## 1. Recent Economic Developments (cr18106)

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### Context and key recent developments
- Real GDP growth in 2017 is estimated at 6.5 percent, driven mainly by domestic demand, including public investment; growth was above the regional average in Côte d’Ivoire and lowest in Togo.
- WAEMU estimated to have exceeded 6 percent growth in 2017 relative to SSA average of 3.7 percent.
- Inflation (2017, average) = 0.8 percent.
- Fiscal developments (2017, commitment basis):
  - Aggregate fiscal deficit = 4.7 percent of GDP (2017) versus 4.5 percent of GDP (2016).
  - Public debt burden end-2017 ≈ 48 percent of GDP (about the end-2016 level).
  - Interest payments as a share of revenue = 8.6 percent (2017) from 8.1 percent (2016).
- BCEAO monetary policy actions:
  - December 2016: doubled spread between policy rate and marginal credit facility rate to 200 basis points.
  - Limited banks’ access to its credit facility to twice their regulatory capital.
  - March 2017: lowered bank required reserves ratio from 5 percent to 3 percent.
- Monetary and balance-sheet outcomes:
  - Net foreign assets contribution: Eurobond issues and BOAD issue contributed to a 10.3 percent growth in net foreign assets.
  - Broad money (M2) growth = 7.5 percent (2017) from 10.7 percent (2016).
  - Since September 2017 renewed liquidity pressures pushed up the interbank market rate and maintained the average refinancing rate at the ceiling of the BCEAO’s policy corridor.
- External sector and reserves:
  - External current account deficit (including grants) = 6 percent of GDP (2017).
  - External reserves increased by CFAF 655 billion (US$1.2 billion) to CFAF 7,184 billion (US$13.1 billion) at end-2017 (recovered about two thirds of the CFAF 993 billion loss in 2016).
  - Net proceeds from Eurobonds by Côte d’Ivoire, Senegal and the BOAD = US$3.1 billion (2017).
  - External reserves’ cover of prospective extra-regional imports increased from 4.0 months (end-2016) to 4.2 months (end-2017).
- Financial sector developments:
  - Moves to Basle II/III prudential standards, new banking chart of accounts, resolution framework, and completion of stress tests.
  - Persistent banking challenges: credit and concentration risks, high gross non-performing loan ratio, some troubled banks unresolved.
  - Mobile banking under-developed in WAEMU countries except Côte d’Ivoire.

### Key statistics (selected exact figures)
- WAEMU: GDP at constant prices (2017) = 6.5 percent.
- GDP per capita at constant prices (2017) = 3.6 percent.
- Broad money to GDP (2017) = 3.3 percent.
- Consumer prices (average, 2017) = 0.8 percent.
- Gross national savings (2017) = 17.4 percent of GDP.
- Gross domestic investment (2017) = 23.4 percent of GDP; public investment (2017) = 8.3 percent of GDP.
- Government total revenue, excl. grants (2017) = 18.7 percent of GDP; Government expenditure (2017) = 25.8 percent of GDP.
- Overall fiscal balance, incl. grants (commitment basis, 2017) = -4.7 percent of GDP.
- Current account, excl. grants (2017) = -8.2 percent of GDP; Current account, incl. grants (2017) = -6.0 percent of GDP.
- Gross international reserves (2017) = 7,184 million US dollars; In months of imports of goods and services (2017) = 4.2 months.
- External public debt (2017) = 29.8 percent of GDP; Total public debt (2017) = 48.2 percent of GDP.
- WAEMU Real GDP projection: 2018 = 6.4 percent; 2019 = 6.3 percent; 2020 = 6.3 percent.
- Regional comparison: WAEMU Real GDP (2017) = 6.5 percent versus Sub-Saharan Africa (2017) = 2.7 percent.
- Financial soundness (June 2017): Regulatory capital to risk weighted assets = 11.4 percent; Gross NPLs to total loans (2017 Jun.) = 14.6 percent; Provisioning rate (2017 Jun.) = 63.4 percent.

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### 2. Medium-term outlook, projections, and risks

### Baseline outlook and projections
- Baseline macro projections assume planned fiscal consolidation by members (except Niger) to meet WAEMU convergence criterion of 3 percent of GDP by 2019 under Fund-supported programs (Niger committed to 3 percent by 2021 under its program).
- Aggregate public finance projections:
  - Aggregate fiscal deficit projected = 4 percent of GDP (2018) and = 2.9 percent of GDP (2019).
  - Public debt projected to decrease to 45.8 percent of GDP over the medium term.
- Current account and reserves:
  - External current account deficit expected to gradually decline, reaching about 5 percent of GDP by 2022.
  - International reserves projected to increase to 4.6 months of imports by 2022, assuming current account deficits are financed by FDI and other investments.
  - Staff estimates suggest WAEMU external reserves should ideally be within a range of 5 to 7 months of prospective extra-regional imports.

### Main downside risks and scenarios
- Fiscal consolidation delays:
  - Spending pressures from social demands and security concerns, and slower-than-projected revenue mobilization could cause fiscal slippages.
  - Staff simulations: if national fiscal deficits remained at their 2017 levels, foreign reserves would fall to less than two months of imports by 2022 (versus baseline 4.6 months).
  - Fiscal slippages would raise public debt and servicing costs, widen the external current account deficit, and could require tighter monetary policy and adjustments in the external-domestic financing mix.
- Other risks:
  - Delays in structural reforms limiting private sector expansion.
  - Persistent security problems weakening fiscal positions, reducing FDI, and delaying projects.
  - Higher international oil prices (WAEMU is a net oil importer) adversely impacting the current account, inflation and budgets.
  - Tighter global financing conditions and a slowdown in world growth raising regional risk premia, reducing external financing, and compounding reserves pressures.

---

### 3. Policy recommendations and priorities

### Fiscal policy and debt sustainability
- Credible fiscal consolidation to reduce fiscal deficits toward the WAEMU convergence criterion of 3 percent of GDP.
- Build fiscal space and prioritize spending to create room for priority infrastructure and social spending.
- Policy measures suggested:
  - Revenue side: hike rates on excises, VAT on exempted products and real property tax, reduce scope for tax exemptions.
  - Spending side: bring wage bills within 35 percent of domestic revenue (WAEMU convergence criterion) and better target subsidies and social assistance.
- Capture fiscal risks:
  - Expand fiscal account coverage and implement the WAEMU Directive on transition to GFSM 2001 fiscal reporting standards.
  - Better capture contingent liabilities from troubled public entities and PPPs.
- Improve public investment efficiency:
  - Strengthen planning and selection of PPPs, multiyear budgeting, project appraisal, implementation monitoring, and accounting of infrastructure assets.
- Strengthen debt coverage and management:
  - Monitor all public contracted and guaranteed debt, widen coverage to state-owned enterprises, and refrain from pre-financing operations.
  - Seek best possible terms on new borrowings to limit debt service costs and FX risks.
  - Issuing Eurobonds in euros could lower FX risks and contribute to reserve consolidation (not a substitute for lowering fiscal deficits).

### Monetary policy, liquidity, and market functioning
- BCEAO should stand ready to further tighten monetary policy if pressures persist on the money market and on foreign exchange reserves.
- Steer liquidity based on autonomous factors while gradually reducing banking system dependence on central bank refinancing.
- Monitor banks engaged in sovereign debt carry trade; raise their capital and liquidity buffers and use supervision/resolution tools to deleverage fragile banks.
- Market development:
  - Improve interbank market functioning (create repo framework; develop secondary trading; eliminate market segmentation).
  - Broaden investor base to non-bank institutional investors to deepen market liquidity.
  - Consider applying different discounts to government securities pledged as collateral based on sovereign credit risk assessment (staff suggestion), noting BCEAO reservations.

### Financial stability and inclusion
- Bring vulnerable banks to deleverage and strengthen capital and liquidity buffers; use supervision and resolution tools to resolve fragile banks.
- Encourage banks to diversify bond portfolios to contain concentration risk and stimulate trading liquidity.
- Ensure microfinance institutions are closely supervised; micro-finance sector ≈ 630 institutions with deposits and loans ≈ 6.5 percent of banking sector aggregates.
- Promote financial inclusion via lower financial service costs, financial literacy, and consumer credit protection.
- Strengthen AML/CFT supervision, notably related to domestic politically-exposed persons, and implement dissuasive sanctions for breaches.

### Structural policies and competitiveness
- Maintain macroeconomic stability, improve trade performance, promote efficient public and private investments, and lower costs of inputs such as transport and electricity.
- Improve efficiency of public investments and ease impediments to doing business.
- Regional actions: WAEMU Commission enhancing regional structural funds for cross-border infrastructure and preparing a community investment code.

---

### 4. External sector assessment, reserves adequacy, and Eurobonds

### External sector developments and projections
- Current account deficit (including grants, 2017) = 6 percent of GDP (increase of 0.4 percentage point of GDP compared to 2016).
- Projection: current account deficit projected to decline to 4.9 percent of GDP by 2022 (assuming fiscal consolidations and improved competitiveness).
- External financing in 2017: capital transfers increased slightly; FDI and portfolio inflows increased; net Eurobond proceeds (Côte d’Ivoire, Senegal, BOAD) = US$3.1 billion (2017).

### Reserves developments and adequacy
- Reserves change: fell by CFAF 993 billion (US$1.7 billion) in 2016; increased by CFAF 655 billion (US$1.2 billion) in 2017 to CFAF 7,184 billion (US$13.1 billion).
- External reserves’ cover of prospective extra-regional imports: 4.0 months (end-2016) → 4.2 months (end-2017).
- Baseline projection: reserve import cover projected to reach 4.6 months by 2022.
- Adequacy benchmark (ARA-CC): WAEMU external reserves should be within a range of 5 months to 7 months of prospective extra-regional imports of goods and services.
- Stress scenario: without fiscal consolidation (regional fiscal deficit remaining at 2017 level), reserves’ import cover would fall below two months by 2022.

### Eurobond issuances and opportunity cost of reserves
- Eurobond operations (June 2017):
  - Côte d’Ivoire US$1.2 billion (yield 6.25 percent).
  - Senegal US$1.1 billion (yield 6.25 percent).
  - Côte d’Ivoire EUR625 million (Euro-denominated) yield 5.125 percent.
  - Average yield across these three operations = 6 percent.
- Opportunity cost proxies:
  - Eurobond-based proxy: estimated return on BCEAO’s reserves = 0.5 percent → opportunity cost (Eurobond yield net of reserve return) ≈ 5.5 percent.
  - Marginal Product of Capital (MPK) proxy: MPK (WAEMU, 1960-2014 average) = 4.5 percent → net after 0.50 percent deduction = 4 percent.
  - Opportunity cost range used for WAEMU = 4 percent to 5.5 percent.
- Adequate reserve level (assuming 50 percent unconditional probability of a large shock) = 5 months to 7 months of prospective extra-regional imports.
- Role of French convertibility guarantee:
  - Convertibility guarantee provides an overdraft facility via BCEAO’s “operations account” with reserve-like features and reinforces external buffers qualitatively.

---

### 5. Financial sector: vulnerabilities, reforms, and safeguards

### Banking soundness and vulnerabilities (mid-2017 indicators)
- Overall capital adequacy ratio (CAR) under Basel I = 11.4 percent (mid-2017).
- Minimum social capital requirement = FCFA 10 billion (some smaller banks had not met this at end-June 2017).
- Risk concentration: exposures to top 5 borrowers reached 90 percent of equity (end-June 2017).
- Gross NPLs = 15 percent of total loans (end-June 2017); provisioning covers two-thirds of NPLs.
- BCEAO stress-tests: equity would be adversely affected by a strong shock; a few non-profitable banks, mostly public institutions, reported negative equity.
- Systemic banks: two state-owned banks in Togo and a private one in Guinea Bissau are of national systemic importance and should be resolved.

### Regulatory and institutional reforms
- Prudential regulation moved to Basel II/III standards in January 2018, phased in over a five-year period; banks should have capital in excess of 8.6 percent of risk-weighted assets at end-2018.
- Shift to risk-based, consolidated supervision; Banking Commission adopted Pillar 2–aligned criteria and launched consolidated supervision of cross-border groups.
- Banking Commission obtained new resolution powers in late 2017.
- Financial safety net components being rolled out:
  - financial guarantee fund for interbank payment clearing settlement finality;
  - bank deposit guarantee scheme funded by deposit institutions;
  - bank resolution fund backed by a creditor bail-in mechanism.
- Committee for Financial Stability includes BCEAO, Banking Commission and CREPMF.

### Staff recommendations on financial stability and inclusion
- Deleverage vulnerable banks and strengthen capital and liquidity buffers; use supervision and resolution tools to resolve fragile banks.
- Diversify banks’ bond portfolios; broaden investor base to improve sovereign risk pricing and market liquidity.
- Supervise microfinance institutions closely; establish prudential safeguards for payment service providers.
- Promote financial inclusion while managing AML/CFT risks; implement dissuasive sanctions for breaches.

### Safeguards and statistics
- Safeguards assessment of the BCEAO substantially complete (2018 cycle); BCEAO maintains a strong internal control environment.
- Adoption of IFRS in 2015; strengthened external auditor selection; audited financial statements since last assessment have unmodified audit opinions and are published timely.
- Statistics: progress includes dissemination on Open Data Platform and Senegal’s adherence to the SDDS in late 2017; need to improve consistency between national and regional data and address balance of payments data weaknesses.
- Staff underscored accelerating transition to GFSM 2001 for consolidated public finance data.

---

### 6. Authorities’ views and implementation status (Annex I summary)

### Authorities’ stance and actions
- Broad agreement with staff on outlook and risks; particular concern about fiscal slippages, security spending pressures, revenue mobilization, and impacts on reserves and public debt.
- Agreed that if downside risks materialize, fiscal adjustment and further monetary tightening, along with adjustments in external/domestic financing mix, would be required.
- Authorities noted vulnerability to adverse climatic changes and the importance of rebuilding policy buffers.
- Implementation notes (2017 recommendations → authorities’ responses):
  - Policy mix recommendation: Broadly consistent; bank refinancing slowed and reserves recovered mainly due to Eurobond issues.
  - Fiscal policy coordination: Partially consistent; deficits widened in many countries in 2017 but 2018 budgets are consistent with convergence toward 3 percent target for 2019.
  - Monetary/financial sector development: Partially consistent; regional debt agency coordinating bond issuance but market remains under-developed; debt and interbank market reforms ongoing.
  - Financial regulation/supervision: Partially consistent; CFAF 10 billion minimum capital effective July 2017; Basel II/III standards and consolidated supervision effective January 2018; some prudential limits/compliance need strengthening.
  - Structural reforms: Partially consistent; some progress on business environment but overall slow.

### Authorities’ operational targets and commitments
- Banks with liquidity shortages asked to increase capital and liquidity buffers and appropriately deleverage by mid-2018.
- Authorities committed to monitoring banks to ensure rapid deleveraging and to use Banking Commission resolution powers as needed after June 2018 deadline.
- Authorities value deepening interbank market, integrating bond market and broadening investor base; BCEAO expressed reservations about differentiated collateral discounts.

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*Source: 1. Recent Economic Developments; Annexes I–III; Eurobond and reserve assessment (cr18106)*

### 1. Recent Economic Developments _______________________________________________________________ 7

### 1. Recent Economic Developments

### Context and Key Recent Developments
- WAEMU was one of the fastest growing regions in sub-Saharan Africa in recent years, with the WAEMU’s real GDP growth rate estimated to have exceeded 6 percent in 2017, compared to an average of 3.7 percent for SSA.
- Real GDP growth in 2017 is estimated at 6.5 percent, driven mainly by domestic demand, including public investment; growth was above the regional average in Côte d’Ivoire and lowest in Togo.
- Inflation in 2017 was low at 0.8 percent, supported by higher domestic agricultural production.
- Fiscal developments:
  - Aggregate fiscal deficit (on a commitment basis) is estimated at 4.7 percent of GDP in 2017, compared to 4.5 percent of GDP in 2016.
  - Public debt burden at end-2017 is estimated to have remained at its end-2016 level of about 48 percent of GDP.
  - Interest payments as a share of revenue rose to an estimated 8.6 percent in 2017 (from 8.1 percent in 2016).
- Monetary policy actions by the BCEAO:
  - In December 2016 the BCEAO doubled the spread between its policy rate and the marginal credit facility rate to 200 basis points.
  - The BCEAO limited banks’ access to its credit facility to twice their regulatory capital.
  - In March 2017 the BCEAO lowered the bank required reserves ratio from 5 percent to 3 percent.
  - These actions tightened monetary policy, stimulated the interbank market, reduced banks’ appetite for government debt, and contributed to Eurobond financing by the two largest WAEMU sovereigns.
- Monetary and balance-sheet outcomes:
  - Net foreign assets contribution: Eurobond issues and BOAD issue contributed to a 10.3 percent growth in net foreign assets.
  - Broad money (M2) growth slowed to 7.5 percent in 2017 (from 10.7 percent in 2016).
  - Since September 2017 renewed liquidity pressures pushed up the interbank market rate and maintained the average refinancing rate at the ceiling of the BCEAO’s policy corridor.
- External sector and reserves:
  - External current account deficit (including grants) is estimated at 6 percent of GDP in 2017.
  - External reserves increased by CFAF 655 billion (US$1.2 billion) to reach CFAF 7,184 billion (US$13.1 billion) at end-2017, recovering about two thirds of the CFAF 993 billion loss incurred in 2016.
  - Net proceeds from Eurobonds by Côte d’Ivoire, Senegal and the BOAD were US$3.1 billion in 2017.
  - External reserves’ cover of prospective extra-regional imports of goods and services increased from 4.0 months at end 2016 to 4.2 months at end 2017.
- Financial sector developments:
  - Steps to promote financial stability included the move to Basle II/III prudential standards, a new banking chart of account, a new framework for resolution of ailing banks, and completion of stress tests.
  - Conditions in the banking system remain challenging: credit and concentration risks are important, gross non-performing loan ratio remains high, and some troubled banks remain unresolved.
  - Mobile banking remains under-developed in WAEMU countries except Côte d’Ivoire.

### Medium-Term Outlook and Projections
- Baseline macro projections assume planned fiscal consolidation by members (except Niger) to meet WAEMU convergence criterion of 3 percent of GDP by 2019 under Fund-supported programs (Niger has committed to 3 percent by 2021 under its program).
- Aggregate public finance projections:
  - Aggregate fiscal deficit projected to decline to 4 percent of GDP in 2018 and 2.9 percent in 2019.
  - Public debt projected to decrease to 45.8 percent of GDP over the medium term.
- Current account and reserves:
  - External current account deficit expected to gradually decline over the medium term, reaching about 5 percent of GDP by 2022.
  - International reserves projected to increase to 4.6 months of imports by 2022, assuming current account deficits are financed by FDI and other investments.
  - Over the medium term, the ratio of external reserves to base money would remain well above the 20 percent threshold required by the monetary arrangement with France.
  - Staff estimates suggest WAEMU external reserves should ideally be within a range of 5 to 7 months of prospective extra-regional imports of goods and services.

### Risks to the Outlook (mainly downside)
- Fiscal consolidation delays:
  - Spending pressures from social demands and security concerns, and slower-than-projected revenue mobilization, could cause fiscal slippages.
  - Staff simulations indicate that if national fiscal deficits remained at their 2017 levels, foreign reserves would fall to less than two months of imports by 2022 (versus baseline 4.6 months).
  - Fiscal slippages would raise public debt and servicing costs, widen the external current account deficit, and could require tighter monetary policy and adjustments in the external-domestic financing mix.
- Delays in structural reforms could prevent the private sector from expanding as the engine of growth.
- Persistent security problems could weaken fiscal positions, reduce FDI, and delay major projects.
- Higher international oil prices would adversely impact the current account (WAEMU is a net oil importer) and could affect inflation and budget deficits depending on pass-through to domestic prices.
- Tighter global financing conditions and a slowdown in world growth could raise regional risk premia, reduce external financing, and compound reserves pressures, affecting growth via terms-of-trade, remittances, and FDI channels.

### Authorities’ Views
- Regional authorities broadly agreed with staff on the outlook and risks.
- Authorities were particularly concerned about potential fiscal slippages, pressures from security spending, lackluster revenue mobilization, and impacts on reserves and public debt sustainability.
- Authorities noted vulnerability to adverse climatic changes given the importance of primary sector activities.
- Authorities agreed that, should downside risks materialize, fiscal adjustment and further monetary policy tightening, along with adjustments in the external/domestic financing mix, would be required to preserve external viability.
- Staff and authorities concurred on the need to rebuild policy buffers to avoid abrupt policy responses if risks materialize.

### Policy Recommendations and Priorities
- Sustain growth momentum while preserving debt sustainability and external stability through:
  - Credible fiscal consolidation to reduce fiscal deficits toward the WAEMU convergence criterion of 3 percent of GDP.
  - Appropriate monetary policy to address liquidity and inflationary pressures.
  - Accelerated structural reforms to promote financial stability and competitiveness and to mobilize private investment.
- Strengthen reserves and external buffers:
  - Reinforce external competitiveness through structural reforms and reduce fiscal imbalances to build reserves towards at least 5 months of import cover.
- Strengthen budget management and accelerate revenue mobilization to respond promptly to any fiscal slippage.
- If slippages occur, consider tightening monetary policy and adjusting the external-domestic financing mix to limit tensions on the regional sovereign debt market.

*Source: 1. Recent Economic Developments (cr18106)*

### 11. Growth-friendly fiscal consolidation is needed to lower public debt and lift

### 11. Growth-friendly fiscal consolidation is needed to lower public debt and lift pressures on monetary policy and reserves

### Fiscal consolidation and debt sustainability
- Effective fiscal consolidation is essential to preserving external viability over the medium term and must be supported by:
  - More comprehensive accounting for risks to fiscal and debt sustainability.
  - Stronger regional surveillance efforts.
  - Improved debt management.
- Policy priorities urged by staff:
  - Building fiscal space:
    - Bolster revenues and prioritize spending to meet the WAEMU fiscal deficit criterion of 3 percent of GDP by 2019 and beyond while creating fiscal space for priority infrastructure and social spending.
    - In the event of deviations from current program targets, additional fiscal measures would be needed.
    - Tax policy measures could include hiking rates on excises, VAT on exempted products and real property tax, and reducing the scope for tax exemptions.
    - Spending measures could include bringing wage bills within 35 percent of domestic revenue (WAEMU convergence criterion) and better targeting subsidies and social assistance to protect the most vulnerable.
    - Several key WAEMU convergence criteria remain unobserved, and current projections suggest that breaches will persist for second-order criteria in most countries over the medium term.
    - The mission encouraged the WAEMU Commission to increase dissemination of the Union countries’ convergence criteria efforts and bring its views of fiscal risks to the attention of the next meeting of the WAEMU Head of States.
  - Capturing fiscal risks:
    - Expand fiscal account coverage and implement the WAEMU Directive on the transition to the GFSM 2001 fiscal reporting standards.
    - Better capture contingent liabilities arising from troubled public entities, including banks, and from increasing recourse to PPPs.
  - Increasing the efficiency of public investment:
    - Improve public investment management, focusing on areas identified by recent PIMA missions: planning and selection of PPPs, multiyear budgeting, effectiveness of project appraisal and selection, monitoring of projects during implementation, and accounting of infrastructure assets.
  - Strengthening debt coverage and management:
    - Closely monitor all public contracted and guaranteed debt, including by widening coverage to state-owned enterprises and refraining from pre-financing operations.
    - Seek the best possible terms on new borrowings to limit debt service costs and FX risks.
    - Issuing Eurobonds in euros (to which the CFA franc is pegged), including for liability management, would lower FX risks; while not a substitute for lowering fiscal deficits to improve regional FX reserves, Eurobonds could contribute to reserve consolidation.

*Authorities’ views on fiscal priorities*
- Regional authorities concurred that widening macroeconomic imbalances have been fueled by high fiscal deficits and intend to keep alerting member governments on the need for effective implementation of fiscal adjustment plans in line with regional convergence criteria.
- Authorities noted significant implementation risks of these plans and the important role of current IMF-supported programs in helping reduce such risks.
- Authorities noted the recovery of international reserves in 2017, enabled by issuances of Eurobonds, and stressed that consolidating external buffers would depend on effectiveness of efforts to improve compliance with repatriation of export receipts.

### Monetary policy, liquidity, and market functioning
- Staff view:
  - National fiscal policies must deliver necessary deficit reductions, but monetary conditions should be tightened if external pressures persist.
  - The BCEAO should stand ready to further tighten monetary policy in case pressures persist on the money market and on foreign exchange reserves.
  - The BCEAO should steer liquidity based on autonomous factors while gradually reducing the banking system’s dependence on central bank refinancing.
  - The BCEAO must monitor closely banks that engaged in the sovereign debt carry trade and that need significant deleveraging, while raising their capital and liquidity buffers. Under an underdeveloped secondary debt market, rapid reduction of sovereign exposures by banks may be difficult, potentially preventing a rapid retraction of central bank liquidity.
- Market development and reforms:
  - Improve functioning of the interbank money market: transaction volumes remained small even after having doubled in 2017; reforms such as creation of a repo contract framework and the new Basel II/III prudential regime should help.
  - Calibrate BCEAO liquidity injections depending on the interbank market situation and steer the average interbank rate into its monetary policy corridor.
  - Eliminate fragmentation of the debt securities market so securities are integrated and fungible for each issuer to support active secondary trading, robust yield curves, and sovereign risk pricing.
  - Broaden the investor base, notably to non-bank institutional investors, to contribute depth and market liquidity.
  - Staff suggestion: BCEAO consider applying different discounts to government securities pledged as collateral for central bank refinancing based on sovereign credit risk assessment (debt sustainability and WAEMU convergence criteria).  

*Authorities’ views on monetary policy and market proposals*
- The BCEAO broadly agreed with staff that monetary policy adjustment may be needed if renewed pressures arise on the money market or reserves, despite the current low inflation environment.
- To ease liquidity tensions, the BCEAO called on banks exhibiting liquidity shortages to increase capital and liquidity buffers and appropriately deleverage by mid-2018.
- The BCEAO expressed reservations about applying differentiated discounts to government securities pledged as collateral because:
  - It considered this inconsistent with the principle under current prudential regulations treating member governments equally on sovereign risk weights.
  - It argued that applying differentiated discounts would overstep the BCEAO’s role, noting each bank should undertake its own assessment of sovereign risk before each government security issuance.

### Financial stability and inclusion: vulnerabilities and reforms
- Background and recent progress:
  - Progress on financial development and inclusion has been made, with mobile payments expanding and monitoring committees set up in 2017 to implement the regional strategy for financial inclusion approved in June 2016.
  - Implementation of the strategy is expected to receive financial support from bilateral and multilateral donors starting in 2018 and technical assistance from the World Bank.
- Banking system soundness and vulnerabilities:
  - The banking system is stable and profitable overall, though pockets of vulnerabilities persist.
  - Overall capital adequacy ratio (CAR) for the sector under Basel I was 11.4 percent at mid-2017.
  - Some banks remain under-capitalized; several smaller banks had not met the minimum social capital of FCFA 10 billion required at end-June 2017.
  - Authorities asked banks to comply with capital obligations at end-June 2018 and are monitoring some banks expected to rebalance assets by raising capital and/or deleveraging.
  - Asset quality and funding weaknesses:
    - Banks’ exposures to sovereign debts have often been funded on short-term central bank refinancing, exposing banks to the risk of tighter monetary conditions.
    - Risk concentration is high: exposures to top 5 borrowers reached 90 percent of equity at end-June 2017.
    - Gross NPLs were 15 percent of total loans at end-June 2017, covered by provisions for two-thirds.
    - BCEAO stress-tests confirmed equity would be adversely affected by a strong shock on credit quality; a few non-profitable banks, mostly public institutions, reported negative equity.
    - Two state-owned banks in Togo and a private one in Guinea Bissau are of national systemic importance and should be resolved.
- Regulatory and institutional reforms:
  - Prudential regulation moved to Basel II/III standards in January 2018, phased in over a five-year period; banks should have capital in excess of 8.6 percent of risk-weighted assets at end-2018.
  - Bank supervision is shifting to a more risk-based and consolidated approach; the Banking Commission adopted new criteria in line with Pillar 2 of Basel standards and launched consolidated supervision of cross-border groups.
  - The Banking Commission obtained new resolution powers in late 2017 to enable cooperation among member countries and independent resolution decision-making.
  - A financial safety net is being rolled out, including: (i) a financial guarantee fund for interbank payment clearing settlement finality; (ii) a bank deposit guarantee scheme funded by deposit institutions; and (iii) a bank resolution fund backed by a creditor bail-in mechanism.
  - A committee for financial stability includes the BCEAO, the Banking Commission and the financial market regulator (CREPMF).
- Staff recommendations to safeguard financial stability and inclusion:
  - Bring vulnerable banks to deleverage and strengthen capital and liquidity buffers; use supervision and resolution tools to improve balance sheets and resolve fragile banks.
  - Encourage banks to diversify bond portfolios to contain risk concentration, reduce systemic risk, improve sovereign risk pricing, and stimulate trading liquidity.
  - Ensure microfinance institutions are closely supervised and that prudential safeguards are established to protect client funds entrusted to payment service providers; the micro-finance sector consists of about 630 institutions, with deposits and loans equivalent to about 6.5 percent of banking sector aggregates.
  - Promote financial inclusion through lower financial service costs, financial literacy, and financial consumer credit protection.
  - Strengthen AML/CFT supervision to ensure compliance with preventive measures, notably related to domestic politically-exposed persons, and implement dissuasive sanctions for breaches.

*Authorities’ views on financial stability and inclusion*
- Authorities agreed that bank weaknesses should be addressed and expected the new prudential regulation and supervision regime to strengthen resilience through improved asset quality and stronger capital.
- Authorities are closely monitoring banks to ensure rapid deleveraging and strengthening of capital and liquidity buffers and view the Banking Commission’s new resolution powers as enabling effective resolution of ailing banks.
- Authorities reiterated commitment to promoting financial inclusion, monitoring micro-finance institutions, and operationalizing the 2015 AML/CFT law (including September 2017 instructions requiring banks to set up information systems to ensure traceability of financial operations and setting thresholds for declaration of cash payments and transactions).

### Growth, competitiveness, and structural policies
- Sustaining growth momentum requires improving competitiveness and promoting diversification; medium-term growth will be driven by domestic demand with an increasing role of private investment as fiscal consolidation takes hold and structural reforms improve the business climate.
- Background findings:
  - Survey-based indicators show regional structural competitiveness improved in 2017 but less than benchmark African and Asian countries with strong growth.
  - WAEMU scores low in business climate and global competitiveness indicators with obstacles in registering property, dealing with construction permits, getting credit and electricity, paying taxes, and availability of infrastructure, technology, and specialized labor.
  - Governance indicators remain weak and logistics performance needs improvements.
  - Despite high public investment spending over the past decade, the infrastructure gap remains important due to large initial gaps and low public investment efficiency.
- Policy recommendations:
  - Maintain macroeconomic stability, improve trade performance, promote efficient public and private investments, and lower costs of inputs such as transport and electricity.
  - Improve efficiency of public investments and the investment climate by easing impediments to doing business.
  - At the regional level, the WAEMU Commission is taking steps to enhance effectiveness of regional structural funds for cross-border infrastructure projects and preparing a community investment code to improve the business climate and reduce the infrastructure gap.

### Other issues: safeguards and statistics
- Safeguards assessment:
  - A safeguards assessment of the BCEAO is substantially complete (2018 cycle); the BCEAO continues to maintain a strong internal control environment.
  - Key recommendations from the 2013 assessment have been implemented.
  - The bank adopted IFRS in 2015 and strengthened external auditor selection criteria. Audited financial statements since the last assessment have had unmodified (clean) audit opinions and are published on a timely basis.
- Official statistics:
  - It is important to further strengthen the quality, timeliness, and dissemination of economic statistics.
  - Progress includes dissemination of WAEMU countries’ data on the Open Data Platform and Senegal’s adherence to the SDDS in late 2017.
  - Remaining issues: improve consistency between national and regional data and address weaknesses of balance of payment data.
  - Staff underscored the need to accelerate the transition of all WAEMU member-countries to the GFSM 2001 fiscal reporting, which would facilitate compilation of consolidated public finance data, including the public sector’s borrowing requirement for the currency union.

*Source: IMF staff report (WAEMU regional chapter).*

### 28. Economic activity remained strong in 2017 but vulnerabilities persist. Real GDP

### Economic activity remained strong in 2017 but vulnerabilities persist. Real GDP

### Overview of 2017 activity and immediate concerns
- Real GDP growth exceeded 6 percent for a sixth year in a row.
- Growth remained driven mainly by public spending, notably to address infrastructure gaps, contributing to widening fiscal and external current deficits.
- The recovery in reserves in 2017 masks continued underlying pressures; reserves would have sustained their slide that started in 2016 were it not for the extraordinary level of Eurobond issues in 2017.

### Medium-term outlook and downside risks
- The medium-term outlook remains positive but subject to significant downside risks.
- Sustaining current growth momentum hinges crucially on:
  - planned fiscal consolidation, and
  - decisive implementation of structural reforms.
- Key downside risks include:
  - delays in fiscal consolidation and structural reforms (jeopardizing debt sustainability and external viability),
  - terms of trade and weather shocks,
  - a global growth slowdown,
  - tighter international financing conditions, and
  - worsening of the security situation.
- Policy recommendation: Timely and well-coordinated national and regional policy responses are needed to build policy buffers to mitigate the impact of these risks.

### Fiscal policy: consolidation and debt sustainability
- Fiscal consolidation is essential to lower public debt and lift pressures on monetary policy and reserves.
- Governments should bolster revenues and prioritize spending to meet the WAEMU fiscal deficit criterion of 3 percent of GDP by 2019 and beyond while creating fiscal space for priority infrastructure and social spending.
- Effective consolidation should be supported by:
  - assessment of risks to fiscal and debt sustainability related to below-the-line operations or contingent liabilities,
  - more effective regional surveillance efforts, and
  - improved debt management.

### Monetary policy, reserves, and market development
- Monetary conditions should be tightened if the external position weakens.
- The BCEAO should stand ready to further tighten monetary policy if pressures persist on the money market and on foreign exchange reserves.
- The BCEAO should steer liquidity based on autonomous factors while gradually reducing the banking system’s dependence on central bank refinancing.
- Developing the interbank and the debt securities markets is important to improve monetary policy transmission:
  - promote development of interbank transactions by continuing to gradually mop up liquidity and promote banks’ balance sheet repair;
  - stimulate the interbank market via more information on counterparty risks and development of repo transactions based on public debt securities;
  - facilitate repo and interbank activity by developing secondary trading of debt securities, including by eliminating market segmentation between the auction and syndication modes of issuance.

### Financial stability and inclusion
- Improving financial stability remains essential to create more room for monetary policy actions.
- Appropriate phasing and effective enforcement of the new prudential rules aligned with Basle II/III principles should help consolidated banks’ balance sheets and address vulnerabilities.
- Authorities should bring all undercapitalized banks to meet capital requirements by June 2018, and are encouraged to use their new bank resolution powers as needed after that deadline.
- Promotion of financial inclusion remains a priority; staff encourages implementation of the regional strategy while paying due consideration to financial stability and money-laundering and terrorism financing risks.

### Structural reforms, investment, and data
- Sustaining growth momentum requires addressing structural impediments to private investment, competitiveness and diversification.
- Efforts are needed to raise public investment efficiency and improve the business environment.
- Efforts to improve the quality, coverage and timeliness of regional data should be sustained; Senegal’s adherence to the SDDS in late 2017 illustrates recent progress.
- Remaining data gaps are particularly important in external sector and public finance statistics.

### Key statistics and projections (selected exact figures from tables)
- WAEMU: GDP at constant prices (2017) = 6.5 percent; GDP per capita at constant prices (2017) = 3.6 percent.
- Broad money to GDP (2017) = 3.3 percent.
- Consumer prices (average, 2017) = 0.8 percent.
- Gross national savings (2017) = 17.4 percent of GDP.
- Gross domestic investment (2017) = 23.4 percent of GDP; public investment (2017) = 8.3 percent of GDP.
- Government total revenue, excl. grants (2017) = 18.7 percent of GDP; Government expenditure (2017) = 25.8 percent of GDP.
- Overall fiscal balance, incl. grants (commitment basis, 2017) = -4.7 percent of GDP.
- Current account, excl. grants (2017) = -8.2 percent of GDP; Current account, incl. grants (2017) = -6.0 percent of GDP.
- Gross international reserves (2017) = 7,184 million US dollars; In months of imports of goods and services (2017) = 4.2 months.
- External public debt (2017) = 29.8 percent of GDP; Total public debt (2017) = 48.2 percent of GDP.
- WAEMU Real GDP projection: 2018 = 6.4 percent; 2019 = 6.3 percent; 2020 = 6.3 percent.
- Regional comparison: WAEMU Real GDP (2017) = 6.5 percent versus Sub-Saharan Africa (2017) = 2.7 percent.
- Financial soundness (June 2017): Regulatory capital to risk weighted assets = 11.4 percent; Gross NPLs to total loans (2017 Jun.) = 14.6 percent; Provisioning rate (2017 Jun.) = 63.4 percent.

*Source: cr18106 - 28. Economic activity remained strong in 2017 but vulnerabilities persist. Real GDP*

### Annex I. Authorities’ Responses to 2017 Policy

### Annex I. Authorities’ Responses to 2017 Policy Recommendations

### Policy Mix
- 2017 recommendation: While fiscal policy should be the first line of defense, the BCEAO should stand ready to tighten monetary conditions if pressures on external reserves persist or re-emerge.
- Authorities’ response: Broadly consistent.
- Implementation notes:
  - Bank refinancing has slowed down and reserves have recovered from their fall in 2016, but mainly due to the temporary impact of Eurobond issues by Côte d’Ivoire and Senegal.

### Fiscal Policy Coordination
- 2017 recommendation: Governments need to adhere to their budget deficit reduction plans while maintaining public investment efforts, which will require increasing tax revenue and improving quality of spending.
- Authorities’ response: Partially consistent.
- Implementation notes:
  - Deficits have widened in many countries in 2017, but 2018 budgets are consistent with convergence towards the 3 percent of GDP deficit target for 2019.

### Monetary / Financial Sector Development
- 2017 recommendations:
  - Enhance monetary policy effectiveness
  - Continue financial sector reforms
  - Accelerate the development of the interbank and government debt markets.
- Authorities’ response: Partially consistent.
- Implementation notes:
  - The regional debt agency is coordinating bond issuance but the regional market remains under-developed.
  - Reforms to debt and interbank market still ongoing.

### Financial Regulation and Supervision
- 2017 recommendations:
  - Speed up implementation of existing prudential regulations, including capital standards consistent with Basel II/III.
  - Strengthen risk based supervision, avoid regulatory forbearance.
- Authorities’ response: Partially consistent.
- Implementation notes:
  - The requirement of CFAF 10 billion minimum capital has become effective in July 2017.
  - New regulations, including bank capital standards consistent with Basel II/III and consolidated supervision became effective in January 2018.
  - Some prudential limits and compliance need strengthening.
  - The Banking Commission’s Charter has been amended to give it resolution authority.

### Structural Reforms / Competitiveness
- 2017 recommendation: Further improve the quality of public infrastructure and ease constraints on the business environment.
- Authorities’ response: Partially consistent.
- Implementation notes:
  - Some WAEMU countries have kept the pace of reforms and made progress in areas such as starting a business, construction permits processing, property registrations, and insolvency resolutions but overall progress remains slow.
  - Data from the 2018 World Bank’s Report indicates that the regional Doing Business climate has improved less than in other comparator countries.

---

### External Sector Assessment (Annex II — summary of key findings)
- Overview:
  - WAEMU’s external current account deficit increased in 2017 relative to 2016 owing to the larger fiscal deficits and terms of trade decline.
  - International reserves’ import coverage in 2017 increased to 4.2 months.
  - Baseline projection (assuming implementation of fiscal consolidations and improved external competitiveness): reserve import cover projected to reach 4.6 months of imports by 2022.
  - EBA-based assessment: WAEMU’s external position remains broadly consistent with regional medium-term fundamentals and desirable policy settings.
  - Structural reforms still needed to address bottlenecks to private sector development.

- External current account developments:
  - Current account deficit (including grants) in 2017: 6 percent of GDP, an increase of 0.4 percentage point of GDP compared to 2016.
  - Projection: current account deficit projected to gradually decline, reaching 4.9 percent of GDP by 2022 (assuming successful implementation of fiscal consolidations and improved external competitiveness).

- External financing:
  - After a slight decline in 2016, capital transfers increased slightly in 2017.
  - FDI and portfolio inflows also increased.
  - FDI projected to increase over the medium term as commodity prices recover and structural reforms take hold.

- International reserves developments and prospects:
  - Reserves change: after falling by CFAF 993 billion (US$1.7 billion) in 2016, external reserves increased by CFAF 655 billion (US$1.2 billion) in 2017 to reach CFAF 7,184 billion (US$13.1 billion) at end-2017.
  - The 2017 increase made up about two thirds of the 2016 loss, driven mainly by net capital inflows, including the US$3.1 billion net proceeds from Eurobonds issued by Côte d’Ivoire, Senegal and the BOAD in 2017.
  - External reserves’ cover of prospective extra-regional imports estimated to have increased from 4.0 months at end-2016 to 4.2 months at end-2017.
  - Baseline projection: reserve import cover projected to improve to 4.6 months by 2022.
  - Adequacy benchmark: the adequate reserve import cover for the WAEMU is estimated at 5 months (see Annex III).
  - Stress scenario: in the absence of fiscal consolidation (i.e., if the regional fiscal deficit remains at its 2017 level in relation to GDP), international reserves’ import cover would fall below two months of imports by 2022.

- Assessment of external position (EBA-lite results):
  - The EBA-based assessment does not indicate significant misalignment of the real effective exchange rate (REER) for the WAEMU.
  - Assessments point to a negligible REER overvaluation between 0.4 percent and 1.8 percent.
  - Summary EBA-lite indicators (2017*):
    - Adjusted actual current account: -5.5
    - Current account norm: -4.7
    - Current account gap (Percent): -0.8
    - Log REER — actual: 3.05
    - Log REER — norm: 2.65
    - REER gap (Percent): 1.8, 0.4, 1.3 (as reported)
  - Note: WAEMU’s CFA franc is pegged to the euro; recent strengthening of the euro against the U.S. dollar is noted.

- Structural competitiveness:
  - Key constraints: inadequate infrastructure; high costs of inputs such as communication, transport and electricity; weak business and legal environments.
  - Doing Business 2018:
    - Regional average WAEMU rank: 150 out of 190 ranked countries.
    - Some countries (Benin, Niger, Senegal) made steady progress in starting a business, construction permits processing, property registrations, and insolvency resolutions.
  - Logistics Performance Index (LPI): regional LPI score and ranking lag peers in Africa and Asia.
  - Governance indicators: scores for government effectiveness, political stability, regulatory quality and rule of law remain weak relative to peers.

### Assessment of External Reserve Adequacy (Annex III — key points)
- ARA-CC model result:
  - Based on WAEMU-calibrated data, the ARA-CC model estimates that WAEMU’s external reserves should be within a range of 5 months to 7 months of prospective extra-regional imports of goods and services.
  - A level closer to the lower bound (5 months) would seem adequate given additional external buffers implied by the convertibility guarantee of WAEMU’s currency to the euro by the French Treasury.

- Conceptual and calibration considerations:
  - International reserve adequacy focuses on precautionary motives—reserves as insurance against temporary and exogenous external liquidity shortfalls.
  - WAEMU reserves are a common pool accessible at fixed parity with the euro; reserve adequacy is therefore assessed at the WAEMU level and applies equally to each of the eight countries.
  - All eight WAEMU countries are PRGT eligible with relatively shallow and underdeveloped financial markets—WAEMU can be considered “credit constrained,” though recent Eurobond issuances have increased market access for some members.
  - Appropriate reserve adequacy metric for WAEMU: coverage of prospective imports of goods and services (focus on external current account shocks), rather than reserves-to-M2 or reserves-to-short-term-debt metrics.
  - ARA-CC calibration accounts for resource-rich (RR) versus non-resource-rich (NRR) profiles:
    - Within WAEMU, Burkina Faso, Mali and Niger may be classified as RR (commodities represent a large share of exports or fiscal revenues).
    - These three countries account for 33 percent of WAEMU's GDP.
    - Adequate reserve estimate for WAEMU calculated as a weighted average of RR and NRR results.

- Opportunity cost proxies considered:
  - Three possible proxies for opportunity cost of holding reserves per ARA-CC:
    1. Sterilization cost, adjusted for exchange rate risk premium (less appropriate for WAEMU due to lack of significant secondary market for government securities).
    2. Yield on sovereign borrowing (relevant given recent Eurobond issuances).
    3. Marginal productivity of capital (MPK) (relevant given thin and underdeveloped financial markets).
  - For WAEMU, proxies (ii) and (iii) appear more relevant.

*Source: IMF staff summary of Annexes I–III of the WAEMU report.*

### 8. Côte d’Ivoire and Senegal issued in June 2017 Eurobonds amounting to US$1.2 billion

### 8. Côte d’Ivoire and Senegal issued in June 2017 Eurobonds amounting to US$1.2 billion

### Eurobond issuances and yields
- Côte d’Ivoire and Senegal issued in June 2017 Eurobonds amounting to US$1.2 billion and US$1.1 billion respectively, with yield of 6.25 percent.
- Côte d’Ivoire also issued in June 2017 a Euro-denominated Eurobond with a yield of 5.125 percent for an amount of EUR625 million.
- The average yield for these three operations is 6 percent.

### Opportunity cost of holding reserves (proxy via Eurobond yields)
- To obtain the corresponding proxy for the opportunity cost of holding reserves, deduct from the average yield the return on BCEAO’s reserves.
- The return on BCEAO’s reserves may be estimated at 0.5 percent, taking into account:
  - the minimum return of 0.75 percent guaranteed on half of the BCEAO’s reserves held on the BCEAO’s “operations account” at the French Treasury, and
  - the negative yield on a significant portion of these reserves held outside the “operations account” in the form of euro-denominated T-bills.
- The opportunity cost of holding additional reserves for the BCEAO as proxied through Eurobond yields net of the return on reserves may be thus estimated at about 5.5 percent.

### Alternative proxy: Marginal Product of Capital (MPK)
- Alternatively, the opportunity cost of holding external reserves may be proxied by the MPK in the WAEMU.
- Using the average for the period 1960-2014 of the weighted averages of estimates available in the World Penn Tables for the share of capital compensation in nominal GDP yields an MPK of 4.5 percent.
- After deducting 0.50 percent for the return on BCEAO’s reserves, this implies an estimate of 4 percent for the opportunity cost of holding reserves.

### Estimated opportunity cost range and adequate reserve level
- Depending on the proxy used (yield of Eurobonds vs. MPK), the opportunity cost of holding reserves for the WAEMU is estimated in the 4 percent and 5.5 percent range.
- Based on this and other relevant WAEMU economic data, and assuming a 50 percent unconditional probability of a large shock event, the adequate level of external reserve is estimated in the range of 5 months to 7 months of prospective extra-regional imports of goods and services.
- The mid-point of the above range implies an adequate import coverage lower than the about 8 months estimated for the CEMAC by Fund staff in the context of its 2017 consultation.

### Role of the French convertibility guarantee
- The ARA-CC model does not account for the value of the convertibility guarantee of the XOF into the euro at a fixed parity by the French Treasury.
- This guarantee amounts, in principle, to an unlimited overdraft facility through the BCEAO’s “operations account” enshrined in the monetary cooperation agreement between France and WAEMU countries.
- Because this overdraft facility possesses a degree of permanency, it has greater reserve-like features than other reserve credit lines available only for limited periods.
- The convertibility guarantee acts as an insurance mechanism against temporary and exogenous external liquidity shortfalls but is not meant to sustain inadequate economic policies or responses to likely permanent exogenous shocks.
- Although difficult to quantify, the guarantee’s value in reinforcing WAEMU’s external buffers is recognized qualitatively, including by rating agencies as a mitigating factor to the risk of balance of payment crisis.

### Key statistics and figures
- Eurobond proceeds: Côte d’Ivoire US$1.2 billion; Senegal US$1.1 billion.
- Euro-denominated Eurobond: EUR625 million, yield 5.125 percent.
- Eurobond yield for the two US$ issuances: 6.25 percent.
- Average yield across three operations: 6 percent.
- Estimated return on BCEAO’s reserves: 0.5 percent (minimum 0.75 percent on half held in “operations account”).
- Opportunity cost of holding reserves (Eurobond-based, net): about 5.5 percent.
- MPK (WAEMU, 1960-2014 average): 4.5 percent → net opportunity cost after 0.50 percent deduction: 4 percent.
- Opportunity cost range used for WAEMU: 4 percent to 5.5 percent.
- Adequate external reserve coverage (based on above and a 50 percent probability of a large shock): 5 months to 7 months of prospective extra-regional imports of goods and services.
- Comparative adequate import cover: WAEMU midpoint below about 8 months estimated for the CEMAC.

*Source: cr18106 - 8. Côte d’Ivoire and Senegal issued in June 2017 Eurobonds amounting to US$1.2 billion*

### 2019. They agree with the recommendation that national authorities should steadfastly boost

### They agree with the recommendation that national authorities should steadfastly boost revenue and prioritize spending over the medium-term, with the view to safeguarding fiscal sustainability, while creating the needed fiscal space for priority infrastructure and social expenditures.

### Fiscal policy and fiscal risks
- Authorities agree with the recommendation that national authorities should steadfastly boost revenue and prioritize spending over the medium-term to:
  - safeguard fiscal sustainability, and
  - create fiscal space for priority infrastructure and social expenditures.
- Intention to continue raising awareness of national authorities on the need to pursue steadfast fiscal adjustment efforts and address fiscal risks arising from contingent liabilities in the public sector.
- Timeline references:
  - mid-2018 (target for banks facing liquidity shortages to increase capital and liquidity buffers and reduce portfolio exposure).
  - 2019 (contextual reference at the start of the document).

### Monetary policy, interbank market, and central bank stance
- The central bank will maintain strict oversight of banks’ compliance with capital and liquidity requirements.
- Banks facing liquidity shortages have been called upon to:
  - increase their capital and liquidity buffers, and
  - reduce their portfolio exposure by mid-2018.
- Monetary authorities are committed to making the interbank money market more dynamic by:
  - creating a repo contract framework, and
  - implementing the newly adopted Basel II/III prudential regime.
- Expected outcomes of Basel II/III adoption:
  - banks improve balance sheets, and
  - banks improve their evaluation of credit risks.
- BCEAO expressed concerns about staff’s call for introducing differentiated discounts to government securities pledged as collateral for central bank refinancing, arguing that such measures would:
  - undermine the central bank’s equal treatment principle regarding sovereign risk weights, and
  - exert undue direct influence on the credit risk taken by banks that acquire sovereign securities.
- BCEAO authorities value staff advice on deepening the interbank market and improving monetary policy transmission, including:
  - achieving an integrated bond market, and
  - broadening the investor base beyond the banking sector.
- BCEAO officials emphasize the importance of compliance with regulations on repatriation of export proceeds to help consolidate external buffers.

### Financial development, inclusion, and stability
- Progress and initiatives:
  - WAEMU countries have made encouraging progress on financial development and inclusion, notably through the promotion of mobile payments and the adoption in 2016 of the regional strategy for financial inclusion.
  - Implementation of this strategy, scheduled this year, will benefit from donors’ financial and technical support.
- Micro-finance and banking soundness:
  - Authorities are committed to monitoring the soundness of micro-finance institutions.
  - The stability and profitability of the banking system are sources of optimism.
  - Under-capitalized banks in the Union have been asked by the regulatory authority to comply with their capital obligations by mid-2018; the adequacy of their assets and resources is being closely monitored.
- Regional supervision and resolution:
  - The Banking Commission has moved toward a more risk-based and consolidated approach to supervision and begun consolidating supervision of cross-border financial groups.
  - Resolution powers of the Banking Commission were strengthened in late 2017, including commitments by all member countries to cooperate with it and respect its independent decision-making regarding resolution of banks.
- Financial safety net and macroprudential arrangements:
  - The central bank is endowed with a financial safety net that includes:
    - a financial guarantee fund;
    - a bank deposit guarantee scheme; and
    - a bank resolution fund.
  - The Committee for Financial Stability (central bank, Banking Commission, CREPMF) is tasked with assessing systemic risks and taking necessary measures to address them.

### Sustaining medium- and long-term growth and strengthening regional institutions
- Authorities acknowledge the need to tackle impediments to growth by:
  - improving competitiveness,
  - promoting economic diversification, and
  - advancing regional integration.
- Ongoing reform efforts by national authorities focus on:
  - business climate,
  - governance, and
  - infrastructure building and performance.
- Planned regional instruments and initiatives:
  - future community investment code, and
  - regional structural funds for infrastructure projects in energy, transport and agriculture.
- Institutional strengthening and transparency:
  - BCEAO maintains a solid internal control environment (recent safeguards assessment).
  - Adoption of International Financial Reporting Standards (IFRS).
  - Enhanced selection criteria for external auditors and timely publication of audited financial statements.
  - WAEMU Commission continues to strengthen capacities, including in statistics, and will welcome Fund technical assistance.

### Risks, monitoring, and policy readiness
- Authorities see no room for complacency given regional challenges including:
  - oil price developments,
  - security threats, and
  - political economy factors.
- Commitment to carefully monitor developments at national and regional levels and to stand ready to make necessary policy adjustments to preserve macroeconomic and external stability.

*cr18106 - 2019*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18106.pdf_