## 1wauea2021002

## Source details

**Canonical URL:** [1wauea2021002](https://www.imf.org/-/media/files/publications/cr/2021/english/1wauea2021002.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2021/english/1wauea2021002.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2021/english/1wauea2021002.pdf.json)

---

### Short-term health and economic impacts of the pandemic in the WAEMU
- Pre-pandemic performance (2012–19):
  - Real GDP growth exceeded 6 percent.
  - Inflation remained subdued.
  - Aggregate fiscal deficit declined below the regional convergence criterion of 3 percent of GDP in 2019.
- Health and containment:
  - All WAEMU countries implemented quarantine/self-quarantine, border closures, air travel restrictions, restrictions on public gatherings, and closures of schools, universities and places of worship.
  - As of December 2020, cumulative cases represented less than 0.1 percent of the WAEMU’s population.
  - Testing capacity constraints imply underreporting of active cases.
- Macroeconomic impact:
  - WAEMU real GDP growth expected to have declined to 0.3 percent in 2020, from 6.0 percent in 2019.
  - The 2020 outcome is almost 6 percentage points below the 2020 pre-Covid forecast.
  - Sectoral contractions concentrated in construction, commerce, transportation and hospitality with a sharp decline end-Q1 and Q2 2020 and some rebound since Q3 2020.
  - Country-specific 2020 GDP projections:
    - Burkina Faso: contraction of 2.8 percent.
    - Guinea Bissau: contraction of 2.4 percent.
    - Mali: contraction of 2.0 percent.
    - Senegal: contraction of 0.7 percent.
    - Togo: real GDP in 2020 expected to be flat.
    - Other three member-countries: moderately positive growth.
  - Real per capita GDP growth turned negative in 2020 in all WAEMU countries, for the first time since 2011.
- Financial markets:
  - Covid-related repricing widened Eurobond spreads for WAEMU sovereigns with market access (Benin, Côte d’Ivoire and Senegal), though less than other SSA frontier countries.
  - Côte d’Ivoire issued a EUR 1 billion eurobond at a rate of 5 percent in November 2020.

### National fiscal policy responses to Covid-19
- Pre-Covid fiscal position:
  - Aggregate fiscal deficit reduced from 3.6 percent of GDP in 2016 to 2.3 percent of GDP in 2019.
  - Public debt was 44.8 percent of GDP at end-2019.
- Emergency fiscal relaxation in 2020:
  - National supplementary 2020 budgets implied a relaxation of the fiscal stance by about 3 percent of GDP.
  - Aggregate fiscal deficit revised up by about 3½ percentage points of GDP relative to 2019.
  - WAEMU convergence criteria were put in abeyance in April 2020, suspending the 3 percent of GDP deficit ceiling and the 70 percent of GDP government debt ceiling.
- Decomposition of the 2020 fiscal revision (initial budget plans to most recent projections):
  - Total upward revision: 3.4 percent of GDP.
  - Components of the 3.4 percentage points:
    - 1.4 percent of GDP: fall in nominal GDP (mechanical increase in expenditure ratio).
    - 1.2 percent of GDP: “discretionary” stimulus (mainly higher expenditure).
      - New spending on goods, services and transfers: 1.1 percentage point of GDP.
      - Higher non-discretionary current spending: 0.1 percentage point of GDP.
      - Capital spending: unchanged in percent of the pre-Covid GDP.
    - 1.2 percentage points of GDP: revenue shortfall.
    - 0.5 percentage points of GDP: higher external grants (partly offsetting revenue shortfall).
  - Note: expenditure ratio corrected for the cycle by freezing GDP at its pre-Covid estimate; the revenue ratio is not cycle-corrected.
- Cross-country variation in fiscal response (expansion relative to pre-Covid initial budget plans):
  - Togo: 4.7 percentage points of GDP (highest).
  - Burkina Faso: 2.6 percentage points of GDP (lowest).
- Projected revenue losses (percentage points of GDP):
  - Mali: -2.7 percentage points of GDP.
  - Benin: -2.2 percentage points of GDP.
  - Senegal: -1.9 percentage points of GDP.
- Country-specific financing and composition:
  - Senegal: higher grants equivalent to 2.2 percentage points of GDP; could finance new discretionary current expenditure of 2.3 percentage points of GDP with marginal capital spending cuts.
  - Côte d’Ivoire: anticipated revenue loss of 0.4 percentage point of GDP and expected to increase expenditure by 2.0 percentage points of GDP excluding the impact of a lower GDP.
- Composition and delivery of measures:
  - Main focuses: (i) reinforcing national health systems, (ii) supporting vulnerable households, (iii) supporting businesses and protecting jobs.
  - Social assistance delivery modes:
    - Mobile money/electronic cash transfers (Togo and Mali).
    - In-kind support (food distribution in Guinea-Bissau and Niger).
  - Togo Novissi program (launched April 2020):
    - State grants cover at least 30 percent of the minimum wage; payouts from CFAF 10,500 ($18) to CFAF 20,000 ($34).
    - As of December 2020: about 1.4 million individuals registered and close to 600,000 received a NOVISSI payment, of which 65 percent are women.
  - Business support measures: direct subsidies (Côte d’Ivoire), temporary tax deferrals (Burkina Faso and Senegal), guarantee funds to incentivize bank lending to SMEs (Benin and Mali).
- Financing of the fiscal response:
  - Higher fiscal deficits in 2020 financed almost entirely by external financial assistance.
  - Financing mix: grants and additional borrowing equivalent to about 3½ percent of GDP.
  - About 40 percent of the external financing came from the IMF (program augmentations, emergency financing RCF and RFI, and debt-service relief through the CCRT).
  - Public debt implications:
    - Public debt ratio expected to increase and peak at 47.7 percent of GDP in 2021.
    - Pre-Covid projection had public debt gradually declining from its 2019 peak of 46.1 percent of GDP.

### Transparency, accountability, and governance measures
- Measures adopted to catalyze external support and track Covid-related spending:
  - Enhanced governance measures to track Covid-related spending.
  - Most member-states announced independent ex-post audits of crisis-related spending; some committed to publishing audits (Mali and Niger).
  - Publication of crisis-related procurement contracts (Benin, Mali, and Senegal) and identification of awarded companies and beneficial owners (Benin, Côte d’Ivoire, Mali, and Senegal).
  - New monitoring mechanisms set up in Burkina Faso, Niger, Senegal and Togo to track expenses executed through the budget, by donors, and in-kind support.

### BCEAO monetary policy response and liquidity provision
- Primary aim: prevent liquidity shortages and avoid market freezes.
- Operational adjustments since crisis onset:
  - Shift from pre-set refinancing auctions to measures providing ample liquidity; average auction rates declined by about 0.75 percentage points relative to March to historically low levels.
  - March shift to a fixed-rate full allotment (FRFA) tender procedure: satisfied market demand in full at a set interest rate; reduced average refinancing rate by about 25 basis points at introduction.
  - June cut of 50 basis points to both the ceiling and the floor of the interest rate corridor, to 4 and 2 percent respectively.
  - Note: WAEMU policy rate already one of the lowest in Africa.
- Collateral-easing measures:
  - March extension of collateral framework to include bank loans to prequalified 1,700 private companies.
  - As of end-December 2020, private sector claims accounted for 4.3 percent of the collateral portfolio held by the BCEAO.
- Covid-19 T-Bill program (2020):
  - Purpose: smooth WAEMU governments’ cashflows and support orderly functioning of financial markets before donor emergency financing disbursements.
  - Mechanism: special 3-month “Covid-19 T-Bills” issued in limited amounts; banks could refinance these T-Bills at a special BCEAO window.
  - Program scale and timing: introduced in April-May for a global amount of 1.3 percent of WAEMU GDP; extended through partial rollovers until end-2020.
- Measures to promote electronic payments:
  - Free nationwide bank money transfers (below a certain threshold).
  - Free electronic payments for electricity and water bills via mobile phone.
  - Lower commissions for retailers using electronic payments; increase ceilings of electronic wallets; reduction in bank transfer fees; elimination of fees for cash ATM withdrawal within the GIM network.
- Regulatory and supervisory response:
  - Forbearance framework (introduced March 2020, expired end-2020): allow postponement of debt service for solvent clients with Covid-related repayment difficulties without reclassifying postponed claims as non-performing.
  - As of end-August 2020, deferred repayments equivalent to 5 percent of bank credit outstanding for the whole of WAEMU.
  - Transition to Basel II/III extended by one year (now ending in 2023 instead of 2022); regulatory capital adequacy ratio unchanged at end-2020 from 2019 level of 9.5 percent, to gradually increase to 11.5 percent by 2023.
  - November 2020: BCEAO temporarily limited distribution of dividends (related to 2020 profits) for all banks.

### Insecurity in the Sahel: dynamics, economic effects, and fiscal implications
- Background and spread:
  - Resurgence starting with the Tuareg rebellion in Northern Mali in 2012; spread to Burkina Faso and Niger.
  - Boko Haram active in Northeastern Nigeria, affecting Lake Chad region.
  - Niger experienced cross-border incursions with two attacks on military camps in December 2019 and January 2020 leaving over 150 soldiers dead.
- Incident and humanitarian metrics:
  - Terrorist incidents rose 70 percent in 2019 to reach 800 in the G5-Sahel countries.
  - Fatalities from extremist-related violent events doubled every year since 2015, reaching 5,500 in the G5-Sahel countries in 2019, of which 4,000 occurred in Burkina Faso, Mali, and Niger.
  - Humanitarian impacts:
    - 1.1 million internally displaced people and 750,000 refugees in the G5-Sahel countries.
    - Urgent food assistance needs doubled to 2.4 million people in Burkina Faso, Mali, and Niger.
    - An estimated 2,000 schools closed in conflict zones of Burkina Faso, Mali, and Niger, affecting some 400,000 children and putting 10,500 teachers out of work.
- External military and civilian assistance:
  - French operation “Serval” (December 2012) and “Barkhane” comprised 4,500 men; France committed 600 additional troops at the January 2020 Pau summit.
  - MINUSMA UN peacekeeping mission numbered 13,000.
  - Some 800 American military personnel stationed in Niger; European countries provide another 600 men for training.
  - Civilian initiatives: Sahel Alliance (July 2017); Partnership for Security and Stability for the Sahel (P3S) announced August 2019 (yet to be launched); International Coalition for the Sahel launched at the Pau Summit in January 2020.
- Empirical impact on economic activity:
  - SSA REO (IMF, 2019): annual real GDP growth in an average country with high-intensity conflict is 3.2 percentage points lower than without conflict; cumulative loss of 15-20 percent in per-capita income for episodes lasting five years or longer.
  - Definition: high-intensity conflict = 29 or more deaths per million per month.
  - WAEMU-specific estimates:
    - Conflict-affected areas account for 9, 4, and 13 percent of national GDP in Burkina Faso, Mali and Niger respectively (night-light proxy).
    - A conflict causing 7 fatalities per million in one month estimated to reduce annual night lights by about 0.13 percent, equivalent to 0.06 percent of annual GDP.
    - For 79 fatalities per million, estimated negative growth effect is 0.7 percent of annual GDP.
    - Cumulative real GDP loss for Burkina Faso, Mali, and Niger between 0.5 and 1.4 percent (depending on population or night-light weights).
    - Corresponding output loss for the WAEMU as a whole between 0.1 and 0.4 percent of GDP.
  - Econometric table excerpt (impact of conflict on night lights): Deaths per 1000 people coefficients — World: -0.312**, SSA: -0.411***, WAEMU: -0.182***; robust standard errors (0.130), (0.141), (0.057) respectively; observations: World 179,681; SSA 41,481; WAEMU 4,835; R-squared: World 0.539; SSA 0.490; WAEMU 0.503.
- Fiscal pressures and spending dynamics:
  - Direct budgetary pressures: increases in military, national guard, gendarmery, and police spending.
  - From onset of insecurity until end-2019, military spending roughly doubled, equivalent to an increase of 2 percent of GDP (about US$850 million).
  - Estimated revenue loss from limited output loss to date: 0.1 to 0.4 percent of GDP cumulatively for 2014–19, depending on country and weighting.
  - Evidence on crowding-out of other spending mixed to date; risk of crowding out if aid falls or domestic revenue mobilization weakens.

### Country highlights: Mali, Burkina Faso, Niger
- Mali:
  - GDP contracted by 1.5 percent in 2012; grew 2.3 percent in 2013; 2012–13 growth fell to 0.7 percent from 4.3 percent previously.
  - Security spending rose from 1.7 percent of GDP before the outbreak to 3.7 percent of GDP in recent years.
  - Foreign aid doubled to 6 percent of GDP in 2019; fiscal deficit declined to 1.7 percent of GDP.
- Burkina Faso:
  - Security spending increased from 0.8 percent of GDP in 2015 to 3.1 percent of GDP in 2019.
  - Fiscal deficit surged from 2.1 percent of GDP in 2015 to 6.9 percent of GDP in 2017; by 2019 reduced to 3.5 percent of GDP via revenue mobilization and normalization of non-security spending.
  - Foreign aid in 2019 was 4.6 percent of GDP.
- Niger:
  - Security spending: 3.3 percent of GDP in 2019 (compared with 1.1 percent in 2011).
  - Incidents in 2019: 103 (about one third of the level seen in Burkina Faso or Mali).
  - Fiscal deficit rose from 2.2 percent of GDP in 2011 to 6.7 percent of GDP in 2015; reduced to 3.6 percent of GDP by 2019.
  - Total aid increased from 4.9 percent of GDP in 2011 to 11.5 percent of GDP in 2019; budget support grants rose from 1.4 percent to 2.6 percent of GDP.
  - Little evidence that security spending crowded out domestically-financed non-security spending; foreign-financed investment expanded strongly.

### Policy implications and regional response options
- Immediate policy priorities:
  - Implement and maintain adequate controls to prevent leakage of donor and internally generated funds as security spending grows.
  - Prioritize containment and roll-back of violence to avoid escalation into economic centers and spread to other WAEMU members.
  - Protect domestic revenue mobilization to finance security needs without unduly crowding out social and development spending.
  - Improve fiscal transparency, public financial management (PFM), and AML/CFT regimes; enhance risk-based AML/CFT supervision regionally.
  - Strengthen regulations to guide emergency procedures and improve data provision for the security sector.
- Regional solidarity and temporary measures:
  - Allow front-line countries (Burkina Faso, Mali, Niger) to converge more slowly toward the 3 percent of GDP deficit ceiling, conditional on safeguards and fiscal consolidation by other members (upcoming review of regional fiscal framework in 2021 noted).
  - Pool national budget resources or transfers from a common pool to countries subject to security shocks.
  - WAEMU decision to create a “Regional Fund” managed by the WAEMU Commission: pledged US$500 million over five years with a first tranche of US$100 million for Burkina Faso, Mali, and Niger; first tranche would allow the three governments to increase spending by about 0.25 percent of their GDP.
- External assistance:
  - Scaled-up, highly-concessional external assistance would ease spending trade-offs and have limited public debt sustainability impact.
  - Reexamine mix between budget support and project aid; increase technical assistance for domestic revenue mobilization and PFM.

### WAEMU fiscal framework, enforcement, and PFM issues
- WAEMU Pact for Convergence, Stability, Growth and Solidarity suspended in April 2020 (exempts authorities from fiscal rules including the 3 percent deficit ceiling).
- Convergence criteria (end-2019 aggregate outcomes):
  - Aggregate fiscal deficit: 2.3 percent of GDP.
  - Public debt: 44.8 percent of GDP.
  - CPI inflation: close to zero at end-2019.
- First-order criteria (Ceiling/Floor):
  - Overall fiscal balance (grants included) to nominal GDP ≥ -3 percent.
  - Average consumer price inflation per year ≤ 3 percent.
  - Total debt to nominal GDP ≤ 70 percent.
- Second-order criteria (Ceiling/Floor):
  - Wages and salaries to tax revenue ≤ 35 percent.
  - Tax revenue to nominal GDP ≥ 20 percent.
- At end-2019: all WAEMU countries met debt and inflation criteria; neither second-order criterion met at regional level; only Senegal met wages criterion; all countries breached the revenue criterion.
- Escape clauses and corrective mechanisms:
  - Good escape-clause design should specify triggers, authority, timeline to revert, control mechanisms, and communication strategy.
  - April 2020 suspension did not invoke a specified escape clause or provide timeline/procedures to revert.
  - Commission can propose activation of escape clauses when a country faces "exceptional circumstances"; member government must propose corrective measures within 30 days.
  - Weaknesses: "Exceptional circumstances" vague; no guidance on designing measures to resume compliance or end activation.
- Sanctions and fiscal councils:
  - Current sanctions under Article 74 include publication of statements, withdrawal of positive measures, recommendation to WADB to review interventions, and suspension of union assistance.
  - In practice, financial sanctions never applied in WAEMU; reputational sanctions seen as more effective.
  - Proposal: increase reputational costs via national or regional fiscal councils.
- Public Financial Management and below-the-line operations:
  - WAEMU public debt increased by about 18 percentage points of GDP between end-2012 and end-2019; estimated above 44 percent of GDP.
  - Accounting decomposition: about two-thirds of debt increase due to cumulated fiscal deficits, about one-third due to cumulative stock-flow adjustments (SFA).
  - SFA averaged about 1.4 percent of GDP per year between 2013 and 2019; peak SFA in 2017 at 3.2 percent of GDP.
  - Country-average SFA (2013–19): Togo 2.3 percent of GDP; Senegal 2.2 percent; Benin and Côte d’Ivoire 1.4 percent.
  - Below-the-line operations include arrears clearance, debt perimeter extensions, prefinancing schemes, treasury financing of SOE deficits, and mis-recording of government arrears.
  - Consistent underestimation of SFA drives forecast errors on debt projections.
- Options to contain below-the-line operations:
  - Emphasize PFM strengthening rather than an additional debt accumulation rule.
  - Strengthen fiscal coordination and tax coordination to limit tax competition and harmful incentives.
  - Regional action plan on revenue mobilization adopted June 2019 to reach second-order revenue criterion; deadline end-2020 for actions.
  - Managing large idiosyncratic shocks: (i) compensate temporary deviations with extra efforts in unaffected countries (operational/political difficulties), or (ii) build a small union budget to mutualize risks (WAEMU budget was 0.2 percent of region GDP in 2019).

### BCEAO institutional framework, performance, and reform priorities
- Institutional objectives and structure:
  - Primary objective: price stability defined as an inflation rate of 2 percent in a ± 1 percent point range over a 24-month horizon.
  - FX reserves floor: monthly average of foreign exchange reserves should not fall below 20 percent of sight liabilities for three consecutive months.
  - Main decision bodies: Governor, Monetary Policy Committee (MPC), Board of Directors, Audit Committee, and National Credit Councils; Financial Stability Committee headed by the governor.
- Exchange rate regime and capital controls:
  - CFA Franc pegged to the euro; reform announced end-2019 includes renaming to ECO, end of requirement to deposit half of FX reserves in French Treasury “operations account,” and withdrawal of French representatives from BCEAO decision bodies, while maintaining convertibility and France's unlimited guarantee.
  - Controls on most outward capital transactions with non-WAEMU residents; no controls on current transactions within WAEMU and capital transactions between WAEMU countries unrestricted.
- Performance outcomes:
  - Average inflation around 2 percent (1999–2019) versus median >6 percent in rest of SSA.
  - Stable nominal exchange rate and low inflation contributed to gradual REER depreciation.
  - Sovereign external borrowing cost comparisons: WAEMU issuers spreads around 3.9 percent (2017–19) vs median 5.3 percent in other frontier SSA markets.
- Four areas where BCEAO framework could be strengthened:
  - 1) Policy trade-offs between external and internal stability: loss of FX reserves makes tightening more likely; peg can exert downward pressure on inflation if euro-area inflation is very low.
  - 2) Fiscal developments influence monetary policy: debt-to-GDP is a predictor; high public debt can make tightening less likely.
  - 3) The interbank rate is not a consistent operational target: interbank rate outside corridor two thirds of time since 2014 due to market segmentation and limited access to refinancing.
  - 4) Analytical capacity and transparency: need for systematic macro-model use and published inflation expectations surveys.
- Empirical evidence (Box 2):
  - Multinomial Probit Model finds lower FX reserves associated with higher likelihood of rate hikes; debt-to-GDP significant predictor making tightening less likely; coefficients on inflation and output gaps not always statistically significant.
  - Limitations: short sample, regime changes, HP filter for output gap.
- Operational and market-structure issues:
  - BCEAO operates half of a corridor (no deposit facility).
  - Access to central bank financing conditional on eligibility, borrowing limits, collateral requirements; government bonds illiquid.
- Policy recommendations for BCEAO strengthening:
  - Acknowledge external constraint and trade-offs more explicitly; short-term: enhance communication on policy reaction function; medium-term: adapt peg protection and consider rule-based FX intervention frameworks.
  - Strengthen central bank independence, accountability and governance; align appointments with best practices; consider non-renewable terms; legislate institutional setup and removal rules.
  - Reform collateral and liquidity frameworks: differentiate sovereign securities via haircuts; broaden eligible collateral away from excessive sovereign exposure.
  - Improve analytical capacity and communication: systematic macro-model use; publish surveys of inflation expectations.
  - Short-term operational priorities: deepen interbank repo segment; align legal framework with GMRA; develop robust short-term benchmark rates; strengthen forecasting and FPAS; publish SPF.
  - Medium-term priorities: develop multi-country models, enhance foreign-exchange intervention capacity, and strengthen technical capacity for stress testing.

### Deepening interbank market, benchmark rates, and transmission channels
- Short-term priorities:
  - Develop secured repo segment and align legal framework with international standards (GMRA).
  - Compute robust benchmark rates from granular interbank transactions; BCEAO has computed a new reference rate excluding counterparties not eligible for refinancing.
  - Strengthen balance sheets of commercial banks and improve data reporting; enforce Basel II/III adherence.
- Medium-term priorities:
  - Develop alternative benchmark rates for very short-term maturities to anchor the short end of yield curve.
  - Foster secured interbank transactions, improve collateral valuation, and introduce new market actors.
  - Enhance secondary market activity for public debt: better coordination between adjudication and syndication, proactive borrowing plans, transform SVTs into true market makers, and centralize continuous price quotations.
- Empirical transmission findings:
  - Credit channel: a 100 basis points increase in BCEAO policy reduces WAEMU private credit growth by about 3 percentage points one quarter later and by 4 percentage points cumulatively after one year (IMF, 2015).
  - Bank-level analysis around December 2016 tightening shows strong effects on sovereign holdings, interbank borrowing, and private lending; small and weakly capitalized banks reduced government security holdings and private credit supply.
- Market depth indicators:
  - Interbank outstanding: CFAF 615 billion (0.8 percent of WAEMU GDP) at end-2018.
  - Secondary market transactions for sovereign bonds in 2019 varied between 8 and 23 percent of total stock; primary dealer system (SVT) not sufficiently incentivizing market making.
  - Stock market (BRVM): number of listed companies rose from 37 (early 2013) to 46 (late 2019); market capitalization around 12 percent of GDP in 2018.

### Structural constraints on credit provision and recommended reforms to strengthen the credit channel
- Key banking sector vulnerabilities (end-2019):
  - Private credit: 25.1 percent of GDP (WAEMU), equal to the SSA median of 25.1 percent.
  - Credit concentration: credit to the five largest borrowers exceeded 83 percent of regional banking sector risk-weighted assets.
  - Non-performing loans (NPLs): 11.4 percent of total loans.
  - Banks’ reliance on BCEAO refinancing: about 40 percent of their sovereign bonds’ exposure at end-2019 (down from 60 percent at end-2016).
- Structural and institutional impediments:
  - Weak legal and judicial frameworks; narrow land registry coverage.
  - OHADA Uniform Act on Secured Transactions (2010) broadened eligible assets, but prudential rules not updated to reflect new instruments.
  - Undeveloped credit bureaus; new laws and bureaus introduced but coverage limited, especially for legacy loans.
- Short-term measures to boost lending:
  - Improve land registries and collateral registration; digitize records and automate procedures.
  - Require timely bank reporting to credit bureaus; remove consent clause hindering information sharing.
  - Coordinate BCEAO and OHADA to align prudential rules with collateral standards.
  - Strengthen supervisory enforcement of Basel II/III principles.
- Medium-term measures:
  - Strengthen supervisory and resolution frameworks; phase and enforce new prudential rules; reinforce stress-testing capacity; address bank capital shortfalls proactively.
  - Develop pricing models for illiquid asset markets and synthetic pricing for government bonds to support yield curve development.
- Conclusions and reform agenda:
  - Recent progress: BCEAO modernization since 2010 and adaptation to Covid-19 in 2020 contributed to exchange rate stability, low inflation, relatively low external borrowing costs, and allowed swift BCEAO response.
  - Outstanding challenges: multiplicity of objectives and constraints, lack of credible operational target, capacity constraints, shallow interbank and secondary markets, and structural impediments to the credit channel.
  - Recommended priorities:
    - Short term: clarify objectives and trade-offs, institutional reforms, make interbank rate an operating target, develop interbank benchmark rates, improve land registries and credit bureaus, and strengthen collateral framework.
    - Medium term: establish FX intervention framework, create incentives for banks to discriminate sovereign risks, systematic macro-model use, strengthen supervisory and resolution frameworks, and advance stress-testing technical capacity.
  - Overall goal: improve monetary policy effectiveness through multipronged actions across all transmission channels and deepen markets while strengthening banks’ balance sheets.

*International Monetary Fund — WEST AFRICAN ECONOMIC AND MONETARY UNION (excerpt provided in the supplied PDF).*

### 1. Cumulative COVID-19 Cases in WAEMU and SSA _________________________________ 5

### 1. Cumulative COVID-19 Cases in WAEMU and SSA

### Short-Term Health and Economic Impacts of the Pandemic in the WAEMU
- Pre-pandemic performance (2012–19):
  - Real GDP growth exceeded 6 percent (much above the 3.7 percent SSA average).
  - Inflation remained subdued.
  - Aggregate fiscal deficit declined below the regional convergence criterion of 3 percent of GDP in 2019.
- Health impact and containment:
  - All WAEMU countries implemented quarantine/self-quarantine, border closures, air travel restrictions, restrictions on public gatherings, and closures of schools, universities and places of worship.
  - As of December 2020, the number of cumulative cases represented less than 0.1 percent of the WAEMU’s population.
  - Testing capacity constraints imply many active cases may remain undetected; the true extent could be underreported.
- Economic impact:
  - WAEMU real GDP growth is expected to have declined to 0.3 percent in 2020, from 6.0 percent in 2019.
  - The 2020 outcome is almost 6 percentage points below the 2020 pre-Covid forecast.
  - Sectoral contractions were concentrated in construction, commerce, transportation and hospitality, with a sharp decline in activity end-Q1 and Q2 2020 and some rebound since Q3 2020.
  - Country-specific 2020 GDP projections:
    - Burkina Faso: contraction of 2.8 percent.
    - Guinea Bissau: contraction of 2.4 percent.
    - Mali: contraction of 2.0 percent.
    - Senegal: contraction of 0.7 percent.
    - Togo: real GDP in 2020 expected to be flat.
    - Other three member-countries: moderately positive growth.
  - Real per capita GDP growth turned negative in 2020 in all WAEMU countries, for the first time since 2011.
- Financial markets:
  - Covid-related repricing led to a significant widening of spreads on Eurobonds for WAEMU sovereigns with market access (Benin, Côte d’Ivoire and Senegal), though to a somewhat lesser extent than other SSA frontier countries.
  - Côte d’Ivoire issued a EUR 1 billion eurobond at a rate of 5 percent in November 2020.

### National Fiscal Policy Responses
- Fiscal position prior to Covid:
  - Aggregate fiscal deficit reduced from 3.6 percent of GDP in 2016 to 2.3 percent of GDP in 2019.
  - Public debt was 44.8 percent of GDP at end-2019.
- Emergency fiscal relaxation:
  - National supplementary 2020 budgets implied a relaxation of the fiscal stance by about 3 percent of GDP.
  - The aggregate fiscal deficit was revised up by about 3½ percentage points of GDP relative to 2019 due to emergency health and economic packages and cyclical revenue declines.
  - In April 2020, the Conference of Heads of States put the WAEMU convergence criteria in abeyance, suspending the 3 percent of GDP deficit ceiling and the 70 percent of GDP government debt ceiling (suspension declared temporary but without specified horizon or conditions for reinstatement).
- Decomposition of the 2020 fiscal revision (initial budget plans to most recent projections):
  - Total upward revision of 3.4 percent of GDP.
  - Of this 3.4 percentage points:
    - 1.4 percent of GDP is due to the fall in nominal GDP (mechanical increase in expenditure ratio).
    - The “discretionary” stimulus totals 1.2 percent of the pre-Covid GDP, mainly higher expenditure.
      - New spending on goods, services and transfers: 1.1 percentage point of GDP.
      - Higher non-discretionary current spending: 0.1 percentage point of GDP.
      - Capital spending: unchanged in percent of the pre-Covid GDP.
    - Revenue shortfall: 1.2 percentage points of GDP.
    - Higher external grants: 0.5 percentage points of GDP (partly offsetting revenue shortfall).
  - Note: the expenditure ratio is corrected for the cycle by freezing GDP at its pre-Covid estimate; the revenue ratio is not corrected for the cycle.
- Cross-country variation in fiscal response:
  - Fiscal expansion in 2020 relative to pre-Covid initial budget plans:
    - Togo: 4.7 percentage points of GDP (highest).
    - Burkina Faso: 2.6 percentage points of GDP (lowest).
  - Projected revenue losses (percentage points of GDP):
    - Mali: -2.7 percentage points of GDP.
    - Benin: -2.2 percentage points of GDP.
    - Senegal: -1.9 percentage points of GDP.
  - Senegal received higher grants equivalent to 2.2 percentage points of GDP and could finance new discretionary current expenditure of 2.3 percentage points of GDP with marginal capital spending cuts.
  - Côte d’Ivoire: anticipated smaller revenue loss of 0.4 percentage point of GDP and expected to increase expenditure by 2.0 percentage points of GDP excluding the impact of a lower GDP.
- Composition of measures:
  - Main focuses: (i) reinforcing national health systems, (ii) supporting vulnerable households, (iii) supporting businesses and protecting jobs.
  - Health measures: monitoring/containment, strengthening medical infrastructure and personnel, purchasing medical equipment, constructing temporary health facilities.
  - Social assistance delivery modes:
    - Mobile money/electronic cash transfers (Togo and Mali).
    - In-kind support (food distribution in Guinea-Bissau and Niger).
  - Example—Togo Novissi program:
    - Launched April 2020 for informal sector workers.
    - State grants cover at least 30 percent of the minimum wage, payouts from CFAF 10,500 ($18) to CFAF 20,000 ($34).
    - Beneficiaries identified via voter IDs and receive grants through mobile money, with a top-up for women.
    - As of December 2020: about 1.4 million individuals registered and close to 600,000 have received a NOVISSI payment, of which 65 percent are women.
    - Eligibility initially broad; later targeted to workers in specific high-contagion districts.
  - Business support measures: direct subsidies (e.g., Côte d’Ivoire), temporary tax deferrals (Burkina Faso and Senegal), guarantee funds to incentivize bank lending to SMEs (Benin and Mali).
- Financing of the fiscal response:
  - Higher fiscal deficits in 2020 financed almost entirely by external financial assistance from donors.
  - Financing mix: grants and additional borrowing equivalent to about 3½ percent of GDP.
  - About 40 percent of the external financing came from the IMF (program augmentations, emergency financing RCF and RFI, and debt-service relief through the CCRT).
  - Public debt implications:
    - Public debt ratio expected to increase and peak at 47.7 percent of GDP in 2021.
    - Pre-Covid projection had public debt gradually declining from its 2019 peak of 46.1 percent of GDP.

### Transparency, Accountability, and Governance Measures
- To catalyze external support, WAEMU countries committed to improved transparency and accountability in the use of international funds.
- Measures adopted by member-states include:
  - Enhanced governance measures to track Covid-related spending.
  - Most member-states announced independent ex-post audits of crisis-related spending; some committed to publishing audits (Mali and Niger).
  - Publication of crisis-related procurement contracts (Benin, Mali, and Senegal) and identification of awarded companies and beneficial owners (Benin, Côte d’Ivoire, Mali, and Senegal).
  - New monitoring mechanisms set up in Burkina Faso, Niger, Senegal and Togo to track expenses executed through the budget, by donors, and in-kind support.

*Source: WEST AFRICAN ECONOMIC AND MONETARY UNION, INTERNATIONAL MONETARY FUND, "WAEMU—INITIAL POLICY RESPONSE TO THE COVID-19 CRISIS" (January 25, 2021).*

### 17.      Amid limited fiscal space, emergency support has also been provided by the regional

### 1wauea2021002 - 17.      Amid limited fiscal space, emergency support has also been provided by the regional

### Monetary policy response and liquidity provision by the BCEAO
- Primary aim since the start of the Covid-19 crisis: prevent liquidity shortages and avoid market freezes.
- Before the crisis: BCEAO provided pre-set amounts of refinancing to banks through auctions against government securities.
- Since the crisis began, BCEAO introduced several measures to provide ample liquidity to banks; these measures helped offset liquidity risk and ensured continued access to liquidity.
- Average auction rates for central bank refinancing operations declined by about 0.75 percentage points relative to March and are now at an historically low level.
- In March, BCEAO shifted to a fixed-rate full allotment (FRFA) tender procedure:
  - Implied satisfying the market’s demand for central bank liquidity in full at a set interest rate.
  - Eligible WAEMU financial institutions now have unlimited access to central bank liquidity at the main refinancing rate, subject to adequate collateral and financial soundness.
  - At introduction, the FRFA policy reduced the average rate of refinancing operations by about 25 basis points compared to before the crisis.
- In June, the BCEAO Monetary Policy Committee cut by 50 basis points both the ceiling and the floor of the interest rate corridor, to 4 and 2 percent respectively.
  - Note: WAEMU policy rate was already one of the lowest in Africa.

### Collateral-easing measures and support for bank lending
- In March the BCEAO extended the collateral framework for central bank refinancing to include bank loans to prequalified 1,700 private companies.
- As of end-December 2020, private sector claims accounted for 4.3 percent of the collateral portfolio held by the BCEAO.
- The collateral-easing measures enlarged the pool of collateral available for commercial banks and facilitated BCEAO refinancing operations.
- By acting promptly, the BCEAO avoided acute shortages of eligible collateral and adverse procyclical feedback effects.

### Covid-19 T-Bill program (2020)
- Purpose: smooth WAEMU governments’ cashflows and support orderly functioning of financial markets during the initial months of the crisis before donor emergency financing disbursements.
- Mechanism:
  - Banks could refinance special 3-month “Covid-19 T-Bills” issued in limited amounts by WAEMU member states on the regional financial market with assistance from Agence UEMOA-Titres (AUT).
  - Banks could submit these T-Bills for refinancing at a special BCEAO window at the prevailing refinancing operations interest rate from the day of their issue and at the latest one month after acquisition, for the remaining term of the security.
  - The "Covid-19 T-Bills" were the only eligible assets on this special window.
- Program scale and timing:
  - Introduced in April-May for a global amount of 1.3 percent of WAEMU GDP.
  - Extended through partial rollovers until the end of 2020.

### Measures to promote electronic payments
- WAEMU authorities encouraged use of digital payments to limit physical contact.
- Measures included:
  - Free nationwide bank money transfers (below a certain threshold).
  - Free electronic payments for electricity and water bills via mobile phone.
  - Lower commissions paid by retailers for the use of electronic payments.
  - Increase the ceiling of electronic wallets.
  - Reduction in fees applied to bank transfers.
  - Elimination of fees for cash ATM withdrawal within the GIM network (Groupement Interbancaire Monétique de l'Union Economique et Monétaire Ouest Africaine).

### Regulatory and supervisory response to mitigate procyclicality
- BCEAO took swift supervisory measures to increase the banking sector’s capacity to absorb losses and support distressed firms and households.
- Forbearance framework (introduced March 2020, expired end-2020):
  - Banks and microfinance institutions were encouraged to postpone, for a 3-month renewable period, debt service falling due for solvent clients with Covid-related repayment difficulties, without reclassifying such postponed claims as non-performing.
  - A monitoring and facilitation structure called "Covid-19 mechanism" was set up to strengthen dialogue between firms and financial intermediaries.
  - As of end-August 2020, the total amount of bank loans for which some repayment was deferred was equivalent to 5 percent of bank credit outstanding for the whole of WAEMU.
- Capital preservation and transition to Basel II/III:
  - BCEAO extended by one year the five-year period for the transition to Basel II/III prudential requirements: transition started in 2018 and will now end in 2023 instead of 2022.
  - Regulatory capital adequacy ratio to remain unchanged at end-2020 from its 2019 level of 9.5 percent, before gradually increasing to 11.5 percent by 2023.
  - In November 2020 BCEAO temporarily limited the distribution of dividends (related to 2020 profits) for all banks to help preserve capital buffers.
- Prudential standards:
  - Regional authorities did not relax prudential and accounting requirements.
  - BCEAO maintained standards to avoid incentivizing excessive risk-taking and hiding poor underwriting practices, relying on flexibility embedded in regulation (use of buffers built in good times).

### Economic and policy implications of insecurity in the Sahel (summary of regional context and risks)
- Background:
  - Significant violent conflicts over two decades; resurgence starting with the Tuareg rebellion in Northern Mali in 2012 and spread thereafter to Burkina Faso and Niger.
  - The security crisis undermines growth prospects, development outcomes, and public finances in afflicted countries and poses spillover risks to the entire WAEMU, including threats to the currency union’s external stability and exchange rate peg.
- Recent conflict dynamics and geographic spread:
  - Violence spread to Burkina Faso in late 2014 and intensified; Burkina Faso described as the “epicenter” of the conflict in the Sahel.
  - Boko Haram in Northeastern Nigeria remains active and deadly, affecting the Lake Chad region (Nigeria, Chad, Cameroon, Niger).
  - Niger faces cross-border incursions and attacks; two attacks on military camps close to the border with Mali in December 2019 and January 2020 left over 150 soldiers dead.
- Deterioration in incident metrics and humanitarian toll:
  - Terrorist incidents rose 70 percent in 2019 alone to reach 800 in the G5-Sahel countries (Burkina Faso, Chad, Mali, Mauritania, and Niger).
  - Fatalities from violent events involving extremist groups have doubled every year since 2015, reaching 5,500 in the G5-Sahel countries in 2019, of which 4,000 occurred in Burkina Faso, Mali, and Niger.
  - Humanitarian impacts:
    - 1.1 million internally displaced people and 750,000 refugees in the G5-Sahel countries.
    - Urgent food assistance needs doubled to 2.4 million people in Burkina Faso, Mali, and Niger.
    - An estimated 2,000 schools are closed in the conflict zones of Burkina Faso, Mali, and Niger, putting 10,500 teachers out of work and interrupting the education of some 400,000 children.
- External military and civilian assistance to date:
  - French operation “Serval” (December 2012) and subsequent “Barkhane” comprised 4,500 men; France committed 600 additional troops at the January 2020 Pau summit.
  - MINUSMA UN peacekeeping mission numbered 13,000 (contextual reference earlier in the chapter).
  - Some 800 American military personnel are stationed in Niger for training and intelligence purposes.
  - European countries provide another 600 men for training.
  - Civilian coordination and aid initiatives: Sahel Alliance launched July 2017; Partnership for Security and Stability for the Sahel (P3S) announced at August 2019 G7 summit (yet to be launched); International Coalition for the Sahel launched at the Pau Summit in January 2020.

*Source: WEST AFRICAN ECONOMIC AND MONETARY UNION — International Monetary Fund, chapter content provided in the supplied PDF excerpt.*

### 10.      Regional initiatives have yet to develop their potential, despite external pledges and

### 10.      Regional initiatives have yet to develop their potential, despite external pledges and regional commitments of substantial new resources

### Regional initiatives and resources
- G5-Sahel Joint Fighting Force established in July 2017; due to include 5,000 military personnel from Burkina Faso, Chad, Mali, Mauritania, and Niger.
- Necessary €414 million to train and equip the G5-Sahel force have been pledged, though not fully disbursed as of now; the force is not yet fully operational.
- Multinational Joint Task Force of the Lake Chad Basin composed of militaries of Cameroon, Chad, Niger, and Nigeria to fight Boko Haram.
- WAEMU committed US$500 million over 2020-24 to fight terrorism in the region and announced a first disbursement of US$100 million for the benefit of Burkina Faso, Mali, and Niger.
- ECOWAS adopted an action plan of US$2.3 billion for regional security at its December 2019 summit, including US$1 billion from internal resources.
- Policy note: "As spending on these initiatives grows and accelerates, adequate controls must be continually implemented to prevent the leakage of donor and internally generated funds, whether to corruption or to mismanagement."

### The impact of insecurity on economic activity — empirical findings
- Empirical estimate (SSA Regional Economic Outlook, IMF, 2019): annual real GDP growth in the average country with high-intensity conflict is 3.2 percentage points lower than it would have been in the absence of conflict; translates into a cumulative loss of 15-20 percent in per-capita income for episodes that last five years or longer.
- Definition: A conflict that claims 29 or more deaths per million of people per month is considered “high intensity.”
- Conflict reduces growth via lower investment, trade, and productivity, and by destruction of human and physical capital.
- Stronger institutions and better fiscal fundamentals have a mitigating effect on the growth impact of conflict.

### WAEMU-specific empirical results and quantitative estimates
- Conflict-affected areas account for 9, 4, and 13 percent of national GDP in Burkina Faso, Mali and Niger, respectively (measured using night-light intensity as proxy for regional economic activity).
- WAEMU-tailored estimation: a conflict causing 7 fatalities per million of population in one month is estimated to reduce annual night lights by about 0.13 percent, equivalent to 0.06 percent of annual GDP.
- For 79 fatalities per million, the negative growth effect is an estimated 0.7 percent of annual GDP.
- Comparative result: estimations for all of sub-Saharan Africa or the world find an effect of violence on economic activity more than two times stronger than in the WAEMU.
- Cumulative real GDP loss for Burkina Faso, Mali, and Niger (aggregating regional effects) is between 0.5 and 1.4 percent, depending on whether population or night-light weights are used.
- Corresponding output loss for the WAEMU as a whole is between 0.1 and 0.4 percent of GDP.
- Econometric table excerpt (impact of conflict on night lights): Deaths per 1000 people coefficients — World: -0.312**, SSA: -0.411***, WAEMU: -0.182***; robust standard errors (0.130), (0.141), (0.057) respectively; observations: World 179,681; SSA 41,481; WAEMU 4,835; R-squared: World 0.539; SSA 0.490; WAEMU 0.503.

### Risks and channels for escalation
- Factors that would materially increase economic toll:
  - Violence creeping closer to centers of economic activity.
  - Violence spreading to more WAEMU countries, particularly Côte d’Ivoire and Senegal.
  - Further escalation in Burkina Faso, Mali, and Niger raising the association with economic activity.
  - Long-term effects through disruptions to education and health care.
  - Dynamic effects of sustained violence that may not be fully captured by current regressions.

### Fiscal impact of insecurity in WAEMU Sahel countries — aggregate pressures
- Direct budgetary pressures: necessary increases in military, national guard, gendarmery, and police spending.
- From onset of insecurity until end-2019, military spending has roughly doubled, equivalent to an increase of 2 percent of GDP (equivalent to about US$850 million).
- Revenue effects: with the limited output loss to date, estimated revenue loss ranges from 0.1 to 0.4 percent of GDP cumulatively for 2014–19, depending on country and regional weighting.
- Crowd-out risk: evidence mixed to date on crowding out of other spending, but clear risks if aid falls or domestic revenue mobilization weakens.

### Country highlights and fiscal dynamics

- Mali
  - GDP contracted by 1.5 percent in 2012; GDP grew by 2.3 percent in 2013; decline of 2012–13 growth performance to 0.7 percent from 4.3 percent previously.
  - Security spending rose from 1.7 percent of GDP before the outbreak of violence to 3.7 percent of GDP in recent years.
  - Fiscal deficit rose until 2019 then reversed: foreign aid doubled to 6 percent of GDP in 2019 and fiscal deficit declined to 1.7 percent of GDP.
  - Domestic revenue mobilization played a key role in preventing larger deficits and protecting non-security spending over the period.

- Burkina Faso
  - Security spending ramped up from 0.8 percent of GDP in 2015 to 3.1 percent of GDP in 2019.
  - Fiscal deficit surged from 2.1 percent of GDP in 2015 to 6.9 percent of GDP in 2017; by 2019 it was brought back to 3.5 percent of GDP through revenue mobilization and normalization of non-security spending.
  - Foreign aid in 2019 was 4.6 percent of GDP, lower than in 2015 and lower than in Mali and Niger.
  - Ratio of domestically-financed non-security spending to GDP was slightly higher in 2019 than in 2015; ratio of social spending to GDP remained unchanged.

- Niger (summary points across sections)
  - Conflict-affected regions account for 13 percent of national GDP by night-light measure.
  - Estimated cumulative real GDP loss and revenue loss are within the ranges reported for the BFA-MLI-NER group (see aggregated figures above).

### Policy implications emphasized
- Implement and maintain adequate controls to prevent leakage of donor and internally generated funds as regional security spending increases.
- Prioritize containment and roll-back of violence to avoid escalation into economic centers and spread to other WAEMU members.
- Protect domestic revenue mobilization efforts to finance security needs without unduly crowding out social and development spending.
- Recognize the critical role of timely and sufficient foreign aid in alleviating fiscal pressures while safeguarding development spending.

*International Monetary Fund — WEST AFRICAN ECONOMIC AND MONETARY UNION (excerpt provided from the source content).*

### 30.      The Burkinabe experience underscores the importance of public spending efficiency

### 30.      The Burkinabe experience underscores the importance of public spending efficiency 

### Burkinabe experience and fiscal challenges
- Donor support declined despite rising needs to spend on security.
- Government actions: reversed an initial run-away in non-security spending and mobilized more domestic revenues.
- Some of the additional revenues in 2019 are temporary; public finances will likely continue to face challenges.

### Niger: security spending, fiscal outcomes, and role of aid (paragraphs 31–34)
- Security spending:
  - Increased early in response to regional tensions: security spending rose to 3.3 percent of GDP in 2019, compared to 1.1 percent in 2011.
- Incidence of violence:
  - Number of incidents rose sharply in 2019 to 103, about one third of the level seen in Burkina Faso or Mali.
- Fiscal deficit dynamics:
  - Fiscal deficit rose from 2.2 percent of GDP in 2011 to a peak of 6.7 percent of GDP in 2015.
  - By 2019, the fiscal deficit had been reduced to 3.6 percent of GDP.
- Drivers of stabilization:
  - Normalization of domestically-financed non-security expenditures.
  - Pronounced step-up in foreign aid: total aid increased from 4.9 percent of GDP in 2011 to 11.5 percent of GDP in 2019.
  - Within aid, budget support grants increased from 1.4 percent of GDP to 2.6 percent of GDP.
  - Niger also mobilized additional domestic revenues.
  - Foreign loan-financed investment increased by a similar amount.
- Crowding-out evidence:
  - Little evidence that security spending crowded out non-security spending; domestically-financed non-security spending is close to pre-violence ratios as a percent of GDP.
  - Foreign-financed investment expanded strongly, leaving total non-security spending in 2019 substantially higher than in 2011.
- Role of foreign aid:
  - The pronounced rise in budget grants allowed Niger to accommodate rising security outlays and to channel additional domestic revenues into additional non-security spending.

### Macroeconomic policy implications of insecurity (paragraphs 35–39)
- Nature of shock:
  - Ongoing surge in violence in the Sahel may be viewed as a durable and large shock with potentially substantial adverse spillover effects to the WAEMU.
  - Risk of spread southward, affecting regions and sectors with larger weight in overall economic activity.
- Need for collective response:
  - Security is a public good at national, regional, and global levels.
  - All stakeholders (including other WAEMU countries, donors, and IFIs) should play roles tailored to their circumstances, responsibilities, and comparative advantage.
  - Directly afflicted countries bear ultimate responsibility to adjust but their adjustment could be smoothed through regional and international solidarity.
  - Regional institutions have a critical role (example: strengthened risk-based AML/CFT supervision by the Banking Commission to prevent/detect terrorist financing and corruption).
- Policy adjustments for afflicted countries:
  - Adjust through a combination of higher revenue, improved spending efficiency, and prioritization; durable external support would help.
  - Improvements needed in fiscal transparency, public financial management (PFM), and AML/CFT regimes at the national level; risk-based AML/CFT supervision at the regional level.
  - Immediate priority: strong regulations to guide emergency procedures.
  - Increase strategic orientation and quality of security spending, raise governance standards, and improve data provision for the security sector.
  - Security expenditure reviews and regional guidance on common data standards could assist.
- Regional solidarity options:
  - Short-term measures could prevent crowding out of investment and social expenditure in front-line countries.
  - Options mentioned:
    - Allowing the three frontline countries (Burkina Faso, Mali, and Niger) to converge more slowly toward the 3 percent of GDP regional fiscal deficit ceiling, conditional on fiscal consolidation by other member countries and safeguards for external reserves and regional bond market stability. (Upcoming review of the regional fiscal framework scheduled for 2021 could provide an opportunity.)
    - Pooling of national budget resources and transfers from a common pool to countries subject to security shocks.
  - WAEMU decision (early December 2019) to create a “Regional Fund” managed by the WAEMU Commission to support member countries’ security actions through grants.
    - Pledged total equivalent: US$500 million over five years, with a first tranche of US$100 million for immediate benefit of Burkina Faso, Mali, and Niger.
    - If disbursed, the first tranche would allow the three beneficiary governments to increase spending by about 0.25 percent of their GDP.
- Scaled-up external assistance:
  - Larger international envelope would ease spending trade-offs and, if highly-concessional, would not much affect public debt sustainability.
  - Reexamine mix between budget support and project aid:
    - Project aid: important for acute relief, state presence, and economic opportunities.
    - Budget support: gives quick financial relief for top priorities, including security.
  - Technical assistance should be increased to help mobilize domestic revenues and improve use of limited resources; strong case for scaling up technical assistance for countries classified as “fragile states.”
  - Security-focused public expenditure reviews by the World Bank in Sahel countries are noted as a promising initiative.

### Conclusions: economic and fiscal consequences and policy trade-offs (paragraphs 40–44)
- Security deterioration risks:
  - Deteriorating security in the Sahel poses grave risks for the WAEMU.
  - Terrorism incidents rose steeply in 2019; fatalities surged in 2020; humanitarian toll compounded by the Covid crisis.
  - If the bulwark in the Sahel crumbles, consequences would be dire for afflicted countries and the entire WAEMU region.
- Economic fallout to date:
  - Negative effect on economic activity has so far been limited but could quickly change.
  - Economic literature finds conflicts reduce GDP growth substantially; for the three afflicted WAEMU countries the magnitude is smaller because:
    - Conflict intensity has not reached full-blown civil war levels.
    - Conflict is concentrated in peripheral regions with low economic activity.
  - Risk that negative effect on growth could become more pronounced if conflict spreads to economic centers or intensity escalates.
- Main economic impact:
  - Effect concentrated on public expenditure rather than revenues: security outlays have roughly doubled in the three WAEMU Sahel countries from 1–2 percent of GDP to 4–5 percent of GDP.
  - Stepped-up revenue mobilization and, in Niger, rising external aid brought fiscal deficits back down after initial deterioration and helped avoid systematic crowding out of non-security spending.
  - Without the conflict, these additional resources could have been used for development and social protection.
- Trade-offs and risks going forward:
  - Solid public finances in the WAEMU are essential for external stability and the exchange rate peg.
  - Front-line states face challenges keeping fiscal deficits low if:
    - Security spending needs to increase further.
    - Foreign aid falters.
    - Some revenue mobilization measures are temporary.
    - Violence further reduces economic activity and revenue collection.
- Regional collective response:
  - Interlinkages among WAEMU countries call for regional collective responses supplementing national efforts and development partner support.
  - Options: differentiating pace of convergence toward the regional deficit ceiling or deploying common resources to address security challenges.
  - These would be temporary arrangements to give afflicted countries more time to achieve needed adjustment when faced with long-lasting shocks.
  - Urgency favors quick decisions and solutions that can be implemented expeditiously.

*Source: WEST AFRICAN ECONOMIC AND MONETARY UNION, INTERNATIONAL MONETARY FUND (excerpt).*

### Annex II. Overview of Security Systems in the G5-Sahel Countries

### Annex II. Overview of Security Systems in the G5-Sahel Countries

### Security forces by country
- Burkina Faso: total security force of 47,000 persons.
  - Defense forces: 27,000
  - Gendarmerie: 5,219
  - Police: 15,000
- Chad: total security force of 30,000-40,000 persons.
  - National Defense (National Army, Ground Forces, Air Force, National Gendarmerie, National and Nomadic Guard of Chad): 25-30,000
  - National police: 5,000-7,000
  - Public order and safety also ensured by the gendarmerie and the national and nomadic guard
- Mali: total security force of 27,000.
  - National Defense: 13,000
  - National Guard: 3,000
  - Gendarmerie: 4,000
  - Police: 6,000
- Mauritania: total security force of 21,000.
  - Army: 15,000
  - Navy: 620
  - Airforce: 250
  - Gendarmerie: 3,000
  - National Guard: 2,250
  - National Police: 4,600
- Niger: total security force of 43,000 persons.
  - Army: 19,000 persons
  - Gendarmerie: 7,200 persons
  - National Guard: 9,000
  - Police: 8,100

### Data sources and notes on security-force figures
- Sources referenced: Globalfirepower.com; www.securityassistance.org; ISS; http://french.china.org.cn/foreign/txt/2014-06/11/content_32629144.htm; Niger, 2017 Security Public Expenditure Review update.
- Additional context cited: a census was conducted in 2014 in Chad followed by recruitment of about 2,000; another census undertaken in 2018 to control the wage bill.

### WAEMU fiscal framework: rationale and recent developments
- Fiscal discipline and coordination are essential in a currency union, especially with a pegged common currency; fiscal actions of one member can affect others through trade and contagion channels and can deplete international reserves under a fixed exchange rate.
- The WAEMU Pact for Convergence, Stability, Growth and Solidarity was suspended in April 2020 to allow member-countries to respond to the COVID-19 crisis; the suspension exempts authorities from abiding with fiscal rules, including the 3 percent of GDP deficit ceiling.
- A review of the WAEMU fiscal framework is being conducted in 2021 by the Commission, which will submit proposals of reform to the WAEMU Council of Ministers.

### Three institutional pillars to support fiscal discipline
- Common fiscal rules
- Shared public financial management systems
- Coordination mechanisms for decentralized fiscal policies

### Fiscal rules design: debt anchor and operational rule
- WAEMU framework currently includes:
  - Debt ceiling of 70 percent of GDP
  - Operational rule capping the fiscal deficit at 3 percent of GDP
- Considerations and proposals:
  - The 70 percent debt ceiling "is not based on a quantitative analysis or concept of debt distress."
  - IMF (2019) argued that lowering the debt ceiling to 60 percent of GDP would be more consistent with preventing most WAEMU member countries from falling into higher risk of public debt distress.
  - Calibration example: assuming potential nominal GDP grows at 6 percent at the steady state in the WAEMU, a deficit of 3 percent of GDP would bring gradually the debt ratio towards 50-60 percent of GDP (depending on the size of the below-the-line operations).
  - Alternative operational rules discussed:
    - Structural balance rule (SBR): problematic because countries tend to overestimate potential output and underestimate the output gap; SBRs can allow excessive spending and are complicated to implement.
    - Expenditure rule: can achieve similar stabilization with a smaller bias but may discourage revenue mobilization unless it accounts for revenue measures.
  - Conclusion in current assessment: maintaining the 3 percent deficit ceiling (unadjusted for the business cycle) seems most appropriate at the moment.

### Uniformity of deficit rule across WAEMU countries
- Maintaining a uniform fiscal deficit rule is recommended despite some countries (Senegal and Niger) recently discovering natural resources and likely entering production phases.
- Differentiated rules for commodity exporters versus importers are considered complex and risky due to calibration difficulties, volatility of spending, and weak historical precedent within currency unions.

### Convergence criteria (in effect until 2019) — key facts
- On January 19, 2015, WAEMU Heads of States adopted new convergence criteria to be met by 2019; the reform envisaged a convergence phase followed by a stability phase.
- At end-2019, first-order convergence criteria were met at the regional (aggregate) level but not by each individual country. WAEMU Commission assessment (as of November 2019) reported:
  - Aggregate fiscal deficit: 2.3 percent of GDP
  - Public debt: 44.8 percent of GDP
  - CPI inflation: close to zero at end-2019
- First-order criteria of the convergence phase (Ceiling/Floor):
  - Overall fiscal balance (grants included) to nominal GDP ≥ -3 percent
  - Average consumer price inflation per year ≤ 3 percent
  - Total debt to nominal GDP ≤ 70 percent
- Second-order criteria (Ceiling/Floor):
  - Wages and salaries to tax revenue ≤ 35 percent
  - Tax revenue to nominal GDP ≥ 20 percent
- At end-2019: all WAEMU countries met the debt and inflation criteria; neither second-order criterion was met at the regional level; only Senegal met the wage and salaries criterion; all countries breached the revenue criterion.

### Fiscal rules enforcement: monitoring, escape clauses, and corrective mechanisms
- Effective enforcement requires:
  - An independent entity monitoring the rule
  - Well-specified escape clauses for authorized deviations
  - Correction mechanisms and sanctions for unauthorized deviations
- Current monitoring under WAEMU:
  - The Commission publishes two reports (June and December) examined by the Council of Ministers.
    - June report: assesses previous year performance and reviews macroeconomic objectives for the current year.
    - December report: focuses on the budget law and forward-looking five-year convergence plans (to be submitted by end-October).
  - Strengthening the Commission's independent enforcer role may require increased capacity and rebalancing power vis-à-vis the Council of Ministers, possibly amending the WAEMU Treaty.
- Escape clauses:
  - Purpose: allow temporary deterioration of fiscal position in special circumstances while preserving credibility.
  - Good design should specify: (i) limited and clearly defined triggering events; (ii) authority responsible for activation; (iii) timeline and procedures to revert to the rule; (iv) an effective control mechanism; and (v) a communication strategy.
  - April 2020 suspension of convergence criteria was justified by COVID-19 pressures but did not invoke a specified escape clause or lay out a timeline and procedures to revert to the rules.
  - Under the WAEMU framework, the Commission can propose activation of escape clauses when a country faces "exceptional circumstances"; the Commission can also propose a directive defining size and duration of deviation and the member government must propose corrective measures within 30 days.
  - Identified weaknesses:
    - "Exceptional circumstances" remain vague in the framework (though regulation 11/99/CM/UEMOA provided some criteria related to government revenues and real GDP).
    - No guidance on designing the measures to resume compliance or to end activation of the escape clause.
    - Risk that poorly specified escape clauses lead to rules being put in abeyance after large shocks or to ad hoc measures.

*International Monetary Fund — Annex II. Overview of Security Systems in the G5-Sahel Countries*

### 14.      The WAEMU would benefit from introducing more specific escape clauses for

### 14. The WAEMU would benefit from introducing more specific escape clauses for exceptional events

### Escape clauses for exceptional events
- Recommendation: introduce more specific escape clauses for severe economic downturns or natural disasters; these can be defined with some degree of precision and quantified triggers.
- Warning: avoid vague escape clauses such as “emergency situation” or “public calamities” because they could allow too much discretion.
- Caveat: escape clauses for epidemic or security shocks may be questionable in WAEMU cases where such situations may not constitute exceptional events and would require adjusting the fiscal stance rather than repeated deviations from fiscal targets.
- Operational challenge: estimating the impact of security and health shocks on the fiscal balance could be very complex given wide-ranging effects on both government spending and revenue.
- Communication requirement: an escape clause should be accompanied by a well-designed communication strategy outlining the process to return to the rule.
  - Critique: The Declaration suspending the deficit ceiling did not indicate a time frame for when consolidation would resume or how long to re-attain the convergence criteria.
  - Guidance: future announcements should make explicit references to:
    - the triggers of the escape clauses,
    - the expected size and duration of the deviation,
    - the advised path to return to the 3 percent ceiling.
  - Procedural detail: when the Commission considers a national convergence plan inadequate and the breach likely, it recommends the Council of Ministers to request the member government to resubmit an appropriately revised plan within 30 days; a member’s compliance is assessed in the June report of the following year.
- Reference to IMF guidance: (IMF, 2020).

### Correction mechanisms (in case of unauthorized deviations)
- Definition: correction mechanisms are a formal set of measures aiming to specify a path back to compliance following a breach or a projected breach.
- Role: useful to avoid permanent drifting of public debt and to defend the peg.
- Convergence phase:
  - A breach of a first-order criterion requires the country to implement corrective measures cleared by the Commission and approved by the Council of Ministers.
  - If the Commission considers a national convergence plan inadequate and a breach likely (Commission’s December reports), the resubmission within 30 days and the June assessment apply.
- Stability phase:
  - Corrective measures required by the Council of Ministers for observed breaches of first-order criteria.
  - Only recommendations are issued for projected breaches.
- Sanctions: failure to implement appropriate corrective measures could lead to sanctions imposed by the Council of Ministers.
- Shortcomings: the current correction mechanisms framework is vague and lacks guidance—specifically it does not cover:
  - the pace of correction,
  - risks,
  - milestones and deadlines,
  - supervisory requirements,
  - economic cost.

### Sanctions, reputational costs, and fiscal councils
- Current sanctions under Article 74 of WAEMU’s Modified Treaty can be declarative or financial:
  - (i) publication of a statement by the Council of Ministers, possibly with additional information on the member state’s situation,
  - (ii) publicly announced withdrawal of any positive measures that may have benefited the member state,
  - (iii) recommendation to the West African Development Bank to review its policy of interventions in favor of the member state,
  - (iv) suspension of union assistance to the member state.
- Critique: these sanctions are mostly of a financial nature, lack credibility and may be counter-productive (loss in resources can worsen the fiscal position).
- Empirical note: in practice, financial sanctions have never been applied in the WAEMU.
- International experience: reputational sanctions are generally more effective (Eyraud and others, 2018).
- Proposed improvement: increase reputational costs by setting up fiscal councils.
  - Options:
    - create eight national fiscal councils (home-grown) — to have material impact they need local ownership,
    - associate national councils with existing independent institutions (e.g., devolve some responsibilities to national BCEAO offices),
    - create a single regional fiscal council tasked with assessing fiscal policy and compliance for all member states.
- Institutional references: Article 18-22 of Additional Act no. 01/2015/CCEG/UEMOA; Article 18 of Additional Act no. 01/2015/CCEG/UEMOA.

### Public Financial Management (PFM) reforms
- Second pillar: a sound framework for PFM covering formulation, approval, and execution of the budget.
- Risks of weak PFM:
  - inappropriate budgetary processes can cause unsustainable increases in expenditure and unbudgeted liabilities,
  - poor or nonexistent financial information can undermine government finances.
- Importance in WAEMU: recent years show budget deficits were not the only driver of rising public debt (Feler and Simard, 2019; Versailles, 2018).
  - In some countries, the deficit ratio has gone down while the debt ratio continued increasing.
  - This disconnect is partly due to “below-the-line operations”: extrabudgetary spending, quasi-fiscal operations, pre-financing schemes, recapitalization of underperforming SOEs, and mis-recording of government arrears.
- Policy priority: upgrade the PFM system to ensure the 3 percent deficit rule remains an effective tool to constrain the debt trajectory.
- WAEMU directives (2009) aimed to:
  - harmonize presentation of fiscal statistics according to the GFSM 2001 standards,
  - strengthen accountability by fostering transition to results-based budgeting and clarifying responsibility lines,
  - buttress internal financial controls over budgetary execution.
- Gap: directives do not provide guidance on fiscal risk management.
- Implementation status (2019 Commission evaluation):
  - Mixed implementation across member states and reform areas.
  - Improving presentation of fiscal accounts relatively advanced.
  - Adoption of laws to improve internal expenditure controls and transparency of accounts has lagged.

### Public debt dynamics and below-the-line operations (2012–19)
- Summary statistics and dynamics:
  - WAEMU public debt increased significantly since 2012.
  - Debt-to-GDP ratio increased by about 18 percentage points of GDP between end-2012 and end-2019 and is currently estimated at above 44 percent of GDP.
  - Accounting decomposition: about two-thirds of the debt increase was due to cumulated fiscal deficits, about a third arose from cumulative stock-flow adjustments (SFA) (abstracting from automatic debt dynamics of growth and exchange rate).
  - SFA averaged about 1.4 percent of GDP per year between 2013 and 2019.
  - Peak SFA in 2017: 3.2 percent of GDP at the WAEMU level (one-off operation related to expansion of the debt perimeter in Senegal).
  - SFA stabilized afterwards at 1 percent of GDP.
  - Country-specific average SFA between 2013 and 2019:
    - Togo: 2.3 percent of GDP on average,
    - Senegal: 2.2 percent of GDP on average,
    - Benin and Côte d’Ivoire: 1.4 percent of GDP on average.
- Nature of below-the-line operations:
  - Some reflect sound budget management (e.g., arrears clearance in Côte d’Ivoire in 2018, debt perimeter extension in Senegal in 2017).
  - Others reflect off-budget spending (prefinancing schemes in Benin, Togo and Senegal; treasury financing of persistent SOE deficits in Senegal).
- Forecasting consequences:
  - Consistent underestimation of SFA is the main factor behind forecast errors on debt projections.
  - Debt ratio increased by about 16 percentage points of GDP between end-2012 and end-2019, while the WEO October 2014 submission projected an increase of 2 percent of GDP over the same period.
  - Forecast errors mostly came from underestimation of SFA.

### Options on containing below-the-line operations and coordination
- PFM strengthening recommended over introducing an additional fiscal rule on debt accumulation.
  - Note on alternative: a debt accumulation rule (e.g., 1/20th debt rule) is difficult to implement, creates conflicts with other rules, fosters procyclicality, and causes confusion—debt should be a medium-term anchor, not a short-term operational target.
- Fiscal coordination in a currency union (third pillar):
  - Purpose: prompt countries to consider effects of their policy actions on other member states to avoid cross-country spillovers and underinvestment in shared-benefit programs.
- Tax coordination:
  - Case for enhancing tax coordination to limit tax competition and a race-to-the-bottom in targeted tax breaks.
  - WAEMU’s de jure tax coordination is advanced but de facto often ineffective due to incomplete implementation of directives.
  - Suggested reforms: revise regional tax directives to curb tax incentives through investment and sectoral codes and raise minimum rates of excises; strengthen monitoring and sanctioning mechanisms.
- Regional action plan on revenue mobilization:
  - Adopted by Council of Ministers in June 2019 (Decision no. 02/CM/2019/UEMOA).
  - Objectives: help countries reach the second-order convergence criterion on tax revenue and increase fiscal space for investment.
  - Focus: improve and standardize VAT collection, excise duty, and direct tax collection; reduce tax competition; strengthen information exchange and digitalization.
  - Deadline: all actions must be completed by either national authorities or the Commission by end-2020.
- Managing large idiosyncratic shocks with contagion effects:
  - Two main approaches:
    - Compensate temporary deviations from the rules in affected countries with additional fiscal efforts in unaffected countries.
      - Operational and political difficulties: quantifying allowed deviations, weak incentives for unaffected countries to make extra efforts, potential loosening of aggregate stance, and impairment of credibility of the rules.
    - Work towards a small union budget to mutualize risks (e.g., targeted common budget for health emergencies).
      - Current scale: WAEMU budget represented 0.2 percent of region GDP (CFAF 152 billion in 2019).
      - Comparative benchmark: European Union budget amounts to 1 percent of EU GDP.

*Source: WEST AFRICAN ECONOMIC AND MONETARY UNION — INTERNATIONAL MONETARY FUND (excerpt).*

### 1.      Over the last decade, the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO)

### 1. Over the last decade, the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO)

### Modernization and institutional reforms
- The BCEAO has modernized its monetary policy framework (MPF) with a view to better anchoring inflation and promoting macroeconomic stability.
- Key reforms in 2010 revamped the institutional framework: changes to decision-making bodies, revised monetary policy objectives, and a larger set of operational tools.
- WAEMU regulations and prudential supervision were aligned to international standards (WAEMU adopted Basel II and III standards simultaneously in 2016 and began their implementation in 2018).

### Objectives and institutional structure
- Primary objective:
  - Price stability defined as an inflation rate of 2 percent in a ± 1 percent point over a 24-month horizon (Article 8 of the BCEAO statutes).
- Secondary objectives:
  - Support of sound and sustainable economic growth (Article 8).
  - Pursuit of member countries’ integration in the economic union “without prejudice to objectives assigned to it” (Article 62).
- FX reserves floor:
  - The BCEAO should not let the monthly average of foreign exchange reserves fall below 20 percent of its sight liabilities (banknotes in circulation and deposits at the central bank) for three consecutive months (Article 76).
- Main decision bodies established after the 2010 reforms:
  - Governor, Monetary Policy Committee (MPC), Board of Directors, Audit Committee, and National Credit Councils (one council in each member state).
  - A Financial Stability Committee headed by the governor, comprising mainly regulators (banking commission, social security regulator, insurance regulator, and the capital market authority).

### Exchange rate regime and capital controls
- The CFA Franc (CFAF) is the legal tender in the WAEMU and is officially pegged to the euro; the CFAF is expected to be replaced by the ECO in the future.
- The FX arrangements reform announced end-2019 comprises three main components:
  - (i) a future change in the name of the currency CFA franc to ECO;
  - (ii) the end of the requirement to deposit at least half of the foreign exchange reserves in the “operations account” of the French Treasury, in addition to the closure of this account; and
  - (iii) the withdrawal of the French representatives from the decision-making bodies of the BCEAO.
- Principles that remain unchanged:
  - (i) the convertibility of the CFAF franc into euro at a fixed parity; and
  - (ii) the unlimited guarantee of convertibility of CFA franc into euro by France.
- Capital controls:
  - Controls on most outward capital transactions with non-WAEMU residents; prior approval by the ministry of finance is generally required for virtually all outward capital transfers except specified exceptions.
  - No controls on current transactions within the WAEMU and capital transactions between WAEMU countries are unrestricted.

### Monetary policy instruments and operational target
- Operational target:
  - Steering the interbank interest rate (operational target) close to the policy rate.
- Policy rate:
  - The minimum bid rate is the minimum rate at which commercial banks can submit bids for liquidity at weekly refinancing auctions; it is the main policy rate.
- Corridor and standing facilities:
  - The maximum (marginal) lending rate is currently set at 200 basis points above the minimum bid rate and acts as the ceiling of the corridor.
- Reserve requirement:
  - Set as a share of banks’ deposits, short-term credit, and gross external assets; maintained on average over one month.
- Market rates definitions:
  - Money market rate (taux marginal): marginal rate of liquidity injections set by multiple rate auctions.
  - Average weighted rate (taux moyen pondéré): weighted average rate across bids served during an auction.
  - Interbank rate (taux interbancaire): uncollateralized rate used as operational target; should lie within the corridor in a well-functioning market.

### Performance outcomes and comparative indicators
- Inflation performance since 1999:
  - Average inflation in the WAEMU hovered around 2 percent a year, compared to a median of more than 6 percent across the rest of SSA (2000–19).
- Inflation volatility:
  - Inflation volatility (standard deviation of year-to-year changes) has been very moderate despite volatile terms of trade.
- Exchange rate and REER:
  - Stable nominal exchange rate and very low inflation contributed to a gradual depreciation of the real effective exchange rate (REER) in the past decade, contrasting with a mild appreciation on average in other SSA countries.
- Sovereign external borrowing costs (2017–19):
  - Spreads on Eurobonds for two established WAEMU issuers (Côte d’Ivoire and Senegal) in the range of 3.9 percent for comparable maturities.
  - Median spreads in other frontier markets in SSA: 5.3 percent (including Ghana 5.6 percent, Kenya 4.4 percent, Nigeria 5.3 percent).

### BCEAO response to the Covid-19 crisis and recent operational adjustments
- Measures introduced to support banks and the economy include:
  - Shift to a full allotment strategy at a fixed rate (the minimum monetary policy rate) in March 2020, allowing banks to satisfy liquidity needs fully at a rate lower than before the crisis.
  - A 50 basis point cut in the ceiling and floor of the interest rate corridor in June 200.
  - Launch of a special 3-month refinancing window at a fixed rate for limited amounts of 3-month "Covid-19 T-Bills" to be issued by each WAEMU sovereign to help meet immediate funding needs related to the pandemic.
  - Extension of the collateral framework to access central bank refinancing to include bank loans to prequalified 1,700 private companies.
  - New measures to promote the use of electronic payments.
- Shift to ‘fixed-rate full allotment’ (FRFA):
  - Since March 2020, BCEAO satisfied market demand for central bank liquidity in full at a given fixed interest rate, conditional on adequate collateral and counterparties’ financial soundness.
  - The FRFA proved efficient in mitigating liquidity risk by ensuring commercial banks continued and sufficient access to central bank liquidity at a fixed rate.

### Outstanding challenges and reform priorities
- Modernization remains difficult and multifaceted, reflecting challenges common in developing and emerging economies:
  - Multiple and sometimes conflicting monetary policy objectives.
  - Liquidity management systems and money market functioning.
  - Central bank accountability and transparency.
  - Organizational structures and operational capacities.
- Analytical and presentation approach of the paper:
  - Separates two main dimensions: “framework” (objectives and instruments) and “transmission” (how policy instruments impact other interest rates and key financial and real variables such as credit, inflation, output, and employment).
  - Suggests reforms with two time horizons:
    - Short-term: 1-3 years.
    - Medium-term: 3-5 years at least.

*Prepared by Nordine Abidi (MCM) and Goran Amidzic (AFR). The paper benefited from insightful comments of Luc Eyraud (AFR), Annalisa Fedelino (AFR), and Dominique Desruelle (AFR). The authors thank Simon Gray (MCM), Romain Veyrune (MCM), Alain Féler (AFR), Kelly Eckhold (MCM), Sebastian Boitreaud (World Bank), and Sonia Cattarinussi Iacovella (World Bank) for discussions, and are grateful for comments received from the BCEAO and the CREPMF.*

### section identifies four areas where the BCEAO framework could benefit from further

### 1wauea2021002 - section identifies four areas where the BCEAO framework could benefit from further strengthening—some of these are already partly addressed by ongoing reforms

### Key findings: four areas for further strengthening
- First: Policy trade-offs between external and internal stability
  - Price stability is the main objective of the BCEAO’s monetary policy; exchange rate stability and maintenance of the peg are essential considerations.
  - Econometric analysis (Box 2) shows that a loss of foreign exchange reserves makes monetary policy tightening more likely.
  - Trade-offs can arise during shocks: a sudden loss of foreign exchange reserves may lead to monetary tightening even when inflation is far below the 2 percent medium-term objective.
  - The fixed exchange rate can exert downward pressure on aggregate inflation if euro-area inflation is very low, complicating achievement of the 2 percent objective.
- Second: Fiscal developments influence monetary policy
  - Box 2 results suggest BCEAO policy rate decisions are sensitive to fiscal variables such as the debt-to-GDP ratio.
  - High public debt can make monetary tightening less likely.
  - The effect is accentuated where commercial banks hold large, relatively illiquid portfolios of government bonds, potentially making the central bank reluctant to raise policy rates.
  - Results are subject to caution due to data limitations and lack of statistical significance under some specifications.
- Third: The interbank rate is not a consistent operational target
  - The interbank rate has remained outside the corridor two thirds of the time since 2014.
  - Three explanations:
    - The central bank refinancing windows and the interbank market are not perfect substitutes; access to BCEAO refinancing is restricted by eligibility, borrowing limits, and collateral requirements.
    - Excess demand on a shallow and segmented interbank market; large precautionary demand for liquidity and counterparty risk leads liquid banks to hoard reserves rather than lend.
    - Illiquid, shallow secondary market for WAEMU public debt removes a clear yield-curve benchmark and makes it difficult to identify risk-free interest rates and set risk premia.
- Fourth: Analytical capacity and transparency could be enhanced
  - The BCEAO has developed toolkit since 2010 reforms, but could make more systematic use of macroeconomic models for scenario analysis, counterfactuals, and to explain policy decisions.
  - No published survey of inflation expectations by market players and institutions at various horizons currently exists; such surveys are widely used by central banks to inform policy and communication.

### Empirical evidence from Box 2 (Multinomial Probit Model analysis)
- Approach:
  - Uses a Multinomial Probit Model (MPM) to estimate probability that the BCEAO cuts, increases, or holds interest rates conditional on variables (inflation gap, output gap, FX reserves ratio, debt-to-GDP).
  - Output gap estimated using the Hodrick-Prescott (HP) filter; inflation gap defined as current inflation minus the medium-term objective of 2 percent.
- Stylized facts on past rate changes:
  - Over the last 30 years (1989–2018), the BCEAO changed rates on fifteen occasions: decreasing rates ten times, and increasing them in five instances.
  - Policy rate changes tend to occur in discrete jumps (usually of at least 25 basis points).
- Main empirical findings:
  - Coefficients on WAEMU inflation and the output gap are not statistically significant in several specifications.
  - Lower FX reserves are associated with a higher likelihood of rate hikes (losses of FX reserves make tightening more likely).
  - Debt-to-GDP ratio is a significant predictor: high levels of public debt make monetary policy tightening less likely.
  - Results are robust if debt-to-GDP is replaced by share of external sovereign debt, but findings require cautious interpretation because: (i) adding FX reserves diminishes significance of coefficients, (ii) short sample length, (iii) regime changes and data limitations.
- Limitations noted:
  - Coverage of periods of regime change, use of HP filter, and data limitations (contemporary output gap and inflation gap restrict forward-looking aspects).

### Operational and market-structure issues
- Interbank market shortcomings:
  - BCEAO operates half of a monetary policy corridor (no deposit facility), unlike ECB which has both deposit and marginal lending facilities.
  - Because markets are imperfect substitutes and many banks face restricted access to BCEAO refinancing, deviations between central bank and interbank rates are common.
  - Shallow and segmented interbank market plus precautionary demand for liquidity contribute to interbank rate above the corridor.
  - Illiquid secondary market for public debt prevents formation of a true yield curve benchmark.
- Collateral and refinancing design:
  - Access to central bank financing is subject to eligibility, borrowing limits, and collateral requirements on auctions and marginal lending facility.
  - Government bonds are relatively illiquid and cannot be easily sold at short notice without banks incurring losses.

### Policy recommendations and options for strengthening
- Acknowledge external constraint and trade-offs more explicitly
  - Short term: BCEAO could enhance communication by providing more information about its policy reaction function and future monetary policy intentions based on its assessment of price, output, and external stability.
  - Medium term: Given decision to maintain fixed exchange rate, adapt protection of the peg to future balance-of-payments developments (greater trade integration, possible gradual capital-account liberalization), and consider strengthening technical capacity for foreign-exchange interventions.
  - Consider transparent, well-communicated, rule-based frameworks for official foreign exchange intervention to better deploy reserves.
- Strengthen central bank independence, accountability, and governance
  - Short term: Align appointment process and tenure of governing bodies with international best practices:
    - Current practice: governor appointed by Conference of Heads of State and Government of WAEMU for a renewable six-year term; deputy governors appointed by the Council of Ministers of WAEMU for a renewable five-year term.
    - Options: extend terms and make them non-renewable; legislate institutional and organizational setup; establish clear rules on removal from office.
  - Medium term: Fiscal discipline as the best guarantee of independence; reforms to foster fiscal discipline could include review of the regional fiscal framework and measures to ensure commercial banks discriminate better across sovereign risks.
- Reform collateral and liquidity frameworks
  - Strengthen collateral framework for refinancing operations by differentiating sovereign securities through different haircuts to reduce incentives for banks to hold higher-credit-risk government bonds.
  - Follow market-based collateral frameworks (example cited: ECB) that calibrate collateral haircuts based on liquidity and credit risks.
  - Broadening collateral frameworks and diversifying eligible collateral away from excessive sovereign exposure can: (i) better protect central-bank balance sheet, (ii) mitigate procyclicality, and (iii) encourage bank lending to productive sectors; reforms can also improve market discipline and transparency of public debt management.
- Improve analytical capacity and communication
  - Make more systematic use of macroeconomic models for scenario analysis, counterfactuals, and policy explanation, including regular model-based analysis in BCEAO publications.
  - Introduce published surveys of inflation expectations across horizons to strengthen forward-looking policy and public communication.

*Source: 1wauea2021002 - section identifies four areas where the BCEAO framework could benefit from further strengthening (IMF PDF).*

### 22.      To ensure that the operational target of monetary policy is credible and effectively

### 22.      To ensure that the operational target of monetary policy is credible and effectively 

### Deepening the interbank market and developing benchmark rates
- Short term: prioritize development of the secured segment (repo) given difficulties in deepening the unsecured interbank market.
- Align repo legal framework with international best practices, for instance by facilitating enforceable legal agreements along the lines of the Master Repurchase Agreement (GMRA).
- Incentive effect: better repo framework would incentivize cash-rich banks with restrictive investment policies and non-bank counterparties to transact beyond intra-group levels.
- Medium term: develop alternative robust benchmark rates based on granular transactions in the interbank market for very short-term maturities to:
  - ensure interbank rates at various maturities reflect market conditions across WAEMU;
  - anchor the short end of the yield curve;
  - provide information about expected future policy rates and other macroeconomic fundamentals.
- Illustration: Reserve Bank of India (2015) developed robust benchmark rates by offering term repos, facilitating interest rate derivatives, and linking OMOs solely to liquidity management (IMF 2015b).
- BCEAO action: has computed a new reference rate that excludes counterparties not eligible for its refinancing operations in the calculation method; this reference rate is now the one on which the operational strategy of the BCEAO is based.
- Note: the reference rate has fluctuated since the second half of 2019, within the corridor formed by the minimum rate for submission to calls for tenders and the rate of the marginal lending window.

### Enhancing BCEAO technical capacities and macro-modeling expertise
- Strengthening forecasting and analytical capacities is essential; central bank analytical capacity strengthening is continuous and not a prerequisite for modernization (IMF 2015a).
- Short term recommendations:
  - expand expertise in advanced analytical tools and formulation of monetary policy;
  - develop and validate a Forecasting and Policy Analysis System (FPAS) model (included in BCEAO strategic plan; model developed and being validated);
  - develop a comprehensive Survey of Professional Forecasters (SPF) to collect expected inflation, real GDP growth, and unemployment at several horizons and report expectations as point forecasts and probability distributions.
  - develop contingency plans and evaluate benefits and costs of non-standard monetary policy measures in the context of the Covid-19 crisis.
- Medium term recommendation:
  - develop multi-country model to:
    - account for relationships among key macroeconomic variables systematically;
    - provide input to macroeconomic forecasting;
    - improve scenario analysis and policy simulations (ECB did this in 2019).

### Overview of monetary policy transmission in WAEMU
- Empirical literature indicates limited transmission of BCEAO monetary policy to WAEMU countries and substantial heterogeneity across countries (Kireyev, 2016).
- Kireyev (2015, 2016) finds limited influence of policy rates on other short- and long-term interest rates; other studies (Nubukpo, 2002; Kanga, 2020) find similar limited effects on inflation and output.
- Link from BCEAO policy rates to overall inflation can be reliably tracked only in Benin, Senegal, and Togo (Kireyev, 2014, 2016).
- Consensus: most important channels in WAEMU are the credit and interest rate channels.

### Quantified effects and empirical bank-level findings
- Credit channel estimate: an increase in 100 basis points in the BCEAO’s policy reduces WAEMU private credit growth by about 3 percentage points one quarter later and by 4 percentage points (cumulative) after one year (IMF, 2015).
- Bank-level analysis using WAEMU bank-level data 2015–18 (covers more than 95 percent of region’s total banking sector) employs a difference-in-differences design around a sudden monetary tightening in December 2016.
  - December 2016 shock: BCEAO tightened policy by expanding the corridor between the minimum bid rate for OMOs and the credit facility rate by 200 basis points, and announced recourse to its lending facility would be capped at twice banks’ capital.
- Main bank-level results:
  - sudden and unexpected tightening had strong and statistically significant effects on banks’ sovereign security holdings, interbank borrowing, and lending to the private sector;
  - effects vary substantially across bank characteristics (size and capital adequacy);
  - small and weakly capitalized banks reduced holdings of government securities and lowered supply of credit to the private sector;
  - interbank market was partly revived and accessible to well-capitalized banks, while borrowing in the interbank market was more constrained for weakly capitalized banks irrespective of size.
- Data coverage example: in 2017, panel covers 119 of 121 banks; these institutions have total balance sheet of 31.965 CFAF billion or 49.53 percent of WAEMU's GDP.

### Challenges impairing monetary policy transmission
- Shallow and segmented interbank market:
  - interbank transactions remain small and often limited to intra-group transactions and counterparties excluded from BCEAO refinancing operations (IMF, 2018).
  - many banks obtain liquidity from BCEAO refinancing windows and keep large reserves at the central bank.
  - interbank rate is not systematically used as benchmark by commercial banks; some rely on the average auction rate which displays low volatility and has often been stuck at the corridor ceiling.
- Interbank market outstanding amounts:
  - outstanding amount was CFAF 615 billion (0.8 percent of WAEMU GDP) at end of 2018 compared to CFAF 556.2 billion (0.7 percent of GDP) at end of 2017.
- Illiquid secondary market for public debt and small equity markets limit central bank influence on asset prices:
  - in 2019, the volume of transactions in the secondary market for WAEMU sovereign bonds issued through auctions varied between 8 and 23 percent of total stock of outstanding sovereign bonds issued in this cluster.
  - issuance fragmentation: sovereign debt issuances supervised and deposited in two separate market clusters (syndication and auction), reducing fungibility and liquidity.
  - primary dealer system (Spécialistes en Valeurs du Trésor, SVT) does not sufficiently incentivize market making due to lack of privileged access to primary issuances and central bank liquidity.
- Stock market (BRVM) indicators:
  - number of listed companies increased from 37 in early 2013 to 46 in late 2019.
  - market capitalization increased from 4.3 percent of GDP in 2002 to around 12 percent of GDP in 2018.
  - by comparison, Morocco and South Africa had market capitalizations of 52 and 235 percent of GDP in 2018, respectively.

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

### 31.      Several structural factors also impair the banks’ ability to provide more loans to the

### 1wauea2021002 - Several structural factors also impair the banks’ ability to provide more loans to the private sector across the WAEMU, thus, inhibiting the credit channel

### Structural constraints on credit provision and banking sector vulnerabilities
- Private credit in the WAEMU was 25.1 percent of GDP in 2019, above the SSA median (25.1 percent) but below many emerging markets, including South Africa (66.5 percent of GDP).
- Key banking sector vulnerabilities and concentration:
  - At end-2019, credit to the five largest borrowers exceeded 83 percent of the regional banking sector’s risk-weighted assets.
  - Non-performing loans (NPLs) were 11.4 percent of total loans at end-2019.
  - Bank portfolio concentration in sovereign bonds creates liquidity risks and possible crowding-out of the private sector.
  - Banks’ reliance on BCEAO refinancing was equivalent to about 40 percent of their sovereign bonds’ exposure at end-2019 (down from a peak of 60 percent in end-2016).
- Structural and institutional impediments:
  - Weak legal and judicial frameworks and lack of collateral (narrow coverage of land registries) reduce efficiency of the collateral framework.
  - OHADA’s Uniform Act on Secured Transactions (2010) broadened eligible assets for guarantees, but new collateral instruments are not reflected in the prudential rules applicable to WAEMU’s banking sector, generating disincentives for banks to use the new collateral arrangements.
  - Asymmetries of information persist owing to undeveloped credit bureaus; new uniform credit reporting law and new credit bureaus have been introduced but coverage and exchange—especially regarding legacy loans—remain limited.

### Enhancing monetary policy transmission — interbank market
- Policy objective: deepen and improve functioning of interbank, debt, equity and private credit markets to improve monetary policy implementation.
- Short-term measures to deepen interbank market:
  - Strengthen balance sheets of WAEMU’s commercial banks and improve banks’ data reporting practices.
  - WAEMU financial regulator should ensure banks’ adherence to the Basel II/III principles.
  - BCEAO should develop robust benchmark rates based on granular transactions in the interbank market for very short-term maturities, using more data from the payment system STAR-UEMOA.
    - STAR-UEMOA is the WAEMU region’s real-time gross settlement system.
    - Example: ECB changed its benchmark interbank rate in October 2019 using granular data from Target-2.
- Medium-term measures:
  - Foster secured interbank transactions and introduce new actors on the interbank market.
  - Improve collateral valuation for use in interbank markets (Nyborg, 2017).
  - Develop a framework for national governments to invest excess cash in the interbank market through the Agence UMOA-Titres.

### Enhancing monetary policy transmission — financial markets and asset price channel
- Challenge: lack of regular issuance of fungible government debt and active secondary market trading undermines development of local currency yield curve and asset price channel (IMF, 2020).
- Short-term market development priorities:
  - More active secondary market for public debt through better coordination and fungibility between adjudication and syndication modes of issuance, proactive communication of member states’ annual borrowing plans, and greater transparency on banks’ bilateral sovereign loans.
  - Transform SVTs into true market makers by giving privileged access to the primary market and special access to BCEAO liquidity to prompt activation of secondary market and continuous price quotations centralized on an accessible platform.
  - Enhance regulations that protect investors and reinforce discipline on equity markets; align accounting, auditing and reporting practices with international standards to restore investor confidence after recent Ponzi schemes.
  - CREPMF could publish names of wrongdoers, descriptions of misconduct, and resulting sanctions to reinforce credibility (drawing on example of Autorité des Marchés Financiers).
- Medium-term market development:
  - Develop pricing models for assets in illiquid markets, including a synthetic pricing model for government bonds as a reference point to improve trading volumes and obtain robust yield curves (Nyborg, 2017).
  - Ensure sovereign securities issuance through typical bullet structure in both segments; amortizing structures for syndication-issued bonds impede secondary market development and pricing.

### Strengthening the credit channel
- Short-term priorities to boost banks’ ability and incentives to lend:
  - Improve capacity and coverage of national land registries and credit bureaus; strengthen registration and valuation of movable and immovable property while keeping registration and related fees low.
  - Allocate resources to computerize land registration, pursue nation-wide coverage, digitize large stocks of data, and automate procedures to reduce delays and enhance security.
  - Require financial intermediaries to provide reliable and comprehensive information to credit bureaus on a timely basis, including for legacy loans; remove the consent clause requiring banks to seek borrowers’ permission when sharing information.
  - Establish coordination mechanism between the BCEAO and OHADA to align region’s prudential rules with OHADA’s collateral standards (IFC 2018).
  - Upgrade national-level data sources for financial (collaterals) and judiciary (insolvency resolution) sectors to improve OHADA monitoring.
- Medium-term priorities:
  - Strengthen banking sector resilience by reinforcing supervisory and resolution frameworks and enhancing financial inclusion policies.
  - Address outstanding bank weaknesses such as capital shortfalls in a proactive and gradual manner.
  - Phase and effectively enforce new prudential rules aligned with Basel II/III principles to consolidate banks’ balance sheets and address vulnerabilities.
  - Strengthen crisis management and bank resolution frameworks to resolve nonviable banks in an orderly manner.
  - BCEAO should continue advancing technical capacity in banks’ stress testing (IMF, 2018).

### Conclusions and recommended reform agenda
- Recent progress:
  - BCEAO modernized its monetary policy framework since 2010; reform momentum continued with December 2019 reform announcement and adaptation to Covid-19 challenges in 2020.
  - The framework has contributed to exchange rate stability, low inflation, relatively low external borrowing costs and a depreciation of the real effective exchange rate; it allowed swift and forceful BCEAO response to the Covid-19 crisis.
- Outstanding challenges:
  - Design: multiplicity of de facto policy objectives and constraints (stabilizing inflation, maintaining the peg, and taking into account fiscal developments) creates complex trade-offs, communication challenges, and possible infringements to monetary policy independence; lack of credible operational target and capacity constraints.
  - Transmission: lack of depth and liquidity in interbank market, secondary market for public debt, and other asset markets; credit channel inhibited by structural problems affecting banks, including asymmetries of information and imperfect access to or lack of collateral.
- Recommended reform priorities:
  - Short term: clarify communication of objectives and trade-offs; continue institutional reforms of governing bodies; make the interbank rate a true operating target for monetary policy; develop robust interbank benchmark rates; improve capacity and coverage of national land registries and credit bureaus; strengthen collateral framework for refinancing operations.
  - Medium term: establish framework for foreign exchange interventions; create incentives for banks to better discriminate across sovereign risks; make more systematic use of macroeconomic models; strengthen supervisory and resolution frameworks; advance technical capacity for stress testing.
- Overall: improve monetary policy effectiveness through multipronged actions tackling all channels of transmission; deepen and improve functioning of interbank, debt and equity markets while strengthening banks’ balance sheets.

*Source: 1wauea2021002 — WEST AFRICAN ECONOMIC AND MONETARY UNION, INTERNATIONAL MONETARY FUND.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1wauea2021002.pdf_