Abstract
Despite a long history of program engagement, the Fund has not developed guidance on program design in members of currency unions.
Following the issuance of the Board paper on “Program Design in Currency Unions” (SM/17/237), staff has continued engagement with representatives of the two unions within the CFA Franc Zone. During this engagement, staff emphasized (i) that the proposed approach regarding policy assurances from union-level institutions would not infringe upon the independence of these institutions; and (ii) that, as discussed in the staff paper, special considerations apply when considering actions that would have a union-wide impact, as distinct from those that would only affect a single country. In the discussions, the representatives for these unions highlighted various aspects of the governance and monetary policy frameworks of these unions which they felt should be taken into account when policy assurances are sought. These frameworks are discussed below. They do not affect the staff’s policy proposals in SM/17/237.
West African Economic and Monetary Union (WAEMU)
1. Two treaties underlie the organization and functioning of the West African Franc Zone. The West Africa Monetary Union (WAMU) treaty was signed in 1973 and was last revised in 2007. It established the monetary union of the member countries and stipulated the institutions in charge of the union’s functioning. The West African Economic and Monetary Union (WAEMU) treaty complements the first treaty by extending the monetary union to an economic union. Specifically, it establishes a framework and set of institutions to, amongst other things, reinforce economic cooperation and convergence, harmonize laws and regulations, and ensure the mobility of goods and people. This treaty was originally introduced in 1994 and was last revised in 2003. A key institution of the economic union is the Commission of the WAEMU, which is led by commissioners who are appointed by the Conference of Heads of States and Governments. These commissioners are fully independent and operate for the common good of the union. They cannot solicitate or accept instructions from any government or institution, and member states are obliged to respect their independence (WAEMU – Article 28).
2. The Monetary Union is structured around a number of key bodies and institutions. These include the Conference of Heads of States and Governments, the Council of Ministers, the Banking Commission, and the Central Bank of West African States (BCEAO) (WAMU – Articles 5 and 25). Among the specific institutions noted above, the two key strategic decision-making bodies are:
The Conference of the Heads of States and Governments, which defines the broad policy direction of the union, approves the admission of new member states, and decides on any issues for which the Council of Minister has not been able to reach a consensus and which the Council has submitted to the Conference for decision.1 The Conference also sets the overall directions of monetary, exchange rate, and financial sector policies, although the operational implementation of these policies is delegated to union-level institutions. The Conference meets at least once a year and decides by unanimous agreement.2
The Council of Ministers ensures the implementation of policy directions and decisions by the Conference of Heads of States and Governments (WAMU – Article 16), and defines the regulatory environment for the banking and financial system and for the exchange rate (WAMU – Article 17). The head of the Council of Ministers is rotated across the membership.
BCEAO
3. Governance. The BCEAO, its organs, and personnel are prohibited from either soliciting or receiving directives or instructions from other union-level organs or institutions, from governments of WAMU member states, or from any other institution or individual. Union-level institutions and organs of the WAMU must also respect this principle (BCEAO Statutes – Article 4). The operational structure of the BCEAO includes the management team led by the governor, the Monetary Policy Committee, the Board of Directors, the Audit Committee, and the National Credit Councils.3
The governor of the BCEAO is appointed by the Conference of Heads of States for a renewable six-year term. Vice-governors are appointed by the Council of Ministers for a renewable five-year term. The governor is responsible for the implementation of monetary policy.4
The BCEAO’s Monetary Policy Committee (MPC) is responsible for setting monetary policy (and establishing the associated implementation tools) for the WAMU (BCEAO Statutes Articles 66). The MPC is composed of the BCEAO governor, vice governors, representatives of each member state, one member in charge of CFAF convertibility (representing France), and four other members nominated by the Council of Ministers.
The BCEAO’s Board of Directors is chaired by the governor or, when the governor is unavailable, by one of the vice-governors, and includes one representative appointed by the governments of each member state as well as France.5
The Audit Committee assesses the quality of the administration, functioning, financial information, and control systems of the BCEAO.6
The National Credit Council analyses the functioning of the financial system, including the banks’ relationship with their clients, the management of the payment system, and the financing of economic activities. The Council may also be consulted on monetary and credit issues.7
4. Monetary and exchange rate policies are implemented in accordance with the following principles:
Monetary Policy. The main objective of monetary policy is price stability, with sound and sustainable growth as a secondary objective (BCEAO Statutes – Article 8). From an operational viewpoint, the BCEAO (through the MPC) defines and implements monetary policy by setting the inflation objective and defining monetary policy tools. The MPC meets at least once a quarter and its decisions are taken by a simple majority of votes, with the vote of the president of the MPC breaking any ties. A quorum of two-thirds is needed for a valid decision to be made.
Exchange Rate Policy. The Council of Ministers defines the exchange rate policy, in consultation with the governor of the BCEAO. The Council of Ministers appoints an Exchange Rate Committee to assist the Council. The BCEAO is in charge of implementing the exchange rate policy set by the Council of Ministers (BCEAO Statutes – Article 9). Within the union, reserves are pooled and capital flows freely (WAMU – Articles 2–3). When the average net external assets of the BCEAO are less than 20 percent of the average short-term liabilities for three consecutive months, the governor informs the president of the Council of Ministers and calls an extraordinary session of the Monetary Policy Committee to examine the situation and take appropriate measures (BCEAO Statutes – Article 76).
Foreign Exchange Management. The management of foreign exchange reserves by the BCEAO is governed by an institutional framework which includes (i) the Cooperation Agreement between the French Republic and WAMU member states (referred to below as the “Operations Account Agreement”); and (ii) the statutes and management rules of the BCEAO.8 Under the operations account mechanism opened with the French Treasury, the BCEAO can resort without limit to advances from the French Treasury, although a minimum threshold for external assets—at least 20 percent of short-term liabilities—is set to prevent the account from being persistently overdrawn. The institutional framework also specifies that when the available deposits in the operations account will be insufficient to fulfill payments, the BCEAO will have to fund the operations account by drawing down its other liquid foreign exchange assets. The Operations Account Agreement was amended in 2005, resulting in major changes to:
lower the portion of operations account deposits which the BCEAO must hold in foreign currency from 65 percent to 50 percent;
ensure that only the portion of foreign currency held in the operations account is subject to the foreign exchange guarantee;
ensure that the mandated portion of the BCEAO’s foreign currency deposits held in the operations account is remunerated at the European Central Bank rate;
diversify the investment tools for foreign currency assets not deposited with the operations account.
Banking Commission
5. The overall responsibility for the stability of the financial system is held by the regional Banking Commission, with the national authorities (specifically, the Ministry of Finance) playing a role in the supervision of microfinance institutions operating in their territory. The Banking Commission is responsible for ensuring the soundness of the banking system of the monetary union and, in particular, the supervision of credit institutions and the resolution of banking crises.9 While the Banking Commission is distinct from the BCEAO, it is chaired by the governor the BCEAO. It consists of two decision making bodies (one for supervision and another for resolution) assisted by a secretariat.
Central African Economic and Monetary Community (CEMAC)
6. Two conventions and one treaty underlie the organization and functioning of the Central African Franc Zone. These are the Central African Monetary Union (UMAC) convention, the Central African Economic (UEAC) convention and the Central Africa Economic and Monetary Union (CEMAC) treaty. The first was signed in 1972 and was last revised in 2008. It established the monetary union and stipulated the institutions responsible for the union’s functioning. The UEAC convention and the CEMAC treaty were originally introduced in 1994 and were last revised in 2008. The UEAC convention complements the UMAC convention by extending the monetary union to an economic union (UEAC) by establishing a framework and a set of institutions to, amongst other things, reinforce economic cooperation and convergence, harmonize laws and regulations, and ensure the mobility of goods and people. The CEMAC treaty provided an umbrella framework for both conventions. A key institution of the CEMAC is the Commission of the CEMAC, which is led by commissioners who are appointed by the Conference of Heads of States (CEMAC – Article 27). These commissioners are fully independent and operate for the common good of the union. They cannot solicitate or accept instructions from any government, institution or individual. Members States have the obligation to respect the independence of these Commissioners (CEMAC – Article 31).
7. The Central African Monetary Union includes a number of decision-making bodies, including the Conference of Heads of States, the Ministerial Committee, and the Council of Ministers (UMAC – Article 9).
The Conference of Heads of States determines the policies of the union and guides the actions of the Council of Ministers (UEAC) and the Ministerial Committee (UMAC). The Conference of Heads of States meets at least once a year and makes its decisions by consensus.
The Ministerial Committee examines the broad policy directions of member countries and ensures their coherence with the common monetary policy. It oversees the enforcement of the UMAC treaty (UMAC – 11–12). The head of the Ministerial Committee is rotated across the membership.
The Council of Ministers establishes the direction of the economic union as defined by the UEAC convention.
In addition to these decision-making bodies, the institutions of the union include the Bank of the Central African States (BEAC) and the Banking Commission.10
BEAC
8. Governance: The operational structure of the BEAC consists of the Board of Directors, the Monetary Policy Committee, the management team (the “gouvernement de la BEAC”), and the national Monetary and Financial Committees.11
The Board of Directors consists of fourteen members, two directors for each member state and France, appointed for renewable three-year terms. The Board of Directors is chaired by the governor of the BEAC.12
The Monetary Policy Committee (MPC) sets monetary policy on behalf of the BEAC, and establishes the associated policy implementation tools (UMAC – Article 22; BEAC – Articles 1 and 38). The MPC is presided over by the governor of the central bank and includes 14 other members, two for each member (one of whom is the Director of the national BEAC branch), and two representing France. Monetary policy is implemented by the Management team of BEAC (BEAC – Article 47).
The BEAC management team is led by the governor, assisted by a vice-governor, a secretary general and three directors general.13 The governor is appointed by the Conference of Heads of State, following a nomination by the Ministerial Committee, and after confirmation by the Board of Directors. The governor is appointed for a non-renewable seven-year term. Other members of the management team are appointed for a non-renewable six-year term.
Members of the management team must follow the principles of independence, impartiality and neutrality in undertaking their duties. Members of the Monetary Policy Committee (including the governor) cannot solicitate or receive directives or instructions from other union-level organs or institutions, from governments of member states of the CEMAC, or from any other institution or individual (BEAC – Article 41).
9. Monetary and exchange rate policies are implemented as follows:
Monetary Policy. The main objective of monetary policy is to guarantee the stability of the currency, with a secondary objective of supporting economic policies adopted by member countries (UMAC – Article 21; BEAC – Article 1). The MPC meets at least once a quarter and its decisions are taken by a simple majority of votes, with the MPC’s president breaking any ties (BEAC – Articles 42–43). National monetary and financial committees also are in place in each member country. These assess each country’s demand for credit (besoins généraux de financement de l’économie), determine the domestic tools and means to meet these needs, and make proposals on the coordination of national policies with regional monetary policy.
Exchange Rate Policy and Reserves Management. Within the union reserves are pooled, and capital flows freely (UMAC – Articles 3 and 5). The management of foreign exchange reserves is governed by an institutional framework which includes (i) the Cooperation Agreement between the French Republic and UMAC member states (referred to below as the “Operations Account Agreement”); and (ii) the statutes and management rules of the BEAC. A share of pooled reserves is deposited in the “Operations Account” and the rest is managed in line with the BEAC’s investment guidelines and risk management framework. Under the operations account mechanism opened with the French Treasury, the BEAC can resort without limit to the advances from the French Treasury, although a minimum threshold for external assets—at least 20 percent of short-term liabilities—is set to prevent the account from being persistently overdrawn. The institutional framework also specifies that when the available deposits in the operations account will be insufficient to fulfill payments, the BEAC will have to fund the operations account by drawing down its other liquid foreign exchange assets. An alert system is in place to avoid a persistent deficit in the “Operations Accounts”:
When a country has a deficit in the “Operations Account,” the BEAC governor calls on the Ministerial Committee of the BEAC members and the concerned country to undertake adequate measures to correct the situation (BEAC – Article 11).
When the ratio of the BEAC’s average external assets to its average short-term liabilities (due in 12 months or less) is less than or equal to 20 percent for three consecutive months, the following measures are also triggered. First, refinancing ceilings are reduced by 20 percent for countries with a deficit in the “Operations Account,” and by 10 percent for countries with a surplus in the “Operations Account” representing less than 15 percent of currency in circulation. Second, the monetary policy committee must immediately deliberate on remedial measures for countries with a deficit position in the “Operations Account.”
Banking Commission
10. The Banking Commission is responsible for the supervision of credit institutions. The Commission has two central functions, to: (i) ensure that credit institutions adhere to the rules and regulations issued by national authorities, the BEAC, and by the Banking Commission; and (ii) impose sanctions for breaches of these rules and regulations. Among other responsibilities, the Banking Commission issues liquidity and solvency rules. While the Banking Commission is distinct from the BEAC, it is chaired by the governor the BEAC, assisted by the vice governor. The Banking Commission has no explicit responsibility in the resolution of crises.
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The above analysis provides useful detail regarding the legal, institutional, and policy frameworks that underpin the institutions of the CFA Franc Unions. From the staff’s perspective, this material does not affect the policy proposals in the main staff paper (SM/17/237). In particular, as is the case with all Fund-supported programs, it is understood that any assurances provided by a central bank regarding its policy intentions are entirely voluntary and, moreover, must be consistent with the legal framework that underpins the mandate of the institution in question. Indeed, safeguarding the independent decision-making of central banks has long been regarded by the Fund as a vital element in securing members’ internal and external balance, and hence international monetary stability.
Article 7 WAMU.
Article 8 WAMU.
Article 52 Statutes BCEAO.
Article 62 Statutes BCEAO.
Articles 80 and 81 Statutes BCEAO.
Article 87 Statutes BCEAO.
Article 93 Statutes BCEAO.
The “Operations Accounts” are sight accounts opened at the French Treasury by the BEAC and the BCEAO. They hold a share of the pooled reserves for each union. Deposits in these accounts are compensated and the accounts offer the possibility of an unlimited overdraft.
Article 2 Annex to Convention on the Banking Commission of UMOA as amended by Decision N0. 010 of 9/29/2017/CM/UMOA.
Article 10 CEMAC.
Article 27 BEAC Statutes.
Article 30 BEAC Statutes.
Article 46 BEAC Statutes.