Public Information Notice No. 11/37

WAEMU: IMF Executive Board Concludes 2011 Discussion on Common Policies of Member Countries of the West African Economic and Monetary Union

March 17, 2011

On March 14, 2011, 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).²

Background

An economic recovery has started in the WAEMU last year following a slowdown in growth in 2009. In 2010, economic growth is estimated to have on average returned to levels similar to those prior to the previous global food and fuel price shocks and the global financial crisis. Growth has been supported by monetary and fiscal easing, good agricultural production, recovery in the region’s main trading partners, and a pick-up in Guinea-Bissau and Togo.

In 2010, average inflation remained low in all WAEMU countries, but edged up in the second half of the year. On average, annual consumer price inflation reached 1.4 percent, up from 0.4 percent in 2009. More recently, however, higher international oil and food prices have started to feed through to inflation, but core inflation has remained subdued.

After a moderate fiscal easing by about 1½ percentage points of GDP in 2009, mostly the result of higher capital spending, the area-wide average deficit is estimated to have declined slightly to 3.2 percent of gross domestic product (GDP) in 2010. Revenues have started to recover, while government expenditure has stabilized.

Following a compression of imports in 2009, the region’s external current account deficit is estimated to have reached about 5½ percent of GDP in 2010. In months of imports of goods and services, international reserves were comfortable at well above 6 months in 2009 and 2010, in part due to the SDR allocation made by the IMF to all member countries in 2009.

Political stability in the region is a precondition for the recovery to continue. With a rapid and peaceful solution in Côte d’Ivoire and the right policies, the region could still experience a continuation of the recovery to close to 4½ percent in 2011, and above 5 percent in the medium term, but regional growth will continue to lag the Sub-Saharan Africa average. With recently rising international food and fuel prices, inflation is projected to edge up.

There are considerable risks to the projected recovery. In particular, the political crisis in Côte d’Ivoire has intensified in recent weeks with significant adverse fallout for domestic financial and economic activity. If not resolved soon, this could also have severe human and financial cost for neighboring countries in the WAEMU and the region, including though trade, migration, and financial sector channels. A more sluggish global economy could slow the regional recovery by dampening exports, remittances, and capital inflows. In turn, this could put pressure on the current account and on the quality of the loan portfolios of banks, and reduce the amounts available for the financing of fiscal deficits. A persistent rise in international food and fuel prices poses inflationary risks, which should be monitored carefully.

Executive Board Assessment

While an economic recovery is underway, Executive Directors expressed deep concern that the ongoing political crisis in Côte d’Ivoire poses serious risks—in particular, through trade and financial sector linkages—and that the spillovers for the region could be severe should the crisis persist. In addition, rising food and fuel prices could risk inflationary pressures, with an adverse impact on poverty. In this context, Directors emphasized the importance of an increased focus on contingency planning and crisis management to limit the impact of the crisis, and underscored the need to closely monitor the economic and financial situation in WAEMU member countries.

Directors considered that fiscal policy should balance support for growth, including large investment needs, with debt sustainability. They emphasized the need to create fiscal space for priority spending—including for infrastructure investment—through broad-based tax and administration reforms, better quality expenditures, and control on recurrent spending. Directors recognized the potential impact of rising food and fuel prices on the poorest segment of the population and underscored that any transfers or subsidies should be carefully targeted to protect the most vulnerable. Directors also called for timely implementation of the WAEMU directives in public financial management.

Directors urged the authorities to be vigilant to upside inflation pressures from higher international food and fuel prices and possible spillovers from the crisis in Côte d’Ivoire. They welcomed the new institutional framework for monetary policy, including the newly established Monetary Policy Committee. To make the framework effective, Directors recommended improving analytical underpinnings, transparency, and communication.

Directors noted the staff’s assessment that the real effective exchange rate appears broadly in line with economic fundamentals. However, the recent large movements in the euro exchange rate have resulted in greater volatility of the WAEMU’s real effective exchange rate. Directors emphasized that it will be critical to make further efforts in supply-side reforms, including reducing infrastructure bottlenecks and improving the business climate and governance.

Directors stressed that restoring the functioning of the Banking Commission is critical to ensure effective supervision and minimize the spillover risk from Côte d’Ivoire. They encouraged the authorities to accelerate the follow-up work on the Financial Sector Assessment Program recommendations, and emphasized the importance of comprehensive and up-to-date banking data and vulnerability indicators to ensure timely assessments of financial stability. Directors also called for further reforms to broaden and deepen financial market development.

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.