Public Information Notice No. 12/29

WAEMU: IMF Executive Board Concludes 2012 Discussion on Common Policies of Member Countries of the West African Economic and Monetary Union

March 22, 2012

On March 14, 2012, 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

2011 was a challenging year for the WAEMU. Côte d’Ivoire experienced a political crisis and armed conflict for a few months after the presidential election held in November 2010. This crisis was the culmination of a decade of political instability in the country, which had a major impact on its development. The crisis ended in April 2011 when President Ouattara (the election winner) took control of the country, but it had a severe economic impact. Subsequently, the new government embarked on an ambitious investment-led recovery. The early part of 2011 was also marked by rising food and fuel prices, which have a major economic and social impact on WAEMU countries. The second half of 2011 was marked by a drought affecting severely cereal production in the Sahel countries, but also by the incipient global slowdown.

Regional growth in 2011 (0.9 percent) was affected by the Ivorian crisis and the drought in the Sahel countries. Côte d’Ivoire’s economic activity contracted sharply in early 2011 as a result of the crisis, which led to an estimated annual GDP decline of 5.8 percent despite the subsequent recovery. The drought had a large impact on cereal production in Burkina Faso, Mali, Niger, and Senegal with estimated declines ranging from 15 to 27 percent. As a result, growth in these countries was significantly affected. The shortfall in the production of these traditional food crops also exposes millions of persons in the region to food insecurity.

Fuel and food prices had a significant impact on regional inflation. The surge in international fuel and food prices pushed inflation upward to a peak in the spring of 2011. The subsequent easing of these prices was accompanied by a quick drop in year-on-year inflation, which was below 3 percent at year-end. On average, annual consumer price inflation is estimated at 3.6 percent in 2011.

The area-wide overall fiscal deficit (excluding grants) widened in 2011. It is estimated to have increased from 5.5 percent of GDP in 2010 to 7.9 percent of GDP, mainly on account of the impact of the crisis in Côte d’Ivoire. Other factors include higher subsidies to the electricity sector in Senegal, the use of privatization revenue for investment projects in Mali, and lower tax revenue in Benin. Average public debt is estimated to have remained at about 42 percent of GDP in 2011.

The region’s current account deficit rose to about 6 percent of GDP in 2011. This increase (from about 5 percent of GDP in 2010) partly reflects less favorable terms of trade, lower worker remittances, and larger imports related to reconstruction in Côte d’Ivoire, to mining in Burkina Faso and Niger, and to higher food and fuel prices. However, thanks to strong capital inflows, the Union’s foreign exchange reserves increased and amounted to about six months’ imports (excluding intra-WAEMU trade) at end-2011.

Progress in the area of convergence was mixed. Whereas all the countries met the inflation criterion in 2010, only a minority of them still did so in 2011, because of the increase in international food and fuel prices. Most of the countries did not meet the key criterion on the fiscal deficit in 2011. On the other hand, progress was made with respect to the indebtedness criterion, as a result of the debt relief granted to Togo and Guinea-Bissau in the context of the HIPC Initiative and MDRI.

Executive Board Assessment

Executive Directors commended the regional authorities’ sound macroeconomic management, which helped contain inflation and maintain financial stability across the region in 2011 despite the political crisis in Côte d’Ivoire in the early part of the year, a sharp increase in international food and fuel prices, and severe drought in the Sahel countries. They noted, however, that progress in complying with convergence criteria has been mixed, and downside risks remain in light of the crisis in Europe and the ongoing drought in the Sahel. Macroeconomic policies will need to respond appropriately if these risks materialize. Over the medium term, it will be critical to improve the macroeconomic policy framework, address underlying structural weaknesses, enhance the stability of the union drawing on the euro area’s experience, and strengthen regional surveillance.

Directors underscored the need to reduce the area-wide fiscal deficit over the medium term to maintain fiscal sustainability, with due attention to the region’s pressing infrastructure needs. They welcomed the ongoing review of the convergence criterion on debt, and suggested that a broader approach to fiscal sustainability could be considered. They urged prompt implementation by member countries of the directives on public financial management, containment of wages and salaries, broad-based tax reforms, and replacement of petroleum price subsidies with well-targeted social safety nets tailored to the region’s circumstances.

Directors considered the monetary stance to be broadly appropriate. However, they highlighted the need to strengthen the liquidity management and forecasting framework and expedite planned inter-bank market reforms. They agreed that foreign exchange reserves are adequate and that the area-wide real exchange rate appears to be broadly aligned with economic fundamentals in the region.

Directors were encouraged that stress tests point to a resilient regional financial sector. Nevertheless, prudential regulation and supervision need to be further strengthened and brought into line with international best practices, and a more formal crisis management framework should be introduced. The FSAP recommendations should continue to be vigorously implemented. Directors also called for stepped-up efforts to develop the financial sector to help ease domestic financing constraints and support growth.

Directors urged the authorities to accelerate regional integration. This would require reinvigorating regional policies, ensuring their full implementation, and increasing policy coordination by member countries. Reform priorities include removal of barriers to intra-regional trade and factor mobility, improvement of the business environment to enhance non-price competitiveness, and development of regional infrastructures.

Directors welcomed the authorities’ initiatives to further improve transparency and information availability, and urged continued progress in this area. They recommended the regular compilation and timely publication of financial soundness indicators.

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.