## cr1799

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---

### Recent economic developments
- Real GDP growth in 2016: 6.2 percent.
- Headline inflation (average) in 2016: 0.4 percent.
- Overall fiscal deficit in 2016 (preliminary): 4.5 percent of GDP.
- Fiscal deficits below or at initial 2016 targets: Burkina Faso, Niger, and Senegal.
- Public investment scaled up in most countries in 2016, contributing to high domestic-demand-driven growth.
- Credit and liquidity dynamics:
  - Credit to the public sector expanded 43.8 percent in 2016.
  - Credit to the private sector expanded 9.7 percent in 2016.
  - Money growth in 2016: 10.2 percent.
- External buffers and reserves:
  - Regional reserves declined by CFAF1000 billion (about $2 billion) in 2016.
  - Reserves in months of imports fell from 4.5 months in 2015 to 3.7 months in 2016.
  - Reserves corresponded to 54 percent of regional broad money and 78 percent of short-term debt in 2016.
- Balance of payments: current account deteriorated by 0.3 percentage point in 2016 and the financial account surplus fell by 1 percentage point, contributing to reserve losses.
- Public debt reached 45.9 percent in 2016; staff analysis suggests the level is still sustainable (Annex II), but increasing reliance on non-concessional loans has heightened debt vulnerabilities.

### Monetary policy framework, operations and recent actions
- BCEAO policy rates and facilities:
  - Minimum bid rate (de facto policy rate) kept unchanged at 2.5 percent.
  - Widened corridor between the minimum bid rate and the credit facility rate to 200 basis points (spread increased from 100 to 200 basis points at End-December 2016).
  - Lending facility rate increased from 3.5 to 4.5 percent (decision dated December 6, 2016).
  - Announced cap on recourse to the lending facility at twice banks’ capital starting June 2017.
  - Reserve requirement ratio reduced from 5 percent to 3 percent of deposits (decision of the Monetary Policy Committee on March 1, 2017).
- Open market operations and refinancing:
  - Two types of open market operations: refinancing for seven days and twenty-eight days (weekly and monthly).
  - Two standing lending facilities: refinancing 1 to 7 days and for 90 to 360 days; facilities priced 200 basis points above the policy rate.
  - Maximum bid amount: banks cannot receive refinancing for more than 35 percent of their credit to the private sector and government securities; this cap is binding for 110 counterparties.
- Effects and concerns:
  - Increase in the lending rate tightened monetary conditions and led to higher interbank activity.
  - Reserve requirement reduction should provide additional liquidity and reduce refinancing needs, but will weaken somewhat the benefit expected from the December 2016 tightening.
  - Until December 2015, refinancing fully accommodated demand (including excess reserves); since end-2015 BCEAO leveled off refinancing to stop accommodating excess reserves.
  - December 2016 actions and end-2015 decisions are expected to boost the interbank market.

### Banking sector structure, vulnerabilities and reforms
- Sector composition and concentration:
  - 102 banks, including 28 banking groups.
  - The 13 larger banking groups accounted together for 80 percent of the total bank assets in June 2016.
  - WAEMU-based banking institutions: 28 percent of total assets; Moroccan banks: about 30 percent; French banks: 13 percent.
  - Ecobank alone makes up about 15 percent of total assets.
- Capital adequacy and supervisory status:
  - Capital ratio: 9.6 percent in June 2016.
  - Minimum capital requirement raised from CFAF 5 billion to CFAF 10 billion in July 2015; banks have "two years, i.e. till June 2017, to comply with the new requirements."
  - Only 57 out of 102 banks comply with the minimum share capital of CFA 10 billion at end-June 2016.
  - Four banks (mainly state-owned) are under temporary administration.
  - 14 banks remain under closer supervisory scrutiny, accounting for around 16.1 percent of the banking sector assets at end-June 2016.
- Asset quality and concentration risks:
  - Ratio of gross NPLs to total loans: 15.6 percent at end-September 2016 (declined to 13.9 percent by December 2016 in later estimates).
  - Around 40 percent of banks are in violation of the single large exposure limit as of end-September 2016.
  - About 27 percent of bank assets consist of government securities (strong bank–sovereign link).
- Regulatory reforms and timetable:
  - Adoption of Basel II and III capital standards; minimum requirements increased to 9 percent with a minimum of 5 percent common equity Tier 1 capital and 6 percent total Tier 1 capital.
  - Introduction of consolidated supervision; decision to give BCEAO and the Banking Commission power to regulate and supervise financial holding companies (decision enters into effect in 2018).
  - Tightening of the large exposure limit to 25% of banks’ Tier 1 capital (current limit was 75 percent of banks’ total regulatory capital).
  - Transitional implementation arrangements from 2018 until 2022.
  - June 2016 regulatory reforms commended; priority to enforce regulations and make the Deposit Guarantee Fund (FGD) operational.
- Resolution framework and safety nets:
  - A new deposit insurance fund (FGD) was established; organizational structure and recruitment of three employees completed in 2016; main remaining actions before FGD operational include adoption of circulars, finalizing procedures, collecting data, and launching the FGD website.
  - Resolution of troubled banks hampered by lack of an effective resolution regime and weak financial safety nets; regional resolution framework and amendment of the Annex to the Convention governing the Banking Commission recommended.

### Monetary transmission, interbank market and refinancing demand (Annex III findings)
- Interbank market characteristics:
  - Interbank loans represented about 2.5 percent of bank deposits between 2009 and 2015.
  - Interbank outstanding debt reached about 50 percent of the banks’ reserve requirements at end-2015.
  - From 2010 to 2016, about 93 percent of lending in the interbank market was unsecured.
  - Most frequently traded interbank maturities: 7 days and 14 days.
  - Intra-group transactions represent about 80 percent of interbank market transactions; five groups generate 75 percent of all interbank transactions.
- Determinants of demand for refinancing and excess reserves:
  - Fundamental determinants: uncertainty (precautionary buffer needs) and opportunity cost of holding excess reserves.
  - Median incompressible reserves: 6.6 percent of banks’ total deposits from 2013 to 2016 for a reserve requirement of 5 percent of deposits.
  - Demand for voluntary reserves could reach more than eight percent of banks’ deposits.
  - Banks with large portfolios of government securities are more likely to participate in refinancing; central bank refinancing goes in large part to counterparties with a small deposit base that invest in government securities rather than lending to the economy.
- Empirical model and marginal effects (panel logit; marginal effects quoted verbatim):
  - Reserve requirement marginal effects: 1.20***, 1.19***, 1.17***, 0.77***, 0.63***, 1.24***, 0.51***, 0.50***, 0.59***, 2.58***, -0.67***, -0.90***, -0.71***
  - Excess liquidity marginal effects: -2.61***, -2.60***, -2.50***, -3.31***, -3.28***, -3.68***, -18.19***, -1.82***, -1.86***, -1.91***, -1.20***, -1.21***, -1.43***
  - Credit claims marginal effects: 0.24***, 0.24***, 0.23***, 0.17***, 0.17***, 0.15***, 0.29***, 0.29***, 0.29***, 0.14**, 0.27***, 0.30***, 0.29***
  - Government securities marginal effects: 0.84***, 0.83***, 0.79***, 0.99***, 0.95***, 0.99***, 0.59***, 0.59***, 0.59***, 0.51***, 0.83***, 0.82***, 0.85***
  - Rate spread marginal effects: 2.82***, 2.80***, 2.82***, 6.61***, 5.37***, 8.7***, 3.41**, 3.39**, 3.57**, 2.71**, 6.86***, 5.89***, 9.03***

### Outlook, projections and downside risks
- Medium-term growth projection: growth is projected to stay above 6 percent; specific projections (selected years):
  - Real GDP growth (%): 2016 (est.): 6.2; 2017 (proj.): 6.5; 2018 (proj.): 6.6; 2019 (proj.): 6.5; 2020 (proj.): 6.6; 2021 (proj.): 6.5.
- Inflation projections (average, %): 2016 (est.): 0.4; 2017 (proj.): 1.5; 2018 (proj.): 1.9; 2019 (proj.): 1.9; 2020 (proj.): 2.0; 2021 (proj.): 2.0.
- Fiscal balances (overall balance incl. grants, % GDP): 2016 (est.): -4.5; 2017 (proj.): -4.7; 2018 (proj.): -3.7; 2019 (proj.): -3.0.
- Public debt (% GDP): 2016 (est.): 45.9; 2017 (proj.): 46.3; 2018 (proj.): 44.8; 2019 (proj.): 43.1; 2021 (proj.): 40.7.
- Current account (% GDP): 2016 (est.): -6.1; 2017 (proj.): -6.3; 2018 (proj.): -6.0; 2021 (proj.): -5.3.
- Reserves (months imports): 2016 (est.): 3.7; 2017 (proj.): 3.5; 2019 (proj.): 4.0; 2021 (proj.): 4.0.
- Reserve projections and assessment:
  - International reserves projected to increase to 4 months of next year’s imports by 2019 (up from 3.5 months’ cover at end-2017).
  - Staff estimate optimal reserve cover for the region at 5 to 12 months of imports (Dabla Norris et al., 2011).
  - Current and projected medium-term reserve cover is above thresholds required by the zone’s monetary arrangement with France but below staff’s optimal buffer.
- Downside risks explicitly identified:
  - Delays in fiscal consolidation.
  - Slow progress in raising public investment efficiency and advancing private-sector friendly structural reforms.
  - Sharper slowdown of world economic growth.
  - Tighter international financing conditions.
  - Sustained decline in cocoa prices.
  - Security risks.
- Shock scenarios and sensitivity:
  - Staff global shock: a slowdown in global growth of 0.5 percent coupled with a fall in commodity prices of 20 percent (including cocoa) could reduce regional growth to under 2 percent by 2019 (4 percentage points lower than baseline).
  - Staff simulations: if fiscal deficits remained at 2016 levels for another five years, GIR coverage could fall to 2 months of imports by 2021.
  - With a prolonged slowdown in global growth and regional terms of trade, regional reserves could decline up to 1.5 months of imports.

### Fiscal policy recommendations and institutional priorities
- Fiscal policy:
  - Growth-friendly fiscal consolidation is key to reducing public debt and rebuilding foreign reserves buffers.
  - Member countries urged to adhere to current budget deficit reduction plans to reach an overall regional fiscal deficit of 3 percent of GDP in 2019 (WAEMU convergence criterion).
  - Adjustment efforts should focus on revenue mobilization and containing current expenditure while protecting priority capital and social spending.
  - Planned fiscal consolidation has been repeatedly deferred; prompt response to fiscal slippage recommended, potentially with parallel monetary tightening and financing-mix adjustments.
- Expanding fiscal space (selected measures):
  - Strengthen revenue administrations and ensure taxpayer compliance.
  - Broaden the tax base, including attracting informal firms to the formal sector and accelerating property tax reforms.
  - Improve exchange of information between tax and customs administrations and effectively implement the common tariff.
  - Reduce tax expenditure and implement measures to limit base erosion and profit shifting.
  - Keep public wage bills below 35 percent of domestic revenue (WAEMU criterion).
- Public investment and PPPs:
  - Improve public investment efficiency; WAEMU Commission and BOAD to help countries build capacity for planning, programming, budgeting, monitoring and evaluation.
  - Fully explore concessional financing before non-concessional resources; PPPs can provide financing but carry fiscal risks and require legal, institutional, accounting and reporting frameworks.
- Debt management:
  - Strengthen debt management capacity; coordinate issuance (e.g., Eurobonds) to limit rollover risks.
  - WAMU Securities Agency (UMOA–Titres) could help ensure coordination.

### Monetary policy recommendations and financial market development
- Monetary policy stance:
  - Supported the December 2016 monetary tightening; noted the March 1, 2017 RR reduction would partly offset the tightening.
  - BCEAO should stand ready to further tighten monetary policy if pressures on external reserves continue; could include raising the BCEAO policy rate or further widening interest rate spread if reserves decline.
  - Staff recommended keeping monetary policy on hold as recent measures feed through the economy, but ready to act if needed.
- Improve monetary policy effectiveness:
  - Energize the interbank market: establish an interbank reference rate; stimulate repurchase (repo) operations; align local legal framework for repo operations with international standards.
  - Further improve liquidity management: calibrate open market operations based on market liquidity needs and adjust reserve requirement to provide buffer above banks’ incompressible balance.
  - Develop healthy financial markets: make government paper attractive to pension and insurance funds and international investors; develop a risk-free yield curve; establish individual ratings for all member countries; harmonize tax treatment of government securities.
  - Over time move to a full interest rate corridor system to promote secondary market development and improve monetary transmission.

### Financial stability, supervision and inclusion priorities
- Regulatory and supervisory actions:
  - Implement Basel II/III standards with new minimum capital requirements of 9 percent and phased implementation 2018–2022.
  - Introduce consolidated supervision and tighten large exposure limits to 25% of Tier 1 capital.
  - Strengthen AML/CFT supervision and implement risk-based supervision tools, stress testing, and improved reporting systems.
  - Organize supervisory colleges for cross-border banking groups and reinforce cross-border cooperation.
- Resolution and safety nets:
  - Make the Deposit Guarantee Fund (FGD) fully operational.
  - Establish an effective regional bank resolution framework aligned with Financial Stability Board principles; amend Convention annex to enable the Banking Commission to act as resolution authority and establish a resolution fund.
- Financial inclusion:
  - Regional five-year strategy target: expand access and use of financial services and products to "75 percent of the WAEMU adult population."
  - Accelerate implementation: lower cost of financial services, strengthen legal/judicial frameworks, improve business environment, boost mobile banking, while considering financial stability and AML issues.

### Data, surveillance and institutional coordination
- Authorities encouraged to improve quality, coverage, and timeliness of regional data, particularly external sector statistics and financial soundness indicators.
- Staff encouraged BCEAO to report timely official reserves for the monetary union in view of Senegal’s forthcoming SDDS subscription.
- Surveillance timetable: the next Article IV consultation discussion with the WAEMU regional authorities will be held on the 12-month cycle (Decision No. 13656-(06/1), as amended).

*Source: INTERNATIONAL MONETARY FUND, cr1799.*

### 3.7 months of imports at End-December 2016, reflecting a continued expansion in public

### 3.7 months of imports at End-December 2016, reflecting a continued expansion in public

### Recent economic developments
- Real GDP growth in 2016: 6.2 percent.
- Headline inflation (average) in 2016: 0.4 percent.
- Overall fiscal deficit in 2016 (preliminary): 4.5 percent of GDP (higher than initially planned 4 percent).
- Fiscal deficits below or at initial 2016 targets: Burkina Faso, Niger, and Senegal.
- Public investment scaled up in most countries in 2016, contributing to high domestic-demand-driven growth.
- Credit and liquidity dynamics:
  - Credit to the public sector expanded 43.8 percent in 2016.
  - Credit to the private sector expanded 9.7 percent in 2016.
  - Money growth in 2016: 10.2 percent.
- External buffers and reserves:
  - Regional reserves declined by CFAF1000 billion (about $2 billion) in 2016.
  - Reserves in months of imports fell from 4.5 months in 2015 to 3.7 months in 2016.
  - Reserves corresponded to 54 percent of regional broad money and 78 percent of short-term debt in 2016.
- Balance of payments: current account deteriorated by 0.3 percentage point in 2016 and the financial account surplus fell by 1 percentage point, contributing to reserve losses.

### Monetary policy and banking sector measures
- BCEAO actions to activate interbank market and enhance monetary transmission:
  - Widened the corridor between the minimum bid rate for open market refinancing operations (de facto policy rate) and the credit facility rate to 200 basis points.
  - Minimum bid rate kept unchanged at 2.5 percent.
  - Lending facility rate increased from 3.5 to 4.5 percent (decision dated December 6, 2016).
  - Announced cap on recourse to the lending facility at twice banks’ capital starting June 2017.
  - Reserve requirement ratio reduced from 5 percent to 3 percent of deposits (decision of the Monetary Policy Committee on March 1, 2017).
- Effects and concerns:
  - Increase in the lending rate tightened monetary conditions and led to higher interbank activity.
  - The reduction in the reserve requirement ratio should provide additional liquidity and reduce the need for refinancing, but will weaken somewhat the benefit expected from the December 2016 tightening.
- Financial sector reforms and vulnerabilities:
  - Adoption of Basel II and III capital standards and introduction of consolidated supervision.
  - Important steps to promote financial stability, but banking sector conditions remain challenging.
  - Credit and concentration risks are important; the ratio of gross NPLs to total loans remains relatively high.
  - Situations of several troubled banks remain unresolved.

### Outlook and risks
- Medium-term growth projection: growth is projected to stay above 6 percent.
- Inflation outlook: inflation would remain low due to continued solid agricultural production.
- Downside risks explicitly identified:
  - Delays in fiscal consolidation.
  - Slow progress in raising public investment efficiency and advancing private-sector friendly structural reforms.
  - Sharper slowdown of world economic growth.
  - Tighter international financing conditions.
  - Sustained decline in cocoa prices.
  - Security risks.
- External and fiscal vulnerabilities noted: rising public debt and shrinking external buffers reduce resilience to shocks.

### Executive Board / Directors’ assessment and policy recommendations
- Directors agreed with staff appraisal: welcomed robust growth and low inflation but noted rising risks to public debt sustainability and external stability.
- Fiscal policy recommendations:
  - Growth-friendly fiscal consolidation is key to reducing public debt and rebuilding foreign reserves buffers.
  - Member countries urged to adhere to current budget deficit reduction plans.
  - Adjustment efforts should focus on revenue mobilization and containing current expenditure while protecting priority capital and social spending.
  - Improve public financial and debt management, enhance spending quality and efficiency, and develop alternative forms of financing for infrastructure while mindful of associated risks.
- Monetary policy recommendations:
  - Supported the December 2016 monetary tightening; noted the March 1, 2017 RR reduction would partly offset the tightening.
  - BCEAO should stand ready to further tighten monetary policy if pressures on external reserves continue.
  - Encourage improved liquidity management, energizing the interbank market, deepening financial markets, and strengthening monetary policy transmission.
- Financial sector recommendations:
  - Adequately prepare for implementation of upgraded regulatory and prudential frameworks, make the financial safety net operational, and develop an effective regional bank resolution regime.
  - Enforce existing prudential regulations to address current pockets of vulnerability.
  - Rapid implementation of the new regional action plan and strategy for financial inclusion, including lowering the cost of financial services, strengthening legal and judicial frameworks, enhancing the business environment, and boosting mobile banking—while considering financial stability and anti-money laundering issues.
- Structural reform recommendations:
  - Accelerate structural reforms to improve the business environment, boost competitiveness, foster diversification, and promote private investment.
  - Reduce barriers to regional trade, including cumbersome administrative procedures, and enhance regional infrastructure.
- Data and surveillance:
  - Authorities encouraged to improve quality, coverage, and timeliness of regional data, particularly external sector statistics and financial soundness indicators.
- Surveillance timetable:
  - The next Article IV consultation discussion with the WAEMU regional authorities will be held on the 12-month cycle.

*International Monetary Fund staff report: WEST AFRICAN ECONOMIC AND MONETARY UNION — Staff Report on Common Policies of Member Countries (March 15, 2017).*

### 45.9 percent in 2016. Although staff

### cr1799 - 45.9 percent in 2016. Although staff

### Recent economic developments
- Public debt reached 45.9 percent in 2016. Although staff analysis suggest that the level of debt is still sustainable (Annex II), the increasing reliance on non-concessional loans has heightened debt vulnerabilities.
- The BCEAO stopped accommodating the demand for excess reserves at its operations, starting December 2015.
- Economic activity has remained strong in 2016, with low inflation.
- Ongoing capital expenditures keep the fiscal deficit at a high level and widen the current account deficit.
- Deterioration in reserve coverage was observed through 2016.

### Monetary policy framework (Box 1 summary)
- The BCEAO relies on:
  - Two types of open market operations: refinancing for seven days and twenty-eight days (respectively each week and each month to banks subject to the reserve requirement) allocated at variable rates; the minimum bid rate which the BCEAO considers as its policy rate (currently 2.5 percent). The intended allotment is normally calibrated based on the BCEAO’s forecast of the liquidity needs during the maturity of the operations.
  - Two types of standing lending facilities: refinancing 1 to 7 days or for 90 to 360 days against government securities and credit claims with maturities ranging from 5 to 20 years at the demand of the banks. The facilities are priced 200 basis points above the policy rate. Starting in June 2017, recourse to the lending facility will be capped at twice the counterparty’s capital.
- Until December 2015, the BCEAO steered short-term rates close to its minimum bid rate. The calibration of the allotment, based on the outstanding refinancing and the expected change in autonomous factors, satisfied most demand for refinancing and the auction weighted average rate hovered at around five basis points above the minimum bid rate.
- As refinancing fully accommodated the demand from banks (including for excess reserves) and provided high certainty regarding roll-over of outstanding loans, it reduced the need for interbank transactions.
- At End-December 2015, the BCEAO stopped accommodating the demand for excess reserves. Since end-2015, the BCEAO levelled off its refinancing to gradually reduce the allotment toward the liquidity need arising from autonomous factors and the reserves requirement, thereby discontinuing the accommodation of the demand for excess reserves.
- At End-December 2016, the BCEAO increased the spread between the minimum bid rate at its open market refinancing operations and the lending facility from 100 to 200 basis points. Consequently, the refinancing weighted average rate has increased by more than 100 basis points. This result combined with the December 2015 decision are expected to boost the interbank market.
- Note: The demand for excess liquidity is due to market segmentation and incompressible reserves in addition of the autonomous factors.

### Outlook and medium-term projections
- Growth:
  - Under the baseline, growth is projected to stay above 6 percent over the medium term assuming accelerated reforms to improve the business environment and promote private investment, enhanced technical capacity, and better accountability and governance in member countries.
- Inflation:
  - Inflation would remain low on account of continued solid agricultural production.
- Fiscal balances:
  - The overall fiscal deficit of the region would increase to 4.7 percent of GDP in 2017 before declining to 3 percent in 2019, in line with the WAEMU convergence criterion, if governments implement their fiscal consolidation plans.
  - The baseline does not envisage that all countries will reach the deficit of 3 percent in 2019. Burkina Faso (3.5 percent of GDP) and Niger (4.7 percent of GDP) breach the criterion.
- Current account and financing:
  - The current account deficit is expected to widen in 2017, reflecting continuous public investment efforts—related imports of intermediated goods and equipment—and less favorable terms of trade.
  - Increasing FDI—especially for large investment projects in Niger, Burkina Faso, and Senegal—and other investment are expected to fully finance the current account deficit in 2017.
  - Over the medium term, country goals for fiscal consolidation and assumed steps to improve external competitiveness are projected to gradually reduce the current account deficit to 5.3 percent of GDP by 2021.
  - FDI with capital grants are expected to remain the main sources of its financing.
- Public debt and reserves:
  - Public debt would start declining from 2018 in relation to GDP.
  - International reserves are projected to increase to 4 months of next year’s imports by 2019 (up from 3.5 months’ cover at end-2017).
- Reserve buffer assessment:
  - The current and projected medium-term reserve cover is above the thresholds required by the zone’s monetary arrangement with France.
  - However, reserve cover would remain below the optimal buffer against external shocks, estimated by staff as corresponding to a reserve cover of 5 to 12 months of imports—depending on the interest rate differential with the rest of the world (Dabla Norris et al., 2011).
  - The arrangement with France provides an operation account on which the BCEAO can draw in case of reserve shortage; in exchange, BCEAO countries must hold 50 percent of their exchange reserves at the French Treasury, and 20 percent of the BCEAO liabilities must be covered by foreign reserves.

### Risks and downside scenarios
- The outlook is subject to substantial downside risks that could reduce regional economic growth down to 1.5 percent over the medium term (RAM).
- Recurrent delays in fiscal consolidation pose increasing risks to the outlook.
- The current baseline scenario contemplates a slight increase in deficits in 2017 (4.7 percent of GDP compared to 4.5 percent in 2016). This represents a clear deterioration with respect to expectations at the time of the 2016 Article IV, when the deficit was projected at earlier levels.

### Key macroeconomic indicators (selected, 2013–21)
- Real GDP growth (%):
  - 2013: 6.1
  - 2014: 6.6
  - 2015: 6.2
  - 2016 (est.): 6.2
  - 2017 (proj.): 6.5
  - 2018 (proj.): 6.6
  - 2019 (proj.): 6.5
  - 2020 (proj.): 6.6
  - 2021 (proj.): 6.5
- Inflation (average, %):
  - 2013: 1.3
  - 2014: -0.1
  - 2015: 1.0
  - 2016 (est.): 0.4
  - 2017 (proj.): 1.5
  - 2018 (proj.): 1.9
  - 2019 (proj.): 1.9
  - 2020 (proj.): 2.0
  - 2021 (proj.): 2.0
- Overall balance incl. grants (% GDP):
  - 2013: -3.0
  - 2014: -3.3
  - 2015: -4.5
  - 2016 (est.): -4.5
  - 2017 (proj.): -4.7
  - 2018 (proj.): -3.7
  - 2019 (proj.): -3.0
  - 2020 (proj.): -2.7
  - 2021 (proj.): -2.5
- Public debt (% GDP):
  - 2013: 37.6
  - 2014: 38.5
  - 2015: 44.5
  - 2016 (est.): 45.9
  - 2017 (proj.): 46.3
  - 2018 (proj.): 44.8
  - 2019 (proj.): 43.1
  - 2020 (proj.): 41.3
  - 2021 (proj.): 40.7
- Current account (% GDP):
  - 2013: -6.6
  - 2014: -5.1
  - 2015: -5.8
  - 2016 (est.): -6.1
  - 2017 (proj.): -6.3
  - 2018 (proj.): -6.0
  - 2019 (proj.): -6.0
  - 2020 (proj.): -5.7
  - 2021 (proj.): -5.3
- Reserves (months imports):
  - 2013: 4.5
  - 2014: 4.7
  - 2015: 4.6
  - 2016 (est.): 3.7
  - 2017 (proj.): 3.5
  - 2018 (proj.): 3.9
  - 2019 (proj.): 4.0
  - 2020 (proj.): 4.0
  - 2021 (proj.): 4.0

*International Monetary Fund (excerpt).*

### 3.4 percent of GDP in 2017. Given upward revisions to the 2017 fiscal deficits, country plans

### cr1799 - 3.4 percent of GDP in 2017. Given upward revisions to the 2017 fiscal deficits, country plans

### Fiscal outlook and risks
- Fiscal consolidation in 2018 and beyond is appropriate to preserve debt sustainability and external stability given upward revisions to the 2017 fiscal deficits.
- Planned fiscal consolidation has been repeatedly deferred in recent years, creating risks of fiscal slippage in 2017 and beyond.
- Sustained departures from planned fiscal paths would eventually put debt sustainability and the currency coverage at risk.
- Staff simulations: if fiscal deficits remained at the levels observed in 2016 for another five years, the GIR coverage could fall to 2 months of imports by 2021.
- Recommendation: respond promptly to any emerging fiscal slippage with steps to reinforce budget management; this could require parallel steps to tighten monetary policy and adjust the external/domestic financing mix.

### External sustainability and reserves
- Reserve cover should be built toward at least 5 months of import cover.
- Drivers of the 2016 decline in reserves:
  - Delays in fiscal consolidation in most member countries.
  - BCEAO’s accommodative refinancing policy.
  - Weak mobilization of external financing.
  - Increased reliance on domestic financing contributed to deterioration of the external position due to the high import content of public capital expenditure.
  - Commercial banks’ greater recourse to the BCEAO for foreign exchange needs due to simplified and faster administrative procedures.
- Repatriation: overall repatriation rate of export receipts continued its increasing trend in recent years.
- Staff recommended: strengthen external competitiveness through structural reforms and/or further strengthen fiscal balances to build reserve cover.

### Growth risks and scenarios
- Lack of progress in raising public investment efficiency and advancing private-sector friendly structural reforms could slow growth momentum.
  - Over the medium term, growth cannot indefinitely continue to depend primarily on public investment.
  - Without structural reforms to improve the business climate and access to finance, private investment and competitiveness may not pick up, weakening domestic and external stability.
- Global shock simulation (staff):
  - A slowdown in global growth of 0.5 percent coupled with a fall in commodity prices of 20 percent (including cocoa) could reduce regional growth to under 2 percent by 2019, that is, 4 percentage points lower than the baseline projections.
- Other external risks: retreat from cross-border integration, significant slowdown in emerging market growth, structurally weak global growth could reduce foreign aid, financing, remittances, and exports.
- Security-related risks: high in the region; would increase pressure on national budgets, reduce external financing, and delay major investment projects.

### Policy recommendations (fiscal and institutional)
- Growth-friendly fiscal consolidation is needed to reduce public debt and lift pressure on monetary policy and reserves.
  - BCEAO and the WAEMU Commission should convey the need to stick to planned current fiscal consolidation paths leading to an overall regional fiscal deficit of 3 percent of GDP in 2019, in line with WAEMU convergence criteria.
  - Fiscal plans for 2017 and 2018 need to be consistent with that target.
- To achieve fiscal consolidation while filling infrastructure and social protection gaps, implement:
  - Reforms to enhance revenue mobilization.
  - Containment of current expenditure.
  - Improvement in public financial management.
  - Increase in public investment efficiency.
  - Strengthening of debt management.
- Strengthened regional institutions are needed to help achieve objectives and enforce fiscal targets.

- Expanding fiscal space (focus areas):
  - Strengthen revenue administrations and ensure taxpayer compliance.
  - Broaden the tax base, including by attracting informal firms to the formal sector and accelerating property tax reforms.
  - Improve exchange of information between tax and customs administrations and effectively implement the common tariff.
  - Reduce tax expenditure, and adopt and implement regulations to limit base erosion and profit shifting by multinational corporations.
  - Improve spending composition and quality: public wage bills should be kept below 35 percent of domestic revenue (WAEMU criterion); subsidies and social assistance should be well-targeted.
  - Technical assistance from the IMF and other development partners can help with reform implementation.

- Improving public investment:
  - WAEMU Commission and BOAD should help countries build capacity and improve planning, programming, budgeting, monitoring and evaluation of projects.

- Promoting public-private partnerships (PPPs):
  - Fully explore concessional financing options before considering non-concessional resources and private sector participation.
  - PPPs can provide financing for infrastructure if appropriately planned and managed, but carry fiscal risks—appropriate legal, institutional, accounting and reporting frameworks are crucial.

- Enhancing debt management:
  - WAEMU Commission should continue to help countries improve debt management capacity.
  - Coordination between countries, particularly with respect to issuance of Eurobonds, may be needed to limit debt rollover risks.
  - The WAMU Securities Agency (UMOA–Titres) could help ensure such coordination.

### Monetary policy and financial market measures
- Monetary policy:
  - The BCEAO should stand ready to tighten monetary conditions if pressures on external reserves continue.
  - Staff welcomed December 2016 Monetary Policy Committee decision to increase its credit facility rate and tighten access to the refinancing window.
  - Staff recommended keeping monetary policy on hold as recent measures feed through the economy; however, if international reserves continue to decline, additional measures could include raising the BCEAO policy rate or further widening its interest rate spread.

- Improving monetary policy effectiveness:
  - Banking system segmentation (large international banks, pan-African groups, small local banks) undermines market development and monetary policy transmission.
  - Large international banks hold most excess liquidity but do not use it to buy government securities; interbank market is shallow; BCEAO is leading source of refinancing.
  - Reforms recommended:
    - Energize the interbank market: establish an interbank reference rate; stimulate repurchase (repo) operations; align local legal framework for repo operations with international standards; implement new prudential framework (including capital requirements in accordance with Basel II/III).
    - Further improve liquidity management: calibrate open market operations based on market liquidity needs and adjust reserve requirement to provide buffer above banks’ incompressible balance.
    - Develop healthy financial markets: make government paper attractive to pension and insurance funds and international investors; develop a risk-free yield curve via active debt management; establish individual ratings for all member countries; merge or link existing clearing and depository systems; allow brokerage institutions (SGIs) to be full-fledged actors in the auction market; harmonize tax treatment of government securities and eliminate tax distortions discriminating against non-resident investors.
    - Over time move to a full interest rate corridor system to promote secondary market development and improve monetary transmission.

### Financial stability and inclusion
- Regulatory reforms (June 2016) adopted:
  - Basel II and III capital standards introduced; minimum requirements increased to 9 percent.
  - Introduction of consolidated supervision (including over WAEMU-based financial holding companies).
  - Tightening of the large exposure limit to 25% of banks’ Tier 1 capital.
  - Transitional implementation arrangements from 2018 until 2022.
  - Decision to give BCEAO and the Banking Commission power to regulate and supervise financial holding companies on a consolidated basis (decision enters into effect in 2018).
  - Adoption of new banking chart of accounts; reorganization of the Banking Commission to integrate crisis resolution monitoring and supervision of large microfinance institutions and specialized institutions such as mobile money firms.
- Basel II/III details:
  - New minimum capital requirements of 9 percent should comprise a minimum of 5 percent common equity Tier 1 capital and 6 percent total Tier 1 capital.
  - Current capital adequacy requirements covered only credit risk and the minimum capital adequacy ratio was 8 percent.
  - Current single large exposure limit was 75 percent of banks’ total regulatory capital; new limit reduced to 25% of banks’ Tier 1 capital.
- Supervisory actions:
  - BCEAO organized in 2016 supervisory colleges for the two WAEMU-based Pan-African banks and participated in supervisory colleges organized by home supervisors of Moroccan, Nigerian and Central African banking groups with subsidiaries in the region.
- Banking sector challenges:
  - Current rules are not effectively enforced: Only 57 out of 102 banks comply with the minimum share capital of CFA 10 billion at end-June 2016.
  - Current capital adequacy of the regional banking sector remains relatively weak.

### Authorities’ views
- Authorities broadly agreed with staff on the outlook and risks; particularly concerned by the drop in cocoa prices and potential fiscal slippages in 2017.
- Authorities noted informal trade as an underestimated spillover channel of regional shocks and the significant impact a slowdown in Nigeria could have on Benin and Togo.
- Agreement that if downside risks materialize, further monetary policy and fiscal tightening, along with adjustment in the external/domestic financing mix, will be required to preserve external stability.
- Agreement between staff and authorities on the need to rebuild policy buffers and resilience to avoid abrupt policy responses.
- BCEAO and WAEMU Commission agreed on the need for coordination and consistency between national fiscal policies and regional monetary policy, while acknowledging challenges in getting member countries to adhere to fiscal consolidation plans.
- BCEAO views:
  - Recent monetary policy decisions could encourage capacity to rely more on external financing; staff noted this could stem reserve pressure short-term but medium-term fiscal deficits must be reduced to preserve the external position.
  - No need to tighten monetary policy further at the moment but committed to take further action should external reserves decline further.
  - Will pursue efforts to improve compliance with regulations requiring 80 percent repatriation of export receipts.
  - Broad agreement with staff on strengthening monetary policy effectiveness and continued priority on financial market deepening; will seek technical assistance from the Fund as needed.

### Key numeric targets and indicators (as presented)
- 3.4 percent of GDP in 2017.
- GIR coverage could fall to 2 months of imports by 2021 under no fiscal adjustment simulation.
- Reserve cover target: at least 5 months of import cover.
- Overall regional fiscal deficit target: 3 percent of GDP in 2019.
- WAEMU convergence criterion for tax revenue/GDP: 20 percent of GDP by 2019.
- Public wage bills: keep below 35 percent of domestic revenue (WAEMU criterion).
- Basel II/III minimum capital requirements: 9 percent (minimum of 5 percent common equity Tier 1 capital and 6 percent total Tier 1 capital).
- Single large exposure limit reduced to 25% of banks’ Tier 1 capital (current was 75 percent of banks’ total regulatory capital).
- Transitional implementation arrangements for new regulations span from 2018 until 2022.
- Only 57 out of 102 banks comply with the minimum share capital of CFA 10 billion at end-June 2016.
- Repatriation regulation: compliance target of 80 percent repatriation of export receipts.
- Simulated global shock: global growth slowdown of 0.5 percent and commodity prices fall of 20 percent could reduce regional growth to under 2 percent by 2019, 4 percentage points below baseline.

*Source: INTERNATIONAL MONETARY FUND, cr1799.*

### 9.6 percent in June 2016, which signals that banks would need significant reinforcement in their

### cr1799 - 9.6 percent in June 2016, which signals that banks would need significant reinforcement in their

### Capital adequacy and supervisory status
- Capital ratio was 9.6 percent in June 2016, which signals that banks would need significant reinforcement in their capital levels to meet the new stricter requirements that will be phased in starting January 2018.
- Four banks (mainly state-owned) are under temporary administration.
- 14 banks remain under closer supervisory scrutiny, accounting for around 16.1 percent of the banking sector assets at end-June 2016.

### Asset quality and concentration risks
- The ratio of gross NPLs to total loans is 15.6 percent at end-September 2016.
- Around 40 percent of banks are in violation of the relatively soft single large exposure limit as of the same period.
- Credit risk and concentration risk are identified as important vulnerabilities.

### Bank resolution framework and financial safety nets
- Dealing with weak and problem banks is hampered by the lack of an effective resolution regime and weak financial safety nets.
- Resolution of troubled banks is often delayed and challenged in part due to the shared powers with national authorities.
- A new deposit insurance fund (FGD) was established but major milestones remain to be completed before it becomes operational.
- Authorities hope that these actions would be completed in [text cutoff in source].

### Key statistics (preserved verbatim)
- Capital ratio: 9.6 percent in June 2016
- Banks under temporary administration: Four banks (mainly state-owned)
- Banks under closer supervisory scrutiny: 14 banks
- Share of sector assets under scrutiny: around 16.1 percent of the banking sector assets at end-June 2016
- Gross NPLs to total loans: 15.6 percent at end-September 2016
- Banks violating single large exposure limit: around 40 percent

*Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1799.pdf*

### 2017. In addition, the Council of Ministers has approved in 2015 the establishment of a

### cr1799 - 2017. In addition, the Council of Ministers has approved in 2015 the establishment of a

### Financial sector vulnerabilities and recent reforms
- Strong bank–sovereign link: "About 27 percent of bank assets consist of government securities."
- Minimum share capital raised from CFAF 5 billion to CFAF 10 billion in July 2015; banks have "two years, i.e. till June 2017, to comply with the new requirements."
- Deposit Guarantee Fund (FGD) progress:
  - Organizational structure and recruitment of three employees completed in 2016.
  - Drafting of some procedures and circulars has started.
  - Main remaining actions before FGD operational: adoption of circulars on membership requirements, contribution rates, and reimbursement rules by the FGD Board of Directors; finalizing working procedures and accounting system; collection of data on bank deposits and assessment of contributions; launching the FGD website.
- Compliance with prudential limits (selected):
  - Minimum Share Capital Requirement (FCFA 10 Billion): compliance tracked Dec-15 and Jun-16 (chart referenced).
  - Minimum Capital Adequacy Ratio (8%): compliance tracked Dec-15 and Jun-16.
  - Related party lending Limit (25% of Regulatory Capital): compliance tracked Dec-15 and Jun-16.
  - Single Large Exposure Limit (75% of regulatory Capital): compliance tracked Dec-15 and Jun-16.
  - Minimum Liquidity Ratio (75%): compliance tracked Dec-15 and Jun-16.

### Staff findings and recommended financial-sector actions
- Priority objectives: enforce existing prudential regulations, prepare effective implementation of new regulations, and enhance financial safety nets.
- Specific recommendations to strengthen bank supervision:
  - Upgrade supervisory tools to implement risk-based supervision (assessing risk profiles, enhancing bank rating system, conducting stress tests, automating reporting tools and procedures).
  - Strengthen AML/CFT supervision, including implementing dissuasive sanctions for breaches related to domestic politically-exposed persons.
  - Prepare for consolidated supervision of banking groups (including those under holding companies).
  - Implement new reporting framework and improve the Banking Commission information system.
  - Strengthen supervisory capacity and resources.
- Ensure effective enforcement of the new prudential framework within set timeframes:
  - Banks must take measures to cover capital needs when new framework enters into force.
  - Finalize draft instructions and circulars related to the new prudential framework.
  - Continue engagement with stakeholders, including banks, to explain requirements and address implementation issues.
- Cross-border supervision:
  - Continue organizing supervisory colleges of large cross-border banking groups.
  - Reinforce cooperation agreements and joint supervisory activities with foreign supervisors.
- Resolution framework and FGD:
  - Make the Deposit Guarantee Fund (FGD) fully operational.
  - Establish an effective regional bank resolution framework aligned with international standards, particularly Financial Stability Board principles.
  - Amend the annex to the Convention governing the Banking Commission without delay to enable the Commission to act as a resolution authority and establish a bank resolution fund (as provided by the regional Council of Ministers in July 2015).

### Financial inclusion and regional strategy
- WAEMU financial inclusion status: access and utilization remain low, especially for vulnerable populations.
- Council of Ministers approved in June 2016 a regional strategy and action plan with budget.
- Five-year strategy target: expand access and use of financial services and products to "75 percent of the WAEMU adult population."
- Staff recommendation: accelerate implementation of the regional action plan; focus on reducing cost of financial services, strengthening legal framework and business environment, and improving financial education and consumer protection while considering financial stability and AML issues.

### Authorities' views on financial stability reforms
- Authorities agreed with staff thrust; will continue reforms to upgrade regulation and supervision.
- They highlighted adoption of Basel II and III capital framework to enhance bank resilience.
- BCEAO indicated introduction of credit bureaus and plan to reduce large exposure limits to reduce credit and concentration risks.
- BCEAO agreed resolution authority should have necessary powers and independence.

### Structural reforms, competitiveness, and regional integration
- Staff view: promoting competitiveness and diversification will help contain vulnerabilities and sustain high growth.
- Survey evidence: very limited progress in structural competitiveness compared to African and Asian peers; significant obstacles remain in registering property, construction permits, getting credit and electricity, paying taxes, and availability of infrastructure, technology, specialized labor.
- Infrastructure gap and limited public investment efficiency (IMF, 2015) contribute to high costs of communication, transport and electricity.
- Recommendation: accelerate reforms, foster regional integration, and implement coordinated policy actions at regional and national levels.

### Macroeconomic outlook and staff appraisal
- Recent performance:
  - "Real GDP growth exceeded 6 percent for the 5th year in a row."
  - Inflation "has remained subdued."
  - Reserve coverage "declined sharply in 2016, reflecting larger than expected fiscal deficits, fueled by continued expansion in public infrastructure spending, and lower-than-expected external financing."
- Outlook and risks:
  - Growth expected to remain "around 6 percent."
  - Downside risks: global uncertainties, slippages in fiscal consolidation plans, sluggish structural reforms, sustained decline in cocoa prices, security-related risks.
- Fiscal policy guidance:
  - 2017 fiscal deficits "are not compatible with medium-term external stability."
  - Member countries should stick to budget deficit reduction plans.
  - Focus on revenue mobilization, contain current expenditure, improve debt management, and prioritize quality of public investment.
  - Further development of alternative financing (e.g., PPPs) recommended.
- Monetary policy stance:
  - BCEAO should be ready to tighten monetary policy if pressures on external reserves continue.
  - The December 2016 Monetary Policy Committee decisions: increase credit facility rate and tighten access to refinancing window—expected to affect banks engaged in government securities carry trade financed with BCEAO refinancing.
  - March 1, 2017 decision to reduce the reserve requirement ratio expected to provide additional liquidity but somewhat weaken benefits of the December 2016 decisions.
  - Further progress needed on liquidity management, interbank market development, and financial market deepening to enhance monetary transmission.

### Financial stability and inclusion priorities reiterated
- Commendation for June 2016 regulatory reforms: adoption of Basel II and Basel III and introduction of consolidated supervision of cross-border banks.
- Continued priorities:
  - Enforce prudential regulations and implement consolidated supervision.
  - Operationalize FGD and develop effective regional bank resolution regime.
  - Intensify efforts to enhance financial inclusion: lower service costs, strengthen legal/judicial frameworks, improve business environment, boost mobile banking development.

### Data, safeguards, and surveillance
- Safeguards: 2013 BCEAO safeguards assessment found continuing strong control environment; all recommendations implemented (including appointment of an international audit firm for FY 2015–17 audits, reinforcing audit committee capacity, and adoption of IFRS starting FY 2015).
- Statistical needs: improve quality, timeliness, and public availability—especially external sector statistics.
- Staff encouraged BCEAO to report timely official reserves for the monetary union in view of Senegal’s forthcoming SDDS subscription.
- Surveillance cycle: discussions with WAEMU authorities on a 12-month cycle per Decision No. 13656-(06/1), as amended.

*International Monetary Fund. cr1799 - 2017.*

### Annex I. WAEMU: External Stability Assessment and

### Annex I. WAEMU: External Stability Assessment and Competitiveness

### Current account and external financing
- Regional current account deficit (including grants) is estimated at 6.1 percent of GDP in 2016, about 0.3 percentage point of GDP more than last year.
- Trade and service deficit increased by 0.7 percentage point to 9.6 percent of GDP in 2016, reflecting a decline in exports of goods—especially cocoa and uranium—and an increase in imports of specialized services.
- Current official transfers are estimated to have increased by 0.4 percentage point to 2.7 percent of GDP in 2016, compensating for slightly lower private transfers.
- The current account deficit is expected to gradually decline to 5.3 percent of GDP by 2021, assuming fiscal consolidation and improved external competitiveness.
- Capital transfers remained stable at about 2 percent of GDP in 2016.
- FDI is estimated to have increased from 2 to 2.7 percent of GDP in 2016, and in the medium term FDI is projected to increase to 3.5 percent of GDP.
- Portfolio and other investments (mainly official loans) are expected to decline by 0.5 and 3.4 percentage point of GDP, respectively (2016 observations/projections context).
- WAEMU external debt is expected to decline progressively to about 35 percent of GDP in 2021.

### Reserves adequacy
- Regional gross international reserves declined from CFAF 7487 billion (US$12.4 billion) at end-2015 to CFAF 6498 billion (US$10.8 billion) at end-2016.
- At end-2016 reserves were equivalent to 3.7 months of extra-regional imports, 55 percent of narrow money, and 74 percent of short-term debt.
- The current and projected medium-term reserve cover is above the thresholds required by the zone’s monetary arrangement with France.
- Dabla-Norris et al. (2011) approach suggests an optimal range of reserves between 5-12 months of imports for the WAEMU depending on the interest rate differential with the rest of the world.
- With a prolonged slowdown in global growth and regional terms of trade, regional reserves could decline up to 1.5 months of imports.

### Assessment of external position and exchange rates
- REER is estimated to have depreciated marginally by 0.4 percent while the NEER appreciated by about 2 percent compared to last year.
- “EBA-lite” analysis does not indicate significant misalignments of the current account or the real effective exchange rate compared to regional fundamentals adjusted by a policy gap.
- Results suggest the current account gap varies between -0.4 to -0.7 percent and the real effective exchange rate overvaluation ranges between 0.9 percent and 1.7 percent.
- Largest contributor to the current account (CA) norm is lagged productivity and demographics; fiscal policy and change in reserves are the largest contributors to the policy gap.

### Competitiveness and structural reforms
- Competitiveness remains weak, and progress is slow according to the 2017 World Bank’s Report.
- The regional Doing Business climate improved less than last year and much less than in other African and Asian regions.
- Some WAEMU countries (Niger, Guinea-Bissau, and Mali) made progress in areas such as starting a business, investment protection, contract enforcement, and insolvency resolutions.
- Fostering regional integration and adopting a regional approach to bridging the infrastructure gap would help improve competitiveness.

### Projections and outlook highlights (2016–2021)
- Current account deficit expected to stabilize and gradually decline to 5.3 percent of GDP by 2021 under assumptions of fiscal consolidation and improved competitiveness.
- Financial inflows are expected to balance the balance of payments by the end of the projection period.
- Reserve coverage projected to increase to about 4 months of imports by 2021.
- National savings and investment dynamics: projections (2016–2021) show public and private investment and savings evolving to finance investment domestically (figures shown in source charts).

---

### Annex II. Anchoring Debt Accumulation in the WAEMU

### Recent public debt developments
- Average public debt ratio rose from 36.5 percent of GDP in 2012 to 45.5 percent of GDP in 2016, reflecting predominantly public investment scaling up.
- External debt accounts for the vast majority of public debt, but composition shifted:
  - Commercial debt increased from 8 percent of total external public debt in 2011 to 16 percent in 2016.
  - Share of Non-Paris club creditors in total external debt grew from 2 percent in 2011 to about 22 percent in 2016.
- These compositional changes, together with a drop in the share of traditional multilateral creditors, resulted in a decline in the grant element for the region.

### DSF application and regional risk assessment
- Elements of the Fund-Bank debt sustainability framework (DSF) applied to the WAEMU indicate a moderate risk of debt distress for the region (analysis uses end-2015 data).
- The DSF takes into account regional indebtedness, repayment capacities, policy and institutional capacity, macroeconomic shocks, and heterogeneity of WAEMU countries.
- Under the baseline scenario, all five debt indicators (in present value—PV) remain below policy-dependent thresholds, but stress tests reveal vulnerabilities.

### Stress test findings and vulnerabilities
- Extreme stress scenario (export growth falling temporarily by one standard deviation below its historical average): all indicators of debt distress increase significantly with two breaching the thresholds.
- Combined GDP growth and external financing shock: all debt indicators increase significantly with two breaching thresholds.
- Other shock simulations (e.g., tightened financial conditions) yield similar results, confirming moderate risk of debt distress.
- Public domestic debt breaches the policy-dependent threshold under all stress test scenarios.
  - PV of domestic debt-to-GDP ratio remains stable under the baseline but shows high vulnerability to growth shocks (temporary lower GDP growth by one standard deviation).
  - With unchanged fiscal policy stance (primary fiscal balance at 2015 level), PV of domestic debt steadily increases over the medium term reaching debt thresholds.
  - Historical-scenario results are similar to a combined large shock (GDP growth and primary fiscal balance decline temporarily by a half standard deviation compared to baseline).
- Country-level differences:
  - PV of domestic debt-to-GDP ratio breaches thresholds in Togo, Cote d’Ivoire, and temporarily in Guinea-Bissau.
  - Risk of debt distress is significantly higher for Togo, Côte d’Ivoire, Niger, and Benin as PV of debt-to-GDP ratio breaches substantially the debt threshold in at least two stress test scenarios.

### Quantitative/graphical diagnostics (high-level)
- Average regional public debt remains stable below a 70-percent threshold, but debt ratios have been increasing in individual countries.
- WAEMU: Total and external public debt (Percent of GDP, 2007-21) displayed upward trends in projections to 2021.
- Annex figures show indicators under alternative scenarios (2016-36) for:
  - Debt accumulation, grant-equivalent financing, grant element of new borrowing.
  - PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, debt service-to-revenue ratios.
- Most extreme stress tests differ by indicator (e.g., Combination shock, Exports shock, One-time depreciation shock) and yield the highest ratio on or before 2026 for each respective indicator.

### Policy implications and required actions
- Member countries need to increase fiscal and external buffers and improve their debt management policy and framework to ensure debt sustainability and macroeconomic stability.
- Strengthening debt management, increasing fiscal buffers, and enhancing institutional and policy capacity would reduce vulnerabilities highlighted by stress tests.

*Source: Annex I and Annex II of IMF country report chapter for WAEMU (text as provided).*

### Annex II, Figure 4. WAEMU Countries: PV of Public Debt -to-GDP Under Different Scenarios

### Annex II, Figure 4. WAEMU Countries: PV of Public Debt -to-GDP Under Different Scenarios (2016-36)

### PV of Public Debt-to-GDP — Scenarios and legend
- Countries covered (as labeled): Benin, Burkina Faso, Cote-d'Ivoire, Guinea Bissau, Mali, Niger, Senegal, Togo.
- Time horizon shown: 2016-36.
- Scenario labels shown in the figure legend:
  - Baseline
  - Fix Primary Balance
  - Most extreme shock Non-debt flows
  - Historical scenario
  - Public debt benchmark
- Y-axis metric: PV of Debt-to-GDP Ratio (percent), scale varying by country panel (examples in panels show ranges such as 0–120, 0–60, 0–100, and negative-to-positive ranges for some countries).
- Sources stated: Country authorities; and staff estimates and projections.

### Key observations from the figure (visual indicators)
- Multiple scenario paths are plotted for each country across 2016–2036, comparing baseline and alternative shock/scenario paths to a public debt benchmark.
- Some country panels display PV of Debt-to-GDP ratios that approach or exceed 100 percent on the plotted scales; other panels show smaller ranges (e.g., up to 60 or 90 percent).
- One panel includes negative-to-positive scale (showing a range from -10 to 60 percent), indicating at least one country with projected net present value debt ratios that at times would be near zero or negative under some scenarios.

### Figure focus
- The figure is intended to illustrate differences in the present value of public debt-to-GDP under alternative scenarios (baseline, fixed primary balance, extreme shock with non-debt flows, historical scenario) relative to a public debt benchmark, over the 2016–2036 horizon for WAEMU countries listed above.

---

### Annex III. Monetary Policy, Market Segmentation and Refinancing in the WAEMU — Overview

### A. Characteristics of the banking sector
- Banking system composition:
  - 102 banks, including 28 banking groups.
  - The 13 larger banking groups accounted together for 80 percent of the total bank assets in June 2016.
  - WAEMU-based banking institutions make up 28 percent of total assets.
  - Moroccan banks account for about 30 percent of total bank assets; French banks account for 13 percent.
  - Ecobank alone makes up for about 15 percent of total assets.
- Business model and market structure:
  - Banks are heterogeneous in business models, size, geographical coverage, and profitability.
  - Banking is predominantly geared towards large enterprises and largely conducted within national borders.
  - Cross-border corporate flows are largely syndicated loans involving sister banks.

- Sector vulnerabilities and supervision:
  - Ratio of gross NPLs to total loans: 15.6 percent at end September 2016.
  - Around 40 percent of banks are in violation of the single large exposure limit (same period).
  - Four banks (mainly state-owned) are under temporary administration.
  - 14 banks remain under closer supervisory scrutiny, accounting for around 16.1 percent of the banking sector assets at end-June 2016.
  - A new deposit insurance fund (FGD) was established but major milestones remain to be completed before it becomes operational.
  - Authorities working on a regional resolution framework (resolution authority and regional resolution fund).

### B. Small and segmented interbank market
- Market size and collateralization:
  - Interbank loans represented about 2.5 percent of bank deposits between 2009 and 2015.
  - Interbank outstanding debt reached about 50 percent of the banks’ reserve requirements at end-2015.
  - From 2010 to 2016, about 93 percent of lending in the interbank market was unsecured.
  - Most frequently traded interbank maturities: 7 days and 14 days.
- Segmentation and concentration:
  - Most interbank transactions occur intra-group; intra-group transactions represent about 80 percent of interbank market transactions.
  - Five groups generate 75 percent of all interbank transactions; in half of the 16 groups intra-group transactions significantly exceeded intergroup transactions.
  - Pan-African and local banks are more active in the interbank market; international banks with large excess reserves are reluctant to lend inter-group and typically do not recycle excess liquidity in the market.
  - Cross-border transactions between the eight WAEMU member countries represent 85 percent of interbank transactions.
- Pricing:
  - Unsecured inter-group transactions are consistently priced above comparable intra-group transactions.
  - Unsecured intra-country transactions are consistently priced above comparable cross-border transactions.

### C. Monetary policy operations and demand for refinancing
- BCEAO open market operations:
  - BCEAO provides refinancing for seven days and 28 days respectively (weekly and monthly).
  - Refinancing is allocated at variable rates; minimum bid rate of the 7-day operation is the BCEAO’s policy rate and also applies to 28-day tender.
  - Maximum bid amount: banks cannot receive refinancing for more than 35 percent of their credit to the private sector and government securities; this cap is binding for 110 counterparties.
- Standing lending facilities:
  - First facility: refinancing on demand from one to seven days.
  - Second facility: refinancing for 90 to 360 days against government securities and credit claims with maturities ranging from 5 to 20 years.
  - Facilities currently priced 200 basis points above the policy rate.
  - Starting in June 2017, recourse to the lending facility will be capped at twice the counterparty’s capital.
- Usage patterns and pricing effects:
  - Recourse to the lending facility represents demand not satisfied at open market operations.
  - Since December 2015 limits on open market operations, banks relied extensively on the lending facility in 2016.
  - In December 2016, the central bank increased the lending facility rate by 100 basis points.
  - Market participants indicated that the spread of 100 basis points between the minimum bid rate at refinancing operations and the lending facility was too narrow to promote interbank transactions.
- Refinancing and balance-sheet relationships (visual results cited):
  - Regression lines illustrated between refinancing balance and Loan + Government Security balances (figures provided in source).

### D. Segmentation of BCEAO counterparties and access to refinancing
- Counterparty categories and access:
  - International banks with large low-cost retail deposit bases and stringent risk limits have large excess reserves and do not need BCEAO refinancing.
  - A second category (Pan-African and WAEMU groups) typically have no excess reserves and large refinancing needs while striving to grow balance sheets.
  - Some small local banks have excess reserves financed at the refinancing operations and bid for precautionary excess reserves; these newcomers have small deposit bases and limited group support.
- Composition of BCEAO refinancing by maintenance period (visual series cited): weekly OMO, monthly OMO, short-term lending facility, long-term lending facility.

### E. Determinants of the demand for excess reserves
- Two fundamental determinants:
  - Uncertainty (precautionary buffer needs).
  - Opportunity cost of holding excess reserves.
- Incompressible reserves (voluntary minimum balances):
  - The median of incompressible reserves stands at 6.6 percent of banks’ total deposits from 2013 to 2016 for a reserve requirement of 5 percent of deposits.
  - They dropped to 2.5 percent during one maintenance period, but often exceed the reserve requirement.
  - The demand for voluntary reserves could reach more than eight percent of banks’ deposits.
  - Intra-maintenance day shock capacity: banks’ buffer can reach CFAF 600 billion (or about 6 percent of deposits) on a given day.
  - Minimum permanent balance estimated at CFAF 250 billion (or about 2.5 percent of deposits).
- Banks’ funding strategy:
  - Some banks use BCEAO refinancing as a cheaper funding source compared to market or new customer deposits to finance growing balance sheets.
  - Banks with refinancing requirements hold government securities portfolios on average twice as large as other banks.
  - Central bank refinancing is going in large part to counterparties with a small deposit base, which invest in government securities rather than lending to the economy.
  - Rationale: spread between refinancing and government securities yields, difference in capital cost between government securities and credit to the private sector, and liquidity differences favor buying government securities with short-term refinancing.

### F. Empirical results on participation in BCEAO refinancing operations
- Estimation approach:
  - Panel logit model for the probability that BCEAO counterparties participate in 7- and 28-day refinancing operations over 2010–2016.
  - About half of counterparties participated in operations on average during the sample.
  - Dummy variables included for membership in a banking group and country location.
  - Variables normalized by each bank’s deposit to control for size.
- Main empirical findings:
  - Liquidity need variables have the largest impact on participation probability; marginal effects of liquidity variables exceed those of investment strategy variables.
  - An increase in the reserve requirement amount increases the probability of a counterparty participating in a refinancing operation.
  - An increase in excess liquidity rapidly reduces a counterparty’s probability of participating in an operation.
  - A larger portfolio of government securities increases the probability of participation in refinancing operations; marginal effect for government securities is positive, significant, and notably larger than for other eligible assets (e.g., credit claims).
  - Participation is correlated with counterparty leverage (approximated by credit-to-deposits ratio).
  - Membership effects:
    - Membership in Pan-African groups and being an independent bank increase the probability of attending an operation the most.
    - Membership in an international or a WAEMU group does not influence the probability of participating in an operation.

*Source: Annex II, Figure 4 and Annex III text as provided in the supplied content unit.*

### Annex III, Box 1. Model Description

### Annex III, Box 1. Model Description

### Long-run model: Vector Error Correction Model (VECM)
- The long-term relationship between the BCEAO refinancing and its determinants is represented as a vector error correction model.
- The model is estimated on maintenance period averages (the averaging provision of the reserve requirement could absorb some liquidity shocks without creating a demand for more or less refinancing at the BCEAO).
- Equation 1 (as presented):
  - ∆[푅퐹 퐴퐹 푅푅]푡 = ∆풚푡 = 휶휷′ 풚푡−1 + Σ푖=1 2 횪푖 ∆풚푡−푖 + 흂 + 휺풕
- Interpretation of components (as given):
  - The change of the total refinancing balance, the sum of the autonomous factors and the reserve requirements at time 풕 is a 3×1 vector.
  - 휶 and 휷 are 1×3 vectors of coefficients on the lag term of the cointegrating vector.
  - 횪푖 are 2×2 coefficient matrices.
  - 흂 is a vector of constants and 휺풕 a matrix of i.i.d. shocks.
  - The residual of equation 1, 휺풕, represents involuntary excess reserves.

### Methodology: Probability of banks receiving BCEAO refinancing (panel logit)
- Model specification:
  - Pr(푦푖푡 = 1 | 푥푖푡, 푣푖) = 퐹(x푖푡 훽 + 푣푖)
  - 퐹(푧) = 1 / (1 + exp(−푧))  (logistic transformation)
- Key features:
  - Probability for bank 푖 at time 푡 is conditional on covariates x푖푡 and a bank-specific effect 푣푖 not captured by covariates.
  - Various specifications tested for bank-specific effects: random effect, fixed effect, and population-averaged effect.

### Determinants of the Demand for Refinancing — Marginal effects (selected variables)
- The reported marginal effects pertain to the probability of receiving 1-week and 28-day refinancing.
- Reserve requirement:
  - 1.20***, 1.19***, 1.17***, 0.77***, 0.63***, 1.24***, 0.51***, 0.50***, 0.59***, 2.58***, -0.67***, -0.90***, -0.71***
- Excess liquidity:
  - -2.61***, -2.60***, -2.50***, -3.31***, -3.28***, -3.68***, -18.19***, -1.82***, -1.86***, -1.91***, -1.20***, -1.21***, -1.43***
- Credit claims:
  - 0.24***, 0.24***, 0.23***, 0.17***, 0.17***, 0.15***, 0.29***, 0.29***, 0.29***, 0.14**, 0.27***, 0.30***, 0.29***
- Government securities:
  - 0.84***, 0.83***, 0.79***, 0.99***, 0.95***, 0.99***, 0.59***, 0.59***, 0.59***, 0.51***, 0.83***, 0.82***, 0.85***
- Net lending:
  - -0.13**, -0.13**, -0.12**, -0.34***, -0.34***, -0.24***, -0.14***, -0.14***, -0.13***, -0.10**, -0.10***, -0.12***, -0.07***
- Rate spread:
  - 2.82***, 2.80***, 2.82***, 6.61***, 5.37***, 8.7***, 3.41**, 3.39**, 3.57**, 2.71**, 6.86***, 5.89***, 9.03***

### Model specifications, diagnostics and sample notes (as reported)
- Other covariates and country indicators appear in the specifications (entries include “Autres”, “Pan-African”, “UMOA”, “International”, “Nonbanks”, and country dummies such as Benin, Burkina, Cote d'Ivoire, Guinee Bissau, Mali, Niger, Senegal, Togo) with marginal effects reported in the table.
- Normalized by deposit: No / Yes (varies by specification)
- Random Effect: Yes / No (varies by specification)
- Fixed Effect: No / Yes (varies by specification)
- Population Average: No / Yes (varies by specification)
- Hit/miss ratio (reported across specifications): 77.23, 76.92, 76.22, 80.76, 76.92, 76.35, 56.92, 55.31, 53.21, 41.91, 58.30, 57.48, 55.89
- Observations (by specification): 876, 987, 698, 769, 876, 987, 698, 769, 510, 251, 025, 102, 267, 951, 025, 102, 5102, 5102  (table lists “Observations8769876987698769876987695102510251022679510251025102” per source)
- Number of banks (by specification): 140, 140, 140, 140, 140, 140, 122, 122, 122, 60, 122, 122, 122
- Significance notation:
  - *** p<0.01, ** p<0.05, * p<0.1
- Note: “Marginal effects in table” (as stated).

### Policy-relevant findings and implications (extracted from surrounding text)
- BCEAO policy actions and effects:
  - Rapid growth of credit notably to the public sector led BCEAO to tighten monetary policy by increasing its lending facility rate and limiting access to refinancing, decreasing banks’ refinancing with the central bank and stimulating interbank market transactions.
  - More recent reduction in the reserve requirement rate by the Monetary Policy Committee is expected to enhance liquidity conditions and further reduce refinancing needs.
  - BCEAO monitors bank liquidity and compliance with prudential requirements and stands ready to take further action to prevent excess liquidity and financing.
- Financial sector resilience:
  - Bank profitability ratio increased by an annual average of 12% since 2010.
  - Bank solvency ratios stand at more than 8% in all but one WAEMU country.
  - NPL ratio declined from 15.6 percent to 13.9 percent from September to December 2016.
- External and fiscal context affecting refinancing demand:
  - Staff estimate total debt in the region rose from 44.5 percent in 2015 to 45.9 percent in 2016 due to reliance on domestic markets to finance deficits.
  - The external position deteriorated as the current account deficit widened and reserves declined in months of imports.
  - Prospects for 2017: growth projected to be in the neighborhood of 6.5%; inflation expected to remain low; fiscal programs anchored by the WAEMU convergence criterion of 3 percent fiscal balance to GDP ratio by 2019.
- Institutional and regulatory actions with implications for refinancing:
  - Continued enforcement of prudential regulations, preparation of macro-prudential regulations, and strengthening of financial safety nets (payment system guarantee fund, Deposit Guarantee Fund, financial stability fund).
  - Transposition of Basel II and III principles for operational and market risks; progress on proposals for amendment of the Annex to the Convention governing the WAMU Banking Commission (including rules on consolidated supervision, a regional resolution authority, and a resolution fund) to be submitted by June 2017.
  - BCEAO will continue to ensure that banks’ use of its window to operate foreign currency transactions is backed with actual demand for transfers and will monitor export revenue repatriation flows and compliance with legal guidance on external financial relations.

*Source: Annex III, Box 1. Model Description (cr1799) — content as provided.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1799.pdf_