West African Economic and Monetary Union: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
02 Mar 2022
eISBN:
9798400204579
Language:
English
Keywords:
market infrastructure; investor base; market-making activity; market participant; market development; Securities markets; Securities; Interbank markets; Money markets; Government securities; West Africa
Download PDF (480.2 KB)

Notwithstanding strong growth during the last decade the WAEMU’s sovereign security market remains underdeveloped and exhibits important gaps in most building blocks needed for such markets to be sufficiently deep, liquid, and efficient. Addressing these gaps will be essential to reduce the dependence of WAEMU governments on external financing and enhance monetary policy transmission. To this end, reform efforts should target improvements in the functioning of the money/interbank market and primary bond market as well as in the financial market infrastructure that most critically hamper the development of the secondary bond market. Incentives to broaden the investor base would also contribute to deepening the WAEMU fixed-income markets.

Abstract

Notwithstanding strong growth during the last decade the WAEMU’s sovereign security market remains underdeveloped and exhibits important gaps in most building blocks needed for such markets to be sufficiently deep, liquid, and efficient. Addressing these gaps will be essential to reduce the dependence of WAEMU governments on external financing and enhance monetary policy transmission. To this end, reform efforts should target improvements in the functioning of the money/interbank market and primary bond market as well as in the financial market infrastructure that most critically hamper the development of the secondary bond market. Incentives to broaden the investor base would also contribute to deepening the WAEMU fixed-income markets.

Developing the Waemu’s Sovereign Security Market1

Notwithstanding strong growth during the last decade the WAEMU’s sovereign security market remains underdeveloped and exhibits important gaps in most building blocks needed for such markets to be sufficiently deep, liquid, and efficient. Addressing these gaps will be essential to reduce the dependence of WAEMU governments on external financing and enhance monetary policy transmission. To this end, reform efforts should target improvements in the functioning of the money/interbank market and primary bond market as well as in the financial market infrastructure that most critically hamper the development of the secondary bond market. Incentives to broaden the investor base would also contribute to deepening the WAEMU fixed-income markets.

A. Background

1. The WAEMU’s sovereign security market has grown substantially since the BCEAO ceased to provide direct funding to member governments a decade ago. This market was launched in 1998 but started to take off after the prohibition of new statutory advances by the BCEAO to member-states in 2010. Thus, the nominal stock of government securities (T-Bills and bonds) issued in CFAF on the regional market (through auctions or syndications) grew on average by about 20 percent a year from 2010 to 2020, from less than 5 percent of GDP to 15 percent of GDP. During the same period, the share of sovereign debt issued on the regional security market in total government debt more than doubled from 14 percent to 30 percent.

Figure 1.
Figure 1.

WAEMU: Stock of Sovereign Securities Issued on Regional Market

(in percent)

Citation: IMF Staff Country Reports 2022, 068; 10.5089/9798400204579.002.A003

Sources: CREPMF, AUT and Fund Staff Estimates

2. The growth of the WAEMU’s sovereign security market was accompanied by improvements in issuance policies and the regulatory environment. In 2013, the WAEMU authorities created the Agence UMOA-Titres (AUT), a regional agency, to coordinate regional market issuance, and in the following years strengthened the regulatory framework for primary market operations. In subsequent years, regional authorities implemented a series of measures to promote the predictability and transparency of sovereign securities auctions. The regional financial market regulator (CREPMF) also strengthened rules and procedures for the issuance of sovereign securities through syndication.

3. At the same time, most of the WAEMU countries strengthened their capacity to prepare and implement a coherent funding strategy. With the assistance of the IMF and the World Bank, many of the countries received tailored training for the formulation and implementation of programs of domestic sovereign security issuance, for the assessment of investor demand, and for interactions with investors. Regional training was also offered on characteristics and pricing of sovereign securities, issuance techniques, and steps for developing a yield curve.2

4. Notwithstanding the progress achieved in recent years, the primary sovereign security market in the WAEMU remains relatively underdeveloped by international standards. The share of sovereign debt issued on the domestic fixed income market3 in the WAEMU is well below other Sub-Saharan countries such as Ghana, Kenya, and Nigeria where it stood at 35, 48, and 75 percent respectively at end-2020. (Figure 2) 4

Figure 2.
Figure 2.

WAEMU: Stock of Local Currency Sovereign Securities

(in percent of total sovereign debt)

Citation: IMF Staff Country Reports 2022, 068; 10.5089/9798400204579.002.A003

Sources: Fund Staff Estimates

5. There is still significant scope for further developing the WAEMU’s local currency sovereign security market. The WAEMU region satisfies several conditions that are generally seen as conducive to local currency bond market (LCBM) development. One of them is the size of the potential market allowed by the economic and monetary integration of eight countries, which creates economies of scale.5 In addition, the strong growth and macroeconomic stability as well as the strengthening of bank soundness achieved during 2012–2019 allowed the WAEMU region to enter the COVID crisis from a position of strength; and prospects for recovery from this crisis are favorable, albeit with some downside risks. The projected convergence of fiscal deficits back to the regional norm of 3 percent of GDP by 2024 should sustain the demand of WAEMU sovereigns for funding on the regional fixed income market while preserving fiscal and external viability. Finally, inflation should remain well-contained given the peg of the CFA Franc to the Euro.

6. This paper applies the IMF/World Bank diagnostic LCBM framework to identify reforms needed to lift the main constraints still impeding the development of the WAEMU’s sovereign security market. This systematic and comprehensive framework is articulated in a recent Guidance Note which expands on the traditional building blocks (pillars) of LCBM development and identifies indicators that can be used to systematically assess the performance of each LCBM building block.6 Taking also into account the synergies between the building blocks, such an approach helps to identify the areas where reforms and policy measures are most needed.

B. Assessment of the Building Blocks for Sovereign Bond Market Development

7. The IMF/World Bank LCBM framework identifies six building blocks that can help analyze the stage of development of the WAEMU’s sovereign security market. These building blocks are intuitively designed to provide focus on key reforms for the efficient functioning of LCBMs:

  • The money/interbank market. It facilitates the implementation of monetary policy and strengthens monetary policy transmission, but also provides a foundation for the maturity extension of sovereign financing. The money market is a thus a building block of the sovereign debt market and is important to assess its level of development.

  • The primary sovereign security market. Through this market, sovereign debt managers implement their debt management strategy and establish the relationship with market participants. Thus, primary market policies have a fundamental role in promoting the development of the domestic sovereign security market.

  • The secondary market. It should provide a cost-efficient and secure platform to trade sovereign securities in a fair and transparent way. The secondary market provides liquidity for government securities that leads to term transformation, allowing investors to hold longer maturities than that of their liabilities on the assumption that liquidity will be available in the secondary market. The secondary market also provides a pricing reference for the sovereign—contributing to price discovery on the sovereign’s new borrowing costs and for non-sovereign borrowers.

  • The investor base. A deep and diversified investor base ensures demand for government securities, strengthening the resilience of the market in times of market stress. The development of a diverse investor base comprising agents with different investment horizons and risk-return preferences, particularly institutional investors, allows governments to spread risk in their debt portfolios and helps to extend the yield curve.

  • The financial market infrastructure (FMI). This building block should facilitate the smooth flow and settlement of transactions in the money market and the primary and secondary markets, strengthen investor confidence, and stimulate the pace of market expansion. The state of development and functioning of the custodial and settlement infrastructure is a major determinant of systemic risk.

  • The legal and regulatory framework. It affects the structure, functioning, and development of the sovereign security market. Legislation and other legal instruments provide for the ability of governments to borrow. At the level of intermediaries and investors, rules and regulations shape the organization of the primary and secondary markets in government securities and influence the roles of different types of market participants.

8. Each building block is decomposed into a series of outcome and/or policy indicators. “Outcome” indicators are used to evaluate the state of the market for each relevant building block; and “policy” indicators are used to assess the policy and regulatory-associated practices employed by the authorities (both de jure and de facto). Four building blocks (money market, primary market, secondary market, and investor base) have outcome indicators and policy indicators. The other two blocks (FMI and legal and regulatory framework) have only policy indicators.

9. Each indicator is assessed through a scale of four stages of market development. Development stages are ranked 1 to 4 corresponding respectively to nascent (1), developing (2), emerging (3) and mature (4). Each indicator’s assessment is derived from averaging answers to qualitative or quantitative questions relevant for that aspect of market development.7 Regarding the WAEMU’s sovereign security market, answers to such questions reflected consultations with relevant regional institutions and Fund staff, including WAEMU country teams for issues of national relevance. Some judgment was made when answers to questions related to national matters differed among member countries, with a view to retaining the most meaningful one for the entire WAEMU region. Consolidating the stages of the indicators for each building block generates also the stage of development for that particular building block – which also ranges from 1 to 4. Finally, individual building blocks’ rankings are combined into an overall assessment of the level of development of the sovereign security market as a whole.

10. Overall, the WAEMU’s sovereign security market is assessed as being a stage 2 of development. For most building blocks, some indicators suggest a good functioning of certain aspects of that particular building block, while other indicators point to severe weaknesses. Deficiencies are more prevalent for the primary market and investor base building blocks, but they also hinder the development of the money market, secondary market, and market infrastructure building blocks. This is illustrated through the colors assigned to each building block in Figure 3 and to each of the 40 underlying indicators in Table 1 below. The main considerations underlying this assessment are summarized below for each building block.

Figure 3.
Figure 3.

WAEMU: Sovereign Bond Market Stages of Building Block Development

Citation: IMF Staff Country Reports 2022, 068; 10.5089/9798400204579.002.A003

Sources: Fund Staff Estimates
Table 1.

WAEMU: Stages of Development of Building Blocks of the Sovereign Security Market

article image

11. The Money Market building block in the WAEMU is assessed to be at a developing stage (2.2), mostly due to a shallow and insufficiently transparent interbank market:

  • The BCEAO’s monetary policy operating framework is broadly sound on a de jure basis and uses interest rates as an operational target. However, in practice, the interbank rate has not acted systematically as a credible “operational target”8

  • The WAEMU’s interbank market remains shallow and lacks proper reference prices for up to one year. The volume of interbank transactions remains very small, with interbank loans equivalent to 2 percent of total bank loans and less than 1 percent of GDP at end 2020 (Figure 4). In addition, transactions are often limited to non-collateralized intra-group institutions (Figure 5). Finally, many banks rely on the BCEAO’s refinancing windows and do not participate in the interbank market, keeping reserves at the central bank to meet their liquidity needs.

  • The WAEMU’s interbank market also lacks transparency. Proper pre and post trading transparency are both lacking, with market participants having incomplete KYC (Know Your Counterparty) information available on other counterparties and insufficient data on quotes for T-bills or repos. No short-term rate is published daily, and banks seem to rely more on the average auction rate to assess financial conditions.

  • The legal framework for the repo interbank market is broadly in place, but improvements are needed. Repos among banks are supported by the legal framework which allows for the full transfer of securities used as collateral. However, a shallow secondary market and a fragmented sovereign security market (see below) constrain the collateralization of repo transactions.

Figure 4.
Figure 4.

WAEMU: Interbank Loans, 2014–20

Citation: IMF Staff Country Reports 2022, 068; 10.5089/9798400204579.002.A003

Sources: BCEAO and IMF Staff Estimates.
Figure 5.
Figure 5.

WAEMU: Interbank Transactions, 2019–20

Citation: IMF Staff Country Reports 2022, 068; 10.5089/9798400204579.002.A003

Sources: BCEAO; and IMF staff estimates.

12. The Primary Security Market building block in the WAEMU is assessed as being at a developing stage (2.3), largely due to its fragmentation. 9

  • Sovereign funding raised on the regional security market, as a share of total debt, remains low by international standards. As noted earlier, despite its strong growth in the last decade, the share of sovereign debt raised on the security market remains much lower in the WAEMU than in Sub-Saharan frontier market countries such as Ghana, Kenya and Nigeria. Also, the maximum tenure of sovereign bonds issued on the WAEMU’s market is 12 years,10 whereas it reaches 15 years in Ghana, Kenya and Tanzania and 30 years in Nigeria.11

  • The segmentation by mode of issuance of the primary sovereign security market critically constrains its development. WAEMU sovereign securities can be issued either through auctions or syndications (Figure 6). T-Bills, of maturity of up to 24-months, are issued only through auctions, while bonds, including Sukuks consistent with Islamic finance principles, may be issued by both auctions and syndications. Auctions are organized by the Agence UMOA Titres (AUT) with securities cleared and deposited at the BCEAO. By contrast, syndicated issues are facilitated and supervised by the financial market regulator (CREPMF), with securities listed on the regional stock exchange (BRVM) and cleared and deposited at the central depository (Dépositaire central/Banque de Règlements or DC/BR), which is the central securities depositor associated with the BRVM. Differences in product characteristics, including the fact that auctioned instruments increasingly require a bullet repayment while syndicated ones are amortizing, as well as different trading platforms and regulatory entity, reinforce the lack of fungibility between securities issued on these two distinct market segments.

  • In addition, the ability to create benchmark securities is hampered by a series of factors. Creating benchmark securities requires re-opening instruments already issued, with a view to increasing the volume of funding raised by the same instrument. However, WAEMU sovereigns tend to adjust the coupon of new bonds in response to market movements, hindering the ability to reopen existing instruments. Moreover, refinancing risk concerns, partly due to cash management weaknesses, may discourage sovereigns from issuing large amounts of individual instruments. Although some benchmark instruments have been issued in the past, the common practice for WAEMU sovereigns remains to issue new instruments of same maturities at short intervals.12 This generates a large number of outstanding instruments of the same maturity that cannot function as reference for that point of the yield curve. (Figure 7) Such a policy of issuing new instruments – with different ISIN codes –makes it more difficult for primary dealers to trade in the secondary market.

  • WAEMU sovereigns’ cash management practices are not sufficiently developed. Some countries in the region have not yet established effective cash management policies to address roll-over risks, such as building up a cash buffer and engaging in regular liability management operations. This makes it more difficult for these WAEMU sovereigns to adhere to their security issuance plans.

  • On the positive side, sovereign security auction practices are relatively efficient and transparent. In collaboration with Agence UMOA-Titres (AUT), WAEMU sovereigns publish yearly and quarterly security auction plans although often with relatively limited lead time. Sovereign security auctions have been generally oversubscribed in recent years, though this may not happen in the event where funding requirements increased substantially and/or monetary policy tightened significantly.13 In line with international best practices, shortly after auctions takes place, results are published along with information on the bid and accepted amounts, as well as the cut-off yield.

Figure 6.
Figure 6.

WAEMU: Stock of CFAF Sovereign Securities

(at end-year, in percent of GDP)

Citation: IMF Staff Country Reports 2022, 068; 10.5089/9798400204579.002.A003

Sources: CREPMF; AUT; and IMF staff estimates.
Figure 7.
Figure 7.

WAEMU: Number of Outstanding Auctioned Securities, end-June 2021

Citation: IMF Staff Country Reports 2022, 068; 10.5089/9798400204579.002.A003

Sources: UMOA-Titres.

13. The Secondary Security Market building block is assessed at a relatively low (1.7) level of development, particularly because of its shallowness and lack of diversification.

  • The secondary market for sovereign securities is relatively shallow, lacking depth and liquidity. The bulk of secondary trading occurs between national subsidiaries of banking groups operating in several WAEMU countries. They mostly involve auctioned securities, predominantly from Côte d’Ivoire, which are more liquid than syndicated ones. (Figure 8) 14 The turnover ratio between the annual volume of secondary market transactions and the stock of auctioned sovereign securities outstanding at the end of the previous year increased from 4.1 percent in 2017 to 20.9 percent in 2020. This rising trend was in fact driven by the more liquid auctioned securities, whose turnover ratio reached 32.7 per cent in 2020 (Figure 9). This later ratio compares favorably with that of 20.9 percent for the CEMAC and but is much less than the average of 143.4 percent for emerging Asian economies such as Malaysia, the Philippines Thailand, and Vietnam). The extremely low turnover ratio of syndicated securities suggests that the framework used around this issuance method has not been sufficient to support market development.

  • Public information on secondary market pricing is insufficient. Trading for auctioned securities is done over-the-counter (OTC) and no platform to disseminate the prices is currently in place. Market-makers do not quote firm prices for benchmark securities on a regular basis and they do not even provide indicative prices. There is a platform for trading syndicated securities, but liquidity is even lower, perhaps to some extent driven by the amortizing structure of the bonds (Figure 9). UMOA-Titres publishes a yield curve weekly but only based on data from the primary market.

  • Sovereign security dealers fall short of being true market makers. A system of sovereign security dealers (Spécialistes en Valeurs du Trésor or SVT) was introduced in 2013 and became operational 2016, with a view to improving secondary market liquidity. Such dealers are licensed to act as privileged partners of one or more WAEMU member states and have obligations to act as market makers on both the primary and secondary markets. In return they can, among other benefits, have access to non-competitive offers and request a delayed payment in auctions. In practice however, such benefits fall short of providing dealers with sufficient incentives to fulfill their expected role of market makers, which basically implies quoting and trading bonds in the secondary market, as well as bidding in the primary market.15 There is also room to improve the mechanisms in which the non-competitive auctions operate, for instance, by providing a longer period in which market-makers can buy bond on a non-competitive basis. In addition, a more efficient policy to build benchmark bonds and provide reference points along the yield curve should facilitate the trading activity of SVTs (as the market would focus on the trading of a smaller number of instruments) and help reduce the above-mentioned imbalance between their obligations and benefits. Establishing a securities lending facility and providing liquidity support for these dealers would also be a welcome policy.

  • The trading environment is deficient and needs to be further developed. There is currently no electronic inter-dealer trading platform that could facilitate trading and promote price transparency. Short-selling is not allowed, which might restrict market-making activity. The segmentation of the market in two different platforms (depending on whether the instrument was issued by syndication or auction) is a further deterrent to a more active secondary market.

  • Other factors contribute to the low level of secondary market liquidity. First, a shallow and non-diversified investor base (covered in next section) structurally reduces the ability of dealers to transfer securities to final investors. Second, deficiencies in the primary market, such as the fragmentation of the market and the sub-optimal policy of benchmark securities issuance (as mentioned above) makes quoting and trading securities more challenging.

Figure 8.
Figure 8.

WAEMU: Secondary Trading on Sovereign Securities

(CFAF Billion)

Citation: IMF Staff Country Reports 2022, 068; 10.5089/9798400204579.002.A003

Sources: CREPMF; AUT; and IMF staff estimates.
Figure 9.
Figure 9.

WAEMU: Turnover Ratio on Secondary Market for Sovereign Securities

(percent)

Citation: IMF Staff Country Reports 2022, 068; 10.5089/9798400204579.002.A003

Sources: CREPMF; AUT; and IMF staff estimates.

14. The Investor Base building block is assessed at a low (1.5) level of development, in particular because of its narrowness and lack of diversity.

  • The WAEMU investor base is shallow and dominated by the banking sector. Banks operating within WAEMU constitute about 85 percent of the investor base for government securities issued domestically (Figure 10). They account for around 90 percent of domestic issuances through auctions and 75 percent of the syndication placements. In the absence of a more liquid secondary market, banks also have a buy-and-hold investment strategy. The remaining players are pension funds (usually from the public sector), insurance companies and investment funds. The participation of international investors from outside the WAEMU remains negligible in the regional security market. It is estimated at less than 1 percent for auctioned securities, while it exceeds 15 percent in comparator SSA countries such as Ghana, Kenya or Nigeria. On a more positive note, central bank direct sovereign financing, including through the BCEAO’s participation in the primary sovereign security market is prohibited.

  • Investor relations practices could be improved. A proper communication with market players is an essential part of the issuance activity. However, in the WAEMU region, most countries do not have an investor relations unit, and this task is mostly delegated to UMOA-Titres, which is short-staffed. In addition, authorities do not regularly engage in two-way communication with market participants, do not conduct regular fora to discuss their debt strategy or market conditions. A dedicated webpage on debt management issues is also missing from the ministries of finance websites.

Figure 10.
Figure 10.

WAEMU: Banks’ Holdings of Sovereign Securities

(percent)

Citation: IMF Staff Country Reports 2022, 068; 10.5089/9798400204579.002.A003

Sources: BCEAO; and IMF staff estimates.

15. The Financial Market Infrastructure building block is assessed at a relatively low (2.3) level of development, notably because of deficiencies in the interbank repo market.

  • The technology platforms are broadly in place. The auctions are held on an electronic platform and seem to work smoothly. For the instruments issued by each mechanism (auction or syndication), there is one single custodian, which prevents further fragmentation of the market. The BCEAO operates a modern RTGS (Real Time Gross Settlement) system.16

  • Clearing and settlement risks are contained. All securities are dematerialized, and such dematerialization is supported by the legal framework. The transactions are settled through the RTGS system, minimizing risks. Moreover, the governance for the central security depository is broadly in place, as the legal framework defines who can own and operate a Central Securities Depository (CSD) as well as its roles and functions.

  • On the other hand, a few issues related to liquidity, transparency, and fragmentation warrant progress. First, the market infrastructure should provide better access to liquidity to participants, for instance by supporting same-day settlements of transactions and allowing the use of intraday repos. Secondly, the current infrastructure does not seem to facilitate the provision of information on transactions volumes and prices, harming market transparency. Third, the fragmentation of the issuance system generates a segmentation of the market infrastructure, increasing costs unnecessarily and reducing market efficiency.

16. The Legal and Regulatory Framework is assessed as broadly supportive of other building blocks and has the most advanced stage of development (3.4) in the WAEMU.

  • The legal framework for the primary security market is sound and adherent to best practices. Such framework provides a clear authority to borrow to individual countries’ ministries of finance and sets clear roles and responsibilities to debt management offices. It also allows these entities to conduct liability management operations and, for all WAEMU countries except Guinea Bissau, requires the publication of a debt management strategy.

  • Secondary market activities are also supported by the legal framework. The regulatory framework prohibits unfair trading practices and the regulatory authority is perceived as having the capacity to monitor secondary market activities, as well as to ensure proper market conduct by the participants. In addition, depositary intermediaries are subject to rules to safeguard investor ownership rights, with the regulatory authority having the capacity to oversee the compliance of the relevant rules. However, there is a need for greater clarity on which institution has supervisory authority on secondary trading of auctioned securities.

  • The participation of institutional players such as investment funds is broadly supported by the legal framework. Standards for eligibility, governance, and operationalization of investment funds are in place. Moreover, sufficient disclosure to ensure investor protection is provided.

  • On the other hand, the rules for taxation of government bonds lack neutrality and are distortionary. Indeed, they discriminate among investors based on their country of residency within the WAEMU. In addition, the regulatory environment seems to miss the requirement for periodic mark-to-market valuation of securities holdings.

C. Conclusions and Policy Recommendations

17. Notwithstanding its significant growth in the past decade, the WAEMU’s sovereign security market remains at a developing stage. This is confirmed by a systematic assessment of an array of indicators of functionality for the six building blocks identified by the LCBM development framework recently elaborated by the IMF and the World Bank. Such an approach facilitates the identification and sequencing of actions most needed to help the WAEMU’s sovereign security market move closer to an emerging stage of development, which will be essential to reduce the dependence of WAEMU governments on external financing, improve WAEMU countries’ economic resilience and enhance monetary policy transmission.

18. In the WAEMU, reform efforts could most usefully focus on measures aimed at increasing the depth and liquidity of the secondary sovereign security market. Such measures would need to be accompanied by mutually reinforcing ones aimed at addressing deficiencies in other LCBM building blocks that most critically hinder the development of the secondary market. Areas that deserve a more attention in each one of the six building blocks are as follows:

  • Money Market:

    • o Promote transparency of the interbank repo market by ensuring the daily availability of information on trading and promoting reference prices/rates that can be used as guidance for banks’ loans.

  • Primary bond market:

    • o Reduce the fragmentation of the market, by acting on two important fronts: (1) eliminate the segmentation derived from the two issuance mechanisms (for auctions and syndications), which would require a generalization of a bullet structure for all sovereign securities, as well as the unification of the trading infrastructure and regulatory environment; (2) enhance the policy of issuance of benchmark bonds, by using more widely the reopening of the same instrument, facilitating their use by market-makers and fostering the formation of better reference prices. This would allow a more effective policy of reopening the instruments issued in previous auctions.

    • o Improve sovereigns’ cash management practices. This would, among other things, require countries building up cash buffers. To provide the proper incentives for such practices, sovereign resources deposited at BCEAO should be remunerated at market rates, and at the same time ring-fenced for debt management purposes.

  • Secondary bond market:

    • o Improve transparency and price formation through the development of an electronic platform for auctioned securities.

    • o Increase the incentives for the SVT to animate the secondary market, including by producing continuous price quotations. To this end, SVT could be provided access to facilities such as securities lending and credit lines. Also, non-competitive auctions could be structured in a way that incentivizes the fulfillment of SVT’s obligations.

  • Investor Base:

    • o Stimulate the creation of institutional investors and private pension funds. o Enhance investor relations programs at the national level to improve two-way communications with investors.

  • Market Infrastructure

    • o Allow the use of intra-day repos and same-day settlement to enhance access to short-term liquidity.

    • o Unify the central depository system for sovereign securities.

  • Legal and Regulatory Frameworks:

    • o Remove distortionary tax treatments on fixed income securities, in particular the exemptions granted to investors purchasing securities from the sovereign of their specific WAEMU country of residence.

    • o Require investment funds to mark-to-market their asset portfolio.

19. Reform measures may take more or less time to be fully implemented depending on the constraints specific to each indicator and building block. For instance, measures involving a single regional institution, such as the BCEAO, should potentially take less time to implement. On the other hand, other measures will need to involve coordination among different agencies and across several countries with varying degrees of capacity development, therefore taking more time to be implemented. Table 2 below illustrates a possible sequencing of proposed policy reforms.

Table 2.

WAEMU: Proposed Sequencing of Reforms for the WAEMU’s Sovereign Security Market

article image

References

  • Agence UMOA-Titres, 2016. “Regional Sovereign Debt Market”, Chapter 14 of Kireyev et alii.

  • Agence UMOA-Titres, 2017–2021. “Bulletins Trimestriels de Statistiques”

  • Ahokpossi, C. Ismail, K, Karmakar, S and Koulet-Vickot, M., 2013. “Financial Dept in the WAEMU: Benchmarking against Frontier SSA Countries”, IMF Working Paper No 13/161.

    • Search Google Scholar
    • Export Citation

  • Abidi, N. and Amidzic, G., 2021. “Modernizing the Monetary Policy Framework and its Transmission”, in West African Economic and Monetary Union Selected Issues Paper, IMF Country Report 21/50.

    • Search Google Scholar
    • Export Citation

  • BIS, 2007. “Financial Stability and Local Currency Bond Markets”, CGFS Papers No 28.

  • Cabrillac, B. and Rocher, E., 2009. “Les Marchés de Titres de la Dette Publique dans les Pays Africains en Développement : Evolution Récente et Principaux Défis ». Bulletin de la Banque de France, No 176.

    • Search Google Scholar
    • Export Citation

  • CREPMF, 2005–2019. « Rapports Annuels »

  • Diouf, A. and Boutin-Dufresne, F., 2012. “Financing Growth in the WAEMU Through the Regional Securities Market: Past Successes and Current Challenges”, IMF Working Paper No 12/149.

    • Search Google Scholar
    • Export Citation

  • Diouf, A. and Boutin-Dufresne, F., 2016. “Financing Growth”, Chapter 8 in Kireyev et alii.

  • Dissou, O. and Baudouin, R., 2017. “Standardisation des Titres Publics et Mise à Jour des Procédures d’Emission dans l’UEMOA”, Rapport d’Assistance Technique, Afritac de l’Ouest.

    • Search Google Scholar
    • Export Citation

  • Dissou, O. and Choquette, S., 2018. « Elaboration des Conventions pour le Marché des Titres d’Etat de l’UEMOA », Rapport d’Assistance Technique, Afritac de l’Ouest.

    • Search Google Scholar
    • Export Citation

  • Dissou, O, Choquette, S and Grifferty, M., 2017. “Elargissement de la Base des Investisseurs du Marché des Titres Publics de l’UMOA”, Rapport d’Assistance Technique, Afritac de l’Ouest.

    • Search Google Scholar
    • Export Citation

  • Dissou, O. and Van der Wansem, P., 2018. “Renforcement de la Procédure de Réalisation des Emissions de Titres d’Etat par Syndication dans l’UEMOA », Rapport d’Assistance Technique, Afritac de l’Ouest.

    • Search Google Scholar
    • Export Citation

  • Dissou, O. and Werner. X., 2018. “Vers l’Elaboration d’un Cadre d’Evaluation de la Capacité d’Absorption du Marché des Titres d’Etat de l’UEMOA”, Rapport d’Assistance Technique, Afritac de l’Ouest.

    • Search Google Scholar
    • Export Citation

  • Essers, D., Blommestein. H.J., Cassimon, D., Ibarlucea P., 2016. « Local Currency Bond Market Development in Sub-Saharan Africa: A Stock-Taking Exercise and Analysis of Key Drivers”, Emerging Markets Finance & Trade, No 52.

    • Search Google Scholar
    • Export Citation

  • IMF and World Bank, 2020. “Staff Note for the G20 International Financial Architecture Working Group – Recent Developments on Local Currency Bond Markets in Emerging Economies”.

    • Search Google Scholar
    • Export Citation

  • IMF and World Bank, 2021. “Guidance Note for Developing Government Local Currency Bond Markets”.

  • IMF, World Bank, EBRD and OECD, 2013. “Local Currency Bond Markets – A diagnostic Framework”.

  • Kireyev. A, et alii, 2016. “Building Integrated Economies in West-Africa ; Lessons in Managing Growth, Inclusiveness and Volatility”, IMF.

    • Search Google Scholar
    • Export Citation

  • Magnan-Marionnet, F., 2016. “Les Emissions de Titres de Dette Souveraine en Zone Franc : Evolutions, Enjeux et Principaux Défis en UEMOA et dans la CEMAC », Epargne sans Frontière ; Techniques Financières et Développement, No 123.

    • Search Google Scholar
    • Export Citation

  • Soltani, C., Lesley Perez, J., 2021. « Developing Yield Curves for the WAEMU Debt Market”, BTO, Technical Assistance Mission, Afritac-West.

    • Search Google Scholar
    • Export Citation

  • Sy, A., 2006. «Financial Integration in the West African Economic and Monetary Union”, IMF Working Paper No 06/214.

  • Sy, A., 2007. “Local Currency Debt Markets in the West African Economic and Monetary Union”, IMF Working Paper No 07/256.

  • Sy, A., 2010. “Government Securities Markets in the West African Economic and Monetary Union: A Review”, African Development Review, Vol. 22, No 2.

    • Search Google Scholar
    • Export Citation

  • Van de Wansem, P. and Horman, G., 2018. “Renforcement du Dispositif de Réalisation des Opérations de Titres d’Etat par Syndication”, Rapport d’Assistance Technique, Afritac de l’Ouest.

    • Search Google Scholar
    • Export Citation
1

Prepared by Alain Feler (AFR), Guilherme Pedras (MCM) in collaboration with Soltani Chaker (Afritac West). We are grateful to Stephane Couderc, Annalisa Fedelino, and Luc Eyraud for comments and suggestions, as well as to officials from the BCEAO, Agence UMOATitres and CREPMF for their inputs and comments.

2

For an assessment of technical assistance provided by the IMF from 2017 to 2020, see Annex VII of IMF Staff Report on Common Policies for WAEMU Member Countries, January 2021.

3

Sovereign debt not issued on the regional market includes domestic loans and external issuances.

4

At end-2019, the share of local currency marketable sovereign debt was 47 percent for emerging economies and 95 percent for advance economies. See IMF and World Bank, 2021 “Guidance Note for Developing Government Local Currency Bond Markets”, available through the following link: https://www.imf.org/en/Publications/analytical-notes/Issues/2021/03/17/Guidance-Note-For-Developing-Government-Local-Currency-Bond-Markets-50256.

5

The WAEMU’s 2020 GDP is about double that of Ghana and 30 percent larger than that of Kenya.

6

See IMF and World Bank, 2021 “Guidance Note for Developing Government Local Currency Bond Markets” (link above).

7

The framework includes about 200 questions spelled out in the aforementioned 2021 LCBM Guidance Note.

8

See Abidi, N. and Amidzic, G. 2021, “Modernizing the Monetary Policy Framework and its Transmission”, in West African Economic and Monetary Union Selected Issues Paper, IMF Country Report 21/50.

9

Focusing only on the auction segment of the primary market would have shifted the assessment to an “emerging” (3) instead of a “developing” (2) stage for this pillar.

10

Côte d’Ivoire issued 12-year bonds (through syndications in 2016 and 2017 and through an auction in 2021) and Togo auctioned a 11-year bond in 2017. Apart from these specific issuances, all other WAEMU CFAF bonds have had maximum tenure of 10-years, except Guinea Bissau which has issued bonds with a maximum 5-year maturity.

11

See IMF and World Bank. 2020. “Staff Note for the G20 International Financial Architecture Working Group – Recent Developments on Local Currency Bond Markets in Emerging Economies”.

12

For instance, Côte d’Ivoire issued two different 5-year bonds in September and December 2020 while Senegal issued two different 7-year bonds within the same month of February 2021.

13

Subscription rates fell significantly short of 100 percent in 2017 following the tightening of monetary policy at end-2016 (partly achieved through the introduction of a quantitative ceiling on recourse of banks to BCEAO refinancing).

14

In 2019–20, syndicated bonds accounted for 3.4 percent of transactions on the WAEMU’s secondary market for sovereign securities. During the same period, Côte d’Ivoire’s share in the volume of sovereign securities traded on the WAEMU’s regional market averaged 51.2 percent, while its share in the stock outstanding of such securities was 35.2 percent (slightly less than its contribution of 38.2 percent to regional GDP).

15

Results from a survey conducted by the 2021 Financial Sector Assessment Program (FSAP) on systemic liquidity.

16

RTGS is a fund transfer system that allows money and/or securities to be transferred instantaneously, thus reducing the risks to the participants.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
West African Economic and Monetary Union: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2022: Issue 068
Publisher:
International Monetary Fund
ISBN:
9798400204579
ISSN:
1934-7685
Pages:
58
DOI:
https://doi.org/10.5089/9798400204579.002
  • View in gallery

    WAEMU: Stock of Sovereign Securities Issued on Regional Market

    (in percent)

  • View in gallery

    WAEMU: Stock of Local Currency Sovereign Securities

    (in percent of total sovereign debt)

  • View in gallery

    WAEMU: Sovereign Bond Market Stages of Building Block Development

  • View in gallery

    WAEMU: Interbank Loans, 2014–20

  • View in gallery

    WAEMU: Interbank Transactions, 2019–20

  • View in gallery

    WAEMU: Stock of CFAF Sovereign Securities

    (at end-year, in percent of GDP)

  • View in gallery

    WAEMU: Number of Outstanding Auctioned Securities, end-June 2021

  • View in gallery

    WAEMU: Secondary Trading on Sovereign Securities

    (CFAF Billion)

  • View in gallery

    WAEMU: Turnover Ratio on Secondary Market for Sovereign Securities

    (percent)

  • View in gallery

    WAEMU: Banks’ Holdings of Sovereign Securities

    (percent)

WAEMU: Stock of Sovereign Securities Issued on Regional Market

(in percent)

WAEMU: Stock of Local Currency Sovereign Securities

(in percent of total sovereign debt)

WAEMU: Sovereign Bond Market Stages of Building Block Development

WAEMU: Interbank Loans, 2014–20

WAEMU: Interbank Transactions, 2019–20

WAEMU: Stock of CFAF Sovereign Securities

(at end-year, in percent of GDP)

WAEMU: Number of Outstanding Auctioned Securities, end-June 2021

WAEMU: Secondary Trading on Sovereign Securities

(CFAF Billion)

WAEMU: Turnover Ratio on Secondary Market for Sovereign Securities

(percent)

WAEMU: Banks’ Holdings of Sovereign Securities

(percent)