Selected Issues

Abstract

Selected Issues

The Economic and Policy Implications for the Waemu of Insecurity in the Sahel1

1. The WAEMU region experienced significant episodes of violent conflicts over the past two decades. During the 2000s, they mainly stemmed from political instability, particularly in Côte d’Ivoire, the WAEMU’s economic hub. Niger also suffered from political instability during the same decade culminating in a military coup in 2010. The restoration of peace in Côte d’Ivoire and the election of a democratic government in Niger in 2011 ushered in an era of stronger economic growth throughout the WAEMU until the Covid crisis in early 2020. 2 However, this progress is now coming under threat from the mushrooming conflict in the Sahel, which first emerged in Mali in 2012, grew in intensity there, spread to Burkina Faso from 2014, and exposes Niger to increasingly vicious cross-border attacks. In the context of pervasive corruption, widespread poverty, and high rates of youth unemployment and underemployment, observers fear that, absent stronger actions to stem the violence and address its root causes, the conflict could spread all the way to the coastal countries of West Africa.3

2. This chapter analyzes the regional economic impact of the deteriorating security situation and lays out options for economic policy responses. Economically, the conflict and the risk of dislocation of state authority affects growth prospects, development outcomes, and public finances of the afflicted countries, but there are also important potential repercussions for the entire WAEMU. Not only could the conflict spread to other members if not forcefully addressed in Burkina Faso, Mali, and Niger, but there could also be spillovers from the public finances of these three countries on the currency union’s shared external stability and exchange rate peg. It therefore takes a coordinated or common policy response to confront insecurity and at the same time preserve macroeconomic stability. Moreover, since spillovers do not stop at the WAEMU’s doorstep, success is in the interest of the wider region and beyond. Foreign aid makes it less hard for the WAEMU to square its twin objective of security and macroeconomic stability.

A. Origin and Scope of Insecurity in the Sahel

3. The current security crisis in the Sahel region began with the Tuareg rebellion in Northern Mali in 2012. The independence drive by the rebel group National Movement for the Liberation of Azawad (MNLA) became a rebellion when the collapse of the Gaddafi regime in Libya in 2011 triggered an influx of Tuareg and heavy weaponry, Mali’s president was ousted in a military coup in 2012, and the group Ansar Dine joined the fight. Most of Northern Mali fell into rebel hands. They were pushed back when France launched its operation “Serval” in December 2012 and deployed troops. Nonetheless and despite the installation of the 13,000-man-strong UN peacekeeping mission MINUSMA, a newly elected government, and a peace agreement with the rebel groups, state control in Northern Mali remains tenuous and insecurity persists.

4. Insecurity spread to Burkina Faso in late 2014. The home-grown Ansarul Islam movement, the Islamic State in the Greater Sahara, and the Al-Qaeda linked Group to Support Islam and Muslims exploited the circumstances created by the ouster of the president in a popular uprising and long-standing discontent in Northeastern Burkina Faso with the perceived neglect by the central government. They recruited heavily from the discriminated ethnic Fulani minority, which in turn triggered reprisals, vigilante groups were formed, and armed groups became radicalized. Burkina Faso’s capital Ouagadougou suffered major attacks in 2016, against a luxury hotel and restaurants, and in 2018, against the military headquarters and the French embassy. Since April 2019, terrorists have targeted churches, undermining Burkina Faso’s culture of religious co-existence, and violence has spread from the northern border with Mali to the eastern border region with Niger, making Burkina Faso the “epicenter” of the conflict in the Sahel.

5. Separately, the terror group Boko Haram in Northeastern Nigeria became more and more deadly. Founded in 2002 as a non-violent group seeking to purify Islam, Boko Haram became increasingly radicalized. Government forces successfully fought it at first, but Boko Haram reconstituted itself and by 2014 controlled vast swarths of land in Northeastern Nigeria. It pledged allegiance to the Islamic State in Iraq and the Levant in 2015. While it lost territory in 2019, Boko Haram remains one of the world’s deadliest terror groups with incessant attacks in the Lake Chad region, comprising territories in Nigeria, Chad, Cameroon, and Niger.

6. Niger is now surrounded by violence. Conflict rages along its porous borders with Mali and Burkina Faso, Boko Haram terrorizes the Lake Chad region, and chaos reigns in Libya to the north. Terrorism has generally not become entrenched in Niger itself, but it suffers increasingly ferocious cross-border incursions. Two attacks on military camps close to the border with Mali in December 2019 and January 2020 left over 150 soldiers dead. The fight against terrorism is further complicated by it being intertwined with other criminal activity, such as the trafficking of drugs, weapons, and migrants along its ancient cross-Saharan trading routes.

7. The security situation in the Sahel keeps deteriorating rapidly. Terrorist incidents rose 70 percent in 2019 alone to reach 800 in the G5-Sahel countries (Burkina Faso, Chad, Mali, Mauritania, and Niger).4 Burkina Faso has narrowly overtaken Mali as the country with the worst violence. Niger and Chad each report about one-third of the level recorded in Burkina Faso or Mali. Mauritania remained largely free of terrorist incidents. Attacks have also become more ferocious, with more victims per incident and the targeting of village chiefs to inflict maximum damage to the social fabric of rural communities.

8. The violence is taking a heavy humanitarian toll on countries already facing multiple challenges, including the Covid pandemic. The Sahel has long been grappling with fragilities, including high poverty levels, inequality and exclusion, climate change, food crises, rapid population growth, and the illicit trafficking of migrants, drugs, and weapons across borders.5 Fatalities from violent events involving extremist groups have doubled every year since 2015, reaching 5,500 in the G5-Sahel countries in 2019, of which 4,000 occurred in Burkina Faso, Mali, and Niger.6 There are now 1.1 million internally displaced people and 750,000 refugees in the G5-Sahel countries.7 Urgent food assistance needs have doubled to 2.4 million people in Burkina Faso, Mali, and Niger.8 An estimated 2,000 schools are closed in the conflict zones of Burkina Faso, Mali, and Niger, putting 10,500 teachers out of work and interrupting the education of some 400,000 children.9

Figure 1.
Figure 1.

WAEMU: Terrorism Incidents and Social Unrest in the Sahel. 2011 – 2020

(number of incidents)

Citation: IMF Staff Country Reports 2021, 050; 10.5089/9781513571041.002.A002

1/ Annualized based on data until October 31,2020.Sources: Control Risks; and IMF and WBG staff calculations
Figure 2.
Figure 2.

Fatalities linked to Security Incidents

(number of fatalities)

Citation: IMF Staff Country Reports 2021, 050; 10.5089/9781513571041.002.A002

1/ Annualized based on data until October 31, 2020Sources: ACLED: and IMF staff calculations

9. Foreign assistance has, so far, not been able to turn the tide. In August 2014, the French “Serval” operation with its mandate for Mali was replaced by the operation “Barkhane,” which is tasked with fighting terrorism throughout the Sahel and comprises 4,500 men. In the wake of the January 2020 summit in Pau, France committed 600 additional troops and joint command and control with the G5-Sahel militaries was agreed. Some 800 American military personnel are stationed in Niger for training and intelligence purposes, as well as for operating a newly built drone base, which serves the entire region. European countries provide another 600 men to provide training and there is the mainly African-staffed MINUSMA blue helmets mission. On the civilian side, the Sahel Alliance was launched in July 2017 by France and Germany, with other countries and 7 months of 2020, fatalities surged by 65 percent while incidents declined by about a third relative to 2019.

10. Regional initiatives have yet to develop their potential, despite external pledges and regional commitments of substantial new resources. To better tackle the cross-border nature of terrorism, the G5-Sahel Joint Fighting Force was established in July 2017. It is due to include 5,000 military personnel from Burkina Faso, Chad, Mali, Mauritania, and Niger. The necessary €414 million to train and equip it have been pledged, though not fully disbursed as of now, and the force is not yet fully operational. Separately, there is also a Multinational Joint Task Force of the Lake Chad Basin made up by the militaries of Cameroon, Chad, Niger, and Nigeria to fight Boko Haram. The WAEMU has committed US$500 million over 2020–24 to fight terrorism in the region and it announced a first disbursement of US$100 million for the benefit of Burkina Faso, Mali, and Niger. At its December 2019 summit, the ECOWAS adopted an action plan of US$2.3 billion for regional security, including US$1 billion from internal resources. As spending on these initiatives grows and accelerates, adequate controls must be continually implemented to prevent the leakage of donor and internally generated funds, whether to corruption or to mismanagement.

B. The Impact of Insecurity on Economic Activity

11. Empirical research finds large and persistent adverse growth effects from conflict in sub-Saharan Africa. According to the SSA Regional Economic Outlook (IMF, 2019), annual real GDP growth in the average country with high-intensity conflict is 3.2 percentage points lower than it would have been in the absence of conflict, which translates into a cumulative loss of 15–20 percent in per-capita income for episodes that last five years or longer. Together with the destruction of human and physical capital, conflict reduces growth via lower investment, trade, and productivity.10 Conflict intensity is the key determining factor for the size of the adverse growth effect, but it also matters whether conflicts afflict a county’s commercial hub or just economically peripheral regions. Also, everything else equal, stronger institutions and better fiscal fundamentals seem to have a mitigating effect.11

12. As predicted by this empirical research, Mali’s economic performance in 2012 and 2013 suffered substantially. GDP contracted by 1.5 percent in 2012, when the military coup destabilized the domestic political situation, insurgents took control of Northern Mali, and half a million people were displaced. In the absence of a legitimate government, donors suspended all budget support and slowed down project aid. Construction, public works, and tourism suffered. But strong performance in gold mining, cotton, and a recovery in agriculture helped soften the blow. In 2013, GDP grew by 2.3 percent, as the normalization of the political situation allowed for the organization of presidential and legislative elections in the second semester and the security situation started to improve following early successes of the French-led military intervention in Northern Mali. The decline of the 2012–13 growth performance to 0.7 percent from 4.3 percent previously appears broadly in line with the estimations for the effect of conflict in sub-Saharan Africa.

Figure 3.
Figure 3.

Mali: Real GDP Growth and Components, 2001–19

(Percent)

Citation: IMF Staff Country Reports 2021, 050; 10.5089/9781513571041.002.A002

13. In contrast, GDP estimates for Burkina Faso, Mali, and Niger do not point to a significant growth slowdown since 2014 when violence started escalating. During 2014–19, annual real GDP growth averaged 5.7 percent, broadly in line with the growth performance of other WAEMU members, except for Côte d’Ivoire, which rebounded from a decade of political instability and civil war. This points to terrorist-related violence having had a materially smaller growth impact than the estimations for sub-Saharan Africa would suggest.

Figure 4.
Figure 4.

WAEMU: Real GDP Growth, 2001–19

(Percent)

Citation: IMF Staff Country Reports 2021, 050; 10.5089/9781513571041.002.A002

14. The seemingly muted impact of violence on the GDPs of Burkina Faso, Mali, and Niger could be due to the concentration of security incidents in regions of relatively low economic activity. Incidents have mainly taken the form of sporadic terrorist attacks along the borders of Burkina Faso, Mali, and Niger, often in desert regions. Specifically: (i) the northern parts of the border provinces “Sahel,” “Centre Nord,” and “Nord” in Burkina Faso, as well as the “Centre Est” province bordering Benin; (ii) the provinces “Gao,” “Kidal,” and “Mopti” in Mali; and (iii) in Niger along the borders with Mali in the provinces “Tahoua” and “Tillabéry,” as well as in the “Diffa” region near Lake Chad in the Southeast. While accounting for a large part of the countries’ territories, relatively low population density and economic activity disproportionately concentrated in subsistence farming, their economic weight is bound to be much lower. In the absence of subnational data on economic activity, regional economic activity is measured by night-light intensity. 12 On this basis, the conflict areas account for 9, 4, and 13 percent of the national GDP in Burkina Faso, Mali and Niger, respectively.13

Figure 5.
Figure 5.

WAEMU: Provinces Including Zones Mainly Afflicted by Ongoing Violence: Area, Population and Night Lights

(Percent of National Data)

Citation: IMF Staff Country Reports 2021, 050; 10.5089/9781513571041.002.A002

Figure 6.
Figure 6.

WAEMU: Conflict Locations, 2012, 2015, 2018

Citation: IMF Staff Country Reports 2021, 050; 10.5089/9781513571041.002.A002

Source: UCDP Georeferenced Event Dataset (GED)

15. Econometric analysis clarifies that the surge in violence does have a statistically significant and detrimental impact on growth in the afflicted regions but that it is quantitatively much smaller than in sub-Saharan Africa on average. An estimation tailored to the WAEMU region shows a significant effect of conflict intensity on night-light growth. A conflict causing 7 fatalities per million of population in one month is estimated to reduce annual night lights by about 0.13 percent, equivalent to 0.06 percent of annual GDP.14 For 79 fatalities per million, the negative growth effect comes to an estimated 0.7 percent of annual GDP . Estimations for all of sub-Saharan Africa or the world find an effect of violence on economic activity more than two times stronger than in the WAEMU. This may reflect non-linearities in the association between conflict intensity and economic activity. For all its dramatic consequences, the conflict in the WAEMU is far below the intensity of full-fledged civil wars that other parts of Africa and the world had to endure over the years.

Table 1.

WAEMU: Impact of Conflict on Night Lights

article image
*** p <0.01; ** p < 0.05; * p < 0.1;

16. The concentration of the conflict in the economically weaker areas of Burkina Faso, Mali, and Niger, together with its relatively low intensity make for an overall limited growth impact, consistent with the evolution of the macroeconomic headline numbers. Using the economic-impact coefficient derived from the customized WAEMU regression and adding up the regional effects yields a cumulative real GDP loss of between 0.5 and 1.4 percent for the three countries, depending on whether population or night-light weights are used in the aggregation over regions. The corresponding output loss for the WAEMU as a whole comes to between 0.1 and 0.4 percent of GDP.

17. That said, the toll on economic activity could easily escalate if violence is not expeditiously contained and rolled back. First, the growth effect for the three countries would become much stronger if violence were to creep closer to the centers of economic activity. Second, the situation would altogether change for the worse if violence spread to more WAEMU counties, particularly the economic heavyweights Côte d’Ivoire and Senegal. Third, if the violence were to escalate further in Burkina Faso, Mali, and Niger, the relatively weak association with economic activity observed in the rest of the WAEMU so far could increase substantially. Fourth, violence could have long-term effects on economic development because of the disruptions it causes to education and health care. Finally, the dynamic effects of sustained violence are not yet fully understood and may not be sufficiently captured in the regressions.

Table 2.

WAEMU: Impact of Violent Conflict on Real GDP Growth, 2014–19

article image
Sources: ACLED; and IMF staff estimates.

C. Fiscal Impact of Insecurity in WAEMU’s Sahel Countries

18. The conflict puts multiple pressures on the public finances of the afflicted countries. The most direct effect comes from the necessary increase of budgetary outlays for the military, the national guard, the gendarmery, and the police to confront the security challenge. Fiscal revenue collection could also be disrupted. These pressures could be attenuated to the extent that donors provide more aid and governments manage to implement revenue measures. Otherwise they are bound to crowd out other spending or increase fiscal deficits. Room to let deficits rise is limited—for the WAEMU as a whole they have just been brought down from the high levels in the mid-2010s to underwrite the currency union’s external stability.

19. The budgetary burden of increased security spending is high. Security spending has rightly been a top priority in the WAEMU Sahel countries, as security is a prerequisite for achieving development and social objectives. From the onset of insecurity until end-2019, military spending has roughly doubled, equivalent to an increase of 2 percent of GDP (equivalent to about US$850 million). This weighs heavily on the public finances of countries that face challenges in mobilizing domestic revenues.

20. The worsening security situation in Burkina Faso, Mali, and Niger has hampered domestic revenue mobilization efforts, albeit only to a limited extent until 2019. Terrorism can erode the tax base and weaken the efficiency of tax administration through physical destruction of businesses (Ndikumana, 2011). While some researchers identify material adverse effects of conflict on the revenue-to-GDP ratio (IMF, 2019), other studies find only a marginal impact (Cevik and Ricco, 2015) or no statistically significant effect at all (Gupta et al., 2004). In the Sahel, one would expect the loss of state control in some areas, disruptions to cross-border trade, increased smuggling, and the collapse of the tourism industry to all weigh on revenue mobilization. Since most of these channels play into reduced economic activity, applying the GDP loss derived in the previous section to countries’ revenue-to-GDP ratio gives a rough estimate of the revenue loss. With the output loss so far limited, the revenue loss is also small, ranging from 0.1 to 0.4 percent of GDP cumulatively for the period 2014–19, depending on the country and the weighing of the afflicted regions within them. That said, just as with the growth impact, the revenue loss could be magnitudes higher if the conflict was further prolonged, spread to the economic centers of the three countries, or started to afflict other WAEMU countries.

Figure 7.
Figure 7.

WAEMU: Terrorism, Fiscal Deficit, and Public Debt, 2010–19

Citation: IMF Staff Country Reports 2021, 050; 10.5089/9781513571041.002.A002

Sources: Control Risk; WEO; country authorities; and IMF staff calculations.
Table 3.

WAEMU: Impact of Violent Conflict on Fiscal Revenues, 2014–19

(Percentage points of GDP)

article image
Sources: ACLED; and IMF staff calculations.

21. Evidence on whether the rise in security spending has already crowded out other spending seems mixed, but there are clear risks going forward. Non-security spending has fluctuated over the years. It is difficult to establish a clear trend and the lack of good data on spending broken down by economic function makes it even more challenging to discern the evolution of social and development spending. However, clearly, other spending could have been higher in the absence of the rise in security outlays. Any additional aid or additionally mobilized domestic revenue could have been spent on development rather than having to be plowed into security spending. It is also clear that crowding would be hard to avoid if an escalating security crisis, a let-up in foreign aid, or a setback in domestic revenue mobilization were to put further pressures on public finances.

22. The diverse conflict history, economic situation, and internal and external policy responses in Burkina Faso, Mali, and Niger warrant a more detailed country-specific analysis. Annex I provides a data summary.

Mali

23. Mali was the first Sahel country confronted with a rapidly deteriorating security situation and escalating security spending needs. Since the Tuareg rebellion in 2012, security incidents rose exponentially through 2018 before receding marginally in 2019 to 267. The French military intervention provided crucial relief, but domestic security spending also had to be ramped up from 1.7 percent of GDP before the outbreak of violence to 3.7 percent of GDP in recent years.

24. In the absence of higher foreign aid, fiscal deficits rose until a sharp reversal in 2019. Foreign aid has generally not been rising over the period. Since the Tuareg rebellion coincided with a military coup, aid was almost entirely suspended in 2012, and when it was restored the year after, it remained below pre-violence levels through 2018. The fiscal deficit rose sharply from some 3 percent of GDP before the conflict to 4.8 percent of GDP in 2018. A reversal occurred in 2019 when foreign aid was doubled to 6 percent of GDP and the fiscal deficit declined to 1.7 percent of GDP. Compared to the pre-violence period, foreign aid is now about the same. In the end it was domestic revenue mobilization that prevented the deficit from rising despite the rise in security spending.

Figure 8.
Figure 8.

Mali: Terrorism and Public Finances, 2010–19

Citation: IMF Staff Country Reports 2021, 050; 10.5089/9781513571041.002.A002

Sources: Control Risk; WEO; Malian authorities; and IMF staff calculations.

25. There is evidence of intermittent but not systematic crowding out of non-security spending. Non-security spending suffered setback from the suspension of aid in 2012 and from the initial ramping up of security spending in 2014 and 2015. However, it tended to revert back to pre-conflict levels in the intervening years and surpassed them in 2019. Focusing more narrowly on priority social spending, one observes a reduction in their share of total spending throughout until a bounce back in 2019.

26. Mali’s experience highlights the crucial role of foreign aid and domestic revenue mobilization. Without the restoration of aid in 2019, it would have been difficult to square high security spending with fiscal consolidation and the protection of other spending. Looking at the entire period from the early 2010s to 2019 and abstracting from the annual fluctuations of aid, it was mainly domestic revenue mobilization that protected the fiscal bottom line and non-security spending in the face of escalating security outlays.

Burkina Faso

27. In Burkina Faso, security incidents and military spending rose sharply from 2016. Security spending had long been very modest but was ramped up quickly from just 0.8 percent of GDP in 2015 to 3.1 percent of GDP in 2019.

Figure 9.
Figure 9.

Burkina Faso: Terrorism and Public Finances, 2010–19

Citation: IMF Staff Country Reports 2021, 050; 10.5089/9781513571041.002.A002

Sources: Control Risk; WEO; Burkinabe authorities; and IMF staff calculations.

28. An initial burst of the fiscal deficit was mostly reversed, due to revenue mobilization and a normalization of non-security spending. The deficit surged from 2.1 percent of GDP in 2015 to 6.9 percent of GDP in 2017 as both security and non-security spending rose sharply. By 2019, it had been brought back to 3.5 percent of GDP as non-security spending normalized and the government succeeded in mobilizing additional domestic revenue. Foreign aid did not provide relief. Indeed, it remains lower than in 2015. At 4.6 percent of GDP, it is also lower than in Mali and Niger.

29. Security spending seems not to have crowded out social spending. The ratio of domestically-financed non-security spending to GDP was slightly higher in 2019 that it was in 2015, the year before security spending was ramped up. The ratio of social spending to GDP remained also unchanged.

30. The Burkinabe experience underscores the importance of public spending efficiency and domestic revenue mobilization. With donor support declining despite the rising needs to spend on security, the onus was on Burkina Faso’s own efforts to keep public finances on an even keel—reversing an initial run-away in non-security spending and mobilizing more domestic revenues. As some of the additional revenues in 2019 are temporary, public finances will likely continue to face challenges.

Niger

31. Niger ramped up security spending early on and before security incidents had escalated. Niger reacted early to the Tuareg insurrection in neighboring Mali and substantially increased security spending in 2012 and then again in 2014 and 2015. It now stands at 3.3 percent of GDP, compared to 1.1 percent in 2011. Niger initially managed to contain the number of incidents well. With the spread of violence to the border with Burkina Faso, the number of incidents rose sharply in 2019, though at 103, they remain at about one third of the level seen in Burkina Faso or Mali.

32. The fiscal deficit rose sharply through the middle of the decade but was subsequently brought back to pre-violence levels. Security and non-security domestically-financed spending were equally responsible for pushing the deficit from 2.2 percent of GDP in 2011 to a peak of 6.7 percent of GDP in 2015. Since then, normalization of domestically-financed non-security expenditures and a pronounced step-up in foreign aid reduced the fiscal deficit to 3.6 percent of GDP in 2019. As opposed to Burkina Faso and Mali, foreign aid is much larger and increased much more during the conflict period. Total aid increased from 4.9 percent of GDP in 2011 to 11.5 percent of GDP in 2019. Within aid, budget support grants increased from 1.4 percent of GDP to 2.6 percent of GDP—an augmentation on the same order of magnitude as the rise in security spending. Niger also managed to mobilize additional domestic revenues. Foreign loan-financed investment was up by a similar amount.

33. There is little evidence suggesting that security spending crowded out non-security spending. Domestically-financed non-security spending fluctuated greatly over the years and, while it temporarily fell in 2012 with the first step-increase in security spending, it now stands as a percent of GDP close to the ratio seen before the violence started. In addition, foreign-financed investment expanded strongly over the period, leaving total non-security spending in 2019 substantially higher than it was in 2011.

34. Niger’s experience highlights the mitigating role of foreign aid. The pronounced rise especially in budget grants allowed Niger to accommodate rising outlays for security. Unlike Burkina Faso and Mali, it allowed Niger to channel the additional domestic revenues that it managed to mobilize into additional non-security spending.

Figure 10.
Figure 10.

Niger: Terrorism and Public Finances, 2010–19

Citation: IMF Staff Country Reports 2021, 050; 10.5089/9781513571041.002.A002

Sources: Control Risk; WEO; Nigerien authorities; and IMF staff calculations.

D. Macroeconomic Policy Implications of Insecurity

35. The ongoing surge in violence in the Sahel may be viewed as a durable and large shock, with potentially substantial adverse spillover effects to the WAEMU. Extremist violence has surged across border regions of the Sahel in the last few years despite all the efforts deployed against such violence by the governments of afflicted countries with significant foreign assistance. There is also some risk that if not sufficiently circumscribed, the current violence surge could spread southward and thus adversely affect regions and sectors with much larger weight in overall economic activity in a greater number of WAEMU member-countries.

36. A collective response involving all stakeholders is needed to address security shocks while limiting risks of macroeconomic instability. Security is a public good, both at the national, regional and more global levels. A persistent insecurity shock in some WAEMU countries could have significant and large contagion effects for all members of the union, but also for other parts of the world, for instance through migration pressures and terrorism threats. All potentially involved stakeholders (including other WAEMU countries, donors and international financial institutions (IFIs)) should play their parts in addressing such a shock, through policies appropriately tailored to their circumstances, responsibilities and comparative advantage. Directly afflicted countries bear the ultimate responsibility to adjust to the persistent shock, but their adjustment could be smoothed through an appropriate degree of solidarity from other members of the WAEMU as well as from the international community. Regional institutions also have a critical role. For example, strengthened risk-based AML/CFT supervision on the part of the Banking Commission would help to prevent and detect certain forms of terrorist financing – and of the pervasive corruption that plays into terrorists’ hands.

37. Countries directly afflicted by durable shocks, including because of insecurity, should ultimately make necessary policy adjustments. Given the scaling-up of security spending they eventually have to adjust through a combination of higher revenue, as well as improved spending efficiency and prioritization, although a durable increase in external support would help (See below). While challenging in the context of a security crisis, improvements in fiscal transparency and public financial management (PFM) as well as in AML/CFT regimes at the national level and risk-based AML/CFT supervision at the regional level will also be critical to ensure that the scaling-up of the security budget is consistent with best practices and does not result in losses owing to corruption, mismanagement, or wasteful spending. Meanwhile, putting in place strong regulations to guide emergency procedures should be an immediate priority. In addition, afflicted countries should increase the strategic orientation and quality of their security spending while raising governance standards and improving data provision for their security sector. The conduct of security expenditure reviews, and some regional guidance on common data standards could help in this regard.

38. Regional solidarity from other WAEMU members could ease the magnitude and pace of adjustment in afflicted countries. In the short term, this could help prevent rising security spending in front-line countries from crowding out investment and social expenditure in these countries. Such solidarity among union members could in principle be achieved through a differentiated pace of convergence towards the WAEMU’s fiscal deficit rule or the pooling of national budget resources.

  • If the three frontline countries of Burkina Faso, Mali, and Niger cannot mobilize sufficient grant financing, consideration could be given to allowing their fiscal deficits to converge more slowly toward the 3 percent of GDP regional ceiling. This fiscal flexibility would need to be supported by full adherence to fiscal consolidation efforts by other member countries, in order to prevent a depletion of external reserves and limit potential tensions on the regional bond market The upcoming review of the regional fiscal framework (scheduled for 2021) could provide an opportunity to agree on differentiated convergence paths and anchor different deadlines towards the 3 percent of GDP deficit target, depending on countries’ exposure to security shocks.15

  • Regional solidarity could also be achieved through the pooling of national budget resources and transfers from this common pool to the countries subject to security shocks. WAEMU countries recently took decisions in this direction to fight terrorism. In early December 2019, WAEMU Heads of States decided to create a “Regional Fund” to finance actions against insecurity in the region. This Regional Fund shall be managed by the WAEMU Commission and support member countries’ security actions through grants. It is not yet clear however whether it will be financed from member-countries’ contributions or from dedicated taxes, or whether it will have authority to borrow. A total equivalent to US$500 million has been pledged for the new Fund over five years, with a first tranche of US$100 million for the immediate benefit of Burkina Faso, Mali, and Niger. If actually disbursed, this first tranche would allow the governments of the three beneficiary countries to increase spending by about 0.25 percent of their GDP.

39. Scaled-up external financial and technical assistance to afflicted countries could make a substantial difference. A larger envelope provided by the international community would ease spending trade-offs and, if financed at highly-concessional terms, would not much affect the sustainability of public debt. The mix between budget support and project aid may also be worth reexamining. Project aid is important to alleviate the acute suffering of afflicted populations, strengthen or re-establish state presence, and provide economic opportunities. Budget support gives quick financial relief that governments can allocate to their top priorities, including security itself. Depending on country circumstances including the strength of public financial management and governance frameworks, the acute security challenges could have tilted the optimal balance of foreign aid in favor of budget support. In addition, the international community could back countries in conflict through increased technical assistance that helps them mobilize domestic revenues and make the most of limited resources. A stronger case for scaling up of technical assistance could be made for countries classified as “fragile states”. In this regard, the security-focused public expenditure reviews to be conducted by the World Bank in the Sahel countries are a promising initiative.

E. Conclusions

40. The deteriorating security situation in the Sahel poses grave risks for the WAEMU. The military efforts by the front-line states Burkina Faso, Mali, and Niger and external partners have not yet turned the tide. Terrorism incidents rose steeply in 2019. Fatalities caused by such incidents have surged in 2020 and their ever-higher humanitarian toll has been compounded by the Covid crisis. Should the bulwark in the Sahel crumble, the consequences would be dire not only for the afflicted countries but the entire WAEMU region.

41. As to the economic fallout from the security crisis, the negative effect on economic activity has so far been limited, but this could quickly change. Economic research typically finds that conflicts reduce GDP growth substantially. Such a negative effect can also be established for the three afflicted WAEMU countries, but its magnitude is much smaller. This seems due to the intensity of the conflict not having reached the level of full-blown civil wars that drive much of the results in the economic literature. Also, the conflict in the Sahel is mostly playing out in peripheral regions where economic activity is low to begin with. While this is somewhat comforting, it also means that the negative effect on growth could become more pronounced if the conflict spread to the centers of economic activity or if its intensity escalated further.

42. The main economic impact of the violence is on public expenditure. As the growth effect is limited, so is the effect on fiscal revenues. But on the expenditure side, outlays for security have roughly doubled in the three WAEMU Sahel countries from 1–2 percent of GDP to 4–5 percent of GDP—a heavy burden on countries with limited revenues. Stepped-up revenue mobilization and, in the case of Niger, rising external aid brought fiscal deficits back down again after an initial deterioration. They also helped avoid a systematic crowding out of non-security spending. That said, in the absence of the conflict these additional resources could have been utilized for badly needed development and social protection.

43. The economic implications of the security crisis give rise to difficult trade-offs. On the one hand, solid public finances in the WAEMU are the linchpin for external stability and the exchange rate peg. On the other hand, it could be challenging for the front-line states to keep fiscal deficits low. They have broadly managed so far, but it may be difficult going forward if security spending needs to be ratcheted up further, if foreign aid was to falter, if some of the revenue mobilization was based on temporary measures, and, most importantly, if a further increase in violence marred economic activity and revenue collection.

44. The interlinkages between the WAEMU countries call for a regional collective response, supplementing efforts by the afflicted countries themselves and support from development partners. It is in the collective interest to contain a potentially catastrophic further spread of the violence within the region. It is also in the collective interest to protect external stability and the exchange rate peg. Without prejudice to national efforts regarding revenue mobilization, PFM reforms, fiscal transparency, and spending quality, and much needed aid from development partners, preferably in the form of budget grants, the region could for example consider differentiating the pace of convergence towards the regional deficit ceiling (between countries affected or not by security shocks) or the deployment of common resources to address the security challenge. These would be temporary arrangements to give afflicted countries more time to achieve the adjustment that is ultimately needed when faced with long-lasting adverse shocks. The urgency of the security crisis puts a premium on quick decisions and solutions that can be implemented expeditiously.

References

  • Arnold N. et alii, 2018, “A Central Fiscal Stabilization Capacity for the Euro Area”, IMF Staff Discussion Note.

  • Bisca P., 2019Can Peace Be affordable; Lessons from Security Sector Expenditure Reviews in West Africa”, Institute for Security Studies (ISS).

    • Search Google Scholar
    • Export Citation
  • Cevik, S. and J. Ricco. 2015. “Fiscal Consequences of Terrorism,” IMF Working Paper, WP/15/225.

  • Diop. A. N., 2019. “Vulnerability of Economies Facing Terrorism: Case of the Countries of the Sahel Belt”, Journal of Economics and Development Studies.

    • Search Google Scholar
    • Export Citation
  • Egoume Ph. and Nayo A., 2011, “Feeling the Elephant’s Weight: Impact of Côte d’Ivoire’s Crisis on WAEMU Trade”, IMF Working Paper

    • Search Google Scholar
    • Export Citation
  • Furceri D. and Zdzienicka A., 2013, “The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism?

  • Gupta S., Clements B., Bhattacharya R., Chakravarti S., 2004. “Fiscal Consequences of Armed Conflict and Terrorism in Low- and Middle-income Countries”, European Journal of Political Economy.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2012WAEMU”, Staff Report on Common Policies for Member Countries

  • International Monetary Fund (IMF). 2018Security ChallengesFig. 1, Staff Report for the 2018 Art. IV consultation with Burkina Faso

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 201xSecurity ChallengesFig. 1, Selected Issues Paper for the 201x Art. IV consultation with Mali

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2019Economic Impact of Security Tensions”, Annex III to Staff Report for the 2019 Art. IV consultation with Niger.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2019 “The Economic Consequences of Conflict”, Regional Economic Outlook for Sub-Saharan Africa.

  • International Monetary Fund (IMF). 2020. “First Review under the Extended Credit Facility Arrangement, Request for a Waiver of Non-Observance of a Performance Criterion and Modification of Performance Criteria”.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2019. “Online Annex – The Economic Consequences of ConflictsBackground Paper.

  • International Monetary Fund (IMF). 2019. “Sub-Saharan Africa Regional Economic Outlook Chapter 2 – The Economic Consequences of Conflicts”.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2018. “The Cost of Insecurity”. Selected Issues Paper, Mali.

  • International Monetary Fund and World Bank Group (2019). Security in the Sahel: Implications for Development and Macroeconomic Policies. August.

    • Search Google Scholar
    • Export Citation
  • Institute for Economics and Peace, 2018, “The Economic Value of Peace – Measuring the Global Economic Impact of Violence and Conflict”.

    • Search Google Scholar
    • Export Citation
  • International Crisis Group, 2019, «The Risk of Jihadist Contagion in West Africa”, Briefing No 149.

  • Jenkinson, G. 2019. “Security Expenditure and Fiscal Adjustment – The Case of Burkina Faso”.

  • Le Roux P. 2019, “Responding to the Rise in Violent Extremism in the Sahel”, Africa Security Brief No36, Africa Center for Strategic Studies.

    • Search Google Scholar
    • Export Citation
  • Mlachila M. and alii, 2019, “The Impact of Conflict and Political Instability on Banking Crises in Developing Countries”.

  • Ndikumana, L., 2001. Fiscal Policy, Conflict, and Reconstruction in Burundi and Rwanda. WIDER Discussion Paper No. 2001/62. World Institute for Development Economics Research, United Nations University, Helsinki.

    • Search Google Scholar
    • Export Citation
  • OECD. 2003La Crise Ivoirienne et son Impact Régional », Afrique Contemporaine – 2003/2 No 206.

  • UNDP. 2011The Conflict in Côte d’Ivoire and its Effect on West African Countries”.

  • UN Economic Commission for Africa, 2017, “Conflict in the Sahel Region and the Developmental Consequences”.

  • UNICEF, 2019, “Education under Threat in Central and West Africa”.

Annex I. Burkina Faso, Mali and Niger; Summary Statistics 2010–19 (Percent of GDP)

article image
Sources: IMF African Department Database; Controls Risks; IMF staff calculations.

Annex II. Overview of Security Systems in the G5-Sahel Countries

Burkina Faso has a security force totaling 47,000 persons. The security forces in Burkina Faso comprise the defense forces (27,000), the gendarmerie (5,219), and the police (15,000).

Chad has a total security force of 30,000–40,000 persons. The national defense comprises the National Army (Ground Forces, Air Force, National Gendarmerie, and National and Nomadic Guard of Chad) (25–30,000)1 Public order and safety is ensured by the gendarmerie, the national police (5,000–7,000),2, 3 and the national and nomadic guard.

Mali has a total security force of 27,000. The Malian security forces consist of the National Defense (13,000), the National Guard (3,000), the gendarmerie (4,000), and the police (6,000).

Mauritania has a total security force of 21,000. The Mauritanian security forces are composed of the Army (15,000), the Navy (620), the Airforce (250), the gendarmerie (3,000), the National Guard (2,250), and the National Police (4,600).

Niger has a total security force of 43,000 persons.4 The security forces in Niger comprise the Army (19,000 persons), the gendarmerie (7,200 persons), the National Guard (9,000), and the police (8,100).

1

Prepared by Alain Féler, Martha Woldemichael, and Jiaxiong Yao under the overall guidance of Christoph Klingen. The authors are also grateful for comments received from Annalisa Fedelino (AFR), and Dominique Desruelle (AFR), Luc Eyraud (AFR), the WAEMU Commission and other regional authorities.

2

The analysis of this Chapter focuses on the situation until end-2019, before the Covid pandemic outbreak that has brought to an abrupt end the near-decade long period of high growth in the WAEMU. It therefore does not cover either event related to the August 2020 coup d’Etat in Mali.

3

“The geographic focus of terrorist attacks has shifted eastwards from Mali to Burkina Faso and is increasingly threatening West African Coastal States,” briefing to the UN Security Council of the Secretary General’s Special Representative to West Africa and the Sahel, January 8, 2020.

4

Incident data are sourced from “Risk Control.” This provider defines a terrorist incident as “violent incidents conducted by non-state actors against state or civilian targets to advance an ideological cause by influencing a wider audience, e.g. bombings, assassinations, hostage-taking, attacks using chemical, biological, radiological or nuclear agents (CBRN).”

5

In turn, together with pervasive corruption, widespread poverty and high rates of youth unemployment and underemployment is creating fertile ground for terrorist groups to recruit and to sow violence.

6

According to the Armed Conflict Location and Event Data (ACLED) project. On an annualized basis, during the first institutions, including the World Bank, subsequently joining. It aims to implement over 800 projects at a cost of €11.6 billion until 2022 to address all current challenges—security, demographic, economic, and social. At the August 2019 Biarritz G7 summit France and Germany announced the Partnership for Security and Stability for the Sahel (P3S), encompassing the countries of the region and their partners in a spirit of shared responsibility. It has yet to be launched. At the Pau Summit in January 2020, the International Coalition for the Sahel was launched by the Heads of State of France, Burkina Faso, Chad, Mali, Mauritania and Niger. The Coalition ambitions to provide a collective response to the challenges of the Sahel region by pooling the work undertaken by the G5 Sahel States and their international partners.

7

According to the UNHCR.

8

According to the Food Crises Prevention Network and the World Food Program (WFP).

9

In early 2019, according to UN Security Council, CS/13810, May 2019.

10

A conflict that claims 29 or more deaths per million of people per month is considered “high intensity.”

11

IMF Sub-Saharan African Regional Economic Outlook: “The Economic Consequences of Conflict”, Spring 2019.

12

For some research finding showing that night-light intensity is a good proxy for real GDP, see Henderson, Storeygard and Weil, 2012. The independent nature of night-light intensity means that this measure of economic activity is less susceptible to systematic measurement error. It is also a useful variable for conflict cases, when data on economic activity is unavailable or unreliable.

13

Livelihood zoning maps and reports from USAID provide also useful information on the spatial distribution of economic activity in Burkina Faso, Mali and Niger.

14

The impact on night-light growth is obtained by multiplying the estimated coefficient for the change in night growth per thousand fatalities (-0.182) by the conflict density (7 per million or .007 per thousand fatalities).

15

This proposal would apply to the convergence phase, that is the transition period before the fiscal deficit rule becomes binding. Another, possibly complementary, option would be to introduce an escape clause for security shocks attached to the fiscal deficit rule, once this rule is in effect. This option could be complicated to implement, because of the difficulty to isolate and measure the impact of security shocks on fiscal deficits (both on revenue and spending).

1

Globalfirepower.com and www.securityassistance.org and ISS.

3

A census was conducted in 2014 and followed by the recruitment of about 2,000. Another census was undertaken in 2018 to better control the wage bill.

4

Niger, 2017 Security Public Expenditure Review update.

West African Economic and Monetary Union: Selected Issues
Author: International Monetary Fund. African Dept.
  • View in gallery

    WAEMU: Terrorism Incidents and Social Unrest in the Sahel. 2011 – 2020

    (number of incidents)

  • View in gallery

    Fatalities linked to Security Incidents

    (number of fatalities)

  • View in gallery

    Mali: Real GDP Growth and Components, 2001–19

    (Percent)

  • View in gallery

    WAEMU: Real GDP Growth, 2001–19

    (Percent)

  • View in gallery

    WAEMU: Provinces Including Zones Mainly Afflicted by Ongoing Violence: Area, Population and Night Lights

    (Percent of National Data)

  • View in gallery

    WAEMU: Conflict Locations, 2012, 2015, 2018

  • View in gallery

    WAEMU: Terrorism, Fiscal Deficit, and Public Debt, 2010–19

  • View in gallery

    Mali: Terrorism and Public Finances, 2010–19

  • View in gallery

    Burkina Faso: Terrorism and Public Finances, 2010–19

  • View in gallery

    Niger: Terrorism and Public Finances, 2010–19