## 1wauea2019002

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### Overview of the WAEMU Regional Surveillance Framework
- Purpose: Ensure sustainability of national fiscal policies and consistency with the common monetary policy after the 1994 devaluation of the CFA Franc; embodied in a “Growth, Stability, Convergence and Solidarity Pact” and revised in 2015.
- Core convergence criterion:
  - Central government overall fiscal deficit ceiling: 3 percent of GDP (key convergence criterion introduced in 2015).
- Other “first order” convergence criteria:
  - Nominal debt stock ceiling: 70 percent of GDP.
  - Annual average inflation ceiling: 3 percent.
- “Second order” convergence criteria (indicative):
  - Government wage bill to tax revenue: cannot exceed 35 percent.
  - Government tax revenue to GDP: at least 20 percent.
- Transition and institutional arrangements:
  - Convergence phase intended to end in 2019; may be extended by one year if, by end-2019, at least half of member countries accounting for at least 65 percent of regional GDP have not sustainably met all “first order” criteria.
  - Shift to a structural deficit concept during the stability phase is foreseen but lacks a specified methodology.
  - Primary enforcement: WAEMU’s Council of Ministers based on WAEMU Commission recommendations; Commission prepares semi-annual reports (June and December).
  - National Economic Policy Committees report quarterly; joint secretariat (WAEMU Commission, BCEAO, BOAD) prepares surveillance documents.
- Corrective provisions:
  - Article 74 of the WAEMU Modified Treaty foresees declarative or financial sanctions (publication of economic statement, BOAD financing review, suspension of WAEMU financial support) for failure to execute corrective measures for excessive fiscal deficits; these provisions have never been triggered.
- Interaction with IMF arrangements:
  - 2015 reform did not obviate the need for Fund arrangements; member countries continue to rely on Fund-supported programs as an additional disciplining device.
  - Exception: Niger aims at reducing its fiscal deficit to 3 percent of GDP under its Fund-supported program by 2020.

### Recent Fiscal Performance and Government Debt Dynamics
- Aggregate fiscal deficit path and slippages:
  - Projected at 2015 reform: decline from 3.8 percent of GDP in 2015 to 2.9 percent of GDP by 2019.
  - Actual trajectory: increased to 4.4 percent of GDP in 2016, remained close to this level in 2017, and projected to decline in 2018 back to its 2015 level.
  - Consequence: adjustment required in 2019 to meet 3 percent of GDP convergence criterion is much greater than initially envisaged.
- Deviations from initial convergence path (2015–2018):
  - Average annual deviations exceeded 0.5 percentage point of GDP.
  - Country-specific average annual deviations:
    - Guinea Bissau: 2.9 percentage points of GDP.
    - Niger: 2.4 percentage points of GDP.
    - Benin: 1.9 percentage points of GDP.
  - Senegal: converged faster than initially envisaged.
  - Togo: large undershooting in 2015 and 2016 followed by significant consolidation in 2017 and 2018.
- Domestic revenue mobilization shortfalls:
  - 2015 projections for tax revenue: 16.5 percent of GDP in 2015 → 17.7 percent of GDP in 2018 → 18 percent of GDP by 2019.
  - Actual/projection divergence: tax-to-GDP ratio remained virtually flat 2015–2018 and projected to increase to only 17 percent of GDP by 2019.
  - Aggregate tax revenue for 2018 estimated 1.3 percentage points of GDP less than anticipated in early 2015.
  - Implication: better tax mobilization would have materially reduced 2018 deficit or provided space for development spending while meeting the 3 percent criterion sooner.
- Public debt outcomes:
  - Expectations in 2015: public debt burden stabilize at about 40 percent of GDP.
  - Actual outcome: aggregate public debt increased by more than 10 percentage points of GDP between 2015 and 2018.
  - NPV of projected 2018 public debt heavier in 2018 than anticipated in 2015 for all WAEMU members (external and total debt).
  - Consequence: room for maneuver within public debt sustainability thresholds significantly reduced.
  - Country-specific risk: Togo shifted to a high overall risk of debt distress since 2015; fiscal consolidation from 2017 under Fund-supported program has put Togo’s debt-to-GDP ratio on a downward trajectory.
  - Debt service pressure: share of interest payments on public debt in government revenue was 6.7 in 2015 and estimated at 9.1 percent in 2018.

### Drivers of Public Debt Increase (2013–18) and Residual Factors
- Contributions to public debt increase (2013–18):
  - Fiscal deficit: annual average of 3.8 percent of GDP.
  - Government guarantees on SOE debt: annual average of 0.5 percent of GDP.
  - Residual factors: 1.2 percent of GDP annually.
- Nature of residual factors:
  - Represent materialized risks or costs that become central government responsibility but were not provisioned above-the-line in budgets.
  - Often stem from activities outside central government fiscal perimeter (SOEs, off-budget/extrabudgetary funds) that migrate to central government debt.
- Common channels and cross-country variation:
  - Channels: accumulation of SOE deficits from quasi-fiscal operations, non–cost-recovery pricing, recourse to below-the-line operations.
  - Average annual residuals 2013–18 ranged from -1.4 percent of GDP to 2.5 percent of GDP across WAEMU members.
  - Residuals ≥ 1⅟2 percent of GDP in: Benin, Côte d’Ivoire, Guinea-Bissau, and Togo.
  - Mitigating factors: privatizations (Burkina Faso, Côte d’Ivoire, Mali, Senegal), debt restructuring (Guinea-Bissau, Mali, Senegal), reimbursement of arrears (Côte d’Ivoire, Burkina Faso, Mali).

### Debt-Stabilizing Fiscal Balance: Estimates and Scenarios
- Baseline (WAEMU data 2013–2018) assumptions:
  - Real GDP growth: 6.4 percent.
  - Residual below-the-line operations: 1.2 percentage point of GDP a year.
  - Average interest bill: 1.3 percent of GDP.
- Estimated balances to stabilize end-2018 debt:
  - Primary fiscal balance to stabilize public debt at end-2018 level: -0.9 percent of GDP (given 6.4 percent growth and 1.2 pp residuals).
  - Debt-stabilizing aggregate overall fiscal deficit of central governments: 2.1 percent of GDP (accounting for 1.3 percent interest bill).
- Alternative comparisons and implications:
  - If real GDP grows at 6.4 percent and central government covers all debt-creating operations, an aggregate overall fiscal deficit of 3.4 percent of GDP would stabilize debt at end-2018 level.
  - If residual below-the-line operations average 1.2 percent of GDP a year (excluding guarantees), an aggregate overall fiscal deficit of 3 percent of GDP would only stabilize public debt if average annual real GDP growth rose to 8.3 percent.
- Fund staff baseline projection (2019-23):
  - Average annual real GDP growth projected at 6.6 percent, assuming effective fiscal consolidation from 2019 and implementation of pro-growth structural reforms.
- Sensitivity examples:
  - At 5.5 percent growth with residuals of 1.2 percent of GDP a year continued, a 3 percent aggregate overall fiscal deficit would decline to 1.7 percent of GDP as the debt-stabilizing deficit.
  - At 5.5 percent growth with no below-the-line operations, the debt-stabilizing deficit would be 2.9 percent of GDP.

### Policy Options to Better Ensure Public Debt Sustainability
- Observing the Fiscal Deficit Criterion:
  - Implement fiscal consolidation plans toward the 3 percent of GDP criterion from 2019 onward.
  - Improve domestic revenue mobilization: analysis suggests potential additional tax revenues of 3½-5 percent of GDP for the sub-Saharan African region.
  - Regional coordination: revise regional tax directives to curb tax incentives and reduce tax expenditures; harmonize national tax data and enforce directives to improve WAEMU Commission surveillance.
  - Spending measures:
    - Bring wage bills within 35 percent of domestic revenue (WAEMU second-order criterion).
    - Better target subsidies and social assistance.
    - Improve public investment efficiency.
  - Consider transposing regional fiscal deficit ceiling into national legal and budgetary frameworks to increase ownership.
- Structural Fiscal Rule Considerations:
  - Shift to a structural fiscal deficit rule could reduce procyclicality but faces practical challenges: estimating output gaps and tax elasticities, member-country diversity, and data limitations.
  - Recommendation: retain current nominal fiscal deficit rule as a maximum deficit, even in a stability phase.
- Containing Below-the-Line Operations and PFM Reforms:
  - Accelerate public financial management reforms to:
    - Reduce accumulation of budgetary arrears.
    - Eliminate pre-financing arrangements.
    - Improve monitoring, management and accountability of banks and SOEs.
  - Ensure cost-recovery pricing for SOE services (fuel, electricity) to avoid loss accumulation and arrears covered by public debt issuance.
  - Pay attention to contingent liabilities, including increased PPPs.
  - Recognize limited medium-term scope for mitigating factors (privatizations, restructurings).

### WAEMU Surveillance Framework, Debt Criterion, and Operational Recommendations
- PFM directives (2009) objectives:
  - Harmonize fiscal statistics presentation (GFSM 2001), strengthen results-based budgeting, and internal financial controls.
  - Key directives include Transparency Code, framework for budget laws, General Regulations of public accounting (TSA governance), common budget nomenclature, accountancy plan, and TOFE on fiscal statistics presentation.
- Implementation status and incentives:
  - Transposition delays ranged from 1 year to 5 years (as of May 2016); heterogeneous progress across countries.
  - No penalties for missing PFM directive implementation timetables.
  - Suggested incentives: public dissemination of progress monitoring reports, peer-to-peer training, explicit references to fiscal risks in transparency directive.
- Debt convergence criterion and DSA recommendations:
  - Current nominal debt ceiling: 70 percent of GDP — set when most WAEMU countries were in debt distress.
  - Argument: 70 percent of GDP is too high to prevent falling back into high risk of debt distress; DSA-based nominal equivalents for NPV thresholds are often significantly lower than 70 percent.
  - Lowering the debt convergence criterion from 70 percent to 60 percent of GDP would be more consistent with preventing higher debt distress risk for most WAEMU members.
  - Operational steps if lowered:
    - Set time horizon for countries exceeding revised ceiling to comply.
    - Require Medium Term Debt Strategies (MTDS) consistent with commitment and limit fiscal deficits sufficiently below 3 percent of GDP.
  - Complement debt ceiling with mandatory annual WAEMU Commission Debt Sustainability Analyses (DSAs), including stock-flow analysis to integrate residual, below-the-line operations into surveillance.
- Convergence criteria adjustments:
  - Tax revenue criterion (20 percent of GDP): recommend greater potency, harmonized reporting, defined compliance horizon, and consider elevating to first-order status.
  - Inflation criterion: consider making it “second order” given limited relevance in a fixed peg currency union.
  - Strengthen member countries’ medium-term convergence plans with systematic quantitative sensitivity analysis and explanation of deviations.

### Empirical DSA Comparisons (selected values preserved)
- Selected country entries (percent of GDP unless otherwise indicated):
  - BEN: Grant Element 16.3; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 64; Face Value 70.
  - BFA: Grant Element 20.2; Debt Carrying Capacity Strong; DSF Benchmark of Total PPGD/GDP 70; Present Value 84; Face Value 70.
  - CIV: Grant Element 12.4; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 62; Face Value 70.
  - GNB: Grant Element 14.1; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 63; Face Value 70.
  - MLI: Grant Element 30.5; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 72; Face Value 70.
  - NER: Grant Element 26.4; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 70; Face Value 70.
  - SEN: Grant Element 10.4; Debt Carrying Capacity Strong; DSF Benchmark of Total PPGD/GDP 70; Present Value 77; Face Value 70.
  - TGO: Grant Element 6.9; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 59; Face Value 70.

### PFM Reform Implementation Highlights and Annex Findings
- TSA and Treasury modernization:
  - Senegal and Côte d’Ivoire: relatively more advanced.
  - Burkina Faso, Niger, and Togo: earlier stages.
  - Overall: implementation lagging; multiplicity of government accounts and incomplete IT interfaces persist; manual reconciliation; risk of continued expenditure arrears.
- SOE monitoring and accountability examples:
  - Benin: presents financial position of SOEs in 2019 budget; performance contracts; next steps include audit of arrears and law improving SOE governance.
  - Burkina Faso: automatic fuel price adjustment implemented (November 2018); database of sovereign guarantees and PPPs; restrict PPPs to annual quantitative ceiling; plans TSA adoption and IT compatibility with BCEAO.
  - Côte d’Ivoire: 2019 budget includes fiscal risk analysis; extend performance contracts; integrate PPPs into public investment program; interface Integrated PFM system with accounting software.
  - Guinea Bissau: audited main SOEs (2017); prepares monthly cash-flow projections; reduced number of accounts though no TSA yet.
  - Mali, Niger, Senegal, Togo: country-specific reform actions detailed, including TSA steps, monitoring arrears, budget presentation reforms, and privatization strategies.

### Trade Performance, Competitiveness, and Potential Gains from Reforms (excerpted findings)
- Context and methodology:
  - Gravity model estimated with panel data for 169 countries over 1980-2017; data source: DOTS.
- WAEMU trade intensity vs peers:
  - WAEMU relative trade performance: 2 times higher than CEMAC.
  - Almost 2 times lower than EAC.
  - Almost 16 times lower than SACU.
- Price competitiveness:
  - Bringing WAEMU aggregate price levels to comparator levels would increase trade flows by 1-2 percent.
  - REER (2008-17): WAEMU experienced on average a slight depreciation of about 0.4 percent.
- Nonprice competitiveness estimated gains if gaps closed (all else equal):
  - Institutions (investor/property protections): +6 percent (African peers), +8 percent (Asian peers).
  - Infrastructure quality: +36 percent (African peers), +55 percent (Asian peers).
  - Education quality: +10 percent (African peers), +16 percent (Asian peers).
  - Customs/procedures: about +2 percent.
  - Labor market capacity to retain talent: +13 percent (African peers), +25 percent (Asian peers).
  - Financial market development (access to credit): +42 percent (Asian peers).
- Policy implications:
  - Infrastructure improvements may require collective regional action and greater domestic revenue mobilization.
  - Easing access to credit should be accompanied by measures to insure banking system soundness (CAR and NPLs correlations).

### Poverty, Inequality, Human Capital and Policy Implications (excerpted findings)
- Poverty and income distribution:
  - Average poverty headcount ratio at US$ 1.90 per day decreased by 19.2 percentage points since early 1990s.
  - Current poverty levels: about 42 percent < US$ 1.90/day; about 75 percent < US$ 3.20/day; about 90 percent < US$ 5.20/day.
  - Absolute number in extreme poverty increased by 16.5 percent (6.4 million people) compared to early 1990s; about 45 million out of 102 million live in extreme poverty.
  - Urban poverty: 27.5 percent; rural poverty: 54.0 percent.
- Human capital and health:
  - WAEMU ranks at bottom worldwide on World Bank Human Capital Index; Mali and Niger among the bottom three.
  - Education: average years vary from <6 years in Mali and Niger to >9 years in Benin and Togo; quality-adjusted education much lower.
  - Health: under-five mortality reduced by half since 1990; examples: Mali >10 deaths per 100 children; Senegal <5 deaths per 100 children.
  - Stunting: 17 percent (Senegal) to 42 percent (Niger).
  - Maternal death ratios declined to below 5 percent; adolescent fertility among highest worldwide.
  - Health expenditures among the lowest worldwide; WAEMU countries among 77 countries spending less than US$ 100 per year on health per capita.
- Financial inclusion and inequality:
  - Account ownership ranges from 9.5 percent (Niger) to 34.1 percent (Togo), compared to almost 37 percent (African benchmarks) and above 40 percent (Asian benchmarks).
  - Gender gaps: men almost three times as likely to own an account as women in Mali; almost twice in Côte d’Ivoire and Benin.
  - Borrowing from financial institutions: <10 percent of population in all WAEMU countries.
- Growth and distributional implications:
  - Bringing WAEMU average income inequality to benchmark levels could increase annual real GDP per capita growth by about 0.2-1.4 percentage points.
  - Closing gender inequality and female legal equity gaps could boost annual per capita income growth by about 0.2-0.5 percentage points.
  - Differences in years of schooling could explain about 0.3-0.5 percentage points of WAEMU income per capita growth shortfall versus benchmarks.
- Policy recommendations (national and regional):
  - National: equalize legal rights and enforcement across genders; invest in education and health; target subsidies and introduce well-targeted social transfers; increase domestic revenue mobilization.
  - Regional: implement regional gender strategy with monitoring by WAEMU Commission; leverage structural funds for regional integration and agriculture; monitor efficiency of education and social spending and develop social spending indicators.

*Source: 1wauea2019002*

### References _________________________________________________________________________________ 21

### The WAEMU Surveillance Framework: Reforms to Foster Public Debt Sustainability

### Overview of the WAEMU Regional Surveillance Framework
- Purpose: Ensure sustainability of national fiscal policies and consistency with the common monetary policy after the 1994 devaluation of the CFA Franc; embodied in a “Growth, Stability, Convergence and Solidarity Pact” and revised in 2015.
- Core convergence criterion:
  - Central government overall fiscal deficit ceiling: 3 percent of GDP (key convergence criterion introduced in 2015).
- Other “first order” convergence criteria:
  - Nominal debt stock ceiling: 70 percent of GDP.
  - Annual average inflation ceiling: 3 percent.
- “Second order” convergence criteria (indicative):
  - Government wage bill to tax revenue: cannot exceed 35 percent.
  - Government tax revenue to GDP: at least 20 percent.
- Transition phases and structural concept:
  - Convergence phase intended to end in 2019; may be extended by one year if, by end-2019, at least half of member countries accounting for at least 65 percent of regional GDP have not sustainably met all “first order” criteria.
  - Framework provides for a shift to a structural deficit concept during the stability phase, but a specific methodology has not yet been specified.
- Institutional enforcement:
  - Primary enforcement entrusted to the WAEMU’s Council of Ministers based on recommendations from the WAEMU Commission.
  - WAEMU Commission prepares semi-annual reports (June and December) assessing macroeconomic performance and forward-looking convergence plans.
  - National Economic Policy Committees report quarterly to the Commission; a joint secretariat (WAEMU Commission, BCEAO, BOAD) prepares surveillance documents.
- Corrective provisions:
  - Article 74 of the WAEMU Modified Treaty foresees declarative or financial sanctions (publication of economic statement, BOAD financing review, suspension of WAEMU financial support) for failure to execute corrective measures for excessive fiscal deficits.
  - These corrective provisions have never been triggered.
- Interaction with IMF arrangements:
  - The 2015 reform has not obviated the need for Fund arrangements; member countries continue to rely on Fund-supported programs as an additional disciplining device.
  - Exception: Niger aims at reducing its fiscal deficit to 3 percent of GDP under its Fund-supported program by 2020.

### Recent Fiscal Performance and Government Debt Dynamics
- Aggregate fiscal deficit path and slippages:
  - At the time of the 2015 reform, the aggregate overall fiscal deficit was projected to decline from 3.8 percent of GDP in 2015 to 2.9 percent of GDP by 2019.
  - Actual trajectory: the aggregate fiscal deficit increased to 4.4 percent of GDP in 2016, remained close to this level in 2017, and was projected to decline in 2018 back to its 2015 level.
  - Result: the adjustment required in 2019 to meet the 3 percent of GDP convergence criterion is much greater than initially envisaged.
- Deviations from initial convergence path:
  - Deviations relative to the initially envisaged fiscal convergence path averaged more than half a percentage point of GDP a year over 2015–2018.
  - Country-specific average annual deviations (2015–2018):
    - Guinea Bissau: 2.9 percentage points of GDP.
    - Niger: 2.4 percentage points of GDP.
    - Benin: 1.9 percentage points of GDP.
  - Senegal: converged faster than initially envisaged.
  - Togo: large undershooting in 2015 and 2016 followed by significant consolidation in 2017 and 2018.
- Domestic revenue mobilization shortfalls:
  - 2015 projections for tax revenue: increase from 16.5 percent of GDP in 2015 to 17.7 percent of GDP in 2018 and 18 percent of GDP by 2019.
  - Actual/projection divergence: average tax to GDP ratio remained virtually flat from 2015 to 2018 and was projected to increase to only 17 percent of GDP by 2019.
  - The level of aggregate tax revenue estimated for 2018 is 1.3 percentage points of GDP less than anticipated in early 2015.
  - Implication: better tax revenue mobilization would have materially reduced the aggregate deficit in 2018 or provided more space for development spending while meeting the 3 percent criterion sooner.
- Public debt outcomes:
  - Expectations in 2015: public debt burden in the WAEMU would stabilize at about 40 percent of GDP.
  - Actual outcome: WAEMU’s aggregate public debt increased by more than 10 percentage points of GDP between 2015 and 2018.
  - Net present value (NPV) of projected 2018 public debt: heavier in 2018 than anticipated in 2015 for all WAEMU member countries (both external and total debt).
  - Consequence: room for maneuver within public debt sustainability thresholds has been significantly reduced.
  - Country-specific risk outcome: Togo shifted to a high overall risk of debt distress since 2015; however, fiscal consolidation initiated in 2017 under its Fund-supported program has put Togo’s debt to GDP ratio on a downward trajectory.
  - Debt service pressure: share of interest payments on public debt in government revenue was 6.7 in 2015 and estimated at 9.1 percent in 2018.

### Implications and Reform Considerations Highlighted in the Text
- Need to broaden surveillance focus:
  - Beyond compliance with the 3 percent fiscal deficit convergence criterion, reforms of WAEMU’s surveillance framework may be required to more effectively control all sources of debt accumulation and ensure debt sustainability.
- Enforcement and credibility:
  - Sanctions under the framework remain unclearly defined and have not been applied, limiting the framework’s disciplining capacity.
  - Fund-supported programs continue to play an important disciplining and signaling role for member countries.
- Key operational gaps:
  - Structural deficit concept for the stability phase is specified in principle but lacks an operational methodology.
  - Some reporting and publication requirements (e.g., national convergence plans) appear not fully observed in the public domain.

*Prepared by Alain Féler and Dominique Simard; March 1, 2019*

### 15. In recent years, budget deficits have not been the only fiscal driver of rising public

### 1wauea2019002 - 15. In recent years, budget deficits have not been the only fiscal driver of rising public

### Drivers of Public Debt Increase (2013–18)
- Fiscal deficit contributed an annual average of 3.8 percent of GDP to public debt over 2013-18.
- Government guarantees on the debt of state-owned enterprises (SOE) contributed an average of 0.5 percent of GDP per year.
- Residual factors accounted for 1.2 percent of GDP annually to the increase in the public debt ratio to GDP.
- Government guarantees on SOE debt increase public debt but do not generate a financing need per se for the central government; residual factors do impact government financing needs.

### Nature and Mechanisms of Residual Factors
- Residual factors represent materialized risks or costs that become the government’s responsibility but were not provisioned by a corresponding budgetary allocation and were not recorded above-the-line in the budget and associated documentation.
- Residual factors often stem from activities beyond the central government’s fiscal perimeter (e.g., SOEs, off-budget and extrabudgetary funds) that migrate to central government debt.
- Common channels:
  - Accumulation of deficits by SOEs due to quasi-fiscal operations and non–cost-recovery pricing of services, eventually covered via issuance of central government debt.
  - Recourse to below-the-line operations when central government resources to cover deficits are not anticipated in the budget.

### Cross-country Variation in Residuals (Average annual residuals, 2013–18)
- Average annual residuals ranged from -1.4 percent of GDP to 2.5 percent of GDP across WAEMU member countries.
- Residuals were at or above 1⅟2 percent of GDP in: Benin, Côte d’Ivoire, Guinea-Bissau, and Togo.
- Drivers of cross-country differences include:
  - Budgetary arrears accumulation or repayment.
  - Recourse to pre-financing arrangement practices (Benin, Togo).
  - Recapitalization of SOEs to cover historic operational losses (Burkina Faso).
  - Issuance of government guarantees (Guinea-Bissau).
- Factors that mitigated public debt accumulation: privatizations (Burkina Faso, Côte d’Ivoire, Mali, Senegal), public debt restructuring (Guinea-Bissau, Mali, Senegal), and reimbursement of budgetary arrears (Côte d’Ivoire, Burkina Faso, Mali).

### Debt-Stabilizing Fiscal Balance: Estimates and Scenarios
- Under current fiscal reporting and budgetary practices:
  - An aggregate fiscal deficit of 3 percent of GDP would only stabilize the public debt burden if there are no concomitant below-the-line operations.
- Debt-stabilizing primary fiscal balance estimate (based on WAEMU data for 2013-2018):
  - Primary fiscal balance to stabilize public debt at its end-2018 level: -0.9 percent of GDP, assuming real GDP growth continues at 6.4 percent and residual below-the-line operations continue to add 1.2 percentage point of GDP a year to public debt dynamics.
  - Debt-stabilizing aggregate overall fiscal deficit of central governments: 2.1 percent of GDP, taking into account an average interest bill of 1.3 percent of GDP.
  - Conversely, if real GDP grows at 6.4 percent a year, an aggregate fiscal deficit of 3.4 percent of GDP, but covering all debt-creating operations of central government, would stabilize the debt burden at its end-2018 level.
- Alternative scenario to accommodate residual operations:
  - If residual below-the-line operations average 1.2 percent of GDP a year (excluding guarantees), an aggregate overall fiscal deficit of 3 percent of GDP would only stabilize public debt if average annual real GDP growth rose to 8.3 percent.
- Fund staff baseline projection (2019-23):
  - Average annual real GDP growth projected at 6.6 percent, assuming from 2019 onward effective fiscal consolidation to meet WAEMU’s key convergence criterion and effective implementation of pro-growth structural reforms.
- Sensitivity examples:
  - A 3 percent aggregate overall fiscal deficit would decline to 1.7 percent of GDP as the debt-stabilizing deficit if average GDP growth were 5.5 percent and residual operations of 1.2 percent of GDP a year continued.
  - Alternatively, the debt-stabilizing deficit would be 2.9 percent of GDP with no below-the-line operations at 5.5 percent growth (or under the relevant comparison presented).

### Policy Options to Better Ensure Public Debt Sustainability
- Observing the Fiscal Deficit Criterion
  - Member countries must effectively implement fiscal consolidation plans toward WAEMU’s key convergence criterion from 2019 onward.
  - More decisive progress to improve domestic revenue mobilization is essential to make room for developmental spending even while consolidating: analysis suggests a potential for an additional tax revenues of 3½-5 percent of GDP for the sub-Saharan African region.
  - Regional coordination roles:
    - Revisions of regional tax directives should prioritize curbing use of tax incentives through investment and sectoral codes and reducing tax expenditures.
    - Better implementation by national authorities of regional directives and harmonization of national tax data are critical to improve WAEMU Commission surveillance.
  - Spending measures:
    - Bring wage bills within 35 percent of domestic revenue (WAEMU second-order convergence criterion).
    - Better target subsidies and social assistance to protect the most vulnerable.
    - Improve efficiency of public investment.
  - To increase ownership by member countries, the regional fiscal deficit ceiling could be transposed into national legal and budgetary frameworks.

- Structural Fiscal Rule Considerations
  - A shift to a structural fiscal deficit rule could reduce procyclicality but would be difficult to implement in the foreseeable future due to challenges in reliably estimating output gaps and tax elasticities, compounded by member-country diversity and data limitations.
  - Even in a stability phase, retaining the current nominal fiscal deficit rule as a maximum deficit may be preferable.

- Containing Below-the-Line Operations and PFM Reforms
  - Effective fiscal consolidation must be accompanied by accelerated implementation of public financial management (PFM) reforms aimed at:
    - Reducing the risk of accumulation of budgetary arrears.
    - Eliminating recourse to pre-financing arrangements.
    - Improving monitoring, management and accountability of banks and SOEs.
  - Ensure cost-recovery prices for services provided by SOEs (including fuel and electricity) to avoid accumulation of losses and arrears that would be covered through public debt issuance.
  - Pay significant attention to contingent liabilities, including increased recourse to PPPs.
  - Recognize that medium-term scope for mitigating factors (privatizations, public debt restructurings) may be limited.

### WAEMU Surveillance Framework and PFM Directives (2009)
- The 2009 WAEMU Directives aimed to harmonize fiscal statistics presentation (GFSM 2001), strengthen accountability through results-based budgeting, and strengthen internal financial controls.
- Key elements:
  - Minister of Finance responsible for subjecting budgetary credit to the availability of budgetary resources.
  - Recommendation that the budget document include the consolidated financial position of local governments, social protection entities, and SOEs.
  - Enhanced role for the Court of Accounts to assess internal control and PFM framework, with the power to set penalties for mismanagement.
- Selected directives:
  - Directive no. 01/2009/CM/UEMOA on the Transparency Code.
  - Directive no. 06/2009/CM/UEMOA LOLF on the framework for budget laws (program-based approach, budget buffers, accountability against performance indicators).
  - Directive no. 07/2009/CM/UEMOA RGCP on General Regulations of public accounting (governs the Treasury Single Account).
  - Directive no. 08/2009/CM/UEMOA NBE on a common budget nomenclature.
  - Directive no. 09/2009/CM/UEMOA PCE on the accountancy plan for reporting and financial statements.
  - Directive no. 10/2009/CM/UEMOA TOFE on presentation of fiscal statistics according to the GFSM.

*Source: 1wauea2019002 - 15. In recent years, budget deficits have not been the only fiscal driver of rising public*

### 2001. It recommends extending the coverage of fiscal accounts to public entities and extrabudgetary

### 2001. It recommends extending the coverage of fiscal accounts to public entities and extrabudgetary funds.

### Implementation of WAEMU directives on PFM reforms
- Transposition delays by member countries ranged from 1 year to 5 years (as of May 2016).
- Heterogeneous progress across PFM areas:
  - Presentation of fiscal accounts: relatively advanced overall, though three smaller countries need much improvement.
  - Adoption of laws to improve internal expenditure controls and transparency of accounts: sluggish across countries; three countries are still missing a Court of Accounts.
  - Transposition of directives enhancing accountability in budgetary execution: weak.
- Recommendation: extend coverage of fiscal accounts to SOEs and extra-budgetary funds through full implementation of GFSM 2001 as outlined in the directive on fiscal statistics.

### Surveillance Framework — incentives and monitoring
- No penalties exist for member countries that miss the timetable for implementing regional PFM directives.
- Suggested incentives to accelerate reforms:
  - More widespread public dissemination of the recurrent progress monitoring report instituted by the WAEMU’s Fiscal Commission in 2015, combined with peer-to-peer training by matching relatively more advanced with relatively delayed countries.
  - Explicit references to fiscal risks and their monitoring in the Directive on transparency (as done in the CEMAC) to enable the WAEMU Commission to conduct regional fiscal risk analysis and inform the WAEMU Council of Ministers.
- Building blocks WAEMU Council of Ministers could stress to contain residual drivers of public debt:
  - Fully adopting the directives on accounting to foster proper Information Technology systems and a fully functioning and integrated Treasury Single Account (TSA).
  - Including SOEs and extra-budgetary funds in fiscal accounts through full implementation of GFSM 2001.
  - Adopting the directive on accountability to strengthen implementation, signature and monitoring of performance contracts for PPPs and SOEs.

### Debt convergence criterion and debt sustainability
- Current regional debt ceiling: 70 percent of GDP.
  - The ceiling was set when most WAEMU countries were in debt distress prompting HIPC and IADM relief.
  - All WAEMU member countries had benefitted from substantial debt relief by 2012.
- Arguments for lowering the convergence criterion:
  - A nominal debt ceiling of 70 percent of GDP is currently too high to prevent member countries from falling back into a high risk of debt distress.
  - Based on current levels of concessional borrowing in latest DSAs, nominal equivalents of DSA thresholds for the NPV of public debt are significantly lower than 70 percent for most WAEMU countries.
  - Lowering the debt convergence from 70 percent to 60 percent of GDP would be more consistent with preventing most WAEMU member countries from falling into higher risk of public debt distress.
  - As non-concessional borrowing share grows, the threshold for risk of debt distress would decline ceteris paribus.
- Operational recommendations if ceiling is lowered:
  - Set a specific time horizon for countries whose debt burden exceeds the revised ceiling to become compliant.
  - Require countries to design Medium Term Debt Strategies (MTDS) consistent with the commitment and limit fiscal deficits sufficiently below the 3 percent of GDP regional ceiling (example: Togo).

### Complementing the debt ceiling with DSAs
- The current debt convergence criterion is narrow: it does not consider degree of debt concessionality, currency denomination, or liquidity considerations.
- Recommendation: mandate the WAEMU Commission to conduct yearly Debt Sustainability Analyses (DSAs) including stock-flow analysis to integrate residual, below-the-line operations into surveillance.

### Convergence criteria and plans
- Tax revenue convergence criterion: current threshold is 20 percent of GDP.
  - Recommendation: give greater potency to the tax revenue criterion, harmonize data reporting standards, specify a reasonable time horizon for compliance.
  - Consider elevating the 20 percent of GDP tax revenue criterion from “second” order to “first” order.
- Inflation convergence criterion: consider making it “second order” given limited national relevance in a currency union with a fixed peg to the Euro.
- Member countries’ medium-term convergence plans should be strengthened:
  - WAEMU Commission to complement broad assessments with systematic quantitative sensitivity analysis.
  - Member governments should explain deviations from previously declared objectives and how new plans address policy slippages and adverse exogenous shocks.

### Empirical estimates of DSA thresholds vs. regional criterion (selected values)
- Table summary (percent of GDP unless otherwise indicated):
  - BEN: Grant Element 16.3; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 64; Face Value 70; Convergence Criterion <
  - BFA: Grant Element 20.2; Debt Carrying Capacity Strong; DSF Benchmark of Total PPGD/GDP 70; Present Value 84; Face Value 70; Convergence Criterion >
  - CIV: Grant Element 12.4; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 62; Face Value 70; Convergence Criterion <
  - GNB: Grant Element 14.1; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 63; Face Value 70; Convergence Criterion <
  - MLI: Grant Element 30.5; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 72; Face Value 70; Convergence Criterion ≈
  - NER: Grant Element 26.4; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 70; Face Value 70; Convergence Criterion ≈
  - SEN: Grant Element 10.4; Debt Carrying Capacity Strong; DSF Benchmark of Total PPGD/GDP 70; Present Value 77; Face Value 70; Convergence Criterion >
  - TGO: Grant Element 6.9; Debt Carrying Capacity Medium; DSF Benchmark of Total PPGD/GDP 55; Present Value 59; Face Value 70; Convergence Criterion <

### Conclusion and policy priorities
- The WAEMU Macroeconomic Surveillance Framework would benefit from adjustments to more effectively set the region’s public debt on a sustainable path.
- Key policy priorities:
  - More efforts at the WAEMU level to rein in sources of “residual” operations that contribute to rising public debt.
  - Potential lowering of the public debt convergence criterion below 70 percent of GDP.
  - Elevate the 20 percent of GDP tax revenue threshold to first order with a defined timetable for observance.
  - Mandate annual WAEMU Commission DSAs and require systematic quantitative sensitivity analyses of member countries’ medium-term convergence plans.
  - Member countries must curb below-the-budget-line operations through improved monitoring of fiscal risks, building adequate budget provisions, accelerating implementation of regional PFM directives, and strengthening management accountability across SOEs and line ministries.
  - Improved Treasury practices to eliminate recourse to pre-financing arrangements and tighten expenditure control.
  - Public dissemination of WAEMU progress reports and strengthened peer-to-peer learning to improve reform momentum.

### Annex I — Recent and Ongoing Reforms in PFM by member countries (high-level findings)
- TSA implementation and Treasury modernization:
  - Senegal and Côte d’Ivoire: relatively more advanced on TSA.
  - Burkina Faso, Niger, and Togo: earlier stages of TSA implementation.
  - Overall: implementation lagging; multiplicity of government accounts and incomplete IT interfaces persist; manual reconciliation remains; risk of continued expenditure arrears.
- SOE monitoring and accountability:
  - Benin presents financial position of SOEs in 2019 budget; Senegal includes SOEs in DSA; Côte d’Ivoire presented fiscal risks in 2019 budget.
  - Performance contracts: Benin and Côte d’Ivoire have performance contracts for at least some SOEs.
- Country-specific reform highlights:
  - Benin: created TSA; improved reporting on budget execution; centralized internal audit coordination; performance contracts; presents SOE positions in 2019 budget; next steps include audit of arrears, full Court of Accounts implementation, adopt law improving SOE governance, and strengthen monitoring of contingent liabilities.
  - Burkina Faso: implemented automatic fuel price adjustment (November 2018); plans to strengthen contingent liability controls in energy, audit state fuel company, include electricity subsidies in budget, stop pre-financing arrangements, record supplier credit-financed projects in budget; created database of sovereign guarantees and PPPs; will restrict PPPs to annual quantitative ceiling; plans TSA adoption and IT compatibility with BCEAO.
  - Côte d’Ivoire: restructuring state-owned energy sector and public banks; 2019 budget includes fiscal risk analysis; next steps include monitoring committees, performance dashboards for SOEs, extend performance contracts, revise PPP institutional framework, integrate active PPPs in public investment program, and fully interface Integrated PFM system with accounting software.
  - Guinea Bissau: eliminated non-regularized expenditure; set up Treasury Committee; prepares monthly cash-flow projections; reduced number of accounts though no TSA yet; progressed on SIGFIP coverage and GFS compilation; issued decree clarifying debt issuance authority (2017); audited main SOEs (2017) revealing weaknesses; plans audit of domestic arrears and 2019 settlement plan.
  - Mali: action plan to raise public investment managers’ accountability; strengthen local governments’ capacities; next steps include centralized SOE database and regulatory PFM strengthening.
  - Niger: implementing TSA and improving IT interface with BCEAO; transfer of several public entity accounts; next steps include new TSA account structure, all government payments through banking system, quarterly spending allocations released within first month, quarterly commitment and cash plans; expects PPP law to give Ministry of Finance authority over PPP contracts to be included in budget.
  - Senegal: STA in place since April 2018; signed decree to limit carryover of current spending balances and cap capital spending carryover at 5 percent of remaining balance; new Post Office-Treasury convention (October 2018) to limit Treasury guarantee; comprehensive reforms needed for Post Office and Civil Service Pension; progress on parametric, systemic, and institutional pension reforms; DSA covers broader public sector including para-public entities and SOEs.
  - Togo: monitoring stock of payment arrears by vintage with monthly reporting; program-based presentation of 2019 budget for ministries; strengthened cash plan and commitments control with monthly updates; moved towards full TSA implementation by closing public entity accounts in commercial banks and transferring balances to TSA; cost-effectiveness analysis of public investment projects needs completion; actions needed to restore financial viability of two remaining public banks including following privatization strategy initiated in 2018.

*Source: 1wauea2019002 - 2001.*

### References

### 1wauea2019002 - References

### References (listed in source order)
- Basdevant, O., P. Imam, T. Kinda, and A. Zdzienicka, 2015, “Strengthening the West African Economic and Monetary Union—The Role of Fiscal and Market Institutions in Economic Stabilization.”
- Dessus, S., J.L. Diaz-Sanchez, J. L., A. Varoudakis, 2016, “Public Investment and Fiscal Rules,” in “Building Integrated Economies in West-Africa,” IMF.
- Diarra, S., 2014, “Dynamique de Convergence dans la Zone UEMOA : du Pacte de 1999 aux Nouveaux Critères de 2015.“
- Eyraud, L., X. Debrun and A. Hodge, 2018, “Second-Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability.”
- Escolano, J. 2010, “A Practical Guide to Public Debt Dynamics, Fiscal Sustainability, and Cyclical Adjustment of Budgetary Aggregates,” Fiscal Affairs Department, IMF.
- Guérineau, S., S. Guillaumont-Jeanneney and L. Florian, 2015, “Viabilité budgétaire et renforcement du dispositif de surveillance multilatérale au sein de la CEMA."
- Hitaj, E., and Y. Kursat Onder, 2013, “Fiscal Discipline in WAEMU: Rules, Institutions, and Markets.“
- IMF, WAEMU, “Common Policies of Member Countries—Staff Report,“ various editions from 2013-2018.
- IMF, 2017, “Senegal: Controlling Budget Execution.“
- IMF, 2018, “Domestic Revenue Mobilization in Sub-Saharan Africa: What Are the Possibilities?”
- Chapter 2, Regional Economic Outlook: Sub-Saharan Africa, Spring 2018.
- IMF, 2018, “Guidance Note on the Bank-Fund Debt Sustainability Framework for Low Income Countries.“
- Palenfo, S. et Bonherbe, J., “Rapport de mise en œuvre des directives, “ 2ème réunion de l’observatoire des finances publique, Lomé du 7 au 16 novembre 2016, Union Économique et Monétaire Ouest Africaine.
- UNDP, Proposition de Dispositif institutionnel de transposition des directives 2009 de l’UEMOA, Pôle “Stratégie de développement et finances publiques,“ Centre régional de Dakar du PNUD.
- UNDP, 2017, “Bilan de la réforme du cadre harmonisé des finances publiques en zone UEMOA,“ Le Pôle Stratégies de développement et finances publiques.
- Versailles, B, 2018, “Sources of Fiscal Risks in WAEMU Countries,“ Selected Issues Paper, IMF.
- WAEMU Commission, “Rapport Semestriel d’Exécution de la Surveillance Multilatérale,“ various editions 2014-2017.

### Paper extract: "BOOSTING COMPETITIVENESS TO FOSTER TRADE PERFORMANCE, WEATHER TERMS-OF-TRADE SHOCKS AND SUPPORT EXTERNAL BUFFER" — Key findings and analysis
- Scope and objective:
  - Examines state of trade performance and global competitiveness in the WAEMU.
  - Emphasizes boosting intraregional and extra-regional trade and building external buffers to self-insure against external volatility.
  - Uses gravity models to estimate the effect of easing constraints to competitiveness on WAEMU bilateral trade flows.

- Growth and external vulnerability:
  - The WAEMU average growth has been above 6 percent since 2012.
  - Exports of goods and services increased by 340 percent over 1996-2018.
  - Imports of goods and services increased by 437 percent over 1996-2018.
  - Export-to-GDP decreased by 1.5 percentage points (ppt) over 1996-2018.
  - Import-to-GDP increased by 6.7 ppt over 1996-2018.
  - Stabilization of external buffers has been heavily dependent on sizeable Eurobond issuances by Côte d’Ivoire and Senegal.

- Rationale for competitiveness focus:
  - Competitiveness supports integration into regional and global export markets, sustaining growth and productivity gains.
  - Better trade integration, export performance and diversification mitigate vulnerability to global shocks and support foreign exchange generation via export proceeds.
  - Particularly relevant for price taker countries such as WAEMU members.

- Definition and components of competitiveness (as used in the paper):
  - Price factors: real effective exchange rate (REER) and relative aggregate price level adjusted for productivity.
  - Nonprice factors (survey-based perception indicators): (i) institutions; (ii) infrastructure; (iii) education; (iv) goods market efficiency; (v) labor market efficiency; (vi) financial market development.

- Nonprice competitiveness elements described:
  - Institutions: legal framework affecting investment and development strategies.
  - Infrastructure: roads, railroads, ports, air transport, and reliable electricity supply.
  - Education: quality of education for integration into global value chains.
  - Goods market efficiency: determines effective trade of goods and production possibility frontier.
  - Labor market efficiency: effective use of workers, productivity, and attractiveness.
  - Financial market development: allocation of resources to entrepreneurial and investment projects.

- Trade evolution and comparison with comparators:
  - Comparator countries (African comparators: Ghana, Kenya, Lesotho, Rwanda, Tanzania, Uganda, and Zambia; Asian comparators: Indonesia, Malaysia, the Philippines, Thailand, and Vietnam).
  - Comparator exports-to-GDP increased by 2.1 ppt (African comparators) and 7.8 ppt (Asian comparators) over 1996-2018.
  - Comparator imports-to-GDP decreased by 1.2 ppt in African comparators and remained almost constant in Asian comparators over 1996-2018.
  - Intraregional export-to-GDP in WAEMU increased by about 0.1 ppt over 1996-2018.
  - Extra-regional export-to-GDP decreased by about 1.5 ppt over 1996-2018.
  - Share of intra-regional trade increased by half (from a low base).

- Price-based competitiveness indicators:
  - REER (2008-17): WAEMU experienced on average a slight depreciation of about 0.4 percent.
  - REER (2008-17): African comparators experienced an average appreciation of about 0.5 percent; Asian comparators experienced an average appreciation of about 1.2 percent.
  - Aggregate price level relative to the United States: relative prices are higher in the WAEMU than in comparators despite lower WAEMU income levels.

- Nonprice (perception-based) competitiveness indicators — main diagnostics:
  - Quality of institutions and infrastructure: perceived to be lower in WAEMU compared to African and Asian comparators.
    - Intellectual property protection shows somewhat less progress in the WAEMU than in comparator countries between 2007 and 2017.
    - No progress achieved in improving property rights in the WAEMU.
    - Quality of infrastructure lagging, especially electricity supply, despite substantial government investment.
  - Education and goods market efficiency:
    - Perceived quality of education on average ¼ higher in comparator countries than in the WAEMU.
    - Internet access in schools is a main driver of the WAEMU education disadvantage.
    - Ease of starting a business: WAEMU has made substantial progress between 2007 and 2017; number of procedures to start a business is much lower in WAEMU than in comparators.
    - Trade tariffs are twice as high in the WAEMU than in comparator Asian countries.
  - Labor market efficiency and financial market development:
    - Comparator countries perceived to have higher capacities to retain and attract talent.
    - Firms in WAEMU have fewer options to raise money by issuing shares and/or bonds and face greater difficulty obtaining bank loans compared to Asian comparators.
    - Private credit as a share of the economy shows substantially less financial deepening in WAEMU than in comparator countries, with even a narrowing in the WAEMU from 2007 to (text ends).

- Methodology notes:
  - Uses gravity model of trade to quantify contributions of competitiveness aspects to the trade gap between WAEMU and comparators.
  - Perception indicators primarily derived from the World Economic Forum’s Executive Opinion Survey (indicators expressed on a 1-7 scale, with 7 being the most desirable outcome).
  - WAEMU averages of perception indicators include 5 countries out of its 8 members: Benin, Burkina Faso, Côte d’Ivoire, Mali, and Senegal.

*Source: Excerpted references list and chapter text from 1wauea2019002 - References.*

### 2017. In addition, based on the analysis of financial soundness indicators, the banking sector is

### 1wauea2019002 - 2017. In addition, based on the analysis of financial soundness indicators, the banking sector is

### Methodology
- Empirical approach: standard gravity model estimated with panel data for 169 countries over the period 1980-2017.
- Baseline specification links bilateral exports to characteristics of exporter and importer, and trade costs, with year fixed effects and lagged explanatory variables to reduce endogeneity.
  - Exports from country i to country j in year t (x_ijt) are modeled as a function of exporter and importer attributes in year t−1 (M_i,t−1^Ex and M_j,t−1^Im), trade costs in t−1 (D_ij,t−1), year fixed effects (a_t), and an error term (u_ijt).
- Export composition is not modeled; focus is on total exports.
- Data source for trade: Direction of Trade Statistics (DOTS) database of the IMF.

### WAEMU trade integration compared to other regions
- Intraregional comparisons use regional dummies and compare WAEMU to other Sub-Saharan African monetary/trading unions (CEMAC, EAC, SACU) using other SSA countries as comparator group.
- Key quantitative comparisons:
  - The WAEMU relative trade performance is 2 times higher than the CEMAC.
  - The WAEMU trade performance is almost 2 times lower than the EAC.
  - The WAEMU trade performance is almost 16 times lower than the SACU.

### Role of competitiveness to boost trade performance
- Price competitiveness
  - Real effective exchange rate (REER) and aggregate price level are positively correlated with trade flows.
  - Computation: bringing WAEMU aggregate price levels to comparator levels would increase trade flows by only 1-2 percent.
  - WAEMU has a slight competitive advantage in REER.
- Nonprice competitiveness — estimated effects of closing WAEMU gaps to comparator levels (all other things being equal):
  - Institutions (investor/property protections)
    - Closing gap to African comparators: potential increase in trade flows by 6 percent.
    - Closing gap to Asian comparators: potential increase in trade flows by 8 percent.
  - Infrastructure (quality)
    - Closing gap to African comparators: potential increase in trade flows by 36 percent.
    - Closing gap to Asian comparators: potential increase in trade flows by 55 percent.
    - Policy implication: improvement may require collective regional actions for cross-border infrastructure (e.g., roads, electricity interconnections) and enforcement of regional infrastructure quality guidelines; sustainability requires greater domestic revenue mobilization.
  - Education (quality and alignment with labor market)
    - Closing gap to African comparators: potential increase in trade flows by 10 percent.
    - Closing gap to Asian comparators: potential increase in trade flows by 16 percent.
    - Policy implication: initiate regional reflection on aligning national education programs with labor market needs.
  - Goods market efficiency (e.g., procedures to start a business, customs procedures)
    - WAEMU already has a competitive advantage on number of procedures to start a business.
    - Reducing customs procedures to comparator levels: potential increase in trade flows by about 2 percent.
  - Labor market efficiency (capacity to retain talent)
    - Closing gap to African comparators: potential increase in trade flows by 13 percent.
    - Closing gap to Asian comparators: potential increase in trade flows by 25 percent.
  - Financial market development (access to credit for private sector)
    - Easing access to credit to the level observed in Asian comparators: potential increase in trade flows by 42 percent.
    - Caveat: expansion of access to credit should be accompanied by measures to insure the soundness of the banking system, since banking soundness (e.g., CAR and NPLs metrics) may be strongly correlated with trade flows.

### Key statistics and findings (preserved from analysis)
- Model coverage: 169 countries; period 1980-2017.
- WAEMU relative trade intensity vs. regional peers:
  - 2 times higher than CEMAC.
  - Almost 2 times lower than EAC.
  - Almost 16 times lower than SACU.
- Estimated potential increases in WAEMU trade if competitiveness gaps closed:
  - Aggregate price level: 1-2 percent.
  - Investor/property protections: 6 percent (African peers), 8 percent (Asian peers).
  - Infrastructure quality: 36 percent (African peers), 55 percent (Asian peers).
  - Education quality: 10 percent (African peers), 16 percent (Asian peers).
  - Customs/procedures: about 2 percent.
  - Labor market capacity to retain talent: 13 percent (African peers), 25 percent (Asian peers).
  - Access to credit (financial development): 42 percent (Asian peers).

*WEST AFRICAN ECONOMIC AND MONETARY UNION — INTERNATIONAL MONETARY FUND*

### References

### References

### References cited
- Boffa, M., Jansen, M., Solleder, O. 2018. Do we need deeper trade agreements for GVCs or just a BIT? World Economy, forthcoming.
- Frankel, J., Rose, A. An estimate of the effect of common currencies on trade and income, Quarterly Journal of Economics, 117, 2, 437-466.
- International Monetary Fund. (2015a). Global value chains: where are you? The missing link in Sub-Saharan Africa’s trade integration, IMF Regional Economic Outlook: Sub-Saharan Africa.
- International Monetary Fund. (2015b). Competitiveness in Sub-Saharan Africa: Marking Time or Moving Ahead? IMF Regional Economic Outlook: Sub-Saharan Africa.
- International Monetary Fund. (2017). West African Economic and Monetary Union—Staff Report on Common Policies of Member States.
- International Monetary Fund. (2018). West African Economic and Monetary Union—Staff Report on Common Policies of Member States.
- Rose, A. 2004. Do we really know that the WTO increases trade? American Economic Review, 94, 1, 98-114.
- Schwab, K., Sala-i-Martin, X. 2018. The Global Competitiveness Report 2017-2018, World Economic Forum.

### Context and scope of the chapter
- The WAEMU has been one of the fastest growing regions in sub-Saharan Africa for the past decade; average growth in the region is projected to exceed 6 percent for a seventh consecutive year in 2018.
- Paper objective: provide an overview of poverty and inequality of income and opportunity (including gender gaps) in the WAEMU, quantify impacts of inequities on growth and economic diversification, and suggest policy measures at national and regional levels.
- Prepared by Hippolyte Weneyam Balima and Monique Newiak; the paper benefited from comments from Bruno Versailles, Johnson Nkem Ndi and Yaindy Nuesi Bautista (UN Women), and colleagues from Benin and Guinea-Bissau teams.

### Stylized facts: poverty and inequality
- Average poverty headcount ratio at US$ 1.90 per day (the international extreme poverty line) has decreased by 19.2 percentage points compared to the early 1990s.
- Current poverty levels:
  - About 42 percent of the population lives on less than US$ 1.90 per day.
  - About 75 percent lives on less than US$ 3.20 per day.
  - About 90 percent lives on less than US$ 5.20 per day.
- Despite declines in rates, the absolute number of people in extreme poverty has increased by 16.5 percent (corresponding to 6.4 million people) compared to the early 1990s.
- About 45 million people out of 102 million still live in extreme poverty in the WAEMU.
- Poverty by area:
  - Poverty rate in urban areas: 27.5 percent.
  - Poverty rate in rural areas: 54.0 percent.
- Country heterogeneities:
  - Extreme poverty rates have decreased in most countries, except in Benin, Côte d’Ivoire and Guinea-Bissau.
  - In Burkina Faso, Mali, Niger, and Senegal, extreme poverty has decreased by about 1/3 compared to the early 1990s.
  - In Togo the decrease has been modest.
- Changes in absolute numbers of people in extreme poverty:
  - More than doubled in Côte d’Ivoire and Guinea-Bissau.
  - Increased by about 2/5 in Benin.
  - Relatively less increase in Niger and Togo.
  - Slight decreases only in Burkina Faso, Mali, and Senegal.

### Income inequality
- Average net Gini coefficient in the WAEMU decreased by 1.8 percentage points between 1990 and 2015.
- Distributional shares:
  - Top 10 percent accounts for 30 percent of total income across WAEMU countries.
  - Bottom 10 percent earns 3 percent of the region’s total income.
- Income inequality decreased in four countries: Burkina Faso, Mali, Niger, and Senegal.
- Income inequality increased in four countries: Benin, Côte d’Ivoire, Guinea-Bissau, and Togo.

### Human capital and inequality of opportunity
- WAEMU ranks at the bottom worldwide on the World Bank’s Human Capital Index; Mali and Niger rank among the bottom three countries, just after South Sudan.
- Education:
  - Average years of education vary from less than 6 years in Mali and Niger to over 9 years in Benin and Togo.
  - Quality-adjusted education levels are lower: about half of the education levels in Mali and Niger vs. two thirds in Burkina Faso and Senegal (relative comparisons described in text).
  - Example disparity: average time in school for a girl in the bottom wealth quintile in Niger is about 4 months; a boy in the richest quintile in Togo averages almost 11 years.
  - Government expenditures on education: reached more than 7 percent of GDP in Senegal in 2015 (up from just above 3 percent of GDP two decades earlier); generally above or close to 4 percent of GDP elsewhere, except Guinea-Bissau at 2.51 percent of GDP (latest available statistics).
- Health:
  - Under-five mortality rates have declined to about half the level observed in 1990 (above 200 deaths per 1,000 live births in 1990); current ratios imply:
    - In Mali: more than one in ten children die before reaching their fifth birthday.
    - In remaining WAEMU countries (except Senegal): seven to ten children in 100 die before age five.
    - Senegal: less than 5 deaths per 100 children.
  - Stunting among children: 17 percent (Senegal) to 42 percent (Niger).
  - Maternal death ratios declined from an average of above 7 percent to below 5 percent—implying that a mother dies in every 20th live birth.
  - Adolescent fertility rates are among the highest worldwide.
  - Health expenditures are among the lowest worldwide, both as a ratio to GDP and per capita.
- Legal and institutional constraints on women:
  - In some countries laws constrain women’s economic activity (e.g., Mali law requires women to obey their husbands).
  - Differentiated property or inheritance rights exist in some countries (Côte d’Ivoire, Guinea-Bissau, Senegal).
  - In half of WAEMU countries, the law does not mandate equal pay for equal work.
  - Some laws permit early marriage (girls can legally marry as early as 14 with parental consent in some countries); in a few countries authorizing child marriage is not punishable by law.
- Access to financial services varies across countries, income and gender (figure references in source).

### Key implications highlighted
- Inequalities in income and opportunity undermine growth, diversification, and stability; addressing them could boost diversification, growth and stability while aiding progress toward the SDGs.
- Population growth and declining fertility rates can create a demographic dividend if accompanied by human capital accumulation (education and health).
- The literature summarized points to multiple channels through which inequality affects macroeconomic outcomes, including underinvestment in physical and human capital, reduced mobility, dampened aggregate demand, social unrest, and impeded export diversification.

*Source: 1wauea2019002 - References*

### 9.5 percent (Niger) to 34.1 percent (Togo), compared to almost 37 percent and above 40

### 1wauea2019002 - 9.5 percent (Niger) to 34.1 percent (Togo), compared to almost 37 percent and above 40

### Inequality in access to financial services
- Account ownership at a financial institution ranges from 9.5 percent (Niger) to 34.1 percent (Togo), compared to almost 37 percent and above 40 percent in African and Asian benchmark countries, respectively.
- Gender gaps in account ownership:
  - Men almost three times as likely to own an account than women in Mali.
  - Men almost twice as likely to own an account than women in Côte d’Ivoire and Benin.
- Mobile money account ownership appears more equally distributed across gender groups.
- Only a fraction of account owners use accounts to save.
- Borrowing from financial institutions:
  - In all WAEMU countries, less than 10 percent of the population borrows from a financial institution.
  - In Côte d’Ivoire, the richest 60 percent are three times more likely to borrow than the poorest 40 percent.
  - In Burkina Faso and Senegal, the richest 60 percent are more than twice as likely to borrow than the poorest 40 percent.
- Borrowing for health and medication purposes: every tenth (Senegal) to every fourth (Niger) person borrows from some source for health and medication purposes.
- Borrowing for business purposes remains below African and Asian benchmarks in all WAEMU countries.

### Human capital, education, and gender/wealth disparities
- Human capital levels in the WAEMU are among the lowest worldwide.
- Expected years of schooling vary widely across the region; quality-adjusted years of schooling are much lower than raw expected years.
- Educational outcomes are strongly associated with gender and wealth; years of education differ markedly by gender and by wealth quintiles.

### Health outcomes and public spending
- Under-5 mortality rates have decreased significantly but remain high compared to peer countries.
- The incidence of stunting among children remains substantial.
- Maternal death rates have declined more slowly than other health indicators.
- Adolescent fertility rates remain among the highest in the world.
- Public expenditure on health relative to GDP is among the lowest worldwide.
- WAEMU countries are at the bottom of the 77 countries that spent less than US$ 100 per year on health per capita.

### Quantifying the impact of inequality and education on growth and diversification
- Methodology:
  - Uses estimated coefficients of income and gender inequality and years of schooling from IMF (2015) and Kazandjian and others (2016).
  - IMF (2015) coefficients drawn from growth regressions on 115 countries over 1995-2014, controlling for initial income, infrastructure, investment, inflation, institutional quality, and terms-of-trade; endogeneity addressed with GMM.
  - Kazandjian and others (2016) coefficients drawn from a panel of 107 countries for 1990-2010, controlling for determinants of diversification; endogeneity addressed with GMM.
- Projected effects on real GDP per capita growth if WAEMU converged to benchmark levels:
  - Bringing average income inequality in the WAEMU to benchmark levels could potentially increase annual real GDP per capita growth by about 0.2-1.4 percentage points.
  - Closing gender inequality and female legal equity gaps could boost annual per capita income growth by about 0.2-0.5 percentage points.
  - Differences in years of schooling could explain about 0.3-0.5 percentage points of the WAEMU’s income per capita growth shortfall compared to benchmark countries.
- Projected effects on export diversification:
  - Reducing gender inequality gaps relative to African and Asian benchmarks is found to increase the export diversification index by about 0.2 and 0.4 units, respectively.
  - The magnitude of this effect is equivalent to up to about 1/4 standard deviations of the index across low-income and developing countries.

### Policy recommendations (national)
- Legal rights and enforcement:
  - Provide men and women, and boys and girls, with the same legal rights and enforce these rights.
  - Eliminate legal provisions that undermine equality of opportunity (e.g., differentiating property and inheritance rights across genders).
  - Introduce anti-discrimination laws, such as in access to credit.
  - Raise awareness of existing rights and strengthen enforcement.
  - Example: In Senegal, a National Strategy for Women’s Economic Empowerment was launched in 2018.
- Education and health investment:
  - Invest in education and health to improve accessibility and quality of services tailored to labor market needs and strengthen health outcomes.
  - Prioritize availability, accessibility and affordability of quality services—including sexual and reproductive health and rights for women and girls.
  - These efforts will require additional fiscal space.
  - To increase fiscal space, there is scope to replace across-the-board subsidies that benefit all segments of the population (including the wealthiest) while introducing well-targeted social transfer schemes to mitigate adverse impacts.
  - Significant efforts are required to increase overall domestic revenue mobilization.
- Infrastructure and social protection:
  - Boost infrastructure—particularly on social protection and public services—to help close gender gaps in education, access to electricity, water and sanitation.
  - Improved infrastructure would increase productivity and improve ease of doing business.

### Policy recommendations (regional)
- Implement regional measures and monitoring:
  - Implement the regional gender strategy, supported by consistent monitoring through the WAEMU Commission.
  - Leverage structural funds dedicated to regional integration and agriculture development.
  - Monitor the efficiency of education and social spending by the WAEMU Commission and ensure data provision along guidelines to keep policymakers informed of improvements and remaining challenges.
- Member countries should continue to develop social spending indicators as part of the implementation of the regional directive bearing the Finance Act.

*Source: WEST AFRICAN ECONOMIC AND MONETARY UNION, INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1wauea2019002.pdf_