Public Information Notice No. 13/35

WAEMU: IMF Executive Board Concludes 2013 Discussion on Common Policies of Member Countries of the West African Economic and Monetary Union

March 27, 2013

On March 25, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the annual Discussion¹ on Common Policies of Member Countries of the West African Economic and Monetary Union (WAEMU).

Background

The WAEMU faced new political and security challenges in 2012. Military coups occurred in Guinea-Bissau and Mali and caused economic disruption in these countries. The northern part of Mali was taken over by terrorist groups, which led to large refugee flows to neighboring countries and triggered a military intervention to restore territorial integrity. On the upside, the sociopolitical situation in Côte d’Ivoire improved significantly, and a peaceful and democratic changeover took place in Senegal.

Regional economic activity rebounded in 2012. After a large decline in 2011 to about 1 percent of gross domestic product (GDP) because of the drought in the Sahel and the post-electoral crisis in Côte d’Ivoire, regional growth is estimated to have reached 5.8 percent of GDP in 2012. Growth was driven mainly by the post-crisis recovery in Côte d’Ivoire, the rebound of agricultural production in a number of countries, and the start of oil production in Niger. A few countries faced inflationary pressures, mainly on domestic prices for food and petroleum products. Nevertheless, average regional inflation remained low, at about 2.5 percent.

The area-wide fiscal deficit stabilized around 4 percent of GDP in 2012, while the overall debt situation improved thanks to debt relief to Côte d’Ivoire. Compared with 2011, fiscal deficits increased in Burkina Faso, Niger, and Togo, stabilized in Côte d’Ivoire, and decreased in the other countries. With Côte d’Ivoire reaching the Heavily Indebted Poor Countries Initiative’s completion point in 2012, all WAEMU countries have benefited from substantial relief on their external debt. The average nominal debt for the region now stands at about 40 percent of GDP. All countries have public debt ratios substantially below the 70 percent of GDP ceiling set by the regional surveillance framework; they also have low or moderate ratings for the risk of debt distress according to recent debt sustainability analyses (DSAs), reflecting prudent fiscal policies and sustained growth.

Monetary policy was eased modestly in 2012. Despite relatively strong growth of credit to the private sector and government, money growth remained moderate in 2012 (at about 8 percent year-on-year) because of a significant contraction in net foreign assets (NFA). In a context of continued moderate inflation and a sharp contraction in bank liquidity (related, to a large extent, to the evolution of NFA) leading to pressures on interest rates, the Central Bank of West African States (BCEAO) injected substantial amounts of liquidity to banks. It also cut the policy rates by 25 basis points to respectively 3 and 4 percent and lowered the reserve requirement ratio to from 7 to 5 percent.

The region’s current account deficit widened significantly in 2012. This outcome reflects a number of exceptional factors, such as higher imports of intermediate and capital goods by Côte d’Ivoire related to reconstruction efforts and by Burkina Faso and Niger for mining and hydrocarbon projects, higher food imports to make up for the impact of the 2011 drought, and unfavorable terms of trade. The higher current account deficit, combined with temporary delays in repatriating export proceeds (mostly by Côte d’Ivoire), led to a deficit in the overall balance of payments and a decline of official reserves, which stood at about 5 months of regional imports and 98 percent of short-term domestic liabilities at end-2012.

Progress in fiscal convergence has been limited. The key convergence criterion on the basic fiscal balance was missed by five of the eight countries in 2012. Following debt relief, the debt criterion is now met by all countries.

Executive Board Assessment

Executive Directors welcomed the maintenance of macroeconomic stability in the region and the prospects for continued robust growth with moderate inflation. Given the continuing challenging environment and downside risks, it will however be important to reconstitute policy buffers and to ensure the full implementation of growth-enhancing policies, including to promote financial deepening and regional integration.

Directors considered the current macroeconomic policy mix appropriate and welcomed the planned fiscal consolidation in the countries with higher deficits. They called for additional efforts to raise revenue and improve the quality of public spending. Directors emphasized the need to strengthen debt management at the country level, paying close attention to domestic debt levels, given less favorable terms. In light of the outlook for inflation, Directors viewed the recent easing of monetary policy as appropriate. They noted that official reserves remain adequate but stressed that their recent decline requires close monitoring.

Directors stressed the importance of better coordination of fiscal policies to help preserve debt sustainability and the stability of the Union in the medium term. They welcomed the intention to conduct a comprehensive review of the regional surveillance framework. They supported a reconsideration of the convergence criteria on public debt and the fiscal deficit and a strengthening of the institutional framework to increase adherence and traction.

Directors encouraged further measures to develop the financial system to help raise growth, mitigate the impact of volatility, increase inclusion and improve the effectiveness of macroeconomic policies. The completion of ongoing reforms to develop the interbank and secondary government debt markets will be critical. Directors noted that banks are on average relatively well capitalized and liquid, although there is substantial heterogeneity among them. Risks arise from high lending concentration and uneven asset quality, and from banks’ increasing exposure to sovereigns in the region and the emergence of regional groups. In this context, Directors urged the acceleration of ongoing work to strengthen bank supervision and regulation, notably to improve observance of prudential rules while bringing some of these rules closer to international standards. They also welcomed efforts to strengthen the crisis prevention and resolution framework.

Directors noted that the area-wide real exchange rate appears to be in line with fundamentals. To improve non-price competitiveness and growth prospects, Directors called for concerted regional and national efforts to strengthen institutions, governance, infrastructure, and trade integration. They also encouraged continued efforts to enhance the quality, coverage, and timeliness of data as well as the sharing of data widely at the national and regional levels.

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