The West African Economic and Monetary Union (WAEMU), Facing the Challenges of the Future -- Statement by Alassane D. Ouattara
June 30, 1998
ORIGINAL IN FRENCHStatement by Alassane D. Ouattara
Deputy Managing Director, International Monetary Fund
at the Meeting of the External Relations Branch of the Conseil Economique et Social
France, June 30, 1998
Like the rest of Africa, the WAEMU 1 countries must now ensure that they are properly equipped to draw the full benefits from globalization and avoid the risk of marginalization. This represents a particular challenge for the countries of the WAEMU, which have long had a single currency and a common monetary policy, based on a special relationship with France, and in which the regional integration process is far more advanced than elsewhere in Africa. At the same time, in opening up to global markets, the WAEMU countries must adjust to likely changes in their relationship with Europe. This issue has become more pressing now that the forthcoming renegotiation of the Lomé Convention is expected to change the nature of the relationship between the European Union and the ACP countries from one of preferential treatment to one of open trade, and now that Europe is preparing to introduce its new single currency and to complete its economic integration with the creation of a single market.
The questions, therefore, are: What remains to be done to ensure that the good economic performance of the WAEMU over the past four or five years can be enhanced to equip the economies to participate fully in globalized markets? Are there any issues specific to WAEMU that require a particular policy response? And how should these countries react to the changing relationship with Europe? These are some of the questions I shall touch upon in my remarks today.
An encouraging recovery since the devaluation of the CFA franc
On this we are all agreed: the devaluation of the CFA franc, accompanied by bold structural reforms, was a necessary response to the failure of the domestic adjustment strategies pursued during the 1980s. The new approach has largely succeeded; economic performance has strengthened significantly since 1994. The growth rate moved from an average of 0.5 percent during the period 1990-93 to 5.5 percent in 1997, which translates into a positive rate of growth per capita. Budget deficits fell from an average of 6.7 percent of GDP to 1.8 percent, while external current account deficits moved from 7.8 percent of GDP to 5.2 percent during the same period. After the initial devaluation-induced price surge in 1994-95, inflation rates declined considerably, reaching 4 percent in 1997. Despite these encouraging results, countries have lagged in implementing a number of key reforms, and growth is not yet high enough to achieve significant reductions in poverty. On the structural front, although banking systems are recovering from the crisis of the late 1980s, and prudential regulation and supervision have been greatly enhanced, financial markets are still very thin. Privatization operations have experienced delays in most countries. Efforts to liberalize external trade arrangements have progressed well, yet by and large tariff rates are still too high and too dispersed. The WAEMU as a whole remains very dependent on trade taxes for budgetary revenue; the tax bases are still too narrow, and their structure and composition do not allow for adequate funding of priority development outlays or investment in vital economic infrastructure
The challenges ahead
The problems that I have described have led to inadequate saving and insufficient domestic and external investment, which, in spite of the improved economic environment, has failed to achieve the expected levels. In my opinion, the cautious private sector response to the reforms is indicative of an underlying lack of confidence. I see several different aspects to this lack of confidence:
- Savers and potential investors are not yet convinced of the direction and sustainability of economic policy. Hesitancy or reluctance to carry out key measures, such as privatization or the elimination of special exemptions, raises the perception that the government’s commitment to the spirit of the adjustment program may be less than whole-hearted and thus susceptible to setbacks or delays when difficult decisions must be made.
- The uncertainty surrounding the legal and regulatory framework for business activity likewise raises the perception of the risk associated with investment. Property rights and contracts have not yet been enforced impartially, opening the door to corruption. Commercial law is often woefully out of date, and even where appropriate legislation exists, the inadequate level of resources devoted to the functioning of the judicial system means that the legislation is often applied arbitrarily and unevenly, if at all.
- Closely related to this is the problem of economic management capacity and administrative or bureaucratic red tape. In a number of African countries, public employees are too numerous to permit civil services to be efficient or to adapt to ever-changing circumstances and requirements. Nominal wage restraint has been an important part of the stabilization effort since the devaluation, but it has also made it more difficult for WAEMU governments to recruit and retain the skilled workers they need to formulate and implement their policies effectively.
- Private investment is discouraged by the absence of an appropriate economic infrastructure and the availability of well-trained affordable labor. A fiscal consolidation policy based on compressing essential investment spending or reducing outlays for health and education is unsustainable over the long run, and sends the wrong signal to potential investors about a government’s priorities.
WAEMU policy priorities in the face of these challenges
In this context, what are the policy priorities for the WAEMU countries? Macroeconomic stability must be maintained, and domestic and external imbalances must be reduced as the basic precondition for increasing savings and investment, accelerating growth, and reducing poverty. In terms of financial policies, further fiscal consolidation is obviously essential. However, I would argue that this effort must be seen as sustainable in order to dispel any fears of setbacks in policy implementation. Fiscal policy in each WAEMU country therefore needs to put more emphasis on revenue collection—by expanding the tax base and eliminating remaining exemptions, for example—while increasing allocations for investment in essential infrastructure and outlays in the priority sectors of health, education, economic management, and the administration of justice.
The unfinished agenda of reforms must, of course, be completed in all the countries of the WAEMU. I would like to address two aspects of this process in particular, namely, privatization and the elimination of monopolies, and the liberalization of agriculture. Any privatization effort must be conducted in a context of absolute transparency, so as to prevent the emergence of new opportunities for rent-seeking for buyers and to confirm in the eyes of investors that the government is truly committed to economic liberalization and promotion of the private sector. In the liberalization of agriculture and exports, efforts to scale back the role of government marketing and distribution agencies have significantly increased producer prices while enhancing production efficiency in the major sectors. These policies make a direct contribution toward raising incomes, and therefore stimulate domestic demand and reduce poverty, particularly in rural areas. These measures should be expanded and applied to the third major sector in the subregion—cotton—, where liberalization efforts are lagging behind the cocoa and coffee sectors, and also behind efforts in other African countries.
However, I believe that the priorities and emphasis of policy within the WAEMU countries must now be determined by the need to strengthen private sector confidence. Based on what I have presented as the various aspects of the weakness of confidence in these countries, I will mention five policy priorities for the future. Reflecting the importance that the Fund attaches to these priorities, future Fund-supported structural adjustment programs will place increasing emphasis on reforms in these areas.
The first step is to establish policy credibility. This is not merely a capacity-building problem, though the lack of appropriate capacity is often at its core. Policy credibility also encompasses the full ownership of the adjustment effort, actively seeking the input of all partners in society in order to build the consensus necessary to sustain the adjustment effort through difficult decisions. I am therefore pleased to observe a greater openness in the policy debate in the WAEMU countries in recent years. The willingness to discuss the adjustment programs with social partners must be supported by a concerted effort to improve the quality, timeliness, and availability of economic and social data to inform policy decisions.
Second, the countries of the WAEMU have already taken steps to strengthen economic security and remedy the shortcomings of their legal and judicial frameworks through their membership in the OHADA (Organisation pour l’harmonisation du droit des affaires) and the strengthening and harmonization of accounting practices (SYSCOA). This initiative needs to be supported by the allocation of appropriate budgetary resources for the hiring and training of magistrates and other judicial personnel, particularly those specializing in commercial law, but also by the clearly demonstrated commitment to upholding the theory and practice of good governance and ensuring the rule of law in every aspect of economic and social life. Specifically, action must be taken to deal with corruption, to ensure transparency and accountability in the management of public resources, and to enforce and protect property rights and contracts.
Third, civil service reform has assumed critical importance in all the WAEMU countries. There is a clear need to establish levels of remuneration in each country that provide adequate incentives to quality and permit the governments to attract the necessary skills and competencies, while remaining within the overall expenditure limits imposed by the budgets. There is also a pressing need to strengthen the management of civil service personnel, ensuring that the right skills are assigned to each function, so that the government can provide public services efficiently, cost-effectively, and at least cost.
Financial sector restructuring and deepening of financial intermediation are the fourth priority for the WAEMU countries. This may involve new private-sector institutions such as mutual credit unions, leasing firms, mortgage finance companies and microfinance organizations, or new instruments of financial saving. With a strong regulatory and supervisory agency already in place, the WAEMU should also move to increase competition in the formal banking sector, either through judicious licensing of new specialized financial institutions, or by allowing established institutions unrestricted access to all eight markets of the Union.
Finally, the WAEMU should pursue diligently the various regional integration initiatives underway, in order to achieve a true economic union as soon as possible. The first major step has already been taken, with the decision to implement a common external tariff with preferential internal tariffs by the year 2000. Looking ahead, the adoption of a common investment code is imminent, a common budgetary nomenclature is under preparation, and the system of multilateral surveillance is contributing to the convergence of budgetary policies. The challenge is to press ahead with the preparations for harmonization of domestic indirect, and eventually direct, taxation, and to effectively implement the provisions for the free movement of goods, services, and people throughout the Union.
The creation of a single market will undoubtedly help the countries of the WAEMU to overcome the disadvantages of their small economic size, and help them prepare to compete internationally and to integrate their economies into the global market. Indeed, the population of this unified economic space would be equivalent to two-thirds that of Nigeria or 11 percent of the population of sub-Saharan Africa, which has some 600 million inhabitants, and its real GDP would be equivalent to approximately 90 percent of Nigeria’s or 10 percent of real GDP for sub-Saharan Africa. This should increase the region’s attractiveness to domestic and foreign investors, while opening the door for much closer cooperation on key infrastructure projects, such as major transportation or energy projects, as well as a common approach toward sectoral policies. But this will only occur if the regional association is seen as a stepping stone to more open trade with the rest of the world.
Furthermore, it is essential to ensure that the integration of the WAEMU countries into a single market does not prevent closer ties with the countries of the Central African Economic and Monetary Community (CAEMC). These two sister unions form a larger whole, and each can benefit from the other. Taken together, they account for an even larger proportion of the African continent—16 percent of the population of sub-Saharan Africa and 18 percent of real GDP for the continent as a whole. All of the countries involved thus have an interest in ensuring that no major differences develop inside the franc zone, as such differences would be sure to complicate each union’s relationship with a unified Europe.
Needless to say, each country faces its own special set of challenges, and certain aspects of the adjustment process may require more substantial efforts in some countries than in others. However, the firm commitment of each government to achieving the goals of the Union provides the assurance that the necessary policies will be duly implemented.
The global partners of the WAEMU countries should continue to support the individual and collective efforts of these countries by providing them with advice as well as financial and technical assistance, while requiring them to use such assistance efficiently. If the industrial countries would open up their markets to goods from the WAEMU countries, these countries would be far better equipped to face the competition on global markets. More targeted assistance from the EU countries would be especially welcome in this respect. Europe’s long experience with regional integration could serve as a valuable guide for the WAEMU countries, and the European Commission is already providing essential technical and financial support to the various regional initiatives. Financial and technical support from bilateral partners remains crucial to the success of these efforts. I encourage the WAEMU governments to move swiftly to strengthen governance, enhance the efficiency of government spending, particularly public investment, and expand their social programs. These efforts are essential to ensure high rates of growth over the long term and thus achieve sustainable reductions in poverty.