Press Release No. 15/139

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with West African Economic and Monetary Union

March 26, 2015

On March 20, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the annual Discussion on Common Policies of Member Countries of the West African Economic and Monetary Union (WAEMU).¹

Despite a still fragile political and security situation in some member countries, growth reached 6.1 percent in 2014, driven by continued high growth in Côte d’Ivoire and a favorable agricultural season in many countries. Rising public infrastructure investment also stimulated economic activity. The impact of Ebola on growth, although important in Guinea, Liberia and Sierra Leone, was small in WAEMU. Consumer price and underlying inflation were close to zero in 2014. In the medium term, growth should remain above 6 percent, owing to continued buoyant public and private sector investment, and be supported by the weakening of the Euro (€), to which the CFAF is pegged, and the decline in international oil prices.

The overall budget deficit (including grants) increased to 4.6 percent of GDP in 2014, up from 3.1 percent in 2013, due to rising public investment to address the infrastructure gap, especially in Burkina Faso, Côte d’Ivoire, Mali and Niger. With tax revenue remaining broadly unchanged at 16 percent of GDP, countries increasingly tapped the regional market for financing. Meanwhile, the total public debt declined slightly to 38.1 percent of GDP. Though fiscal pressures persisted, the current account deficit (including grants) declined to 7.3 percent of GDP in 2014, mainly reflecting the drop in international oil prices. As a result, after declining for three consecutive years, the international reserves of the Central Bank of West African States (BCEAO) rose slightly in 2014, covering 4.6 months of imports. This increase was broadly offset by the decline in the net foreign asset position of commercial banks.

The BCEAO has kept its key interest rate unchanged since September 2013. Credit to the economy has continued to grow at robust rates (14 percent in 2014) and credit to governments at even higher rates (24 percent). Refinancing operations by the BCEAO almost doubled over the past year, and banks’ position with the central bank turned from a net creditor to a net debtor position. Commercial banks’ borrowing from the central bank and governments’ borrowing from commercial banks have risen in synch: the former has reached 9 percent of banks’ liabilities and the latter about 20 percent of their assets.

The average capital adequacy ratio of banks (9.3 percent) was above the minimum required (8 percent) at the end of June 2014 but lower than the minimum required in half of the countries. The level of nonperforming loans reached 15.7 percent of total loans.

Executive Board Assessment²

Executive Directors welcomed the region’s strong economic performance and moderate inflation, and prospects for continued strong growth in 2015. Looking ahead, they emphasized that strengthening fiscal positions, ensuring a sound financial system, and promoting structural transformation will be key to safeguarding external stability and bolstering medium-term growth prospects.

Directors noted that the external position remains sustainable and the exchange rate appears broadly in line with the region’s fundamentals. Nonetheless, fiscal deficits are exerting increasing pressures on the balance of payments, and Directors generally agreed that fiscal consolidation will be needed in coming years. They welcomed the intention of member countries to bring down fiscal deficits to below 3 percent of GDP by 2019, consistent with the newly adopted convergence criteria, while encouraging additional steps to increase national ownership of these criteria. Directors agreed that consolidation efforts should focus on increasing tax revenue and containing current expenditure to maintain much-needed infrastructure investment and priority social spending. They also encouraged the authorities to improve public financial management and to underpin their debt management with a broader view of debt sustainability than a single debt level.

Directors agreed that the current monetary stance remains appropriate in the absence of inflation or external stability risks. However, should the planned fiscal consolidation in member countries fail to materialize, the BCEAO may need to consider a tighter monetary stance. Directors recommended that the BCEAO closely monitor the evolution of macroprudential risks from the sharp increase in commercial bank refinancing. They highlighted in this context the importance of developing a liquid government bond market and an active interbank market.

To safeguard financial sector stability, Directors encouraged the authorities to step up ongoing efforts to enforce existing prudential regulations and raise standards to international best practices. They noted that the current economic environment is favorable to strengthening the regulatory framework and building buffers in the financial system. They encouraged the authorities to proceed with plans to raise banks’ capital requirements, make the deposit insurance and financial stability funds operational, subject bank holding companies to appropriate banking regulation and consolidated supervision, and establish a single and independent administrative resolution authority. Further financial deepening will be crucial to boost economic activity and improve monetary transmission.

Directors stressed the importance of sustained structural reforms aimed at raising economic growth, making it more inclusive, and increasing the region’s resilience to shocks. They supported the authorities’ agenda to make further progress in regional integration, notably by improving regional infrastructure and ensuring a more reliable and affordable energy supply, and to improve access to financial services, develop human capital, and enhance governance. Directors welcomed the WAEMU Commission’s intention to safeguard the common market through a uniform application of the common external tariff across member countries and non-application of additional tariff protection.

The views expressed by Executive Directors today will form part of the Article IV consultation discussions on individual member states that take place until the next Board discussion of WAEMU common policies.