Abdoul Aziz Wane

In 1999, the WAEMU countries—Benin, Burkina Faso, Côte d’lvoire, Guinea Bissau, Mali, Niger, Senegal, and Togo—adopted a regional “Convergence, Stability, Growth, and Solidarity Pact.” The pact provides a framework for fiscal convergence similar to the European Union’s Maastricht Treaty, and stresses the need to reinforce convergence through further progress with structural reforms and the harmonization of sectoral policies. The aim is to strengthen economic stability and growth through regional integration. This article reviews recent IMF research on the WAEMU and its main challenges, including the need to expand markets by widening the union.

The single most important challenge facing the WAEMU countries is to reduce poverty through enhanced macroeconomic stability and growth. Wane (2004) finds that the driving force behind growth in WAEMU countries has been investment in human and physical capital, rather than growth in total factor productivity (TFP). He also finds that per capita income in lower-income WAEMU countries converges to that in higher-income countries when economic policies are similar. Aid, government spending, credit to the private sector, and openness positively affect TFP growth, while government deficits affect it negatively. Similarly, Vamvakidis (1998) shows that openness to international trade, competition in the domestic market, freedom of international capital transactions, and low dependency ratios are positively correlated with investment in WAEMU countries.

Instability has been generally identified as an important deterrent to foreign direct investment (FDD in Africa. Doré, Anne, and Engmann (2003) evaluate the impact of political instability in Côte d’lvoire. Using a nonsubjective weighted index of regional instability, they find that the increase in regional instability caused by Côte d’lvoire’s political crisis had a negative effect on growth in its closest neighbors, but no significant effect on the WAEMU as a whole. Rogoff and Reinhart (2003) show that while the exchange rate arrangement in WAEMU and other CFA zone countries has contributed to price stability, this was not enough to attract significant FDI. Improved economic governance and transparency might be crucial to attracting such investment.

Daumont, Le Gall, and Leroux (2004) show that government intervention negatively affected financial stability in Sub-Saharan Africa, including in Benin, Côte d’lvoire, and Senegal. Rother (1998) investigates the stability of regional monetary aggregates and their forecast performance. His money demand estimations suggest a stable relationship for narrow money and allow him to conclude that if the Central Bank of West African States (BCEAO) succeeds in maintaining financial stability, it can continue conducting monetary policy in line with the fixed exchange rate system. Macroeconomic stability, however, also requires sound debt management policies. Beaugrand, Loko, and Mlachila (2002) show that highly concessional external debt financing is at the moment preferable to domestic debt financing both in terms of costs and risks. Looking ahead. West and Central African countries will need to take a gradual approach to domestic debt financing, beginning with issuing short-term bills and establishing a solid track record in meeting their debt-service obligations.

To determine the feasibility and nature of the policy adjustment necessary to meet the new convergence criteria, Doré and Nachega (2000) investigate the relationship between revenue and expenditure in seven WAEMU countries. They show that causality is running from revenue to expenditure in Burkina Faso and Senegal, and from expenditure to revenue in Benin and Togo. They also find bidirectional causality in Côte d’lvoire and Mali, but no causality in Niger. In reviewing fiscal adjustments undertaken by WAEMU countries since 1994, Doré and Masson (2002) find that the fiscal stance worsened in some countries from 1998-2001 because of terms-of-trade deterioration and unfavorable movements in the business cycle, and that convergence stalled even when corrected for these factors. To meet fiscal deficit targets in the future, the authors recommend that the countries increase revenues and reduce government wages as shares of GDP.

Masson and Pattillo (2001a) discuss how monetary unions could affect fiscal discipline in West Africa. They highlight that fiscal profligacy might be perceived as less costly, either because bailouts could be seen as more likely, or because the cost of unsound fiscal policies would be partially borne by other members. Thus, a West African monetary union could promote fiscal discipline only if the hands of the fiscal authorities were tied by a set of strong fiscal restraints. In this respect, Debrun, Masson, and Pattillo (2002) show that for a monetary union with Nigeria to be in the interests of other countries of the Economic Community of West African States (ECOWAS), it is crucial that Nigeria credibly commit to effective fiscal discipline.

IMF researchers have also investigated the challenges associated with widening the WAEMU zones to non-WAEMU ECOWAS members. Masson and Pattillo (2001b) evaluate the economic costs and benefits of a wider monetary union in West Africa. Celasun and Justiniano (forthcoming) examine the extent of synchronization between output fluctuations in ECOWAS countries, with a view to assessing the appropriateness of adhering to common monetary and exchange rate policies. They find output synchronization to be very low among ECOWAS countries when compared to Economic and Monetary Union (EMU) countries. However, they also find the Sahelian countries of Burkina Faso, Mali, and Niger to be relatively more synchronized among themselves as well as with Ghana and Guinea, on account of relatively similar climatic conditions. Finally, Nigeria, the largest country in the region and an oil exporter which faces different terms-of-trade fluctuations, experiences largely dissimilar fluctuations in comparison with the rest of the ECOWAS countries.