## 1wauea2019001

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### BACKGROUND, OUTLOOK, AND RISKS
- Growth and inflation
  - Growth remained strong in 2018, region estimated above "6 percent" for the 7th year in a row.
  - Consumer prices (average): "1.4 percent" in 2018.
- Fiscal position and public debt
  - Aggregate fiscal deficit narrowed by "½ percentage point of GDP" to an estimated "3.8 percent of GDP" in 2018 (from "4.3 percent" in 2017).
  - Public debt rose to "52.5 percent of GDP" at end-2018 from "50.1 percent" in 2017; public debt rose by "17½ percentage points of GDP" over the last 5 years.
  - Below-the-line budget operations averaged "1.2 percentage points of GDP" annually.
  - Debt servicing costs rose from "20¾ percent of revenue" in 2015 to "33 percent" in 2018; interest payments rose from "6.7 percent" to "9.1 percent of revenue".
- External sector and reserves
  - External current account deficit estimated at "6.8 percent of GDP" in 2018 (from "6.6 percent" in 2017).
  - External reserves: "4.3 months" of imports of goods and services (or "32.2 percent of M2") at end-2018, up from "3.9 months" (or "29.4 percent of M2") at end-2017.
  - Reserve import cover of "4.3 months" remains below the "5-8-month" range estimated as adequate for the WAEMU.
  - Eurobond issues (Côte d’Ivoire and Senegal) net equivalent to "1.1 months of imports" and to "87 percent of the WAEMU’s aggregate fiscal deficit in 2018".
- Financial system and liquidity
  - BCEAO reduced refinancing volume to banks by about "24 percent" between early 2017 and end-2018.
  - Average rate at BCEAO weekly refinancing auction: at "4.5 percent" ceiling Nov 2017–Jun 2018, declined to below "3 percent" after Eurobond inflows, and crawled back to "4.5 percent" in late 2018.

### BANKING SECTOR DEVELOPMENTS AND FINANCIAL STABILITY
- Regulatory and supervisory reforms
  - Move to Basel II/III prudential standards with a "5 year-phasing period"; new bank accounting rules; risk-sensitive consolidation supervision; steps to operationalize new resolution framework.
  - BCEAO ran more demanding stress-test exercises over the last two years.
- Performance and vulnerabilities
  - Credit to the economy estimated growth: "8 percent" in 2018.
  - Capital base increased by "360 billion FCFA" over first 9 months of 2018.
  - Capital to risk-weighted assets (CAR) at "10.0 percent" under Basel II/III at end-June 2018 (above the "8.625 percent" required for end-2018).
  - One fifth of banks, accounting for "16 percent" of total assets, were below the CAR minimum at end-June 2018; five banks failed to meet the CFAF"10 billion" minimum capital requirement set in 2017.
  - Non-performing loans (NPLs): "12.9 percent" of total loans at end-June 2018; provisioning covers "2/3" of NPLs.
  - Banks’ reliance on BCEAO refinancing ≈ "40 percent" of their sovereign bonds exposure at end-2018 (down from "54 percent" in 2016).
- Staff assessment
  - Important banking sector reforms implemented in 2018.
  - A few ailing banks must be resolved promptly; operationalization of the new resolution framework is needed.

### MEDIUM-TERM OUTLOOK AND RISKS
- Projections and conditionality
  - Medium-term regional growth projected to stay above "6 percent", conditional on fiscal consolidation to meet the regional fiscal deficit convergence criterion of "3 percent of GDP", elimination of below-the-line budgetary operations from this year onwards, and implementation of structural reforms.
  - External current account deficit projected to converge back to "5 percent of GDP" over the medium term; international reserves projected to reach "4.8 months" of imports by 2023 (projection horizon in table: 2023 shows "4.8 months").
- Downside risks
  - Risks tilted to the downside from potential slippages in fiscal consolidation; slow structural reform progress; larger imports or lower capital inflows; persistent security concerns; weaker global recovery; tighter international financial conditions.

### POLICY RECOMMENDATIONS (HIGHLIGHTS)
- Fiscal policy
  - Adhere to fiscal consolidation commitments; focus on domestic revenue mobilization and control of below-the-line operations.
  - Urged member-countries to adhere to regional fiscal deficit convergence criterion of "3 percent of GDP".
  - Adjustment efforts should curb tax exemptions and enforce regional tax policy directives.
  - Encourage review of regional surveillance framework to better contain debt sustainability risks.
- Monetary policy
  - Current monetary policy stance considered broadly appropriate; BCEAO should stand ready to tighten if external reserves deteriorate.
  - BCEAO encouraged to address banking sector structural liquidity deficit and to develop active/liquid secondary debt and interbank markets.
  - BCEAO should remain cautious in managing liquidity to prevent refinancing of sovereign bond holdings from constraining monetary policy.
- Financial sector
  - Proactive supervision during transition to Basel II/III; prompt resolution of ailing banks; increase banks’ capital; reduce concentration risks and NPLs.
  - Identify criteria for defining systemic institutions.
  - Improve financial inclusion with adequate supervision; closely monitor microfinance institutions; strengthen AML/CFT risk-based supervision.
- Competitiveness and structural reforms
  - Intensify structural reforms and regional initiatives: promote cross-border infrastructure projects; ease customs procedures.
  - Sustain progress in improving quality, coverage, and timeliness of regional data.

### KEY STATISTICS (SELECTED FROM TABLES AND TEXT)
- GDP at constant prices: "6.6 percent" in 2017; "6.3 percent" in 2018; projected "6.6 percent" in 2019.
- GDP per capita at constant prices: "3.7 percent" in 2017; "3.6 percent" in 2018; projected "3.7 percent" in 2019.
- Consumer prices (average): "0.8 percent" in 2017; "1.4 percent" in 2018; projected "1.6 percent" in 2019.
- Government total revenue, excl. grants: "18.1 percent of GDP" in 2017; "18.2 percent" in 2018; projected "18.6 percent" in 2019.
- Government expenditure: "24.6 percent of GDP" in 2017; "24.1 percent" in 2018; projected "23.8 percent" in 2019.
- Overall fiscal balance (commitment basis): "-4.3 percent" in 2017; "-3.8 percent" in 2018; projected "-3.1 percent" in 2019.
- Basic fiscal balance, incl. grants & HIPC: "-1.3 percent" in 2017; "-0.9 percent" in 2018; projected "-0.1 percent" in 2019.
- Exports of goods and services: "22.1 percent of GDP" in 2017; "22.5 percent" in 2018.
- Imports of goods and services: "31.0 percent of GDP" in 2017; "32.1 percent" in 2018.
- Current account, excl. grants: "-8.5 percent of GDP" in 2017; "-8.9 percent" in 2018.
- Current account, incl. grants: "-6.6 percent of GDP" in 2017; "-6.8 percent" in 2018.
- External public debt: "29.6 percent of GDP" in 2017; "33.8 percent" in 2018.
- Total public debt: "50.1 percent of GDP" in 2017; "52.5 percent of GDP" in 2018.
- Broad money to GDP (Broad money): "28.9 percent" in 2016; "28.9 percent" in 2017; "31.1 percent" in 2018; "33.3 percent" projected in 2019.
- Nominal GDP (billions of CFA francs): "64,208" in 2017; "69,351" in 2018; "75,119" projected in 2019.
- Nominal GDP per capita (US dollars): "1,112" in 2017; "1,227" in 2018; "1,258" projected in 2019.
- Gross international reserves: "12,367 million US dollars" in 2017; "15,419 million US dollars" in 2018; "16,514 million US dollars" projected in 2019.
- Gross international reserves in months of imports: "3.9 months" in 2017; "4.3 months" in 2018; "4.4 months" projected in 2019.

### EBA-BASED ASSESSMENT AND OUTLOOK (2023 NOTES)
- EBA assessment: WAEMU external position moderately weaker than implied by current fundamentals and desirable policies; would be addressed as fiscal consolidation and structural reforms materialize.
- Risks tilted to the downside (RAM, Annex III).
- Illustration scenarios and crowding-out effects:
  - Room for bank credit to private sector to grow by "8.3 percent" in 2019 under baseline.
  - If banks had to satisfy an additional "1 percent of GDP" of public borrowing needs in 2019, projected growth of bank credit to private sector reduced to "4.7 percent".
  - If additional public borrowing requirements persisted over medium term without squeezing private credit growth, projected external reserves’ import cover could fall to about "2 months" and increase public debt to "57.5 percent of GDP by 2023".

### FISCAL RISKS, TRANSPARENCY, AND DEBT SUSTAINABILITY
- Findings
  - Public debt projected at "57.5 percent of GDP by 2023."
  - Average tax revenue to GDP ratio estimated at "15.9 percent in 2018", only "1 percentage point higher than a decade earlier."
- Recommendations
  - Improve analysis, management, and disclosure of fiscal risks by better measuring below-the-line operations (quasi-fiscal activities, SOE losses, PPPs), expanding fiscal accounts coverage, and implementing regional directive on transition to GFSM 2001 reporting standards.
  - Complement WAEMU Commission’s annual assessment of five-year convergence plans with quantitative sensitivity analysis.
  - Staff recommends lowering the regional public debt ceiling "to around 60 percent of GDP" from current "70 percent of GDP" given increased non-concessional borrowing.
  - Complement debt convergence assessment with full-fledged Debt Sustainability Analysis (DSA) to account for concessionally, foreign exchange, and liquidity risks.
  - Prioritize revisions of regional tax directives to curb tax exemptions and harmonize national tax data; consider upgrading tax revenue to GDP ratio from a second-order to a first-order convergence criterion.
- Authorities’ commitments/positions
  - National governments agreed to implement plans to bring deficits down to "at most 3 percent of GDP from 2019 onwards."
  - Authorities acknowledged need to curtail below-the-line operations and extend budget coverage to general government via WAEMU public finance management directives; mixed appetite to lower the debt ceiling.

### MONETARY POLICY, RESERVES, AND MARKET DEVELOPMENT
- Monetary policy stance and reserves
  - Current monetary policy stance described as "appropriate"; external reserves projected to increase gradually.
  - Risk trigger: BCEAO should tighten if reserve import-cover ratio declines for several months or abruptly moves below "3 months."
  - Recommended instruments: quantitative measures (refinancing window and/or reserve requirement) and potentially rates increases.
  - Recommendation: Provide refinancing cautiously to avoid repeat of the 2016 bank leverage build-up.
  - BCEAO cautioned against banks substituting permanent resources with short-term central bank refinancing.
- Financial market development and monetary transmission
  - Large bank sovereign exposures and a shallow secondary bond market constrain deleveraging and private sector financing.
  - Recommendations: integrated market supervision; single Central Securities Depositor; develop repo transactions; strengthen bank balance sheets and transparency; calibrate liquidity supply to steer interbank rate into policy corridor.
  - Current haircut applied by BCEAO to all sovereign collateral at refinancing windows: "10 percent".

### PRUDENTIAL FRAMEWORK, SUPERVISION, AND RESOLUTION
- Progress and requirements
  - Move to Basel II/III and new accounting standards proceeded smoothly in 2018.
  - Banks must continue to increase capital to meet the "11.5 percent CAR targeted at end-2022 (from a mimimum of 8.625 percent at end-2018)."
- Recommendations
  - Rapidly restructure weak banks; require additional shareholder resources; reduce dividend distribution; streamline asset portfolios.
  - Gradually reduce individual risk concentration limits from "75 percent of bank equity under Basel I to 25 percent in 2022 under Basel II/III."
  - Calibrate forthcoming liquidity ratios; continue addressing NPLs.
  - Improve cross-border group supervision via Colleges of Supervisors; require recovery plans from systemic institutions.
- Resolution actions
  - Operationalize new resolution framework rapidly; identify criteria for systemic institutions.
  - "12 largest banking groups" account for "more than ¾ of the banking system’s total assets" and should prepare recovery plans.
  - Deposit insurance scheme (DIS) started receiving initial contributions in 2018; amended to be callable to help fund bank resolution plans after other sources mobilized.

### FINANCIAL INCLUSION, MICROFINANCE, AND AML/CFT
- Findings
  - Financial inclusion improved since BCEAO created specific status for electronic money providers in 2015; mobile-based retail payments increased.
  - Microfinance sector ≈ "about 7 percent of the banking sector in terms of deposits and loans"; sector has seen institution failures and restructurings.
- Recommendations
  - Allow growth of electronic money segment while ensuring it does not create new financial stability risks; set up interconnection platform for WAEMU mobile banking operators.
  - Strengthen AML/CFT supervision: increase onsite inspections, ensure sanction effectiveness, improve information sharing with national authorities.
- AML/CFT supervisory activity
  - Banking Commission increased onsite inspections in 2017: "two AML/CFT thematic inspections and 18 inspections with an AML/CFT component" among "145 supervised banks".
  - Regional uniform AML/CFT law adopted by all member countries; BCEAO issued implementation instructions in 2017.

### COMPETITIVENESS, INCLUSIVENESS, AND STRUCTURAL REFORMS
- Recommendations
  - National reforms to raise structural competitiveness: improve business climate, logistics performance, governance, and public investment efficiency.
  - Regional integration: better intra- and extra-regional trade integration, cross-border infrastructure projects, facilitation of customs procedures.
  - Support to SMEs: BCEAO and Regional Stock Exchange initiatives to facilitate financing access for small and medium-size enterprises.
  - Continue implementing regional gender strategy and develop social spending indicators per regional Finance Act directive.
- Analytical finding
  - Addressing structural constraints (institutional/legal investor protection, infrastructure, labor skills, access to finance) can significantly enhance bilateral trade flows.

### DATA, SAFEGUARDS, AND REGIONAL COORDINATION
- Findings and recommendations
  - BCEAO safeguards assessment in 2018 found a strong control environment; financial statements prepared in accordance with IFRS.
  - Recommendation: Consolidate progress on quality, timeliness, and dissemination of economic statistics; accelerate transition to GFSM 2001 fiscal reporting across WAEMU.
  - WAEMU data disseminated on the Open Data Platform; Senegal adhered to the SDDS in late 2017.
  - Operational discussions with WAEMU authorities will be on a "12-month cycle in accordance with Decision No. 13656-(06/1), as amended."

*International Monetary Fund staff report on WAEMU common policies, March 1, 2019.*

### 52.5 percent of GDP in 2018 from 50.1 percent in 2017, and in total debt service to 33 percent of

### WEST AFRICAN ECONOMIC AND MONETARY UNION STAFF REPORT ON COMMON POLICIES OF MEMBER COUNTRIES

### BACKGROUND, OUTLOOK, AND RISKS
- Growth and inflation
  - Growth remained strong in 2018, the region continued to exhibit one of the fastest growth rates in Africa—estimated above 6 percent for the 7th year in a row.
  - Consumer prices (average) were low: 1.4 percent in 2018.
- Fiscal position and public debt
  - Aggregate fiscal deficit narrowed by ½ percentage point of GDP to an estimated 3.8 percent of GDP in 2018 (from 4.3 percent in 2017).
  - Public debt rose to 52.5 percent of GDP at end-2018 from 50.1 percent in 2017; public debt rose by 17½ percentage points of GDP over the last 5 years.
  - Below-the-line budget operations averaged 1.2 percentage points of GDP annually and have contributed to debt accumulation.
  - Debt servicing costs rose from 20¾ percent of revenue in 2015 to 33 percent in 2018; interest payments rose from 6.7 percent to 9.1 percent of revenue.
- External sector and reserves
  - External current account deficit estimated to have widened to 6.8 percent of GDP in 2018 from 6.6 percent of GDP in 2017.
  - External reserves increased to 4.3 months of imports of goods and services (or 32.2 percent of M2) at end-2018, up from 3.9 months (or 29.4 percent of M2) at end-2017.
  - Reserve import cover of 4.3 months remains below the 5-8-month range estimated as adequate for the WAEMU.
  - Eurobond issues from Côte d’Ivoire and Senegal were equivalent to 1.1 months of imports in net terms and to 87 percent of the WAEMU’s aggregate fiscal deficit in 2018.
- Financial system and liquidity
  - BCEAO reduced refinancing volume to banks by about 24 percent between early 2017 and end-2018.
  - Average rate at BCEAO weekly refinancing auction had been at its 4.5 percent ceiling from November 2017 to June 2018, declined to below 3 percent after Eurobond inflows, and crawled back to 4.5 percent ceiling in late 2018.

### BANKING SECTOR DEVELOPMENTS AND FINANCIAL STABILITY
- Regulatory and supervisory reforms
  - Move to Basel II/III prudential standards with a 5 year-phasing period; new bank accounting rules; banking supervision based on a risk-sensitive consolidation approach to groups; steps to operationalize the new resolution framework for the Banking Commission.
  - BCEAO ran more demanding stress-test exercises over the last two years.
- Performance and vulnerabilities
  - Credit to the economy estimated growth: 8 percent in 2018.
  - Capital base increased by 360 billion FCFA over the first 9 months of 2018.
  - Capital to risk-weighted assets (CAR) at 10.0 percent under Basel II/III at end-June 2018 (above the 8.625 percent required for end-2018).
  - One fifth of banks, accounting for 16 percent of total assets, were below the CAR minimum at end-June 2018; five banks failed to meet the CFAF10 billion minimum capital requirement set in 2017.
  - Non-performing loans (NPLs) at 12.9 percent of total loans at end-June 2018; provisioning covers 2/3 of NPLs.
  - Banks’ reliance on BCEAO refinancing was equivalent to about 40 percent of their sovereign bonds exposure at end-2018 (down from a peak of 54 percent in 2016), reflecting a structural liquidity deficit.
- Staff assessment
  - Important banking sector reforms were implemented in 2018.
  - A few ailing banks must be resolved promptly; operationalization of the new resolution framework is needed.

### MEDIUM-TERM OUTLOOK AND RISKS
- Projections and conditionality
  - Medium-term regional growth is projected to stay above 6 percent, assuming fiscal consolidation to meet the regional fiscal deficit convergence criterion of 3 percent of GDP, elimination of below-the-line budgetary operations from this year onwards, and structural reforms implementation.
  - External current account deficit projected to converge back to 5 percent of GDP over the medium term, and international reserves projected to reach 4.8 months of imports by (projection horizon in table: 2023 shows 4.8 months).
- Downside risks
  - Risks are tilted to the downside from potential slippages in fiscal consolidation; slow progress in implementing structural reforms and improving inclusiveness; larger imports or lower capital inflows relative to projections; persistent security concerns; weaker-than-expected global recovery; and tighter international financial conditions.

### POLICY RECOMMENDATIONS
- Fiscal policy
  - Collectively adhere to fiscal consolidation commitments, with focus on domestic revenue mobilization and more effective control of below-the-line operations, to lower risks of public debt distress, support international reserves, and preserve external viability.
  - Urged member-countries to adhere to the regional fiscal deficit convergence criterion of 3 percent of GDP.
  - Adjustment efforts should focus on curbing tax exemptions and enforcing regional tax policy directives to generate space for development spending.
  - Urged more effective control of below-the-line budget operations and encouraged a review of the regional surveillance framework to better contain debt sustainability risks.
- Monetary policy
  - Current monetary policy stance considered broadly appropriate; BCEAO should stand ready to tighten if external reserves deteriorate.
  - BCEAO encouraged to address cautiously the banking sector’s structural liquidity deficit and to further develop more active and liquid secondary debt and interbank markets to deepen WAEMU financial markets and enhance monetary policy transmission.
  - BCEAO should remain cautious in managing liquidity to prevent its refinancing of sovereign bond holdings from constraining monetary policy.
- Financial sector
  - Proactive supervision during transition to Basel II/III to strengthen bank balance sheets.
  - Prompt resolution of ailing banks and operationalization of the new resolution framework.
  - Increase banks’ capital and reduce concentration risks and NPLs to foster confidence.
  - Identify criteria for defining systemic institutions.
  - Improve financial inclusion with adequate supervision; closely monitor microfinance institutions and strengthen AML/CFT risk-based supervision.
- Competitiveness and structural reforms
  - Intensify structural reforms and regional initiatives to improve competitiveness and inclusiveness, including promoting cross-border infrastructure projects and easing customs procedures.
  - Sustain progress in improving the quality, coverage, and timeliness of regional data.

### KEY STATISTICS (SELECTED FROM TABLES AND TEXT)
- GDP at constant prices: 6.6 percent in 2017; 6.3 percent in 2018; projected 6.6 percent in 2019.
- GDP per capita at constant prices: 3.7 percent in 2017; 3.6 percent in 2018; projected 3.7 percent in 2019.
- Consumer prices (average): 0.8 percent in 2017; 1.4 percent in 2018; projected 1.6 percent in 2019.
- Government total revenue, excl. grants: 18.1 percent of GDP in 2017; 18.2 percent in 2018; projected 18.6 percent in 2019.
- Government expenditure: 24.6 percent of GDP in 2017; 24.1 percent in 2018; projected 23.8 percent in 2019.
- Overall fiscal balance (commitment basis): -4.3 percent in 2017; -3.8 percent in 2018; projected -3.1 percent in 2019.
- Basic fiscal balance, incl. grants & HIPC: -1.3 percent in 2017; -0.9 percent in 2018; projected -0.1 percent in 2019.
- Exports of goods and services: 22.1 percent of GDP in 2017; 22.5 percent in 2018.
- Imports of goods and services: 31.0 percent of GDP in 2017; 32.1 percent in 2018.
- Current account, excl. grants: -8.5 percent of GDP in 2017; -8.9 percent in 2018.
- Current account, incl. grants: -6.6 percent of GDP in 2017; -6.8 percent in 2018.
- External public debt: 29.6 percent of GDP in 2017; 33.8 percent in 2018.
- Total public debt: 50.1 percent of GDP in 2017; 52.5 percent in 2018.
- Broad money to GDP (table row labelled Broad money): 28.9 percent in 2016; 28.9 percent in 2017; 31.1 percent in 2018; 33.3 percent projected in 2019.
- Nominal GDP (billions of CFA francs): 64,208 in 2017; 69,351 in 2018; 75,119 projected in 2019.
- Nominal GDP per capita (US dollars): 1,112 in 2017; 1,227 in 2018; 1,258 projected in 2019.
- Gross international reserves: 12,367 million US dollars in 2017; 15,419 million US dollars in 2018; 16,514 million US dollars projected in 2019.
- Gross international reserves in months of imports: 3.9 months in 2017; 4.3 months in 2018; 4.4 months projected in 2019.

*International Monetary Fund staff report on WAEMU common policies, March 1, 2019.*

### 2023. An EBA-based assessment suggests that the WAEMU’s external position is moderately weaker

### 2023. An EBA-based assessment suggests that the WAEMU’s external position is moderately weaker

### EBA assessment and outlook
- An EBA-based assessment suggests that the WAEMU’s external position is moderately weaker than implied by current fundamentals and desirable policies, which would be addressed as fiscal consolidation and structural reforms materialize (Annex I).
- Risks are tilted to the downside (RAM, Annex III).

### Downside risks (enumerated)
- Slippages in fiscal consolidation and significant extra-budgetary spending could:
  - further increase public debt and servicing costs,
  - crowd-out credit to the private sector,
  - put renewed pressures on external reserves.
- Slower-than-expected structural reforms, larger imports, or lower capital inflows could undermine projected external buffer consolidation.
- A persistent aggravation of insecurity would:
  - strain governments’ budgets,
  - undermine investment,
  - hamper growth.
- Insufficient progress in improving inclusiveness could undermine social stability and support for reforms.
- A weaker-than-expected global recovery could hamper WAEMU’s growth through:
  - terms-of-trade channels,
  - remittances,
  - FDI channels.
- Exposure to global financial markets has risen due to Eurobond issuances; monetary policy normalizations in Europe and USA could:
  - lead to higher risk premia,
  - lower external financing for WAEMU sovereigns,
  - weigh on the external reserve position.

### Authorities’ views
- Regional authorities broadly agreed with staff views on the outlook and risks but considered the real effective exchange rate to be close to equilibrium.
- Authorities’ growth projections for 2019 and the medium-term were somewhat more optimistic than those of staff.
- Authorities concurred that policy implementation was paramount to sustain the favorable outlook and that risks were tilted to the downside but considered these risks to be mainly exogenous rather than related to national or regional policies.
- Authorities noted WAEMU’s vulnerability to adverse changes in weather conditions due to the importance of the primary sector in member-countries, and were particularly concerned with:
  - security-related shocks,
  - terms-of-trade volatility,
  - tighter foreign financing conditions,
  - lower global growth.
- Based on their own tools, derived from the macroeconomic balance and external sustainability approaches, they estimated the real effective exchange rate to be close to equilibrium.

### Policy discussions — strategic focus
- Maintain the region’s strong growth momentum in a sustainable way through a shift toward more private sector-led growth.
- Key policy priorities:
  - Credible fiscal consolidation to preserve external stability.
  - Reforms to deepen financial markets.
  - Proactive banking supervision.
  - More effective monetary policy transmission to support private sector-led growth.
  - Regional initiatives to promote competitiveness and inclusiveness.

### Ensuring durable fiscal consolidation to support external stability
- Adherence to the regional convergence criterion of 3 percent of GDP for the budget deficit in 2019 and beyond is paramount.
- All WAEMU member-countries have committed to this target in their Fund-supported programs (with Niger for 2020).
- Under the baseline scenario, which also assumes the elimination of below-the-line operations, these fiscal policies are consistent with macroeconomic stability.
- Based on recent trends in broad money growth as well as central governments’ borrowing needs and external financing plans:
  - there would still be room for bank credit to the private sector to grow by 8.3 percent in 2019 (broadly in line with nominal GDP growth),
  - the import cover of external reserves would inch up.
- Deviations from the baseline (shortfalls in external financing, fiscal slippages and/or significant below-the-line operations) could undermine private sector credit growth or external buffers.
- Illustration scenarios:
  - If banks had to satisfy an additional 1 percent of GDP of public borrowing needs in 2019, projected growth of bank credit to the private sector would be reduced to 4.7 percent, suggesting some crowding-out.
  - Alternately, if additional public borrowing requirements of a similar magnitude were to persist over the medium term without squeezing private sector credit growth, they could lower projected external reserves’ import cover to about 2 months and increase public debt to

*Source: 1wauea2019001 - 2023. An EBA-based assessment suggests that the WAEMU’s external position is moderately weaker*

### 57.5 percent of GDP by 2023.

### 1wauea2019001 - 57.5 percent of GDP by 2023.

### Fiscal risks, transparency, and debt sustainability
- Finding: Public debt projected at "57.5 percent of GDP by 2023."
- Finding: Average tax revenue to GDP ratio in the WAEMU is estimated at "15.9 percent in 2018", only "1 percentage point higher than a decade earlier."
- Recommendation: Improve analysis, management, and disclosure of fiscal risks by better measuring below-the-line operations (quasi-fiscal activities, losses by state-owned enterprises, increasing recourse to PPPs), expanding fiscal accounts coverage, and implementing the regional directive on transition to GFSM 2001 reporting standards.
- Recommendation: Complement the WAEMU Commission’s annual assessment of five-year convergence plans with quantitative sensitivity analysis to test realism and macroeconomic consistency of underlying assumptions.
- Finding / Policy proposal: The current regional public debt ceiling of "70 percent of GDP" was set when financing was mostly concessional; with more non-concessional borrowing, staff recommends lowering the debt convergence criterion "to around 60 percent of GDP."
- Recommendation: Complement the debt convergence assessment with full-fledged Debt Sustainability Analysis (DSA) to better account for degree of concessionally, foreign exchange, and liquidity risks.
- Recommendation: Prioritize revisions of regional tax directives to curb tax exemptions (incentives in investment and sectoral codes) and harmonize national tax data; consider upgrading the tax revenue to GDP ratio from a second-order to a first-order convergence criterion.
- Authorities’ commitments/positions:
  - National governments agreed to implement plans to bring deficits down to "at most 3 percent of GDP from 2019 onwards."
  - Authorities acknowledged need to curtail below-the-line operations and to extend budget coverage to the general government via WAEMU public finance management directives, though they differed with staff on the estimated size of such operations.
  - Mixed appetite to lower the debt ceiling; WAEMU Commission signaled the issue could be discussed during the regional surveillance framework review and concurred on greater use of DSA.

### Monetary policy stance and reserves
- Finding: Current monetary policy stance described as "appropriate" while external reserves are projected to increase gradually over the medium-term.
- Risk trigger: BCEAO should tighten if the reserve import-cover ratio were to decline for several months or abruptly move below "3 months."
- Recommended instruments: Initially rely on quantitative measures (refinancing window and/or reserve requirement) and potentially rates increases.
- Recommendation: Provide refinancing cautiously to avoid repeat of the 2016 bank leverage build-up; proactive supervision should prompt increases in capital and other stable resources to address structural liquidity deficits.
- Authorities’ views:
  - BCEAO agreed on need to remain vigilant to external reserve developments and to shield and gradually increase external reserves.
  - BCEAO emphasized liquidity supply is based on economy needs and cautioned against banks substituting permanent resources with short-term central bank refinancing.
  - On differentiated sovereign haircuts, BCEAO considered that each bank should assess sovereign risk and the central bank should not interfere with market play.

### Financial market development and monetary transmission
- Finding: Large bank sovereign exposures and a shallow secondary bond market constrain deleveraging and private sector financing.
- Recommendations to deepen markets:
  - Move to integrated market supervision and a single Central Securities Depositor to eliminate segmentation between auction and syndication and allow pooled trading of same-maturity sovereign issues.
  - Develop repo transactions based on sovereign bonds to increase interbank and debt market volumes.
  - Strengthen bank balance sheets and transparency to improve willingness for short-term transactions and stimulate interbank markets.
  - BCEAO to calibrate liquidity supply to steer interbank rate back into the monetary policy corridor.
- Staff recommendation: Consider differentiated haircuts to sovereign securities used as collateral; current haircut applied by BCEAO is "10 percent" to all sovereign collateral at refinancing windows.

### Prudential framework, supervision, and resolution
- Finding: Move to new prudential regulation aligned to Basel II/III and new bank accounting standards proceeded smoothly in 2018.
- Requirement: Banks must continue to increase capital to meet the "11.5 percent CAR targeted at end-2022 (from a mimimum of 8.625 percent at end-2018)."
- Recommendations:
  - Rapidly restructure weak banks; require additional shareholder resources, reduce dividend distribution, and/or streamline asset portfolios.
  - Gradually reduce individual risk concentration limits from "75 percent of bank equity under Basel I to 25 percent in 2022 under Basel II/III."
  - Calibrate forthcoming liquidity ratios to improve structural liquidity and continue addressing NPLs.
  - Improve cross-border group supervision via Colleges of Supervisors and require recovery plans from systemic institutions.
- Resolution actions:
  - Operationalize the new resolution framework rapidly; current supervisory regime already provides instruments to resolve ailing banks promptly.
  - Identify criteria to designate systemic institutions; large institutions (the "12 largest banking groups" account for "more than ¾ of the banking system’s total assets") should prepare recovery plans.
  - Financial safety net: payments clearing finality guarantee is fully operational; deposit insurance scheme (DIS) started receiving initial contributions in 2018, amended to be callable to help fund bank resolution plans after other sources mobilized.

### Financial inclusion, microfinance, and AML/CFT
- Finding: Financial inclusion improved substantially since BCEAO created a specific status for electronic money providers in 2015; mobile-based retail payments increased.
- Finding: Microfinance sector represents "about 7 percent of the banking sector in terms of deposits and loans" and has seen institution failures; several fragile entities recently restructured or terminated.
- Recommendation: Allow growth of electronic money segment while ensuring it does not create new financial stability risks; set up interconnection platform for WAEMU mobile banking operators.
- AML/CFT supervision:
  - Regional uniform AML/CFT law adopted by all member countries; BCEAO issued implementation instructions in 2017.
  - Banking Commission increased onsite inspections in 2017: "two AML/CFT thematic inspections and 18 inspections with an AML/CFT component" among "145 supervised banks."
  - Substantial efforts required to adapt supervision to ML/TF risks, increase onsite inspections, ensure sanction effectiveness, and improve information sharing with national authorities.
- Authorities’ views: Commitment to promote financial inclusion, monitor microfinance, and enforce the 2015 AML/CFT law with improved information systems and cash transaction thresholds (September 2017 instructions).

### Competitiveness, inclusiveness, and structural reforms
- Recommendations:
  - National reforms to raise structural competitiveness: improve business climate, logistics performance, governance, and public investment efficiency.
  - Regional integration: better integration of intra- and extra-regional trade flows, cross-border infrastructure projects, facilitation of customs procedures.
  - Support to SMEs: BCEAO and Regional Stock Exchange initiatives to facilitate financing access for small and medium-size enterprises.
  - Social and gender policies: continue implementing regional gender strategy and develop social spending indicators per the regional Finance Act directive.
- Analytical finding: Addressing structural constraints (institutional/legal investor protection, infrastructure, labor skills, access to finance) can significantly enhance bilateral trade flows.
- Authorities’ notes: Ongoing efforts via regional structural funds and recent adoption of a regional strategy towards greater gender equality.

### Data, safeguards, and regional coordination
- Finding: Updated BCEAO safeguards assessment in 2018 found a strong control environment; financial statements prepared in accordance with IFRS; oversight role of audit committee enhanced.
- Recommendation: Consolidate progress on quality, timeliness, and dissemination of economic statistics; accelerate transition of all WAEMU member-countries to GFSM 2001 fiscal reporting to compile consolidated public finance data and public sector borrowing requirement.
- Progress note: WAEMU data disseminated on the Open Data Platform; Senegal adhered to the SDDS in late 2017.
- Operational note: Discussions with WAEMU authorities will be on a "12-month cycle in accordance with Decision No. 13656-(06/1), as amended."

### Staff appraisal — key judgments and risks
- Macro performance and risks:
  - Real GDP growth exceeded "6 percent for a seventh year in a row" and inflation remained low in 2018, but public debt and servicing costs have risen.
  - Buoyant domestic demand and lower terms-of-trade contributed to a widening external current deficit; external reserves increased largely due to large Eurobond issues in "2017-2018."
- Outlook:
  - Medium-term outlook positive but subject to significant downside risks: slippages in fiscal consolidation and structural reforms, high extra-budgetary operations, terms-of-trade and weather shocks, worsening security, lower global growth, and tighter international financing conditions.
- Core policy imperatives:
  - Effective fiscal consolidation and convergence to fiscal deficits of "no more than 3 percent of GDP" essential to avoid crowding out private credit and reserve pressures.
  - Much greater progress needed to bolster government revenues to create fiscal space for priority infrastructure and social spending.
  - Control below-the-line operations to preserve public debt sustainability.
  - Tighten monetary policy if pressures on foreign exchange reserves reemerge; continue steering liquidity and reducing dependence on central bank refinancing.
  - Deepen interbank and debt securities markets to improve monetary policy transmission and mobilize regional savings for private sector financing.
  - Enforce new prudential rules aligned with Basle II/III, resolve ailing and undercapitalized banks, and operationalize bank resolution powers.
  - Strengthen AML/CFT supervision to preserve banking sector integrity.
  - Increase inclusiveness and address structural constraints to promote private investment, competitiveness, and diversification.
- Final operational point: Sustain efforts to improve external sector and public finance statistics.

*Source: IMF staff report excerpt for the West African Economic and Monetary Union (WAEMU).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### External and current account developments
- WAEMU’s external current account deficit (including grants) is estimated to have increased by 0.2 percentage points of GDP in 2018 to reach 6.8 percent of GDP.
- Drivers of the 2018 widening:
  - Deterioration of terms-of-trade due to higher global oil prices.
  - Strong petroleum imports.
- Trade balance is estimated to have deteriorated by 0.7 percentage points of GDP in 2018.
- Net income and current transfers would have increased slightly in 2018.
- Projection: current account deficit is projected to decline over the medium-term to reach 5.0 percent of GDP by 2023, reflecting:
  - Successful implementation of fiscal consolidation plans and structural reforms to boost competitiveness.
  - Improved terms of trade.
  - Slowdown of net oil imports with expected increase of production in WAEMU’s oil-producing countries.

### External financing
- Capital transfers and FDI are estimated to have increased slightly by about 0.1 percentage points of GDP in 2018.
- Portfolio inflows would have significantly increased by 1.7 percentage points of GDP in 2018, reflecting Eurobonds issued by Côte d’Ivoire and Senegal in March 2018 of about US$4.3 billion in gross terms.
- External public debt is estimated to have increased in 2018 to reach 33.8 percent of GDP, from 29.6 percent of GDP in 2017, reflecting in part the Eurobond issuances.
- External debt is expected to stabilize at 29.7 percent of GDP in 2023 as fiscal consolidation takes hold and WAEMU sovereigns rebalance financing toward greater recourse to the regional market.

### Reserves adequacy
- International reserves movements:
  - After an increase of CFAF 655 billion (US$1.2 billion) in 2017, international reserves rose by CFAF 1,377 billion (US$2.4 billion) to reach CFAF 8,561 billion (US$14.9 billion) at end-2018.
  - Increase in 2018 reflects Eurobond net proceeds (almost ¾ higher than 2017 Eurobond issuances) and improved compliance with export receipts repatriation requirements.
- Repatriation of export receipts estimated to have increased from 43 percent in 2017 to 56 percent in 2018.
- Reserve coverage:
  - At end-2018, external reserves are estimated to cover 4.3 months of prospective extra-regional imports of goods and services (up from 3.9 months at end-2017).
  - Under the baseline scenario of fiscal consolidation (member states meet the regional fiscal deficit convergence criterion of 3 percent of GDP from 2019 onwards and external competitiveness improves), reserve import cover is projected to reach 4.8 months by 2023.
  - The medium-term projection remains somewhat below the estimated adequate reserve import cover range of 5 months to 8 months for the WAEMU.
- Risks to reserves outlook:
  - Endogenous risks: delayed fiscal adjustment and non-delivery of reforms to boost external competitiveness.
  - Exogenous risks: unusually elevated global policy uncertainty including trade tensions and risk of weaker-than-expected global growth.

### Exchange rate assessment
- The real effective exchange rate (REER) was stable in 2017 and appreciated by 1.9 percent in 2018, partially reflecting the strengthening of the Euro (to which the WAEMU’s CFAF is pegged).
- EBA-based assessment: the external position is moderately weaker than implied by current fundamentals and desirable policy settings; adjustment would be addressed through region-wide fiscal consolidation, structural reforms, and coming on stream of new oil and gas production in Senegal.
- Two EBA approaches:
  - EBA Lite Index REER: shows an undervaluation of 0.5 percent (model does not properly consider the evolution of the REER).
  - EBA Current Account model (staff places more weight): indicates an overvaluation of 5.0 percent and a current account gap of -2.3 percent (with an adjusted current account balance of -6.9 percent of GDP compared to an estimated norm of -4.6 percent of GDP).

### Structural competitiveness
- Competitiveness remains hampered by significant structural constraints measured by Doing Business, Global Competitiveness, Logistics Performance, and Governance Indicators.
- Doing Business:
  - 2019 World Bank Doing Business Report shows regional business climate improved; average WAEMU rank moves up by 4 places between 2018 and 2019, driven mainly by progress in Côte d’Ivoire and Togo.
  - Region kept pace of reforms in starting a business.
  - WAEMU countries still lag in getting electricity, getting credit, registering property, protecting investors, paying taxes, and enforcing contracts.
- Global Competitiveness and perception indicators point to constraints in institutional and legal investor protection, infrastructure, labor skills, and access to finance.
- Logistics Performance Index (LPI):
  - Regional LPI ranking remained unchanged between 2016 and 2018 while comparator countries in Africa and Asia made progress.
- Governance indicators:
  - Scores for government effectiveness, political stability, regulatory quality and rule of law remain weak compared to comparator countries.
  - WAEMU performs relatively well in voice and accountability.

### Authorities’ responses to 2018 policy recommendations (summary)
- Policy Mix
  - 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 — The monetary policy stance remained broadly unchanged in 2018 as external reserves increased on the back of large Eurobond issues by Côte d’Ivoire and Senegal.
- Fiscal Policy Coordination
  - Recommendations: Adhere to budget deficit reduction plans while maintaining public investment; increase tax revenue and improve quality of spending; better control off-budget operations.
  - Authorities’ response: Partially consistent — Aggregate fiscal deficit decreased by 0.5 pp to 3.8 percent of GDP in 2018 and expected to converge to the 3 percent of GDP WAEMU target for 2019; Off-budget operations averaged 1.3 percent of GDP in 2018 from 2.3 percent of GDP in 2017.
- Monetary/Financial sector development
  - Recommendations: Enhance monetary policy effectiveness; continue financial sector reforms; accelerate development of interbank and government debt markets.
  - Authorities’ response: Partially consistent — Regional debt agency coordinating bond issuance through auctions; regional market remains segmented and under-developed; reforms ongoing.
- Financial Regulation and Supervision
  - Recommendations: Speed up financial sector reform; implement prudential regulations including capital standards consistent with Base II/III; strengthen risk-based supervision; avoid regulatory forbearance.
  - Authorities’ response: Partially consistent — June 2017 requirement of CFAF 10 billion minimum capital remains unmet by a few banks; new prudential regulations launched January 2018 and risk-based supervision gearing up; enforcement remains weak; Banking Commission’s new resolution powers not yet operational.
- Structural Reforms/Competitiveness
  - Recommendations: Improve effectiveness of public investments and ease business environment constraints; enhance effectiveness of regional structural funds for cross-border infrastructure.
  - Authorities’ response: Partially consistent — Ease of doing business improved (region’s average rank moved up by 4 places between 2018 and 2019), but WAEMU still lags in non-price competitiveness including institutions, legal framework for investors, transportation and electricity infrastructure (including cross-border projects).

### Key risks (Risk Assessment Matrix highlights)
- Global spillovers
  - Tighter global financial conditions (High likelihood): Low to medium potential impact; increased financing costs, higher regional risk premium; possible higher sovereign debt burden for un-hedged dollar exposures.
  - Weaker-than-expected global growth (Medium likelihood): Medium to high potential impact; could lower trade, investment, financing flows and dampen commodity prices; mixed effects on WAEMU current account depending on oil price movements.
  - Sizeable deviations from baseline energy prices (Medium likelihood): Medium to high potential impact; as net oil importers (except Niger), higher oil prices would deteriorate current accounts and growth; a reversal would have opposite effects.
- Regional risks
  - Political and security risks, including regional spillovers (Medium likelihood): High potential impact; destruction of capital, negative effects on growth and inclusiveness, delays in reforms, increased fiscal and liquidity risks, and higher investor risk aversion.
  - Delay in reforms at country and regional level (Medium likelihood): Medium to high potential impact; could undermine fiscal consolidation, infrastructure investment efficiency, PFM, financial sector safety, and regional integration.
  - Adverse weather conditions (Short- to medium-term likelihood): High potential impact; lower agricultural production, food security risks, decline in growth rates, and additional fiscal costs.
  - Exchange rate pressure in the CEMAC (Low likelihood): High potential impact; pressure on the XAF could have spillover effects on the XOF.

*Annex I. External Sector Assessment*

### Annex IV. Strengthening Tax Coordination to Mobilize Revenue

### Annex IV. Strengthening Tax Coordination to Mobilize Revenue

### Regional tax coordination: scope and current instruments
- WAEMU member countries have coordinated domestic tax policies for over two decades covering most tax revenue sources—including CIT, portfolio income taxation, VAT, excise taxes, and custom duties—and supporting the objectives of the 1994 WAEMU Treaty of reducing distortions to intra-community trade and mobilizing additional tax revenue.
- Coordination practices also include preparation and publication of tax expenditures according to a common framework.
- Coordination has at times been used to obtain supranational endorsement of preexisting national policies that may not always be consistent with best practices (example: the systematic recourse to reduced VAT rates).

- Corporate Income Tax (CIT):
  - WAEMU’s CIT directives define a standard tax base and allow a tax rate between 25 percent and 30 percent.
  - The absence of constraints on members’ ability to grant investment incentives (investment codes, sectoral codes, free zones and taxpayer agreements) significantly weakens the benefits from current coordination of CIT.

- Portfolio income taxation:
  - A directive governs the taxation of portfolio income, with rates for interest, dividends, and capital gains ranging from 0-15 percent based on different criteria.
  - Simplifying and improving the neutrality of portfolio income taxation is identified as a priority reform area.

- Indirect taxes (VAT and excises):
  - Regional VAT directives provide a comprehensive list of mandatory exemptions (e.g. education and health services) and allow a standard rate between 15-20 percent and a reduced rate between 5-10 percent on certain goods and services.
  - Excise tax directives contemplate mandatory taxation of tobacco, alcohol and non-alcoholic beverages, and elective taxation within a limitative list of other goods.
  - Since 2015, the WAEMU aligned its common external tariff policy with the ECOWAS; it now contains five categories with rates ranging from 0 percent (basic necessities) to 35 percent (final consumption).

### Gaps, risks, and implementation challenges
- Regional instruments have sometimes legitimized national practices rather than guiding members toward better policy outcomes; revisions to existing regional tax directives are needed to support revenue mobilization.
- Key gap: lack of regional constraints on investment incentives (tax holidays, VAT exemptions), and sectoral exemptions (e.g., extractives and telecoms) that undermine coordinated CIT outcomes.
- Effective implementation is weak: member countries tend to follow visible parameters (tax rates) but diverge on tax base calculations, creating a gap between de jure and de facto coordination.
- Surveillance weaknesses: calculation of tax bases is difficult to apprehend without an effective and credible surveillance structure, contributing to coordination gaps.

### Policy recommendations to broaden and harmonize tax cooperation
- Reorient regional directives to guide members toward better policy outcomes rather than endorse existing national practices.
- Minimum regional framework actions:
  - Provide a negative list precluding certain incentives (e.g., tax holidays and VAT exemptions) and exclude certain sectors (e.g., extractives and telecoms) from receiving any type of incentive.
- Other regional actions to broaden and harmonize tax cooperation while supporting revenue mobilization:
  - Strengthen anti-avoidance rules (e.g., interest deductions and indirect transfers).
  - Simplify and improve the neutrality of portfolio income taxation.
  - Reduce the number of VAT exemptions and make them optional, while using as necessary—but only temporarily—the reduced rate to facilitate a transition towards full taxation.
  - Reassess the adequacy of excise tax rates on alcohol and petroleum products.
  - Strengthen requirements on tax expenditure reporting and analysis.
  - Consider coordinated actions to develop real estate taxes as a revenue source for local governments.

### Implementation and institutional recommendations
- Strengthen surveillance and enforcement to close the gap between de jure and de facto coordination, including more effective and credible monitoring of tax base calculations.
- Harmonize national tax data and enhance tax coordination to improve the effectiveness of the WAEMU Commission’s surveillance functions.
- Use fuller debt sustainability analyses to strengthen assessments of countries’ debt sustainability in the context of discussions on the debt ceiling criterion.

### Contextual economic and policy priorities (regional statement highlights)
- Recent developments and outlook:
  - WAEMU remains one of the fastest growing regions worldwide, with growth rate again exceeding 6 percent in 2018, owing mainly to robust domestic demand.
  - Inflation remains low.
  - Fiscal consolidation efforts have helped maintain fiscal deficits on the path to meeting the convergence criterion of 3 percent of GDP by next year.
  - Authorities estimate external reserves at 4.8 months of imports of goods and services at end-2018; staff’s estimate is 4.3 months of import coverage.
  - Since 2015 alignment of common external tariff with ECOWAS resulted in rates from 0 percent to 35 percent.

- Risks and vulnerabilities:
  - Public debt ratios have risen significantly in recent years due to sizeable investment programs, quasi-fiscal operations of SOEs and realization of contingent liabilities.
  - External vulnerabilities from volatile terms of trade, notably movements of export commodity and oil prices, may put pressure on external buffers.
  - Banking sector risks: concentration, credit and liquidity risks remain concerns despite reforms and stronger capital ratios under Basel II/III.

- Policy and reform priorities:
  - Continue fiscal consolidation to meet the 3 percent of GDP deficit target by 2019 while avoiding excessive capital spending cuts and allowing space for security-related spending consistent with consolidation schedules.
  - Enhance domestic revenue mobilization, notably tax revenue, with Fund assistance.
  - Strengthen monetary policy transmission and maintain a firm monetary policy stance; promote deepening of secondary debt and interbank markets.
  - Enforce Basel II/III-aligned prudential norms; monitor and resolve ailing banks; consider recapitalization of public banks with external support.
  - Advance financial inclusion, develop financial markets (including addressing security market fragmentation), and implement regional gender strategy and investments in education and health.

- Medium-term outlook:
  - Growth projected to stay above 6 percent.
  - External current account imbalances as percentage of GDP expected to narrow over the next few years.
  - External buffers are expected to strengthen with international reserves gradually moving closer to the 5-months of import coverage.

*Source: Annex IV. Strengthening Tax Coordination to Mobilize Revenue; Statement by WAEMU authorities, March 18, 2019.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1wauea2019001.pdf_