Statement by Mr. Mohamed-Lemine Raghani, Executive Director, Mr. Razafindramanana, Alternate Executive Director, and Mr. N’Sonde, Senior Advisor on West African Economic and Monetary Union March 18, 2019

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

Abstract

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

On behalf of our WAEMU authorities, we thank staff for the candid and productive discussions held in Ouagadougou, Abidjan, Dakar and Cotonou in the context of the 2019 regional consultations on common policies. We appreciate the quality dialogue to help the authorities address vulnerabilities, build policy buffers, and sustain the region’s growth momentum. We also thank Management and the Executive Board for their continued support to WAEMU member countries in their efforts to implement their Fund-supported programs.

The WAEMU authorities share the view that the staff report adequately reflects their discussions on economic developments, outlook and risks, and policy priorities. There is a broad agreement on the policies and reforms needed at the regional and national levels albeit nuances on the scope and significance of some measures.

Recent Economic Developments, Prospects and Risks

Amid adverse terms of trade shocks and security challenges in some member countries, WAEMU remains one of the fastest growing regions worldwide, with growth rate again exceeding 6 percent in 2018, owing mainly to robust domestic demand. Inflation remains low thanks to strong agricultural supply, the exchange rate anchor and prudent monetary policy. On the fiscal front, countries have pursued their consolidation efforts which have helped maintain fiscal deficits on the path to meeting the convergence criterion of 3 percent of GDP by next year.

External buffers continue to strengthen as a result of the fiscal adjustment, improved enforcement of export proceed repatriation requirements, and significant Eurobond issuances by Côte d’Ivoire and Senegal in 2018. Specifically, the authorities estimate external reserves to have increased to 4.8 months of imports of goods and services at end-2018 against the staff’s estimate of 4.3 months of import coverage. The disparity lies on differences in measuring imports of goods and services for this indicator. The authorities have agreed on working with staff to reconcile their methodological approaches. To further safeguard external reserves, BCEAO is undertaking a profound reform of foreign exchange regulations. Regarding the financial sector, Eurobond issuances have contributed to releasing liquidity pressures.

The authorities note that albeit these positive developments, vulnerabilities persist. Public debt ratios have risen significantly in recent years on the back of sizeable investment programs—which are bearing fruits—as well as quasi-fiscal operations of SOEs and realization of contingent liabilities. The authorities caution on the need to better reflect on country-specific circumstances behind the latter. The regional authorities also expressed concerns over external vulnerabilities stemming from volatile terms of trade, notably the movements of export commodity and oil prices, which may put pressure on external buffers.

Regarding the financial system, significant reforms were carried out in the banking regulatory framework in 2018, including the transition to the Basel II/III prudential norms and new bank accounting rules more in line with international standards. Under Basel II/III requirements, credit continued to increase in 2018 while banks strengthened their capital base significantly notably through more comfortable ratios of capital to risk-weighted assets. The Banking Commission will continue to closely monitor non-compliant banks, notably the relatively large ones. The Commission has strengthened banking supervision with the risk-sensitive consolidated approach applicable to groups and made further steps to operationalize its new resolution framework.

Moreover, the regional central bank BCEAO has conducted more sophisticated stress tests which reveal that the banking sector remains broadly resilient. Nevertheless, the concentration, credit and liquidity risks to which the region’s banking sector is subject to remains sources of concerns, with the latter risk weighing on banks’ recourse to the central bank refinancing. However, it is worth noting, that banks have already started to reduce their non-performing loans in 2018 under the tighter Basel II/III requirements.

Looking forward, the region’s prospects remain positive, with medium-term growth projected to stay above 6 percent, external current account imbalances as percentage of GDP narrowing over the next few years, and external buffers further strengthening with international reserves gradually moving closer to the 5-months of import coverage. The regional authorities concur that this favorable outlook is predicated on smooth implementation of member countries’ fiscal consolidation plans and structural reforms to ensure fiscal and debt sustainability, enhance competitiveness and foster private sector-led growth. The authorities are conscious of the importance of policymakers to remain steadfast in implementing their policy and reform agendas as downside risks are significant. Among these risks, they underscore fiscal slippages and delays in structural reforms but also the significant exogenous risks stemming from persistent security challenges, spillovers from global trade tensions, and more generally considerably slower global growth.

Policy and Reform Priorities Going Forward

Our WAEMU authorities share the priorities to durably preserve the region’s growth impetus while safeguarding external and financial stability through continued fiscal consolidation, more effective monetary policy transmission, enhanced banking supervision and more developed financial markets to sustain the private sector development as main engine of growth and job creation. They continue to view the fixed exchange rate peg and regime as an essential anchor to external stability. They share the view that strengthening regional institutions to allow them to meet their mandate will be critical to achieving these objectives.

Pursuing Fiscal Consolidation

The regional authorities of WAEMU consider the national governments meeting the fiscal deficit target of 3 percent of GDP by 2019 as critical to achieving medium-term macroeconomic objectives, including preserving reserve buffers. Both the WEAMU Commission and BCEAO stress the importance of enhancing domestic revenue mobilization where there is considerable room for improvement notably on tax revenue. Fund’s increased assistance to countries in this regard is critical. They also underscore the need to pay attention to preventing excessive capital spending cuts out of concern for growth. They have highlighted the need to allow space for spending related to security—which heavily weighs on some countries’ growth prospects—in a way that is consistent with their respective fiscal consolidation schedules. In the same vein, they view strengthening fiscal planning as essential to meet unforeseen spending needs.

Albeit some differences with staff’s estimations, the authorities also recognize the need to tackle below-the-line operations where they exist, notably through the implementation of WAEMU directives on public finance management which implies extending the budget coverage to the general government. On the debt ceiling criterion, the authorities remain to be convinced to lower the threshold from the current 70-percent to 60-percent of GDP. However, the WAEMU Commission concedes that this issue can be addressed in the context of the upcoming review of the regional surveillance framework while recognizing the need for fuller use of debt sustainability analyses to strengthen the assessments of countries’ debt sustainability. The Commission stands ready to improve the effectiveness of its surveillance functions through the harmonization of national tax data and enhancing of tax coordination.

Further Strengthening Monetary Policy Transmission and Effectiveness

The regional central bank BCEAO will maintain a firm monetary policy stance as external buffers gradually improve over the medium-term but stand ready to use appropriate policy instruments to tighten its policy if reserves came under pressure. The Central Bank continues to rationalize banks’ refinancing at its window to keep the sector leverage under control while promoting adequate capital and stable resource ratios for banks through active banking supervision. It plans to promote the deepening of the secondary debt and interbank markets, which will help banks meet their temporary liquidity needs and further enhance monetary policy transmission.

Fostering Financial Stability and Development

The Banking Commission (the regional banking supervisory authority) strives to enforce the new prudential regime aligned to Basel II/III especially as it relates to asset quality and capital base with the view to strengthening banks’ resilience. The Banking Commission monitors ailing banks closely and intends to pursue their resolution, including where needed through withdrawal of license or restructuring. Recapitalization of public banks is also being contemplated although additional shareholder resources are seldom available. They would welcome Fund and World Bank’s support in this regard. Preserving financial stability will also hinge on the banking supervisor’s efforts to tackle concentration and liquidity risks, which it is committed to address through enforcing the relevant norms under Basel II/III. Regarding crisis prevention, progress is noticeable with the financial guarantee scheme and the deposit insurance scheme which was modified to allow the funding of bank resolution plans in complement to other sources of financing. Meanwhile, the 2015 AML/CFT law continues to be enforced, with banks induced to establish efficient financial information systems.

The regional authorities remain committed to further advance financial inclusion through enhanced access to basic financial services and mobile banking to remote areas as well as the strengthening and close monitoring of microfinance institutions. On a different front, relevant regional authorities, notably the financial market regulator CREPMF (Conseil Régional de l’Epargne Publique et des Marchés Financiers), BCEAO and the debt securities regulator Agence UMOA-Titres, are open to discuss the staff-proposed elimination of the security market fragmentation, with the view to further develop financial markets.

Bolstering Competitiveness and Inclusion

Cognizant of the need for the region to catch up with comparator countries on competitiveness and business climate, the authorities have initiated programs at the national and regional levels to address these impediments, promote governance and raise public investment efficiency. The WAEMU Commission coordinates a number of these initiatives. Moreover, actions undertaken by regional institutions include plans to promote access to financing for SMEs and individual entrepreneurs.

Our WAEMU authorities see merit in staff recommendations to reduce income and gender inequality, noting the significant benefits to be drawn in terms of growth of GDP per capita and economic diversification as made evident in the insightful Selected Issues paper on “Sharing the Dividends of Growth”. They plan to move in those directions, building on current efforts to fund at the regional level projects in energy, transport, agriculture and infrastructure sectors. They will also intensify their efforts to address the income and gender inequalities through adequate measures to further decrease poverty in the WAEMU region. In this regard, the regional gender strategy will be forcefully implemented while further investment in education and health will help increase accessibility to, and quality of, public services and social protection.

Conclusion

Our WAEMU authorities remain committed to meeting their respective regional objectives and to assisting member countries in implementing their economic development, and convergence agendas. In this endeavor, they highly value Fund advice and technical assistance, and welcome any effort to further strengthen this constructive collaboration.