the authorities should identify criteria to designate systemic institutions. The Commission Bancaire would then be expected to ask large insitutions—including the 12 largest banking groups, which alone account for more than ¾ of the banking system’s total assets—to prepare recovery plans to deal with crisis management.

  • Progress on crisis prevention tools and the financial safety net is ongoing. The financial guarantee scheme to ensure finality of clearing positions is fully operational on the payments clearing system. The deposit insurance scheme (DIS) has started receiving initial contributions from deposit collecting institutions in 2018, but it will take time to reach a steady-state regime. The DIS was amended so it could be called to help fund bank resolution plans, after all other sources of funding have been mobilized.

21. Financial inclusion has improved substantially over the last few years and supervision should continue to evolve alongside financial innovations. Since the creation by the BCEAO of a specific status for electronic money providers in 2015, retail payments through mobile telephony operators have increased significantly, while the offering of savings and loan products still goes through partner banks to ensure regulatory compliance and customer protection. These developments have noticeably improved access to basic financial services for underserved populations and are likely to be further supported by the setting up of an interconnection platform common to all WAEMU mobile banking operators. The BCEAO is encouraged to continue to allow for the growth of that segment while ensuring that it does not create new risks to financial stability. Meanwhile, the microfinance sector, which represents about 7 percent of the banking sector in terms of deposits and loans, has seen several institutions fail in the past. While several fragile entities have recently undergone restructuring or termination, the sector still needs to be further strengthened.

22. Strengthening AML/CFT risk-based supervision of banks by the Banking Commission will help support national AML/CFT and anti-corruption efforts. The regionalization of the AML/CFT framework has been strengthened with the adoption by all member countries of a uniformed AML/CFT law and the adoption by the BCEAO of instructions in 2017 to guide its implementation. The Banking Commission is enhancing its risk-based supervision activities and has increased the number of onsite inspections with two AML/CFT thematic inspections and 18 inspections with an AML/CFT component in 2017, against a total of 145 supervised banks. Substantial efforts are required to adapt the supervisory framework to account for ML/TF risks, increase and strengthen onsite inspections, ensure the effectiveness of sanctions and improve information sharing with national authorities. These efforts are central to supporting national efforts to fight money laundering, terrorism financing and related crimes such as corruption.

Authorities’ Views

23. The BCEAO agreed it needed to remain vigilant to external reserve developments. It agreed that external reserves needed to be shielded and should be gradually increased in upcoming years. Furthermore, it concurred that renewed pressures on external reserves would warrant monetary policy action, with the choice of instrument contingent on the source of those pressures, for instance depending on whether they would come from banks’ lending behavior or overall overheating of the economy. The BCEAO stressed that its liquidity supply was not excessive and that it was based on the liquidity needs in the economy. It agreed though that banks should not be allowed to substitute needed stable permanent resources with short-term central bank refinancing. On differentiated sovereign haircuts for its collateral framework, the BCEAO was of the view that each bank needed to make its own assessment of sovereign risk and that the central bank should not interfere with market play.

24. The authorities acknowledged that bank weaknesses should be addressed to ensure financial stability and sustained growth of credit to the economy. They noted that the new prudential regime was meant to strengthen bank resilience, through improved asset quality and a stronger capital base. As an indication of their commitment, they highlighted their close monitoring of fragile banks, but underscored that many of those were state-owned, complicating their tasks in a context of limited national public resources to recapitalize them. They further stressed that the existing supervisory framework allowed for orderly resolutions if needed, even as the new regime was being operationalized. The authorities reiterated their commitment to promote financial inclusion and closely monitor micro-finance institutions. They underscored their commitment to enforce the 2015 AML/CFT law, as reflected in the September 2017 instructions requiring banks to put in place efficient information systems to ensure financial operations traceability and setting up thresholds for the declaration of cash transactions.

25. The authorities concurred that financial sector development remained an important objective. They stressed that they were taking steps—including to better inform private firms about the options to raise financing on the regional market and to attract nonbank investors—but that those would take time to yield results. They agreed that the elimination of the current fragmentation of the debt securities market could help develop financial markets while making monetary transmission more effective. In that context, they were willing to discuss with Fund staff practical approaches towards such elimination, involving both the market regulator (CREPMF), the BCEAO and the Agence UMOA-Titres.

C. Promoting Competitiveness and Inclusiveness

26. Initiatives, including at the regional level, to improve competitiveness should be encouraged. At the national level, member-countries should accelerate reforms to raise structural competitiveness, including through improvements in the business climate, logistics performance, governance, and public investment efficiency. At the regional level, better integration of intra- and extra-regional trade flows would also help mitigate vulnerability to global shocks, support sustainable external buffers, and underpin private sector-led growth. Analytical work by staff suggests that addressing structural constraints to competitiveness can significantly enhance bilateral trade flows, via better institutional and legal investor protection, infrastructure, labor skills and access to finance.5 To that end, the WAEMU Commission is coordinating several initiatives, including cross-border infrastructure projects and the facilitation of custom procedures, while the BCEAO and the Regional Stock Exchange have launched initiatives to facilitate access to financing for small and medium-size enterprises. Actions to support these initiatives could include better implementation of regional guidelines on infrastructure quality and a regional reflection on ways to better align national education programs with labor market needs.

27. Greater inclusiveness would foster broader-based and more sustainable growth. Reducing income and gender inequality in the WAEMU could significantly boost real GDP per capita and economic diversification, thereby strengthening the acceptance of reforms.6 Member-countries should therefore continue to develop social spending indicators as part of the implementation of the regional directive bearing the Finance Act. At the regional level, ongoing efforts by the WAEMU Commission to effectively implement the regional gender strategy should allow over time for the systemic integration of a gender perspective in the WAEMU institutions and member-countries.

Authorities’ Views

28. 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 recent adoption of a regional strategy towards greater gender equality.

Other Issues

29. An updated safeguards assessment of the BCEAO was completed in 2018. It found that the central bank had maintained a strong control environment, audit arrangements were in broad conformity with international standards, and the financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS). The BCEAO has recently enhanced the oversight role of its audit committee in line with the assessment recommendations.

30. Substantial progress was made in recent years to strengthen the quality, timeliness, and dissemination of economic statistics and must be consolidated. WAEMU countries’ data are disseminated on the Open Data Platform developed by the African Development Bank in collaboration with the Fund and Senegal adhered to the SDDS in late 2017. Further progress is warranted, 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

31. Economic activity has remained strong, while vulnerabilities persist. Real GDP growth exceeded 6 percent for a seventh year in a row, inflation remained low and some fiscal consolidation was achieved in 2018. However, public debt and its servicing costs have kept rising while growth continued to be driven by domestic demand, including public spending, notably to address infrastructure gaps. Buoyant domestic demand, together with lower terms-of-trade, contributed to a widening of the external current deficit. External reserves increased, owing largely to large Eurobond issues by Côte d’Ivoire and Senegal.

32. The medium-term outlook remains positive, but subject to significant downside risks. Sustaining the current growth momentum over the medium term crucially hinges on the effective and timely implementation of planned fiscal consolidation and structural reforms. Slippages on these fronts, including through persistently high extra-budgetary operations, would jeopardize public debt sustainability, private sector development and external viability. Other downside risks to the outlook relate to terms of trade and weather shocks, a worsening security situation, lower global growth, and tighter international financing conditions. 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.

33. Effective fiscal consolidation, including convergence to fiscal deficits of no more than 3 percent of GDP, is essential. Absent this, credit to the private sector would be squeezed, preventing a switch to private-sector-led growth, or pressures on external reserves would reemerge. Much greater progress is needed to bolster government revenues to create fiscal space for priority infrastructure and social spending while meeting the WAEMU fiscal deficit criterion by 2019 and beyond. Effective fiscal consolidation must also entail a much greater control of below-the-line operations, which have contributed significantly to rapid public debt increase in recent years. The WAEMU Commission, along with national governments, should therefore improve the analysis, management, and disclosure of fiscal risks.

34. The current monetary policy stance is broadly appropriate. Monetary policy should be tightened if pressures reemerge on foreign exchange reserves. Meanwhile, the BCEAO should continue to steer liquidity based on autonomous factors while continuing to gradually reduce the banking system’s dependence on central bank refinancing.

35. Financial market deepening and better monetary policy transmission require developing the interbank and the debt securities markets. The BCEAO and Banking Commission could further promote the development of interbank transactions by respectively continuing to gradually mop up liquidity and promoting banks’ balance sheet repair and improved information on counterparty risks. The interbank market would be further stimulated by 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.

36. Improving financial stability is also a key requirement to enable a shift toward more private sector-led growth. The appropriate phasing and effective enforcement of the new prudential rules aligned with Basle II/III principles offer the opportunity to proactively consolidate banks’ balance sheets and address vulnerabilities. The authorities should bring all undercapitalized banks to meet capital requirements and promptly resolve ailing banks. They are also encouraged to make their Banking Commission’s new bank resolution powers operational as soon as possible. Those measures are essential to allow the banking sector, and financial markets more broadly, to better tap regional savings and effectively allocate financing to the private sector. Strengthened AML/CFT supervision by the Banking Commission would help support national AML/CFT and anti-corruption efforts and preserve the integrity of the banking sector.

37. Increasing inclusiveness is a priority, including to foster reform acceptance. Staff encourages the authorities to implement the regional strategy for financial inclusion adopted to this end, while paying due consideration to financial stability and money-laundering and terrorism financing risks. Due attention should also be paid to social and gender equality, which could significantly boost real GDP per capita.

38. Addressing structural constraints to promote private investment, competitiveness and diversification will help secure sustainable growth. At the national level, member-countries should further improve the business environment, logistics performance, governance, and public investment efficiency. At the WAEMU level, additional efforts are needed to reduce barriers to regional integration.

39. 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.

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

Figure 1.
Figure 1.

WAEMU: Recent Economic Developments, 2014–18

Citation: IMF Staff Country Reports 2019, 090; 10.5089/9781498305907.002.A001

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

WAEMU: Recent Financial Sector Developments, 2015–19

Citation: IMF Staff Country Reports 2019, 090; 10.5089/9781498305907.002.A001

Sources: BCEAO and IMF staff calculations.
Figure 3.
Figure 3.

WAEMU: Medium Term Prospects, 2017–23

Citation: IMF Staff Country Reports 2019, 090; 10.5089/9781498305907.002.A001

Sources: BCEAO; World Economic Outlook; and IMF staff calculations.
Figure 4.
Figure 4.

WAEMU: Banking Sector Soundness, 2012–18

Citation: IMF Staff Country Reports 2019, 090; 10.5089/9781498305907.002.A001

Sources: BCEAO and IMF staff calculations.1 June 2018 corresponds to the first period of data reporting in accordance with Basel II/III prudential standards and the new banking chart of account (interim data).2 The minimum regulatory CAR at end-2018 under Basel II/III was 8.625 percent.
Table 2.

WAEMU: Selected National Accounts and Inflation Statistics, 2015–23

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

Sub-Saharan Africa: Cross-Group Comparison, 2015–23

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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, 2015–23

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

Excludes net lending.

Table 5.

WAEMU: Balance of Payments, 2015–23

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Source: IMF, African Department database.
Table 6.

WAEMU: Government Debt and Debt Service, 2015–23

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Source: IMF. African Department database.

Reflects debt relief on Guinea-Bissau’s arrears with Taiwan in 201 7.

Reflects expended coverage to include all treasury securities from 2Q1S onwards.