## Alternative Scenario with a More Gradual Recovery (Content unit: 1wauea2022001) ## Source details **Canonical URL:** [Alternative Scenario with a More Gradual Recovery (Content unit: 1wauea2022001)](https://www.imf.org/-/media/files/publications/cr/2022/english/1wauea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1wauea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1wauea2022001.pdf.json) --- ### Recent developments — Health and security - WAEMU experienced four waves of the Covid virus; new cases per million soared to 21 as of January 10, 2022 (compared to 32 in SSA) — well above the average of 3 recorded since the beginning of the pandemic. - Fatality rate for WAEMU countries was estimated at 1.6 percent of identified cases as of January 10, 2022 (compared to 2.0 percent for SSA). - Vaccination progress remains slow and uneven: the number of fully vaccinated people in the WAEMU is still very low (below 10 percent in most countries as of the first week of January). - Simulation note from source: If countries pursue the same pace of vaccination as in 2021, about 15 percent of the WAEMU population would be fully vaccinated at end-2022, compared to 5 percent at end-2021. - Security deterioration in the Sahel since 2012; Burkina Faso, Mali and Niger particularly impacted. In 2021, close to 2,500 security incidents were reported in these three countries — an increase of about 15 percent relative to 2020. Fatalities are at historically high levels. Spillovers observed to border areas in Benin and Côte d’Ivoire. ### Recent developments — Economic - GDP growth in 2020 is estimated at 2 percent, above previous projection of 0.3 percent, mainly due to higher-than-expected domestic demand. - Regional GDP growth is expected to bounce back to 5.7 percent in 2021, driven by an acceleration of private domestic demand. - Headline inflation exceeded the BCEAO target range (1-3 percent) since April; average inflation for 2021 is expected to be slightly above 3 percent. - Core inflation (excluding energy and certain food items) rose from 1.6 percent in April to 3.6 percent in November 2021. - Monthly indicators point to robust recovery in 2021, especially in commerce and services; rebound appears broad-based across countries. ### Recent developments — Macroeconomic policy and financial conditions - Fiscal stance: overall deficit reached 5.7 percent of GDP in 2020 — a relaxation of close to 3.5 percent of GDP relative to 2019. - Regional fiscal deficit is estimated at 5.9 percent of GDP in 2021. Financing covered by regional market issuances, Eurobond issuances, and the SDR allocation. - Debt levels estimated to reach 56 percent of GDP in 2021; debt service burden indicators deteriorated. - BCEAO policy rate remained at 2 percent since June 2020; fixed rate full allotment (FRFA) policy in place. - Structural liquidity of banks improved markedly since Q4 2020. - Nominal reserves in dollars increased by 9 percent between end-2020 and end-November 2021 to reach USD 23.7 billion. - Import cover increased from 5.5 months to 5.8 months over the same period. - SDR allocation amounted to USD 2.3 billion; Eurobond issuances by Benin, Côte d’Ivoire, Senegal and the BOAD amounted to USD 4.7 billion. - Exports and imports recovered in H1 2021, but imports increased more than exports. - Banking system resilience: average bank capital adequacy ratio rose from 11.5 percent at end-2019 to 11.8 percent at end-2020 and reached 12.0 percent at end-June 2021. - Private sector credit showed robust growth (~7 percent y-o-y monthly average) between January and October 2021. - Banks’ gross non-performing loans (NPL) were 11.4 percent of total loans at end-2019, 11.0 percent at end-2020, and 11.3 percent in June 2021. - Microfinance institutions (MFIs) NPLs: 6.5 percent at end-2019, 12.6 percent in June 2020, and 9.0 percent in June 2021. MFI credit at end-2020 represented about 1.8 percent of GDP and 7.8 percent of bank credit to the private sector. ### Outlook and key projections - Growth is projected to return to potential by 2022; growth expected to accelerate to 6.1 percent in 2022 despite planned fiscal consolidation of over 1 percentage point of regional GDP. - Inflation projected to return to the BCEAO’s target band by end-2022. - Medium-term GDP growth would stabilize around 6 percent, after a temporary rise over 2023-24 due to hydrocarbon projects in Niger and Senegal. - Staff estimates the pandemic could reduce growth prospects absent proactive measures to prevent scarring effects. - Fiscal policy: gradual adjustment toward a 3 percent deficit by 2024 — consolidation of around 1 percent of GDP per year until ceiling is reached. - Adjustment tilted toward expenditure containment; in near term retrenchment concentrated on current spending and discontinuation of most Covid-related support measures in 2022. - Domestic revenue mobilization efforts should be significant; projected revenue ratio increase (excluding grants) of 1.2 percent of GDP between 2021 and 2024 (compared to 0.9 percent projected in February 2020). - Current account: projected to widen to 5.9 percent of GDP in 2021-22, then narrow by around 1½ percent of GDP subsequently. - Reserve coverage projected to stabilize at 5 months of imports by end of forecast horizon. ### Risks and uncertainty - Main risks: evolution of the pandemic (slow/uneven vaccination, vaccine-resistant variants), abrupt tightening of global financial conditions, faster-than-expected normalization of advanced economy monetary policies. - Adverse terms-of-trade developments, particularly higher oil prices, are an important risk (including for inflation). - Regional risks: worsening security, political uncertainties, delays in hydrocarbon projects, and slower fiscal adjustment that could undermine convergence credibility and FX reserves. - Box 1 presents a downside scenario with a slower recovery. ### Box 1 — Alternative downside scenario (More Gradual Recovery) - Methodology: - Step 1: GDP growth path simulated with a Growth-at-Risk (GaR) model tailored to low-income countries, using the last two recovery episodes of 1992 and 2011. - Step 2: Quantify effects of lower economic growth on fiscal deficits and reserves. Revenue-to-GDP elasticity assumed at 1; nominal spending unchanged relative to baseline. Reserves impact estimated with econometric relationship between fiscal deficits and reserves. - Simulation results: - Growth rate would be, on average, about 1 percentage points lower than under the baseline over 2021-26. - Fiscal deficit ratio would increase to about 4 percent of GDP by end of forecast horizon, compared to 3 percent of GDP under the baseline. - Reserve coverage would decline by about half a month of imports by 2026 compared to the baseline (4.5 months versus 5.0 months). - Policy implications under the downside scenario: - Letting automatic stabilizers operate would make it much more difficult to converge to a 3 percent deficit by 2024. - Staff recommendation: offset cyclical revenue shortfalls through better expenditure prioritization. - Monetary policy: maintaining an accommodative monetary stance for longer would seem warranted. ### Fiscal convergence and medium-term targets - Staff supports the authorities’ decision to converge towards the regional fiscal deficit of 3 percent of GDP by 2024. - ECOWAS heads of state committed to converging towards the fiscal deficit anchor over the years 2024-26. - Maintain debt and deficit ceilings at their previous levels of, respectively, 70 and 3 percent of GDP is preferable. - The 70 percent debt ceiling balances growth and fiscal prudence. - Raising the deficit ceiling from 3 to 4 percent of GDP could undermine domestic and external stability except under very specific circumstances. ### Fiscal sustainability and public debt dynamics - Even with successful consolidation and strong growth, the public debt-to-GDP ratio would remain about 5 percentage points higher in 2026 compared with pre-Covid level of 45.5 percent in 2019. - WAEMU’s foreign exchange position is stronger than expected at the time of last year’s consultation; the regional financial market has shown resilience in absorbing increased sovereign issuances. ### Public financial management (PFM) and stock-flow adjustments (SFAs) - Re-establishing the WAEMU Convergence Pact (suspended in 2020) would strengthen credibility of the medium-term fiscal trajectory. - SFAs have historically averaged 1 percent of GDP a year in the WAEMU and are estimated to be even larger in 2020. - As of July 2021, two thirds of the eight regional PFM directives had been implemented. The six directives adopted in 2009 are already fully transposed at the national level. - Five member states have transitioned towards program-based budgeting (two in 2020-21). - Six member states were able to produce general government financial statistics, albeit not yet on a consolidated basis. ### Composition of fiscal adjustment and health policy - Fiscal adjustment should foster an inclusive economic recovery: - Shift from broad fiscal support to more targeted policies. - Emphasis on revenue-enhancing measures (examples: increased digitalization of tax administration; broadening tax base by eliminating some tax exemptions and tax expenditures; enhanced efficiency of customs collections). - Protect priority social expenditure and infrastructure investment (examples: spending on education with focus on primary and secondary education; social protection including cash transfer programs). - Staff encourages authorities to accelerate vaccination rollout by: - Stepping up information campaigns to overcome misinformation. - Addressing shortcomings in logistics of vaccine distribution. - Providing more incentives for citizens to get vaccinated. - The 2021 SDR allocation will support the medium-term fiscal strategy. ### SDR allocation (Box 2) — amounts, terms, and recommended use - Out of the August 2021 general SDR allocation, about US$2.3 billion (SDR 1.6 billion or 1.3 percent of regional GDP) was transferred to the BCEAO. - The CFAF-equivalent of the SDR allocation was on-lent to all member countries by the BCEAO on August 23, through MOUs with: - 20-year maturity (with possibility of rollover) at a fixed interest rate of 0.05 percent. - On-lent amounts across countries range from 0.8 percent of GDP (Burkina Faso) to 2.4 percent of GDP (Guinea-Bissau and Togo). - To put these amounts into perspective, total gross borrowing needs at the regional level average about 10 percent of GDP per year (over 2021-23). - Staff encourages member states to use the allocation in a way that preserves fiscal sustainability and external stability and does not delay needed policy adjustment. - Box Table 1 (WAEMU total): SDR million 1,640.5; CFAF billion 1,302.6; US$ million 2,327.0; Percent of GDP 1.3. ### Country-level intended uses of SDRs (summarized) - Above-the-line use examples: - Benin used the allocation to finance the 2021 budget deficit, including security spending and health and social measures. - Niger planned to spend half of the allocation during 2021 for food security measures, security expenditures, and road infrastructure. - Region-wide above-the-line use in 2021 is estimated at less than half a percent of GDP. - Below-the-line use examples: - Burkina Faso and Côte d’Ivoire: use allocation in 2021 as substitute for more expensive domestic financing. - Togo: keep SDRs in a special account at the BCEAO as substitute for domestic financing. - Mali: intend to use about one third during 2021 if privatization receipts do not materialize, remainder in 2022 to replace domestic debt issuances. - Mixed use examples: - Guinea-Bissau: use entire allocation in 2021 to finance Covid-related expenditures and meet anticipated debt service payments to BOAD in 2021-22. - Senegal: more than half of allocation used in 2021 for Covid-related expenses and to clear unmet obligations; remainder for targeted financial transactions and substitute for other financing during 2021-22. ### Authorities’ views on fiscal convergence and PFM - Authorities acknowledged the importance of re-establishing the Convergence Pact in 2022 and welcomed IMF staff’s analysis on fiscal rule calibration. - They concurred that compliance with the 3 percent of GDP deficit anchor would help maintain adequate external reserves, prevent pressures on the regional public securities market, and preserve debt sustainability. - Discussion among policymakers on medium-term fiscal targets was ongoing; revised Convergence Pact expected to include more precise escape clauses. ### Monetary policy stance and BCEAO actions - BCEAO response to the crisis (2020-21) included: - Cutting the policy rate by 50 basis points in June 2020. - Launching new 6-months and 12-months refinancing windows for government securities at the minimum bid rate (2 percent). - Since March 2020, refinancing operations conducted through FRFA tenders where banks’ demand for liquidity is fully satisfied at a fixed rate against adequate collateral. - The 2020 and 2021 WAEMU external positions are assessed as broadly consistent with fundamentals and desirable policy settings. ### Monetary policy guidance and conditionality for tightening - BCEAO should stand ready to tighten monetary policy if: - The external position weakens, or - Inflation forecasts exceed durably the ceiling of the target band. - Headline inflation exceeded the upper limit of the central bank’s target band since April 2021; a monetary policy response may be warranted if inflation pressures persist and forecasts do not return within the target band at a 24-month horizon. - Various monetary policy rules estimated by staff would support a moderate rate hike if economic recovery continues and inflationary pressures prove persistent. ### Modernization of BCEAO policy and governance frameworks (Box 3) - Staff encourages BCEAO to pursue modernization, including: - Examining the opportunity of maintaining the FRFA procedure after macroeconomic conditions normalize to guarantee adequate liquidity supply and enhance monetary policy transmission. - Assessing the adequacy of the uniform 10 percent haircut applied to all collateral and exploring greater differentiation in haircut rates. - Formalizing an Emergency Liquidity Assistance (ELA) framework to improve preparedness, set explicit lender-of-last-resort rules, limit moral hazard, and better safeguard the central bank. - Enhancing transparency and perceived independence (appointing independent experts in the monetary policy committee; reviewing the transparency framework using the IMF’s Central Bank Transparency Code). - Continuing communication with private investors and development partners on currency reform and ECOWAS roadmap. ### Risks and BCEAO balance sheet considerations - As of end-December 2021: The net SDR position of the eight WAEMU countries recorded a surplus of SDR 1.9 billion (equivalent to 1.5 percent of regional GDP). - Future uses of SDRs may push holdings below allocations and lead the BCEAO to pay the SDR rate on the difference. - Staff encourages the BCEAO to assess implications of such scenarios on its capital given the low fixed rate at which the 2021 SDR allocation was on-lent to member states. ### Banking sector resilience and crisis measures - Transition path to Basel II/III postponed by one year; convergence to a regulatory capital adequacy ratio of 11.5 percent now expected in 2023. - BCEAO set up a regulatory forbearance scheme for banks and MFIs to defer repayments of distressed customers, without reclassifying these claims as NPLs; the scheme was terminated in December 2020. - AML/CFT onsite inspections: physical onsite inspections resumed in October 2020 after suspension in March 2020; virtual off-site monitoring continued throughout the period. - Inspection counts: 48 onsite inspections had taken place in 2021 compared to 27 in 2020 and 36 in 2019. - Proportion of thematic inspections focused on AML/CFT increased to about 20 percent in 2021 from 5 percent in 2019. - IMF regional FSAP started in 2021 and to be completed at the end of the first quarter of 2022. ### Operationalizing the bank resolution framework - As of October 2021, 25 of the 28 systemic banks had presented preventive restructuring plans (PRP); five PRPs were formally approved by the Supervisory Board. - Supervisor will prepare resolution plans for institutions whose PRPs are approved; adoption of these resolution plans for all systemic institutions is expected in 2022. - Additional technical, procedural, regulatory or legislative steps remain necessary to make the resolution mechanism fully effective. ### Vulnerabilities from reliance on BCEAO refinancing - Banks’ claims on central governments increased from 27 percent of total assets at end-2019 to 34 percent at end-September 2021. - BCEAO refinancing provided at 2 percent, below yields on government bonds (example: yields on 3-year bonds averaged 5.6 percent in the first 10 months of 2021 across all member states). - Favorable regulatory treatment of government securities: zero-risk weight; can be refinanced at the BCEAO with a uniform 10 percent haircut; included in regulatory liquid assets without discount. - Shortcomings of quantitative limits on access to refinancing identified: lack of gradualism and flexibility; credibility risks at ceilings; no mandated corrective actions. - Policy recommendation: consider requesting “funding plans” from banks excessively reliant on refinancing to encourage diversification of financing and set explicit targets. ### Microfinance institutions (MFIs) — diagnostics and reform needs - MFI sector structural weaknesses: poor governance and risk management, exposure to informal and rural sectors, lack of adequate information and reporting systems. - BCEAO diagnostic project (with AFD support in 2020-21) to identify MFIs in difficulty and conduct review missions is welcomed. - Recommendations: better monitoring, strengthened capacity, restructuring of distressed institutions; improve digital and financial literacy; develop technological infrastructure; mitigate mobile money risks. ### Financial market development priorities - Measures to deepen and improve liquidity of secondary sovereign security market: - Improve transparency and price formation through development of an electronic platform for auctioned securities. - Increase incentives for sovereign security dealers (SVT) to animate primary and secondary markets. - Develop benchmark maturities through reopening sovereign security issues and better planning issuances. - Advance towards greater fungibility between syndicated and auctioned securities to gradually eliminate market segmentation. ### Mitigating risk of scarring effects on medium-term growth - Staff analysis suggests the pandemic could reduce GDP growth by up to 1 percentage point over the medium term in the absence of corrective measures. - Main channels of scarring: subdued investment outlook, negative effect of school closures on human capital accumulation, productivity losses associated with possible increase in informality. - Reform priorities: improve access to electricity, expand bank financing for private ventures, reduce size/impact of informal sector; improve governance, accelerate economic diversification, facilitate access to finance, and strengthen education and vocational training. - Regional integration and trade: deeper trade integration helps diffuse knowledge, reduce costs, and achieve economies of scale; non-tariff barriers remain a constraint. ### Financial inclusion — impact and policy findings (Annex I) - MFI sector end-2020 credit outstanding represented about 1.8 percent of GDP. - Banks’ credit to the private sector stood at about 23 percent of GDP. - Total value of e-money transactions (including digital payments) was about 44 percent of GDP during 2020. - Key findings: - MFIs have remained mired in persistent vulnerabilities. - Progress made on e-money and digital transactions could outlast the pandemic and deepen as Covid recedes. - Policy rationale: boosting financial inclusion supports growth, reduces poverty and mitigates inequality. ### Selected key statistics (as reported) - Nominal GDP (2020, millions of US Dollars): 159,277 - GDP per capita (2020, US Dollars): 1,218 - Total population (2020, millions): 131 - Urban population (2020, percent of total): 40.8 - Headcount ratio at $1.90 a day (2011 PPP): 47.1 - Undernourishment (percent of population): 12.5 - Income share held by highest 10 percent of population: 32.1 - Income share held by lowest 20 percent of population: 6.1 - Life expectancy at birth (2019, years): 61.3 - Gini index: 40.8 - WAEMU aggregate annual national income and prices (selected series, GDP at constant prices across 2018–26, annual percentage change): 6.5; 5.8; 0.3; 2.0; 5.4; 5.7; 6.1; 7.0; 7.2; 6.1; 5.8 - Consumer prices (average) series (selected across 2018–26): 1.0; -0.1; 1.7; 2.3; 1.6; 3.3; 2.5; 1.9; 1.9; 1.9; 1.9 - Government total revenue, excl. grants (percent of GDP, series): 14.6; 15.6; 14.7; 15.2; 15.5; 15.3; 15.9; 16.3; 16.5; 16.9; 17.2 - Overall fiscal balance, incl. grants (percent of GDP, series): -3.3; -2.3; -5.9; -5.7; -4.9; -5.9; -4.7; -3.8; -3.0; -3.0; -3.0 - Total public debt (percent of GDP, series): 43.4; 45.5; 48.5; 52.1; 49.6; 55.6; 55.5; 54.5; 52.7; 51.5; 50.8 - Gross international reserves (in months of next year's imports, series): 4.6; 5.6; 5.5; 5.5; 5.0; 5.8; 5.5; 5.3; 5.3; 5.2; 5.0 - Gross international reserves (in millions of US dollars, series): 14,853; 17,547; 19,275; 21,764; 19,497; 24,228; 24,898; 25,827; 27,626; 29,035; 30,043 ### Annex IV — Inflation dynamics and policy implications - Headline inflation started increasing at the beginning of 2020 and breached the 1-3 percent target ceiling in April 2021. - Decomposition shows rise in headline inflation driven essentially by higher food prices: contribution of food to inflation increased from 0.20 percent before the crisis to 3.0 percent on average over August-October 2021. - Core inflation measures (BCEAO core and IMF trimmed mean) show upward trends; trimmed mean forecast likely to revert to target by end-2022 while authorities’ core indicator would decline at a slower pace. - Rolling autoregressive model indicates persistence of headline inflation has increased since the beginning of 2021. - Overall assessment: three approaches do not give a clear uniform message; close monthly monitoring is essential. ### Annex V — Assessing the monetary policy stance (rules and results) - Two rules applied: augmented Taylor rule and variant of Orphanides rule (forward-looking). - Monetary policy rule formula preserved as in source: R_t = R_{t-1} + θ_1 (Eπ_{t+4/t-1} − π) + θ_2 (EΔy_{t+4/t-1} − Δy) - π is the central inflation target of 2 percent. - Eπ_{t+4/t-1} and EΔy_{t+4/t-1} defined as in the source. - Results: - Taylor rule suggests the monetary policy stance has been slightly accommodative during the pandemic. - Estimated Taylor rule recommends a 50-basis point increase by end-2022—an order of magnitude similar to the Orphanides rule. - Staff assesses the monetary stance as appropriate at the moment and recommends a prudent approach with timely reassessment once more information on inflation becomes available. - Operational constraint recommended: BCEAO should not let the monthly average of foreign exchange reserves fall below 20 percent of its sight liabilities for three consecutive months. ### Monetary cooperation with France and currency reform (Annex VI) - Key governance and operational changes under the new Treaty signed December 2019 and ratified by France in February 2021: - France is no longer represented in WAEMU decision making bodies; may request temporary observer representation in crisis prevention/management. - BCEAO no longer required to hold 50 percent of its international reserves at the French Treasury; “operation account” closed. - If BCEAO reserves are about to be exhausted, BCEAO must inform guarantor with a five-day notice to call the convertibility guarantee. - Use of the overdraft facility implies an interest charge equal to the daily rate of the ECB’s marginal loans and at least 80 percent of foreign exchange inflows into the WAEMU must be used toward paying back this overdraft. - Currency reform: - WAEMU authorities announced intention to replace CFAF with “ECO”; ECO launch postponed because of Covid and coordination with ECOWAS plans. - In June 2021, ECOWAS authorities stated intention to launch the ECO by 2027 for countries meeting convergence criteria from 2024 onwards including a fiscal deficit ceiling of 3 percent of GDP. ### Capacity development and IMF technical assistance priorities (Annex VII and VII summary) - Main TA providers: AFRITAC West (AFW), Fiscal Affairs Department (FAD), Monetary and Capital Markets Department (MCM), IMF Statistics Department. - Near-term CD priorities grouped into five areas: - Banking regulation and supervision: strengthen banks’ balance sheets, restructure weak institutions, mitigate risks, operationalize resolution procedures. - Financial sector development: deepen sovereign security market, improve money/interbank market functioning, broaden investor base. - Monetary policy: protect central bank’s balance sheet, review transparency practices, establish ELA framework. - PFM and fiscal institutions: advance PFM reforms, contain below-the-line operations, re-establish WAEMU Convergence Pact with enhanced enforcement. - Tax policy: advance domestic revenue mobilization, revise regional tax directives (especially VAT), harmonize customs procedures. ### Staff appraisal — key conclusions and recommendations (summary) - Region showed remarkable resilience to the Covid shock; near- and medium-term prospects point to a fast recovery with growth likely to stabilize around 6 percent. - Fiscal policy recommendations: - Re-anchor fiscal trajectory in a credible medium-term fiscal framework; support convergence towards the 3 percent of GDP deficit by 2024. - Re-introduce the WAEMU Convergence Pact to enhance credibility. - Ensure fiscal adjustment fosters inclusive recovery: shift to targeted policies, emphasize revenue-enhancing measures, protect health expenditures and infrastructure investment. - Monetary policy and central bank governance: - Current accommodative stance appropriate; BCEAO should be ready to tighten if external position weakens or inflation forecasts durably exceed the target band ceiling. - Support BCEAO efforts to modernize policy and governance frameworks; consider extending FRFA after normalization; explore differentiation in treatment of collateral. - Financial sector and market development priorities: - Complete operationalization of bank resolution framework. - Address high reliance on BCEAO refinancing (consider funding plans). - Tackle structural fragilities in MFI sector. - Deepen secondary sovereign security market by improving transparency, developing benchmark maturities, and reducing market segmentation. *International Monetary Fund — WEST AFRICAN ECONOMIC AND MONETARY UNION (excerpt).* ### 1. Alternative Scenario with a More Gradual Recovery ____________________________________________ 9 ### 1. Alternative Scenario with a More Gradual Recovery ### Recent developments — Health and security - WAEMU experienced four waves of the Covid virus; new cases per million soared to 21 as of January 10, 2022 (compared to 32 in SSA) — well above the average of 3 recorded since the beginning of the pandemic. - Fatality rate for WAEMU countries was estimated at 1.6 percent of identified cases as of January 10, 2022 (compared to 2.0 percent for SSA). - Vaccination progress remains slow and uneven: the number of fully vaccinated people in the WAEMU is still very low (below 10 percent in most countries as of the first week of January). - Simulation note from source: If countries pursue the same pace of vaccination as in 2021, about 15 percent of the WAEMU population would be fully vaccinated at end-2022, compared to 5 percent at end-2021. - Security deterioration in the Sahel since 2012; Burkina Faso, Mali and Niger particularly impacted. In 2021, close to 2,500 security incidents were reported in these three countries — an increase of about 15 percent relative to 2020. Fatalities are at historically high levels. Spillovers observed to border areas in Benin and Côte d’Ivoire. ### Recent developments — Economic - GDP growth in 2020 is estimated at 2 percent, above previous projection of 0.3 percent, mainly due to higher-than-expected domestic demand. - Regional GDP growth is expected to bounce back to 5.7 percent in 2021, driven by an acceleration of private domestic demand. - Headline inflation exceeded the BCEAO target range (1-3 percent) since April; average inflation for 2021 is expected to be slightly above 3 percent. - Core inflation (excluding energy and certain food items) rose from 1.6 percent in April to 3.6 percent in November 2021. - Monthly indicators point to robust recovery in 2021, especially in commerce and services; rebound appears broad-based across countries. ### Recent developments — Macroeconomic policy and financial conditions - Fiscal stance: overall deficit reached 5.7 percent of GDP in 2020 — a relaxation of close to 3.5 percent of GDP relative to 2019. - Regional fiscal deficit is estimated at 5.9 percent of GDP in 2021. Financing covered by regional market issuances, Eurobond issuances, and the SDR allocation. - Debt levels estimated to reach 56 percent of GDP in 2021; debt service burden indicators deteriorated (Table 6 referenced). - BCEAO policy rate remained at 2 percent since June 2020; fixed rate full allotment (FRFA) policy in place. - Structural liquidity of banks improved markedly since Q4 2020. - Nominal reserves in dollars increased by 9 percent between end-2020 and end-November 2021 to reach USD 23.7 billion. - Import cover increased from 5.5 months to 5.8 months over the same period. - SDR allocation amounted to USD 2.3 billion; Eurobond issuances by Benin, Côte d’Ivoire, Senegal and the BOAD amounted to USD 4.7 billion. - Exports and imports recovered in H1 2021, but imports increased more than exports. - Banking system resilience: average bank capital adequacy ratio rose from 11.5 percent at end-2019 to 11.8 percent at end-2020 and reached 12.0 percent at end-June 2021. - Private sector credit showed robust growth (~7 percent y-o-y monthly average) between January and October 2021. - Banks’ gross non-performing loans (NPL) were 11.4 percent of total loans at end-2019, 11.0 percent at end-2020, and 11.3 percent in June 2021. - Microfinance institutions (MFIs) NPLs: 6.5 percent at end-2019, 12.6 percent in June 2020, and 9.0 percent in June 2021. MFI credit at end-2020 represented about 1.8 percent of GDP and 7.8 percent of bank credit to the private sector. ### Outlook and key projections - Growth is projected to return to potential by 2022; growth expected to accelerate to 6.1 percent in 2022 despite planned fiscal consolidation of over 1 percentage point of regional GDP. - Inflation projected to return to the BCEAO’s target band by end-2022. - Medium-term GDP growth would stabilize around 6 percent, after a temporary rise over 2023-24 due to hydrocarbon projects in Niger and Senegal. - Staff estimates the pandemic could reduce growth prospects absent proactive measures to prevent scarring effects. - Fiscal policy: gradual adjustment toward a 3 percent deficit by 2024 — consolidation of around 1 percent of GDP per year until ceiling is reached. - Adjustment tilted toward expenditure containment; in near term retrenchment concentrated on current spending and discontinuation of most Covid-related support measures in 2022. - Domestic revenue mobilization efforts should be significant; projected revenue ratio increase (excluding grants) of 1.2 percent of GDP between 2021 and 2024 (compared to 0.9 percent projected in February 2020). - Current account: projected to widen to 5.9 percent of GDP in 2021-22, then narrow by around 1½ percent of GDP subsequently. - Reserve coverage projected to stabilize at 5 months of imports by end of forecast horizon. ### Risks and uncertainty - Main risks: evolution of the pandemic (slow/uneven vaccination, vaccine-resistant variants), abrupt tightening of global financial conditions, faster-than-expected normalization of advanced economy monetary policies. - Adverse terms-of-trade developments, particularly higher oil prices, are an important risk (including for inflation). - Regional risks: worsening security, political uncertainties, delays in hydrocarbon projects, and slower fiscal adjustment that could undermine convergence credibility and FX reserves. - Box 1 presents a downside scenario with a slower recovery. ### Box 1 — Alternative downside scenario (More Gradual Recovery) - Methodology: - Step 1: GDP growth path simulated with a Growth-at-Risk (GaR) model tailored to low-income countries, using the last two recovery episodes of 1992 and 2011. - Step 2: Quantify effects of lower economic growth on fiscal deficits and reserves. Revenue-to-GDP elasticity assumed at 1; nominal spending unchanged relative to baseline. Reserves impact estimated with econometric relationship between fiscal deficits and reserves. - Simulation results: - Growth rate would be, on average, about 1 percentage points lower than under the baseline over 2021-26. - Fiscal deficit ratio would increase to about 4 percent of GDP by end of forecast horizon, compared to 3 percent of GDP under the baseline. - Reserve coverage would decline by about half a month of imports by 2026 compared to the baseline (4.5 months versus 5.0 months). - Policy implications under the downside scenario: - Letting automatic stabilizers operate would make it much more difficult to converge to a 3 percent deficit by 2024. - Staff recommendation: offset cyclical revenue shortfalls through better expenditure prioritization. - Monetary policy: maintaining an accommodative monetary stance for longer would seem warranted. ### Authorities’ views - Regional authorities broadly agreed with IMF staff on outlook and risks. - BCEAO and WAEMU Commission forecast medium-term growth about half a percentage point higher than staff over 2022-25, assuming full recovery of affected sectors and strong effects of public infrastructure. - Authorities expect convergence to the 3 percent deficit target by 2024, consistent with staff. - BCEAO foresees higher capital inflows than staff, anticipating stronger FDIs linked to hydrocarbon projects in Senegal and Niger. - Authorities project reserve coverage stabilizing around 6 months of imports by 2023 (compared to close to 5 months in staff projections). _International Monetary Fund — WEST AFRICAN ECONOMIC AND MONETARY UNION (excerpt)_ ### 15. Staff supports the authorities’ decision to converge towards the regional fiscal deficit ### 1wauea2022001 - 15. Staff supports the authorities’ decision to converge towards the regional fiscal deficit ### Fiscal convergence and medium-term targets - Staff supports the authorities’ decision to converge towards the regional fiscal deficit of 3 percent of GDP by 2024. - ECOWAS heads of state committed to converging towards the fiscal deficit anchor over the years 2024-26. - The one-year delay relative to last year’s recommendation is assessed as compatible with external viability and fiscal sustainability under the staff baseline projections. - Model-based simulations and staff analysis (summarized in SIP #2) indicate: - Maintain debt and deficit ceilings at their previous levels of, respectively, 70 and 3 percent of GDP is preferable. - The 70 percent debt ceiling strikes the right balance between growth and fiscal prudence considerations. - Raising the deficit ceiling from 3 to 4 percent of GDP could undermine domestic and external stability except under very specific circumstances—namely with unconstrained access to external financing and significant progress in fiscal transparency. ### Fiscal sustainability and public debt dynamics - Even with successful consolidation and strong growth, the public debt-to-GDP ratio would remain about 5 percentage points higher in 2026 compared with pre-Covid level of 45.5 percent in 2019. - WAEMU’s foreign exchange position is stronger than expected at the time of last year’s consultation; the regional financial market has shown resilience in absorbing increased sovereign issuances. ### Public financial management (PFM) and stock-flow adjustments (SFAs) - Re-establishing the WAEMU Convergence Pact (suspended in 2020) would strengthen the credibility of the medium-term fiscal trajectory. - A convergence plan exists at the ECOWAS level, but the WAEMU set of fiscal rules has not yet been reinstated; the WAEMU Commission is expected to make a proposal to the Council of Ministers in the first semester of 2022. - Persistent discrepancy between the fiscal deficit (above the line) and the increase in government debt—stock-flow adjustments (SFAs)—is a concern: - SFAs have historically averaged 1 percent of GDP a year in the WAEMU and are estimated to be even larger in 2020. - Large SFAs signal PFM weaknesses, such as off-budget expenditure and materialization of contingent liabilities. - Implementation of regional PFM directives at the national level is uneven: - As of July 2021, two thirds of the eight regional PFM directives had been implemented. - The six directives adopted in 2009 are already fully transposed at the national level. - Five member states have transitioned towards program-based budgeting (two in 2020-21). - Six member states were able to produce general government financial statistics, albeit not yet on a consolidated basis. - Practical difficulties include limitations of national budgetary and accounting systems, challenges in implementing accrual accounting, and limited public access to budgetary information. ### Composition of fiscal adjustment and health policy - Fiscal adjustment should foster an inclusive economic recovery: - Shift from broad fiscal support to more targeted policies. - Emphasis on revenue-enhancing measures to create fiscal space and strengthen capacity to service debt (examples at country level: increased digitalization of tax administration; broadening tax base by eliminating some tax exemptions and tax expenditures; enhanced efficiency of customs collections). - On the spending side, protect priority social expenditure and infrastructure investment (examples: spending on education with focus on primary and secondary education; social protection including cash transfer programs). - Staff encourages authorities to accelerate vaccination rollout by: - Stepping up information campaigns to overcome misinformation. - Addressing shortcomings in logistics of vaccine distribution. - Providing more incentives for citizens to get vaccinated. - The 2021 SDR allocation will support the medium-term fiscal strategy. ### SDR allocation (Box 2) — amounts, terms, and recommended use - Out of the August 2021 general SDR allocation, about US$2.3 billion (SDR 1.6 billion or 1.3 percent of regional GDP) was transferred to the BCEAO, acting as fiscal agent of WAEMU member countries. - The CFAF-equivalent of the SDR allocation was on-lent to all member countries by the BCEAO on August 23, through MOUs under the following terms: - 20-year maturity (with possibility of rollover) at a fixed interest rate of 0.05 percent. - By comparison, the 2009 allocation (1.2 percent of rebased GDP) was on-lent at 3 percent for a period of 10 years. - On-lent amounts across countries range from 0.8 percent of GDP (Burkina Faso) to 2.4 percent of GDP (Guinea-Bissau and Togo). - To put these amounts into perspective, total gross borrowing needs at the regional level average about 10 percent of GDP per year (over 2021-23). - Staff encourages member states to use the allocation in a way that preserves fiscal sustainability and external stability and does not delay needed policy adjustment; warns that larger and/or more protracted fiscal deficits financed by on-lent resources could erode external buffers and undermine credibility of the regional convergence path. - Box Table 1 (WAEMU total): SDR million 1,640.5; CFAF billion 1,302.6; US$ million 2,327.0; Percent of GDP 1.3. ### Country-level intended uses of SDRs (summarized) - Above-the-line use examples: - Benin used the allocation to finance the 2021 budget deficit, including security spending and health and social measures. - Niger planned to spend half of the allocation during 2021 for food security measures, security expenditures, and road infrastructure; discussions on remainder use continued. - Region-wide above-the-line use in 2021 is estimated at less than half a percent of GDP. - Below-the-line use examples: - Burkina Faso and Côte d’Ivoire: use allocation in 2021 as substitute for more expensive domestic financing. - Togo: keep SDRs in a special account at the BCEAO as substitute for domestic financing. - Mali: intend to use about one third during 2021 if privatization receipts do not materialize, remainder in 2022 to replace domestic debt issuances. - Mixed use examples: - Guinea-Bissau: use entire allocation in 2021 to finance Covid-related expenditures and meet anticipated debt service payments to BOAD in 2021-22. - Senegal: more than half of allocation used in 2021 for Covid-related expenses and to clear unmet obligations; remainder for targeted financial transactions and substitute for other financing during 2021-22. ### Authorities’ views on fiscal convergence and PFM - Regional authorities acknowledged the importance of re-establishing the Convergence Pact in 2022 and welcomed IMF staff’s analysis on fiscal rule calibration. - They concurred that compliance with the 3 percent of GDP deficit anchor would help maintain adequate external reserves, prevent pressures on the regional public securities market, and preserve debt sustainability. - Discussion among policymakers on medium-term fiscal targets was ongoing; revised Convergence Pact expected to include more precise escape clauses. - Authorities highlighted progress on PFM directives and program-based budgeting but noted practical implementation difficulties. ### Monetary policy stance and BCEAO actions - BCEAO response to the crisis (2020-21) included: - Cutting the policy rate by 50 basis points in June 2020. - Launching new 6-months and 12-months refinancing windows for government securities at the minimum bid rate (2 percent). - Since March 2020, refinancing operations conducted through FRFA tenders where banks’ demand for liquidity is fully satisfied at a fixed rate against adequate collateral. - Regional financial market has so far accommodated increased sovereign funding without tightening financial conditions or crowding-out private sector credit. - The 2020 and 2021 WAEMU external positions are assessed as broadly consistent with fundamentals and desirable policy settings. ### Monetary policy guidance and conditionality for tightening - BCEAO should stand ready to tighten monetary policy if: - The external position weakens, or - Inflation forecasts exceed durably the ceiling of the target band. - Headline inflation exceeded the upper limit of the central bank’s target band since April 2021; a monetary policy response may be warranted if inflation pressures persist and forecasts do not return within the target band at a 24-month horizon. - Various monetary policy rules estimated by staff would support a moderate rate hike if economic recovery continues and inflationary pressures prove persistent. ### Modernization of BCEAO policy and governance frameworks (Box 3) - Staff encourages BCEAO to pursue modernization, including: - Examining the opportunity of maintaining the FRFA procedure after macroeconomic conditions normalize to guarantee adequate liquidity supply and enhance monetary policy transmission. - Assessing the adequacy of the uniform 10 percent haircut applied to all collateral and exploring greater differentiation in haircut rates (grouped buckets, haircut premiums for risk categories, applying haircuts to market value of collateralized assets). - Formalizing an Emergency Liquidity Assistance (ELA) framework to improve preparedness, set explicit lender-of-last-resort rules (including supervision, conditionality, and cost), limit moral hazard, and better safeguard the central bank (solvency requirement, risk control measures, possible government guarantees). - Enhancing transparency and perceived independence (appointing independent experts in the monetary policy committee; reviewing the transparency framework using the IMF’s Central Bank Transparency Code). - Continuing communication with private investors and development partners on currency reform and ECOWAS roadmap to ensure a gradual and predictable transition. ### Risks and BCEAO balance sheet considerations - Future uses of SDRs could entail costs for the central bank; as of end-December 2021: - The net SDR position of the eight WAEMU countries recorded a surplus of SDR 1.9 billion (equivalent to 1.5 percent of regional GDP). - Future uses of SDRs (e.g., program repurchases or fiscal deficits causing pressures on international reserves) may push holdings below allocations and lead the BCEAO to pay the SDR rate on the difference. - Staff encourages the BCEAO to assess the implications of such scenarios on its capital given the low fixed rate at which the 2021 SDR allocation was on-lent to member states, leaving exchange rate and interest rate risks with the central bank. ### Authorities’ views on monetary recommendations - The BCEAO broadly concurred with IMF staff’s assessment of the monetary policy stance: - Viewed inflation increase as temporary; expected inflation to return below 3 percent within the next 24 months. - Considered inflation concentrated on food products with limited transmission to other categories. - Agreed that current level of reserves was adequate and exchange rate was in line with fundamentals. - On reforms: - Agreed on principle of protecting central bank’s balance sheet but expressed reservations about differentiating haircut rates due to solidarity concerns and potential market development effects. - Agreed on FRFA benefits but requested deeper analysis of liquidity control implications. - Interested in exploring formalizing an ELA framework and will pursue discussions in the context of the FSAP mission. - Noted balance sheet implications related to SDR use but deemed the scenario low probability and manageable with existing mechanisms. *International Monetary Fund — WEST AFRICAN ECONOMIC AND MONETARY UNION, excerpted content.* ### 28. The banking sector has been resilient during the crisis, partly because of the proactive ### The banking sector has been resilient during the crisis, partly because of the proactive ### Banking sector resilience and crisis measures - Transition path to Basel II/III postponed by one year; convergence to a regulatory capital adequacy ratio of 11.5 percent now expected in 2023. - BCEAO set up a regulatory forbearance scheme for banks and MFIs to defer repayments of distressed customers, without reclassifying these claims as NPLs; the scheme was terminated in December 2020. - AML/CFT onsite inspections: physical onsite inspections resumed in October 2020 after suspension in March 2020; virtual off-site monitoring continued throughout the period. - Inspection counts (for 2021 ratio computed using data until October): 48 onsite inspections had taken place in 2021 compared to 27 in 2020 and 36 in 2019. - Proportion of thematic inspections focused on AML/CFT increased to about 20 percent in 2021 from 5 percent in 2019. - IMF is conducting a regional FSAP started in 2021 and to be completed at the end of the first quarter of 2022; scope includes assessing financial sector risks and vulnerabilities, institutional framework (including bank supervision and regulation and AML/CFT oversight), crisis management and bank resolution mechanisms, and options to develop financial markets. ### Operationalizing the bank resolution framework - As of October 2021, 25 of the 28 systemic banks had presented preventive restructuring plans (PRP) to the General Secretariat of the Banking Commission; five PRPs were formally approved by the Supervisory Board. - Supervisor will prepare resolution plans for institutions whose PRPs are approved; adoption of these resolution plans for all systemic institutions is expected in 2022. - Additional measures needed to make the resolution mechanism fully effective include technical, procedural, regulatory or legislative steps (examples listed in source: updating MOUs with foreign supervisors; decisions on design of resolution options such as shareholder structure of bridge banks; clarity on financing of resolution operations and potential need for financial backstops; incorporation of some legislative measures into the new draft Banking Law under preparation). ### Vulnerabilities from reliance on BCEAO refinancing - Banks’ claims on central governments increased from 27 percent of total assets at end-2019 to 34 percent at end-September 2021. - BCEAO refinancing for main open market operations provided at 2 percent, which is below yields on government bonds (example: yields on 3-year bonds averaged 5.6 percent in the first 10 months of 2021 across all member states). - Favorable regulatory treatment of government securities: zero-risk weight; can be refinanced at the BCEAO with a uniform 10 percent haircut; included in regulatory liquid assets without discount. - Existing quantitative limits on access to refinancing: capped at 35 percent of assets (all windows) and twice their regulatory capital (specifically for the marginal lending facility). - Shortcomings of quantitative limits identified: 1. Lack gradualism and flexibility — demand for refinancing becomes suddenly constrained once ceilings are breached. 2. Credibility risks if a systemic bank at the limit encounters liquidity stress (deposit flight or loss of access to interbank market). 3. Do not mandate corrective actions or provide support to banks in designing deleveraging strategies. - Policy recommendation: consider requesting “funding plans” from banks excessively reliant on refinancing; these plans would be assessed and monitored by the supervisor and could complement existing quantitative limits to encourage diversification of financing (e.g., interbank market) and set explicit targets for resource diversification. ### Microfinance institutions (MFIs) — diagnostics and reform needs - MFI sector hit hard by the pandemic; structural weaknesses include poor governance and risk management, exposure to informal and rural sectors with elevated information asymmetry, and lack of adequate information and reporting systems. - BCEAO diagnostic project (with AFD support in 2020-21) to identify MFIs in difficulty and conduct review missions is welcomed. - Recommendations: better monitoring, strengthened capacity, restructuring of distressed institutions; improve digital and financial literacy, develop technological infrastructure, mitigate financial risks related to mobile money (fraud, cyberattacks), and improve customer service. ### Financial market development priorities - SIP#3 presents systematic analysis using IMF Monetary and Capital Markets department tool. - Measures to deepen and improve liquidity of secondary sovereign security market: 1. Improve transparency and price formation through development of an electronic platform for auctioned securities. 2. Increase incentives for sovereign security dealers (SVT) to animate primary and secondary markets. 3. Develop benchmark maturities through reopening sovereign security issues and better planning issuances within each member’s medium-term debt strategy. 4. Advance towards greater fungibility between syndicated and auctioned securities to gradually eliminate market segmentation. - Authorities note some issuances already being reopened; further progress requires greater tolerance by issuers for bond price changes and cashflow management improvements as volumes and principal repayments increase. ### Mitigating risk of scarring effects on medium-term growth - Staff analysis (SIP #1) suggests the pandemic could reduce GDP growth by up to 1 percentage point over the medium term in the absence of corrective measures. - Main channels of scarring: subdued investment outlook, negative effect of school closures on human capital accumulation, productivity losses associated with possible increase in informality. - Reform priorities to address growth bottlenecks: improve access to electricity, expand bank financing for private ventures, reduce size/impact of informal sector; national-level agendas include improving governance, accelerating economic diversification, facilitating access to finance, and strengthening education and vocational training. - Regional integration and trade: - Deeper trade integration helps diffuse knowledge, reduce costs, and achieve economies of scale. - Trade is free of customs duties within WAEMU and ECOWAS by law, but intra-regional trade remains limited due to non-tariff barriers (lack of common documentation, ad-hoc levies for road transit). - Simplification and harmonization of procedures are priorities; AfCFTA could catalyze integration (AfCFTA aims described; as of September 2021 it had been ratified by 38 countries including Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo). - Regional infrastructure projects and business climate: - PER (Programme Economique Régional) comprises regional infrastructure projects; latest phase comprises 102 projects (43 implemented by WAEMU commission and other regional institutions) amounting to about 7 percent of regional GDP. - Implementation bottlenecks: weaknesses in budget programming, lack of financing, cumbersome administrative procedures (public procurement), and capacity constraints for project monitoring. - Regional competition framework reforms and clearer division of responsibilities between WAEMU Commission and national competition authorities recommended to foster cross-border investment and productivity. ### Authorities’ views - Authorities committed to further strengthening financial sector resilience; intend to finalize resolution plans for all systemically important banks by 2022 and to work on remaining procedures and legal measures. - Authorities acknowledge excessive reliance on refinancing as a vulnerability, especially to higher interest rates, but expressed concerns about administrative burden of supervising funding plans and see existing quantitative limits as broadly effective. - On MFIs, authorities emphasized their role for financial inclusion and noted action plans to modernize information systems, foster access to regional payment systems, and that diagnostic missions are essential to tailor policy responses. - Authorities broadly agreed with IMF staff on financial market development and highlighted initiatives: review of regulatory framework for non-bank financial market intermediaries; project to improve incentives for SVTs to act as market makers; reopening of some issuances to build benchmarks. ### Staff appraisal — key conclusions and recommendations - Region showed remarkable resilience to the Covid shock; member states entered crisis in a relatively strong macroeconomic position supported by robust regional institutional frameworks. - Near- and medium-term prospects: fast recovery; growth likely to stabilize around 6 percent; external current account deficit expected to narrow; risks tilted to the downside (rapid spread of new Covid variants, low vaccination, abrupt tightening of global financial conditions, deterioration of security situation, delays in fiscal adjustment). - Fiscal policy recommendations: - Re-anchor fiscal trajectory in credible medium-term fiscal framework; support convergence towards regional fiscal deficit anchor of 3 percent of GDP by 2024. - Re-introducing the WAEMU Convergence Pact would enhance credibility. - Maintain medium-term fiscal targets embedded in pre-crisis framework (70 percent of GDP debt ceiling and 3 percent of GDP deficit ceiling). - Ensure fiscal adjustment composition fosters inclusive recovery: shift from broad fiscal support to targeted policies; emphasize revenue-enhancing measures; protect health expenditures (vaccination rollout), other priority social spending, and infrastructure investment. - Monetary policy and central bank governance: - Current accommodative stance appropriate; BCEAO should be ready to tighten if external position weakens or inflation forecasts durably exceed target band ceiling. - Support BCEAO efforts to modernize policy and governance frameworks; consider extending FRFA procedure after normalization; explore greater differentiation in treatment of expanded collateral pool eligible for refinancing operations. - Financial sector and market development priorities reiterated: - Complete operationalization of bank resolution framework (legislative, regulatory, procedural measures still needed). - Address high reliance on BCEAO refinancing (consider funding plans to encourage other financing sources). - Tackle structural fragilities in MFI sector through enhanced monitoring, capacity building, and restructuring of distressed institutions. - Deepen secondary sovereign security market by improving transparency and price formation, developing benchmark maturities, and reducing market segmentation between syndicated and auctioned government securities. *Source: WEST AFRICAN ECONOMIC AND MONETARY UNION — INTERNATIONAL MONETARY FUND (content from provided PDF excerpt).* ### 48. Countering the possible scarring effects of the crisis will require bold actions at both ### 1wauea2022001 - 48. Countering the possible scarring effects of the crisis will require bold actions at both ### Regional and national policy priorities - Countering possible scarring effects requires bold actions at both the regional and national levels to boost productivity growth and stimulate private investment. - Regional priorities: - Foster trade integration. - Enhance the regional competition framework. - Accelerate implementation of regional infrastructure projects in transportation, electricity, and digitalization. - Engagement timeline: - Discussions with the WAEMU authorities will be on the 12-month cycle in accordance with Decision No. 13656-(06/1), as amended. ### Recent economic developments (summary of figures and indicators) - Activity and recovery: - Activity indicators point to a consolidation of the recovery over 2021, though with an inflection around the third Covid wave. - Inflation: - Inflation has drifted above the upper limit of the target band, driven by higher food prices. - Fiscal stance and debt: - The fiscal stance was relaxed significantly in 2020 and 2021 in response to the crisis. - Debt levels have increased rapidly in a context of low growth. - External sector and reserves: - The current account deficit narrowed modestly in 2020. - Reserves rose to comfortable levels on the back of strong capital inflows, including Eurobond issuances. - Sources cited in figures: BCEAO, World Economic Outlook and IMF staff calculations. ### Monetary and financial sector developments - Monetary policy: - Monetary policy continued to be accommodative in 2021. - Banks’ demand for BCEAO’s liquidity is below the peaks of the start of the pandemic. - Credit and NPLs: - Private credit has showed resilience during the crisis. - NPLs were stable in part due to the regulatory forbearance measures. - Market indicators: - EMBIG spreads on Euro-denominated Eurobonds issued by WAEMU sovereigns have abated since 2020 peaks. - Domestic financial conditions have been favorable over 2021. - Sources cited in figures: BCEAO; Agence UMOA-Titres; and IMF staff calculations. ### Medium-term prospects (key projections and expectations) - GDP growth: - GDP growth is projected to converge back to around 6 percent in the medium-term. - Growth recovery driven mostly by private consumption and a rebound in net exports. - Fiscal consolidation and debt service: - Consolidation towards the regional deficit ceiling should start in 2022, gradually reducing high debt service levels. - Current account and reserves: - The current account deficit is expected to widen in 2021-22 before converging to around 4.5 percent of GDP. - Reserves would eventually stabilize at 5 months of imports. - Sources cited in figures: BCEAO; World Economic Outlook; and IMF staff calculations. ### Regional macroeconomic heterogeneity - Growth: - Most countries are expected to return to or even exceed pre-pandemic growth rates. - Inflation: - Inflation dispersion has narrowed over time and reflects, to some extent, differences in economic growth rates. - Fiscal adjustment: - Fiscal adjustment is expected to be stronger in countries with initially higher fiscal deficits, relying on a country-specific mix of current expenditure cuts and revenue mobilization efforts. - Financial depth and lending rates: - Significant heterogeneity in the degree of financial depth across countries and no evident sign of convergence. - Despite the single monetary policy, bank lending rates differ substantially across countries. - Sources cited in figures: BCEAO; World Economic Outlook; and IMF staff calculations. ### Selected key statistics (as reported in Table 1 and related tables) - Nominal GDP (2020, millions of US Dollars): 159,277 - GDP per capita (2020, US Dollars): 1,218 - Total population (2020, millions): 131 - Urban population (2020, percent of total): 40.8 - Headcount ratio at $1.90 a day (2011 PPP): 47.1 - Undernourishment (percent of population): 12.5 - Income share held by highest 10 percent of population: 32.1 - Income share held by lowest 20 percent of population: 6.1 - Life expectancy at birth (2019, years): 61.3 - Gini index: 40.8 - WAEMU aggregate annual national income and prices (selected series, annual percentage change unless noted): - GDP at constant prices: 6.5, 5.8, 0.3, 2.0, 5.4, 5.7, 6.1, 7.0, 7.2, 6.1, 5.8 (years across 2018–26 shown in table) - GDP per capita at constant prices: 3.4, 2.8, -2.5, -1.0, 2.5, 2.8, 3.1, 3.9, 4.1, 3.1, 2.8 - Consumer prices (average): 1.0, -0.1, 1.7, 2.3, 1.6, 3.3, 2.5, 1.9, 1.9, 1.9, 1.9 - Gross domestic investment (percent of GDP): 24.4, 24.2, 24.0, 24.6, 25.1, 25.4, 25.9, 26.0, 25.5, 25.8, 26.0 - Government total revenue, excl. grants (percent of GDP): 14.6, 15.6, 14.7, 15.2, 15.5, 15.3, 15.9, 16.3, 16.5, 16.9, 17.2 - Government expenditure (percent of GDP): 19.7, 19.8, 23.1, 22.9, 22.3, 22.9, 22.4, 21.6, 21.0, 21.2, 21.4 - Overall fiscal balance, excl. grants (percent of GDP): -5.0, -4.1, -8.4, -7.6, -6.9, -7.6, -6.5, -5.4, -4.4, -4.3, -4.2 - Overall fiscal balance, incl. grants (percent of GDP): -3.3, -2.3, -5.9, -5.7, -4.9, -5.9, -4.7, -3.8, -3.0, -3.0, -3.0 - Current account, excl. grants (percent of GDP): -6.7, -6.1, -6.9, -5.9, -6.8, -6.8, -6.8, -6.3, -5.4, -5.3, -5.3 - Current account, incl. grants (percent of GDP): -5.6, -4.9, -5.4, -4.5, -5.7, -5.9, -5.9, -5.3, -4.5, -4.5, -4.6 - External public debt (percent of GDP): 28.0, 30.2, 32.9, 33.6, 33.3, 36.4, 35.1, 33.5, 31.8, 30.3, 29.4 - Total public debt (percent of GDP): 43.4, 45.5, 48.5, 52.1, 49.6, 55.6, 55.5, 54.5, 52.7, 51.5, 50.8 - Gross international reserves (in months of next year's imports): 4.6, 5.6, 5.5, 5.5, 5.0, 5.8, 5.5, 5.3, 5.3, 5.2, 5.0 - Gross international reserves (in millions of US dollars): 14,853; 17,547; 19,275; 21,764; 19,497; 24,228; 24,898; 25,827; 27,626; 29,035; 30,043 - Memorandum: Nominal GDP (billions of CFA francs) series includes 83,301; 88,519; 90,231; 91,545; 96,476; 98,891; 106,762; 116,024; 126,456; 136,513; 147,001 - Memorandum: CFA franc per US dollars, average: 555; 585.9; ...; 574.8; ..................... Notes and footnotes in tables: - All projections presented in this staff report were prepared in the first half of December 2021 and do not incorporate any further developments. - Excluding intraregional trade. - Projections for 2021 include the 2021 SDR allocation which is equivalent to US$2,327 million, or 0.6 months of imports and 9.6 percent of the BCEAO's sight liabilities. - The acceleration in GDP growth in 2023 is due to the start of production of large hydrocarbon projects in Niger and Senegal. - Shows data from the IMF Country Report No. 21/49, published on January 21, 2021 (Board document number SM/21/5). ### Country-level projections and heterogeneity (selected entries from Table 2) - Real GDP growth (selected countries, annual percentage change, sample years across 2018–26 shown in table): - Benin: 6.7; 6.9; 2.0; 3.8; 7.0; 6.0; 6.0; 6.0; 6.0; 6.0 - Burkina Faso: 6.7; 5.7; -2.8; 1.9; 6.7; 5.6; 5.3; 5.3; 5.3; 5.3 - Côte d'Ivoire: 6.9; 6.2; 1.8; 2.0; 6.0; 6.5; 6.4; 6.3; 6.1; 6.0 - Niger: 7.2; 5.9; 1.2; 3.6; 5.4; 6.5; 10.4; 11.4; 8.5; 6.0 - Senegal: 6.2; 4.4; -0.7; 1.5; 5.0; 5.5; 9.5; 10.3; 5.4; 5.5 - WAEMU aggregate: 6.5; 5.8; 0.3; 2.0; 5.7; 6.1; 7.0; 7.2; 6.1; 5.8 - Inflation (selected): WAEMU: 1.0; -0.1; 1.7; 2.3; 3.3; 2.5; 1.9; 1.9; 1.9 ### Fiscal indicators and debt service (selected highlights from Tables 4 and 6) - WAEMU overall fiscal balance (including grants), commitment basis (percent of GDP): -3.3; -2.3; -5.7; -5.9; -4.7; -3.8; -3.0; -3.0; -3.0 (2018–26 series as shown) - WAEMU primary fiscal balance (percent of GDP): -1.9; -0.8; -4.0; -4.0; -2.9; -1.9; -1.1; -1.1; -1.0 - Total public debt (WAEMU, percent of GDP): 43.4; 45.5; 48.5; 52.1; 49.6; 55.6; 55.5; 54.5; 52.7; 51.5; 50.8 - Total debt service (WAEMU, percent of government revenue excluding grants): 38.4; 37.8; 40.6; 49.1; 44.4; 47.8; 44.7; 46.4; 45.4 - Debt service, interest (WAEMU, percent of government revenue excluding grants): 9.0; 9.5; 11.0; 11.2; 10.9; 10.8; 10.7; 10.4; 10.3 ### Annex I — Impact of the Pandemic on Financial Inclusion (overview) - Focus and scope: - Preliminary analysis of the impact of the Covid pandemic on financial inclusion in the WAEMU during 2020. - Focus on three dimensions: microfinance institutions (MFIs), e-money, and banking sector. - Key findings: - MFIs have remained mired in persistent vulnerabilities. - Progress made on e-money and digital transactions could outlast the pandemic and deepen as Covid recedes. - Quantitative context: - MFI sector end-2020 credit outstanding represented about 1.8 percent of GDP. - Banks’ credit to the private sector stood at about 23 percent of GDP. - Total value of e-money transactions (including digital payments) was about 44 percent of GDP during 2020. - Policy rationale: - Boosting financial inclusion is a policy priority given its role in economic development through supporting growth, reducing poverty and mitigating inequality. - Greater availability of financial services can unlock business opportunities, allow investment in education, cushion negative shocks, and support savings; small and young firms can contribute to job creation in more inclusive financial systems. - Definitions (Box 1): - Financial inclusion: extent to which individuals and firms have access to, and effectively use, formal financial services at high quality and low costs. - MFI sector: institutions providing financial services mainly to low-income households and small- or micro-sized enterprises. - Mobile money and e-money: "Mobile money" defined as services offered by mobile network operators or partners, often without a bank account; "E-money" covers broader digital financial services (DFS) provided by banks or other institutions via mobile phone, internet, or electronic devices (e.g., deposits, bill payments, online transfers). - Prepared by: Can Sever (AFR). *Source: IMF staff report material extracted from the WAEMU chapter (figures, tables, and Annex I) of the referenced document.* ### 3. The Covid pandemic may have created both challenges and opportunities for financial ### 3. The Covid pandemic may have created both challenges and opportunities for financial ### Channels and overall impact - Lockdowns, travel restrictions and social distancing disrupted economies in Africa; slow vaccine rollout imposed further strains. - Financial institutions faced deterioration of credit quality, with customers having difficulties to repay their debt. - The MFI sector was particularly impacted because it engages with lower income groups and small-sized firms disproportionately hit by the pandemic. - Social distancing measures disrupted MFI operations: collection of repayments, face-to-face meetings with clients, and flow of work. - Virus containment measures promoted contactless transactions and compelled many people to adopt DFS for the first time. - Central banks (including the BCEAO) reduced transaction fees and other measures to boost the use of DFS; governments introduced mobile cash transfers (example cited: Novissi program in Togo). ### Evolution of financial inclusion pre-pandemic #### Microfinance Institutions - The nominal stock of loans provided by MFIs increased by about 60 percent, from 934 to 1,483CFAF billion, between the end of 2015 and the end of 2019. - As share of GDP, the loan ratio increased from 1.4 to 1.7 percent over the same period. - Number of MFIs declined from 679 at end-2015 to 508 by end-2019. - Total number of MFI clients was broadly stable at around 14-15 million over the period. - Note: analysis focuses on the past five years before the pandemic for all financial inclusion measures due to data availability limitations. #### E-money - Number of e-money accounts (as a share of adult population) increased from 29 to 66 percent over 2015-19. - Number of person-to-person transfers increased fourfold and total volume of payments increased sixfold over 2015-19. - Improvements in infrastructure that supported e-money over the past decade: - Cellular phone subscriptions: reached 100 (per 100 people) in 2019, doubling from 52 in 2010. - Internet use (share of total population): increased from 3 to 21 percent over 2010-17. - Access to electricity: increased from 34 to 44 percent of population during 2010-19. #### Banking Sector - Number of bank accounts (share of adult population) increased from 13 to 15 percent during 2015-19. - Service points showed modest progress. - Credit to the private sector grew by about 40 percent, from a nominal value of 14,400 at end-2015 to 21,000 CFAF billion at end-2019. - In proportion of GDP, credit to the private sector increased from 21 to 23 percent during 2015-19. ### Financial inclusion during the crisis #### Microfinance Institutions - Initial decline in the nominal stock of loans in Q2 2020; effect was short-lived. - Loans rebounded during the second half of 2020 with an average quarterly growth rate of about 10 percent (y-o-y). - First half of 2021: credit from MFIs rebounded with an average quarterly growth of 19 percent y-o-y (partly reflecting base effects from Q2 2020). - Number of MFI clients increased by about 1.5 million people since the beginning of 2020, reaching 16 million at end-Q1 2021. - Aggregate NPL ratio increased from 6.5 percent at the end of 2019 to a peak of 12.6 percent in Q2 2020. - Drivers of NPL increase: low adoption by MFIs of BCEAO forbearance measures; weaknesses in MFIs’ information systems that prevented classification of forborne loans as performing; large exposure of MFIs to the agriculture sector. - MFIs’ NPL ratio declined to 9.0 percent in Q2 2021 — 2.5 percentage points higher than in the last quarter of 2019 — reflecting structural fragilities (poor governance and risk management, inadequate staffing, weak legal structures) aggravated by the pandemic. Box: Authorities’ actions to foster inclusion during the pandemic - BCEAO actions in 2020: - Reduced fees and commissions in various types of e-money transactions and relaxed conditions for opening e-money accounts. - Launched a framework encouraging banks and MFIs to postpone debt repayments of customers affected by the pandemic (but evaluated as solvent) without reclassifying those claims as non-performing. - Made bank loans granted to eligible MFIs eligible, as collateral, for a special refinancing window of the BCEAO to facilitate MFI access to bank financing. #### E-money during the pandemic - E-money accounts (share of adult population) increased from 66 at end-2019 to 76 percent at end-2020. - Number of businesses accepting e-payments increased almost fourfold during the pandemic, reaching almost 413,000 by end-2020 compared to end-2019. - Person-to-person transactions improved from 190 to almost 300 percent of adult population by end-2020. - Number of payments increased from 111 to 160 percent of adult population between 2019 and 2020. - Durability of 2020 gains uncertain; three factors could make gains more durable: - Many first-time users may continue beyond Covid. - Increase in digitalization and internet use during the pandemic. - BCEAO likely to continue incentivizing e-money transactions beyond the pandemic. #### Banking sector during the pandemic - Individuals with a bank account (share of adult population) increased from 15 percent at end-2019 to 16.5 at end-2020. - Small decline in nominal stock of bank loans to the private sector in Q1 2020 was transitory. - Loans resumed increase afterwards at an average 5.6 percent quarterly growth y-o-y. - Service points for the banking sector remained stable in 2020. #### Overall use of financial services - BCEAO composite indicator: share of adult population using at least one sort of financial services reached 64 percent at end-2020 from 60 percent at end-2019. - Share of adult population using financial services stood at 42 percent by end-2015, showing continuation of steady improvement. ### Policy responses and risks - BCEAO measures to support inclusion: fee reductions for e-money, relaxed account opening conditions, loan forbearance framework, special refinancing window collateral treatment for bank loans to eligible MFIs. - Annex II: Risk Assessment Matrix (selected entries) - Uncontrolled Covid local outbreaks and subpar/volatile growth - Relative Likelihood/Time Horizon: High / Short to Medium Term - Expected Impact if Realized: High - Recommended Policy Response: Reintroduce containment and mitigation measures. Prioritize spending and target support to affected firms and households. Provide adequate liquidity to banks. Mobilize greater donor support to accelerate vaccine rollout. - De-anchoring of inflation expectations in the U.S. leads to rising core yields and risk premia - Relative Likelihood/Time Horizon: Medium / Short to Medium Term - Expected Impact if Realized: Medium - Recommended Policy Response: Tighten monetary policy, as needed, to support reserves. Maintain a prudent fiscal policy stance to protect the peg and alleviate crowding-out in the regional market. Accelerate structural reforms to support capital flows (in particular FDI) and confidence. - Rising commodity prices amid bouts of volatility - Relative Likelihood/Time Horizon: Medium / Short to Medium Term - Expected Impact if Realized: Medium - Recommended Policy Response: Adjust domestic energy prices to reflect changes in international prices. Mitigate adverse effects on the most vulnerable through targeted fiscal transfers. - Higher frequency and severity of natural disasters related to climate change - Relative Likelihood/Time Horizon: Medium / Short to Medium Term - Expected Impact if Realized: High - Recommended Policy Response: Develop further food security strategy. Strengthen resilience through irrigation and productivity in agriculture. Mitigate impact on the poor through targeted fiscal transfers and other public spending. - Widespread social discontent and political instability - Relative Likelihood/Time Horizon: Medium / Short to Medium Term - Expected Impact if Realized: High - Recommended Policy Response: Unwind support measures targeted to vulnerable groups more gradually. Improve spending efficiency, and reprioritize spending to enhance social safety nets. - Intensified security risks, including due to regional spillovers - Relative Likelihood/Time Horizon: Short to Medium Term - Expected Impact if Realized: High - Recommended Policy Response: Create space for crisis response through better revenue mobilization and improved spending efficiency. Ensure gradual pace of medium-term consolidation. Improve fiscal transparency and governance when scaling up security budget. Reach out to international community for external financing and technical assistance. - Delays in realization of oil and gas projects in Niger or Senegal - Relative Likelihood/Time Horizon: Medium / Medium Term - Expected Impact if Realized: Medium - Recommended Policy Response: Adjust fiscal plans, improve spending quality and step-up structural reforms to improve competitiveness and foster private sector development in non-extractive sectors. _ WEST AFRICAN ECONOMIC AND MONETARY UNION INTERNATIONAL MONETARY FUND _ ### 5. Background. The CFA Franc (CFAF), in real effective terms, depreciated by about ### 5. Background. The CFA Franc (CFAF), in real effective terms, depreciated by about ### Background: Exchange Rate and REER Movements - The CFA Franc (CFAF), in real effective terms, depreciated by about 14.3 percent between the peak of 2009 and 2019, reflecting both the nominal depreciation of the Euro vis-à-vis the US dollar and relatively low inflation in WAEMU countries compared to trading partners. - In 2020, the depreciating trend was halted: the real effective exchange rate (REER) appreciated by about 3.9 percent compared to 2019 levels, largely the result of relative appreciation of the Euro against the USD, while the inflation differential with trading partners was stable over the same period. - In 2021, the REER further appreciated by about 1.9 percent over January-October, compared to the average value over the same period in 2020, reflecting the nominal exchange rate appreciation. - Estimates for the region reflect the average of WAEMU member countries, weighted by contribution to 2020 nominal GDP. These estimates should be interpreted with caution, given considerable uncertainty surrounding projections for 2021. ### Assessment: Exchange Rate Alignment - EBA-Lite Index Real Effective Exchange Rate (IREER) model (applied to 2020 data) finds a marginal misalignment of CFAF, estimating an undervaluation of approximately 2.1 percent with respect to values implied by economic fundamentals and equilibrium policies. - EBA-Lite CA model suggests an undervaluation of 0.23 for 2020 assuming an elasticity of the real exchange rate to the CA deficit of -0.18 (using IMF staff assumptions). - Applying the IREER to preliminary data covering January–October 2021 suggests the CFA franc is broadly aligned with economic fundamentals; the small difference between the two assessments reflects the mild appreciation of the currency in the first three quarters of 2021. ### D. Capital Flows — Background - Net capital inflows in 2020 are estimated to have declined to 3.2 percent of GDP, from 5.6 percent in 2019, largely driven by a contraction in FDI in the context of the pandemic. - Portfolio inflows increased from 0.2 percent of GDP in 2019 to 0.6 percent in 2020, partly driven by a Eurobond issuance by Côte d’Ivoire in the second half of the year. - In 2021, the financial account is projected to recover to 5.1 percent of GDP, in line with the 2017-2019 average (5.2 percent), reflecting a projected rebound in FDI as well as a further increase in portfolio inflows, projected to reach 2.1 percent of GDP in 2021. - Over the medium term, the financial account would decline and oscillate around 4 percent of GDP, reflecting a decrease in FDI inflows (as a share of GDP) after the completion of planned hydrocarbon projects and a decline in the portfolio investments ratio — the latter reflects prudent assumptions on new net Eurobond issuances over the period (given uncertain access of Eurobond issuers to international markets). ### D. Capital Flows — Assessment - Sovereign spreads for Eurobond issuers declined, on average, by over 100 basis points over January-September 2021 compared to the second half of 2020, and are currently below their average pre-pandemic levels. - Outlook for capital inflows remains subject to considerable uncertainties: shifts in global risk appetite due to monetary policy normalization in advanced economies and concerns related to debt sustainability in some WAEMU economies might complicate access to international markets for Eurobond issuers. - Over the medium term, policies to improve competitiveness and guarantee the soundness of the macroeconomic framework will be important to enhance attractiveness and boost capital inflows. - At the time of drafting this annex, Benin, the BOAD, Cote d’Ivoire and Senegal had all issued Eurobonds in 2021 for a cumulative amount of around 2.6 percent of regional GDP. ### E. Reserve Adequacy — Background - WAEMU pooled reserves increased mildly from CFAF 10,357 billion at end-2019 to about CFAF 11,731 billion at end-2020 — equivalent to 5.5 months of 2021 imports or 77.3 percent of the BCEAO’s sight liabilities. - In 2020, reserve position was mostly supported by exceptional financial assistance received from the international community during the pandemic; export proceed surrender receipts declined given some deferrals of payments granted by exporters during the crisis. - Between January and November 2021, foreign reserves further increased to CFAF 13,630 billion, roughly equivalent to 5.8 of projected 2022 imports or 82.1 percent of the BCEAO’s sight liabilities, as a result of: (1) Eurobond issuances of Benin, Côte d’Ivoire, Senegal and the BOAD (2.6 percent of 2021 GDP or 1.1 months of 2022 imports), (2) a recovery in export repatriation proceeds, and (3) the August 2021 SDR allocation (about US$2.3 billion, equivalent to 1.3 percent of GDP or 0.6 months of 2022 imports). - Reserves are projected to stand at 5.8 months of imports coverage by the end of 2021. In subsequent years, the reserve coverage ratio would decrease towards 5 months of imports, despite the decline in the CA ratio, reflecting the projected reduction in net capital inflows (in percent of GDP) as well as the expected growth in nominal imports. ### E. Reserve Adequacy — Assessment - The ARA CC approach based on 2020 data estimates an adequate level of reserves of 4.4 to 6.5 months of prospective import coverage for the WAEMU, with the lower end calibrated on fragile states and the higher end calibrated on non-resource rich countries. - Based on this model, the level of reserves projected for end-2021 (5.8 months of imports) as well as the medium-term projection (5 months at end-2026) are assessed as being adequate. - Growth-friendly fiscal consolidation and implementation of structural reforms will be key to maintaining reserves within the estimated optimal range. ### F. Competitiveness — Trade Performance - The CA balance marginally worsened: from about -4.5 percent of GDP on average between 2012 and 2015 to -4.8 percent between 2016 and 2019. - The share of exports over GDP declined from 25.4 percent on average in 2012-15 to 23.4 percent in 2016-19. - WAEMU exports are dominated by raw materials including gold, cotton, unrefined oil, and agricultural commodities; manufacturing exports account for about 18 percent of total merchandise exports. - Improving trade performance requires enhancing competitiveness of the WAEMU’s export sector; structural factors hinder competitiveness despite broadly favorable exchange rate trends. ### F. Competitiveness — Price and Non-Price Competitiveness - REER depreciation over the past decade suggests favorable trends in price competitiveness; EBA-Lite methodology suggests REER is currently consistent with economic fundamentals, implying limited near-term space for further price-competitiveness improvements. - Non-price competitiveness constrained by structural factors: 2020 World Bank governance indicators (WGI) show WAEMU countries fall behind key competitors in government effectiveness, control of corruption, regulatory quality, and rule of law. - 2019 World Economic Forum “Global Competitiveness Report” indicators show relatively low scores on dealing with insolvency regulations, paying taxes, and infrastructure endowment — notably road quality and access to electricity. - World Bank Logistics Performance Index (LPI) data indicate trade connectivity quality did not improve significantly between 2010 and 2018, with underperformance on ease to deal with customs procedures and timeliness of shipments. ### F. Competitiveness — Intra-regional Trade and Policy Recommendations - Exports to other WAEMU countries were broadly stable at about 15 percent of total exports between 2010 and 2017; largest trade exchanges occurred with countries outside WAEMU. - Constraining factors for low trade integration: (1) dominance of non-transformed commodity and agricultural goods with limited regional supply-chain integration; (2) non-tariff barriers including lack of common documentation for customs procedures and ad hoc levies charged for road transit. - National-level policy recommendations: - Enhance provision of infrastructure, particularly electricity provision. - Improve business climate through governance measures (for example, stronger anti-corruption agencies). - Facilitate access to finance. - Foster industrialization (for example, carefully targeted fiscal incentives) to move beyond non-transformed commodity exports. - Regional-level policy recommendations: - Targeted incentives and financing to promote cross-border infrastructure projects in energy and transport. - Efforts to harmonize customs procedures. - Measures aimed at removing non-tariff trade barriers. ### Annex IV. Inflation Dynamics During the Pandemic — Overview and Motivation - Annex analyzes recent increase in inflation in the region to identify causes and assess persistence. Three approaches do not provide a clear and consistent message about the risk of second-round effects; high uncertainty means close monitoring is essential to determine whether inflation will return within the BCEAO’s target band without policy tightening. - Headline inflation started increasing at the beginning of 2020 after recording negative rates throughout 2019. - Inflation has exceeded the BCEAO central target of 2 percent since mid-2020, breached the ceiling of the 1-3 range in April 2021, and has remained above 3 percent in subsequent months. ### Annex IV — First Approach: Decomposition of Headline Inflation - Rise in headline inflation during the crisis has been essentially driven by higher food prices, reflecting domestic supply problems and higher import costs. - Contribution of food to inflation increased from 0.20 percent before the crisis (December 2019-February 2020) to 3.0 percent on average over August-October 2021. - Other components of the consumption basket have had marginal effects on inflation dynamics. ### Annex IV — Second Approach: Core Inflation Analysis - Two measures of core inflation used: - Authorities’ “core” indicator (BCEAO) which excludes food and energy prices from headline inflation. - IMF staff “trimmed mean” approach that filters out disturbances by excluding components at the high and low ends of the distribution and aggregating the remaining components. - Both measures display an upward trend. - Forecasts using ARIMA models indicate: - Underlying indicator using the trimmed mean is likely to revert to the target by the end of 2022. - Core inflation (authorities’ indicator) would decline at a slower pace, remaining above the target. ### Annex IV — Third Approach: Direct Estimation of Inflation Persistence - Rolling autoregressive model computes a coefficient of persistence of headline inflation. - Estimation shows inflation typically displays low and positive persistence, but the coefficient has increased markedly since the beginning of 2021. ### Annex IV — Overall Assessment - The three approaches do not deliver a clear and uniform message about the risk of second-round effects. - Although persistence seems to have increased in recent months, inflation remains mostly driven by food with few spillovers to other components. - Core inflation is projected to decline slowly in 2022. - Given high uncertainty, close monthly monitoring is essential to determine whether the recent increase in inflation is temporary or reflects a more permanent trend. ### Annex V. Assessing the Monetary Policy Stance — Objective and Summary - Annex analyzes monetary policy stance in the WAEMU to assess consistency with inflation and output stabilization objectives, the fixed exchange rate setting, and the need to maintain an adequate FX reserve buffer. - Results suggest the monetary policy stance is broadly appropriate at the moment, with consideration of some tightening being warranted as conditions evolve. ### Annex V — Methodology: Taylor and Orphanides Rules - Two rules applied to historical and projected data: - (i) augmented Taylor rule (reaction function estimated via OLS on time series data), - (ii) variant of the Orphanides rule (calibrated reaction function in first differences with imposed parameters for output gap and inflation deviation). - Dependent variable: marginal policy rate (effective driver of market rates, more volatile than minimum bid rate). - Main differences between rules: - Taylor rule parameters estimated via OLS; Orphanides rule parameters imposed based on central bank preference assumptions. - Taylor rule uses current values of variables; Orphanides rule uses forward-looking information (one year-ahead). - Taylor rule specified in levels; Orphanides rule in first differences and uses potential growth instead of output gap. ### Annex V — Taylor Rule Specification and Considerations - Taylor rule estimates BCEAO policy rate response to domestic inflation rates, output gap, and net foreign assets (NFA) gap. - Extensions in specification: - Add smoothing component via lagged interest rate. - Include NFA gap estimated with HP-filter (NFA measured as average stock over the quarter). - Level and evolution of FX reserves are important variables for BCEAO; Article 76 of the BCEAO statutes specifies a minimum threshold for FX reserves, below which monetary policy stance would need reassessment and remedial actions. - It is assumed BCEAO is more likely to increase short-term interest rates when NFA deviate from long-term trend. - Estimation performed using OLS with Newey-West standard errors on quarterly data. ### Annex V — Orphanides Rule Calibration - Following Orphanides and Wieland (2013), a simple policy rule in first difference is calibrated assuming two alternative sets of weights for the inflation gap and the business cycle. - Rule responds to: - (i) forecast of inflation deviation from BCEAO inflation target, - (ii) economic growth forecast deviation from potential output growth one year ahead. - Assumed inflation target: 2 percent (mid-point of the range). - Assumed potential output growth: 6 percent. - Two weight configurations: - First case: equal weights on inflation and growth (standard in literature). - Second case: weight of 0.75 on inflation and 0.25 on growth, reflecting BCEAO’s legal framework prioritizing inflation considerations. *International Monetary Fund — WEST AFRICAN ECONOMIC AND MONETARY UNION (excerpts).* ### 0.25 on growth. The resulting formula is: ### 1wauea2022001 - 0.25 on growth. The resulting formula is: ### Monetary policy rule (formula and definitions) - Formula as presented: R_t = R_{t-1} + θ_1 (Eπ_{t+4/t-1} − π) + θ_2 (EΔy_{t+4/t-1} − Δy) - Definitions and details preserved exactly as in the source: - t represents the quarter. - R_t is the interest rate in quarter t. - θ represents the respective weights. - Eπ_{t+4/t-1} denotes the year-on-year inflation rate projected during quarter t-1 for quarter t+4 (relative to the same quarter one year before). - π is the central inflation target of 2 percent. - EΔ y_{t+4} is the year-on-year GDP growth projected during quarter t-1 for quarter t+4 (relative to the same quarter one year earlier). - Δ y is potential growth in real terms. - As the rule is applied in a forward-looking way for every quarter of 2022, the most recent Fall projections from the World Economic Outlook (WEO) for 2023 are used for all the estimations; therefore, in this application t-1 always refers to the projections produced in 2021Q3. ### Results from applying policy rules (Taylor and Orphanides rules) - When applied to past data: - The Taylor rule suggests the monetary policy stance has been slightly accommodative during the pandemic. - Despite the negative output gap and the relatively high level of reserves, the policy rate estimated by the Taylor rule is still above the observed marginal rate since the outbreak of the pandemic in 2020Q1. - Maintaining an accommodative stance was appropriate given that pressures on inflation were initially contained and reserve levels were comfortable. - The Taylor rule may overestimate the size of monetary policy accommodation because it does not capture the structural break associated with the shift to the FRFA tender procedure. - Structural break and interpretation notes: - In March 2020 the BCEAO changed the tender procedure from variable rate fixed quantity to fixed rate full allotment (FRFA), anchoring the marginal rate to the policy rate and mechanically lowering the marginal rate; this exogenous change is not captured by the Taylor rule. - Because of the shift to FRFA, the Taylor rule results should be interpreted by comparing the estimated policy rate in Q3 2021 to the estimated policy rate in Q4 2022, rather than by comparing estimated and observed rates. - The estimated Taylor rule recommends a 50-basis point increase by end-2022—an order of magnitude similar to the result of the Orphanides rule. - Forward-looking policy suggestion: - The three rules (Taylor and both versions of the Orphanides rule) suggest the need for a moderate rate hike in the short term. - Results indicate that a moderate increase in the policy rate might be appropriate by the end of 2022. - Staff assesses the monetary stance as being appropriate at the moment and recommends a prudent approach with a timely reassessment once more information on macroeconomic developments, in particular inflation, becomes available. ### Reserve and operational constraints highlighted - Specific operational constraint suggested for BCEAO: - 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. - Exchange rate stability is not a de jure objective of monetary policy. - Empirical notes: - Given the short time series and small number of observations, a state-dependent analysis over sub-periods cannot be conducted; therefore a linear response of the BCEAO to the level of NFAs is assumed. - Alternative specifications using gross reserves instead of net reserves and alternative measures of the gap had lower explanatory power. ### Monetary cooperation with France and currency reform (Annex VI) - Previous arrangements (as amended in 1973 and after the Euro replacement in 1999) included: - A French Treasury’s convertibility guarantee of the WAEMU’s CFAF into Euro at a pegged rate of EUR 1 = 655.957 CFAF, through an unlimited overdraft facility. - France appointed representatives as full members of the BCEAO’s Board, the Monetary Policy Committee and the WAEMU Banking Commission. - Obligation for the BCEAO to hold 50 percent of its international reserves into an “operation account” at the French Treasury; reserves at the French Treasury were available on sight and remunerated at the marginal lending facility rate of the European Central Bank (ECB), subject to a floor of 0.75 percent. - At end-2019, 62 percent of the BCEAO’s reserves were deposited at the French Treasury. - Reform of the monetary cooperation with France (new Treaty signed December 2019; ratified by France in February 2021) — key changes: - France is no longer represented in any WAEMU decision making bodies; France may request temporary observer representation on the Board of the BCEAO and the WAEMU Banking Commission to help prevent or manage a foreign exchange crisis. - France monitors WAEMU developments through regular data sharing by the BCEAO and periodic technical meetings. - If the BCEAO’s reserves are about to be exhausted, the BCEAO must inform the guarantor of its intention to call the convertibility guarantee with a five-day advance notice. - Use of the overdraft facility implies an interest charge equal to the daily rate of the ECB’s marginal loans and at least 80 percent of foreign exchange inflows into the WAEMU must be used toward paying back this overdraft. - The BCEAO no longer has to deposit part of its reserves at the French Treasury and the “operation account” was closed. - The BCEAO now manages all its reserves through a portfolio allocation system aimed at satisfying liquidity requirements while minimizing the opportunity cost of holding these reserves. - Currency reform: - In December 2019 the WAEMU authorities announced intention to replace the WAEMU CFAF with a new currency called “ECO” as soon as possible; the ECO launch was postponed because of the Covid crisis and the need to articulate this change with ECOWAS plans. - In June 2021, the ECOWAS authorities stated their intention to launch the ECO by 2027 for countries which will have met, from 2024 onwards, regional macroeconomic convergence criteria, including a fiscal deficit ceiling of 3 percent of GDP. ### Capacity development and IMF technical assistance during the pandemic (Annex VII) - Focus and providers: - The annex focuses on TA provided since the beginning of 2020, mainly in the context of the Covid crisis, and updates the near-term CD strategy for regional institutions. - Main Fund TA providers to WAEMU regional institutions: AFRITAC West (AFW), Fiscal Affairs Department (FAD), and Monetary and Capital Markets Department (MCM); some TA was provided by the IMF Statistics Department in collaboration with AFW. - Recipient regional institutions: the Central Bank (BCEAO), the WAEMU Commission, the General Secretariat of the Banking Commission (SGBCU), the Financial Market Regulator (CREPMF), and UMOA-Titres (UT). - TA objectives and outputs (selected highlights): - Strengthening banking and macroprudential supervision in support of the transition to Basel II/III norms and enhancing banking supervision capacity (on-site and document control including AML-FT). - Enhancing supervision of regional affiliates of external banking groups and capacity for conduct of colleges with non-WAEMU supervisors. - Improving credit risk evaluation and control; improving supervision of banks’ Islamic finance operations. - Reviewing the BCEAO’s draft roadmap on transition by WAEMU banks to IFRS standards. - Providing MCM technical note on policy options to manage potential deterioration of bank asset quality following unwinding of prudential forbearance measures. - Strengthening regulatory framework for security brokers and promoting development of the government security market (training on construction and interpretation of yield curves for WAEMU sovereign securities). - Supporting implementation by member states of regional Directive on Organic Budget Laws with completion of guidance notes on (1) employment ceilings, (2) governments’ opening balance sheets, and (3) internal accounting control. - Improving CPI compilation methodologies. - Delivery mode and pandemic impact: - Covid-related travel and health restrictions led to postponement of TA missions until virtual missions could be implemented in Fall 2020, contributing to a decline in the number of missions in fiscal year 2021. - WAEMU institutions adapted to virtual TA despite connectivity issues; the pandemic stretched absorptive capacity and shifted focus to immediate policy challenges. - Virtual interactions improved integration of CD and surveillance activities of the IMF and allowed broader participation by Fund TA departments in regional dialogues and FSAP-related work. - Near-term CD strategy priorities (five main areas): - Banking regulation and supervision: strengthen banks’ balance sheets, restructure weak institutions, mitigate risks, fully operationalize banking resolution procedures; address vulnerability from high reliance on central bank refinancing of government securities; draw guidance from the ongoing regional FSAP (findings to be discussed by the Fund’s Executive Board in the Spring of 2022). - Financial sector development: deepen the sovereign security market, improve money/interbank market functioning, primary bond market, and financial market infrastructure; broaden investor base to deepen fixed-income markets. - Monetary policy: consider reforms to (1) protect the central bank’s balance sheet from possible valuation losses of assets eligible to refinancing, (2) review transparency practices, and (3) establish a proper framework for emergency assistance to banks with temporary liquidity shortfalls; further guidance may come from the FSAP. - PFM and fiscal institutions: advance PFM reforms to contain below-the-line and off-budget operations, increase spending efficiency; prepare guidance notes for timelier implementation of regional PFM Directives; re-establish the WAEMU Convergence Pact with enhanced enforcement and monitoring mechanisms. - Tax policy: advance domestic revenue mobilization, revise regional tax directives (especially VAT), harmonize customs procedures and information exchange, and harmonize taxation of income from financial assets to support regional financial market development. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1wauea2022001.pdf* ### 7. Fund CD priorities and challenges for WAEMU regional institutions are summarized in ### 7. Fund CD priorities and challenges for WAEMU regional institutions are summarized in ### Near-Term Capacity Development Priorities — Bank supervision and regulation - Strategic goals - Strengthen banking supervision while completing the transition to Basel II/III prudential norms - Address impact of the Covid pandemic on banks’ asset quality and capital needs - Strengthen macroprudential policy - Complete the operationalization of bank resolution framework - Reduce dependence of some banks on central bank refinancing - Intermediate targets / deliverables - Complete the operationalization of bank resolution framework - Challenges - The ability of banks to meet liquidity requirements or restructure their balance sheet is hampered by the shallowness of the secondary market for government securities - Some measures to fully operationalize the bank resolution framework will require approval of the new Banking Law - The SGCBU has limited administrative resources ### Near-Term Capacity Development Priorities — Debt management - Strategic goals - Develop the regional government security market - Enhance financial market prudential regulations and accounting standards - Improve procedures for syndicated securities issuance - Intermediate targets / deliverables - Assess options for reducing segmentation of government security market between auction and syndication modes of issuance - Develop yield curves for sovereign securities - Develop the issuance of benchmark securities - Enhance incentives for SVT to animate the primary and secondary markets for auctioned securities - Challenges - The CREPMF and the two depository institutions (BCEAO for auctioned securities and the WAEMU Central Depository for syndicated securities) should develop a shared vision on actions needed to reduce market segmentation - Limited secondary market trading hampers the construction of yield curves for securities issued on both segments of the WAEMU’s sovereign security market - Some WAEMU governments remain reluctant to re-open sovereign security issues - Cash management practices of some member states are insufficiently developed - The investor base is shallow and non-diversified ### Near-Term Capacity Development Priorities — Monetary Policy - Strategic goals - Further improve the efficiency of monetary policy transmission - Enhance the BCEAO’s governance and policy frameworks with a view to increasing transparency, protecting the balance sheet of the BCEAO from depreciation of assets used as collateral for bank refinancing, and establishing a proper framework for the provision of emergency assistance to banks experiencing temporary liquidity shortfalls - Intermediate targets / deliverables - Enhance governance and policy frameworks; establish framework for emergency assistance - Challenges - The shallowness of the secondary market for government securities and the lack of credit ratings for some WAEMU sovereigns hampers an assessment of the market value of assets eligible for central bank refinancing - Insufficient data on credit and liquidity risk constrains the introduction of haircuts for public and private assets used as collateral for central bank refinancing ### Near-Term Capacity Development Priorities — Public Financial Management - Strategic goals - Support the implementation of the WAEMU’s regional PFM directives by member-countries and at regional level - Intermediate targets / deliverables - Ensure that all countries have transposed and implemented the eight PFM directives - Improve transparency in budget execution of crisis-related spending - Extend the coverage of the central government financial operations statistics (TOFE) to include all public sector entities - Adapt the BCEAO’s IT environment to facilitate the TSA management with a main account and corresponding sub-accounts attached to it - Revise the regional fiscal rule framework (convergence criteria as well as monitoring and enforcing mechanisms) - Challenges - Currently all member countries have fully transposed 6 of the 8 PFM directives; however, implementation varies significantly across countries - There is significant variation in administrative capacity among member-countries - Guidance on some operational aspects of the reforms implied by the regional directives can be insufficient - Limited availability of some data, for public entities other than central governments, presents challenges to expanding the coverage of TOFE ### Near-Term Capacity Development Priorities — Tax Policy - Strategic goals - Enhance tax policy coordination and design at the regional level - Intermediate targets / deliverables - Review regional tax policy directives to update their provisions and support greater revenue mobilization - Strengthen the dialogue between WAEMU Commission and member countries in setting regional priorities - Initiate discussions with member countries on options to promote conformity with regional tax commitments - Harmonize cross-country taxation on income from financial assets - Challenges - Implementation by national authorities of regional tax policy directives is sporadic and projects to revise them advance very slowly - However, the need to increase domestic revenue has recently been increasingly echoed by national and regional authorities giving possible impetus for renewed collaboration ### Annex VIII — Authorities’ Responses to the 2020 Policy Recommendations (selected) - Fiscal Policy Coordination - Recommendation: Returning collectively to a regional fiscal deficit of 3 percent of GDP by 2023 - Authorities’ response: Broadly consistent - The projected fiscal consolidation path is more gradual and extended by one year to 2024, including to accommodate Covid vaccination costs - This new path remains consistent with macroeconomic stability due to a stronger than expected external position (including because of the SDR allocation) and the resilience of the regional financial market in meeting governments’ funding needs - Monetary Policy stance - Recommendation: BCEAO should continue to satisfy banks’ liquidity needs at a set rate and stand ready to tighten monetary policy if external buffers fall significantly - Authorities’ response: Broadly consistent - The BCEAO has maintained an accommodative monetary policy stance by satisfying all banks’ liquidity needs at a 2 percent rate to support the recovery, against the background of stronger than expected external buffers - Financial Regulation and Supervision - Recommendation: Bank resolution framework should be made fully operational in 2021 - Authorities’ response: Partially consistent - Good progress has been made towards the approval of banks’ preventive restructuring plans but the adoption of bank resolution plans, now planned for 2022, will have to be complemented by other measures to make the bank resolution framework fully operational - Financial Sector Development - Recommendation: Reduce fragmentation of the primary market for sovereign securities and deepen the secondary market by transforming primary dealers into true market makers - Authorities’ response: Partially consistent - The market remains segmented by syndication or auction modes of issuance but a reform to improve the balance of rights versus obligations for primary dealers is under preparation - International reserve management - Recommendation: BCEAO should continue adapting its investment strategies and risk management following the end of the centralization of half of its reserves at the French Treasury - Authorities’ response: Consistent - The BCEAO now manages all of its FX reserves through a new portfolio allocation system with a view to satisfying liquidity requirements while reducing the opportunity cost of holding reserves ### Statement by WAEMU Authorities — Recent developments and outlook (selected findings and projections) - Pandemic impact and recovery - GDP growth in the WAEMU region dropped in 2020 to 2 percent - For 2021, GDP growth is expected to rebound to 5.7 percent, driven by robust private domestic demand - Growth projected to reach 6.1 percent of GDP in 2022 - Medium-term growth projected at an average of 7.1 percent for the period 2022-2025 - Inflation and monetary policy - Headline inflation above the BCEAO’s target band of 1-3% in 2021, on the back of high food prices - The BCEAO policy rate kept at 2 percent since June 2020 - Public finances and debt - Overall regional fiscal deficit projected to reach 5.9 percent of GDP in 2021 from 5.7 percent in 2020 and 2.3 percent in 2019 - Debt level rose from 45.5 percent of GDP in 2019 to 52.1 percent of GDP in 2020 and is projected at 55.6 percent of GDP for 2021 - Strong capital inflows have allowed the BCEAO’s reserves to rise to comfortable levels, with reserves estimated to have reached close to 6 months of prospective imports in 2021 - Banking sector - Average bank capital adequacy ratio at 12.0 percent at end-June 2021, above the regulatory minimum threshold - Private credit growth remained strong during the crisis and the level of non-performing loans (NPLs) relatively stable - Policy priorities and commitments - Authorities aim to converge to the 3 percent of GDP deficit target by 2024 - Proposals by the WAEMU Commission to the Council of Ministers on medium-term fiscal targets expected by end-June 2022 - BCEAO will pursue accommodative stance but stands ready to tighten policy if reserves come under pressure or inflation forecasts remain above the ceiling of the target band within the 24-month horizon - Authorities plan to complete systemic bank resolution plans and make them operational as swiftly as possible - Continued emphasis on accelerating implementation of outstanding PFM directives and addressing capacity constraints - Structural reform priorities include advancing convergence, enhancing trade and regional integration (including AfCFTA), and supporting large cross-country infrastructure projects via BOAD and the Programme Economique Régional (PER) - Measures to reduce non-tariff barriers include implementing the Mécanisme d’Alerte sur les Obstacles au Commerce (MAOC) *Source: 1wauea2022001 - 7. Fund CD priorities and challenges for WAEMU regional institutions are summarized in* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1wauea2022001.pdf_