## WEST AFRICAN ECONOMIC AND MONETARY UNION STAFF REPORT ON COMMON POLICIES OF MEMBER COUNTRIES (1wauea2023001)

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### Key issues, outlook, and executive conclusions
- WAEMU’s post-Covid-19 recovery has withstood new global and regional shocks, supported by macroeconomic policies and favorable initial conditions.
- Main near-term challenges:
  - rising inflation,
  - more limited access to international capital markets,
  - eroding external reserve buffers,
  - regional security issues amid elevated global risks.
- IMF Executive Board: 2022 discussions concluded February 1, 2023; staff report completed January 17, 2023.
- Directors stressed the importance of a prudent fiscal and monetary policy mix and structural reforms to maintain macroeconomic and financial stability and foster inclusive growth.
- Significant downside risks: volatile global economic and financial outlook, regional security risks, political uncertainty.

### Recent performance and medium-term projections
- Growth and inflation
  - Growth in 2022 is estimated at 5½ percent.
  - Growth projected to rebound to about 6 percent over the medium term, aided by new hydrocarbon production.
  - Growth projected: 5.9 percent in 2022; 6.1 percent for 2023; 5.1 percent for 2024; 6.2 percent for 2025.
  - Inflation averaged 7.5 percent in 2022; projected to return to the BCEAO’s target band by end-2024.
  - Consumer prices (average): 3.6 percent in 2022; projected 2.5 percent for 2023; 7.5 percent for 2024; projected decline to 3.3 percent in 2025.
- External position and reserves
  - External reserves declined by about 20 percent to reach the equivalent of 4.5 months of imports in 2022.
  - Gross international reserves (US$ millions): 24,194 in 2022; projected 24,898 for 2023; 18,490 for 2024.
  - Import coverage of reserves: 4.5 months at end-2022; projected about 4.6 months in the medium term.
  - Current account, excl. grants: -7.0 percent of GDP in 2022; projected -6.8 percent for 2023; -8.5 percent for 2024.
- Public finances and debt
  - Government total revenue, excl. grants: 16.2 percent of GDP in 2022 (15.6 in 2019; 15.2 in 2020; 15.3 in 2021).
  - Government expenditure: 23.3 percent of GDP in 2022 (19.7 in 2019; 22.8 in 2020; 22.9 in 2021).
  - Overall fiscal balance, excl. grants: -7.1 percent of GDP in 2022 (-4.1 in 2019; -7.6 in 2020; -7.6 in 2021).
  - Overall fiscal balance, incl. grants: -5.6 percent of GDP in 2022 (-2.3 in 2019; -5.6 in 2020; -5.9 in 2021).
  - Total public debt: 57.1 percent of GDP in 2022 (45.2 in 2019; 51.9 in 2020; 55.6 in 2021).
  - External public debt: 36.5 percent of GDP in 2022; projected 35.1 percent for 2023; 34.6 percent for 2024.
  - Nominal GDP (billions of CFA francs): 99,054 in 2022; projected 106,762 for 2023; 108,834 for 2024.
  - Nominal GDP per capita (US dollars): 1,322 in 2022; projected 1,394 for 2023; 1,263 for 2024.
- Poverty and social indicators (latest available)
  - Headcount ratio at $1.90 a day (2011 PPP): 22.0.
  - Undernourishment: 12.3 percent.
  - GDP per capita (2021, US Dollars): 1,322.
  - Total population (2020, millions): 130.9.
  - Urban population (2020, percent of total): 40.4.
  - Life expectancy at birth (2020, years): 61.7.
  - Gini index: 39.1.

### Fiscal policy — findings and policy recommendations
- Findings
  - Continued delay in fiscal consolidation and surge in public debt are affecting fiscal credibility, debt sustainability, and external viability.
  - Significant extra-budgetary and below-the-line operations (SFAs of about 3.6 and 1.4 percent of regional GDP in 2020 and 2021) contributed to public debt rising by close to 12 percentage points of GDP over 2019–2021.
- Recommendations
  - Urgently design a credible fiscal strategy anchoring debt sustainability, based on clear and adequate deficit and debt regional ceilings.
  - Reintroduce and revamp regional fiscal rules with enhanced supporting elements: a credible fiscal correction mechanism, well-designed escape clauses, and enforcement mechanisms.
  - Control all debt-increasing flows (such as below-the-line and extra-budgetary operations).
  - Any delay of the envisaged convergence of fiscal deficits to 3 percent of GDP in 2024 should be limited to one year, strongly justified, and financeable.
  - Enhance domestic revenue mobilization and public financial management; control stock-flow adjustment operations to preserve debt sustainability while protecting priority spending.
  - Composition of fiscal adjustment should be conducive to inclusive and sustainable economic growth; fund medium-term spending pressures via enhanced domestic revenues rather than debt.
  - Staff advised against loosening the 35 percent regional ceiling on the wage bill to tax revenue ratio or broadening the denominator to overall government revenue.

### Monetary policy — findings and policy guidance
- Findings
  - Monetary policy tightened in 2022 via three consecutive 25 basis points hikes.
  - Broad money growth: 8.1 percent in 2022 (10.3 in 2019; 16.5 in 2020; 8.0 in 2021).
  - Net foreign assets contribution to broad money: 6.0 percent in 2022 (6.6 in 2019; 0.7 in 2020; 2.5 in 2021).
- Recommendations and guidance
  - Further monetary tightening seems warranted unless large risks that second-round effects may derail inflation dissipate.
  - Authorities should stand ready to further tighten monetary policy as needed to contain inflationary pressures and, together with tighter fiscal policies, help strengthen external reserve adequacy.
  - Monetary policy should be data-dependent, with attention to regional food production, international food and energy prices, non-food inflation persistence and diffusion, reserves developments, market inflation expectations, and monetary policy in advanced economies.
  - FRFA procedure has enhanced monetary transmission; staff highlighted benefits of differentiated haircuts on collateral rather than the uniform 10 percent haircut to all assets.

### Financial sector — findings and supervisory recommendations
- Findings
  - Financial system appears resilient but faces vulnerabilities from increased bank exposure to sovereigns and refinancing dependence on the BCEAO.
  - Credit to the economy: 0.6 percent annual change in 2022 (4.2 in 2019; 4.1 in 2020; 2.6 in 2021).
  - Private sector credit growth averaged 14.5 percent in the first 8 months of 2022.
  - Average CAR rose from 11.5 prior to the Covid crisis to 12.6 at end-June 2022.
  - NPL ratio fell to 10.0 percent at end-June 2022 from 11.4 percent at end-2019.
  - Gross international reserves in 2022: US$24,194 million (in months of next year's imports: 5.6 in 2022; 5.8 in 2021; 5.4 in 2020; 5.6 in 2019).
- Recommendations
  - Finalize operationalization of the bank resolution framework; PRPs have been produced by all 34 EBIS and resolution plans expected in 2023.
  - Introduce “targeted” Pillar 2 capital surcharges and liquidity requirements for banks most exposed to concentrated sovereign exposures.
  - Enhance supervisory independence and implement an emergency liquidity assistance scheme with appropriate risk-mitigation mechanisms and usage conditions.
  - Require banks very dependent on BCEAO refinancing to implement funding plans to gradually reduce such recourse.
  - Timely introduction of the Basel III liquidity ratios.
  - Enhance depth and liquidity of the sovereign security market; address market fragmentation and promote electronic trading and dealer incentives.
  - Enhance AML/CFT supervision, finalize regional AML/CFT law (expected 2023), and assess climate-related risks in line with FSAP recommendations.
  - Continue restructuring of the MFI sector and promote financial literacy to address over-indebtedness and fraud.
  - BCEAO to investigate need for a CBDC, assessing benefits and related risks (cybercrimes, money laundering, terrorism financing).

### Structural policies, regional integration, and development projects
- Findings
  - Growth prospects would benefit from more robust structural reforms, regional trade integration, and greater coordination and pooled resources to implement regional development projects.
  - Acceleration needed in projects particularly in energy, digital and physical infrastructure, and food resilience.
- Recommendations
  - Accelerate progress in regional reforms and development projects.
  - Implement structural reforms to foster productivity growth and private investment to counteract Covid-19 scarring and facilitate intra-regional transactions.
  - Increase coordination and pooled resources for regional development projects.
  - Authorities plan to raise donor funds in 2023 for the Regional Development Strategy (runs through 2040) and develop legal and institutional frameworks for PPPs.

### Financial inclusion and CBDC considerations
- Progress and indicators
  - Share of individuals using financial services reached 67 percent of the WAEMU population at end-2021, up from 60 percent at end-2019.
  - E-money transactions (total value) about 65 percent of GDP during 2021.
  - Bank credit to the private sector: about 24 percent of GDP (end-2021).
  - MFI sector credit outstanding: about 2 percent of GDP (end-2021).
  - Country heterogeneity at end-2021: Niger 14 percent using financial services; Mali 55 percent; Benin and Togo about 86 percent.
- CBDC potential benefits and risks
  - Potential benefits: broaden financial inclusion, decrease transaction costs, support interoperability, facilitate targeted transfers and remittances.
  - Risks and design considerations: legal/institutional foundations, cyber-risks, ML/TF risks, privacy, bank disintermediation, currency substitution, capital account volatility, infrastructure constraints (internet, electricity), financial literacy gaps.
- Policy recommendations
  - Do not view CBDC as a silver bullet; assess whether regulated private-sector e-money can deliver similar results.
  - Before issuing a CBDC undertake legal and institutional analysis, ML/TF risk assessment and AML/CFT adjustments, cybersecurity and data privacy strategies, central bank capacity planning, and design to minimize bank disintermediation.
  - Strengthen e-money regulation and oversight and address structural barriers to digital access.

### Risks to the outlook (Annex II Risk Assessment Matrix highlights)
- Global and regional risks are tilted to the downside.
- Key high-likelihood, high-impact risks:
  - Intensifying spillovers from Russia’s war in Ukraine.
  - Commodity price shocks and oil-price volatility.
  - Deepening geo-economic fragmentation and geopolitical tensions.
  - Systemic social unrest from rising inflation and declining incomes.
- Other risks:
  - Natural disasters related to climate change (likelihood: Medium; expected impact if realized: High).
  - Intensified regional security risks (likelihood: Medium; expected impact if realized: High).
  - Delays in realization of oil and gas projects in Niger and/or Senegal (likelihood: Medium; expected impact if realized: Medium).
- Likelihood classifications used: "low" < 10 percent, "medium" 10–30 percent, "high" 30–50 percent.
- Recommended policy responses include strengthening food supply resilience, targeted support to vulnerable groups, improving spending efficiency, accelerating structural reforms, and mobilizing donor financing.

### Staff appraisal — balance of policies and priorities
- Staff view: WAEMU economy has shown resilience; medium-term prospects favorable with growth stabilizing around 6 percent.
- Policy balance emphasized:
  - Reintroduce and revamp the Convergence Pact and regional fiscal rules with credible correction and enforcement mechanisms.
  - Urgently mobilize domestic revenues and strengthen PFM to contain extra-budgetary and below-the-line operations.
  - Sequence and combine fiscal consolidation with monetary tightening as needed to anchor inflation expectations and preserve external buffers.
  - Finalize banking resolution framework, strengthen supervision, and deepen regional financial markets.
  - Accelerate regional structural reforms in energy, infrastructure, and food resilience and improve intra-regional trade facilitation.

*Source: IMF staff report on common policies of WAEMU member countries (staff report completed January 17, 2023; Executive Board discussion concluded February 1, 2023).*

### 2022. Based on information available at the time of these discussions, the staff report

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

### Key Issues and Executive Board Conclusions
- The WAEMU’s post-Covid-19 recovery has withstood new global and regional shocks, partly due to supportive macroeconomic policies and favorable initial macroeconomic conditions.
- Main near-term challenges: rising inflation, more limited access to international capital markets, eroding external reserve buffers, and regional security issues amid elevated global risks.
- IMF Executive Board concluded the 2022 discussions on WAEMU common policies on February 1, 2023; the staff report was completed on January 17, 2023.
- Directors agreed with the staff appraisal and stressed the importance of a prudent fiscal and monetary policy mix and structural reforms to maintain macroeconomic and financial stability and foster inclusive growth.

### Recent Performance and Outlook
- 2022 estimates and near-term projections:
  - Growth in 2022 is estimated at 5½ percent.
  - Inflation averaged 7.5 percent in 2022, mainly due to higher local and global food prices.
  - External reserves declined by about 20 percent to reach the equivalent of 4.5 months of imports in 2022.
  - Monetary policy in 2022: three consecutive rate hikes of 25 basis points.
  - Growth is expected to rebound to about 6 percent over the medium term, including due to the coming on stream of new hydrocarbon production.
  - Inflation is projected to return to the BCEAO’s target band by end-2024.
  - A gradual fiscal consolidation should start in 2023 and bring the aggregate fiscal deficit to 3 percent of GDP by 2025 at the latest.
  - Significant downside risks: volatile global economic and financial outlook, regional security risks, and political uncertainty.

### Fiscal Policy — Findings and Recommendations
- Findings:
  - Continued delay in fiscal consolidation and the recent surge in public debt are affecting fiscal credibility, debt sustainability, and external viability.
  - Government total revenue, excl. grants: 16.2 percent of GDP in 2022 (15.6 in 2019; 15.2 in 2020; 15.3 in 2021).
  - Government expenditure: 23.3 percent of GDP in 2022 (19.7 in 2019; 22.8 in 2020; 22.9 in 2021).
  - Overall fiscal balance, excl. grants: -7.1 percent of GDP in 2022 (-4.1 in 2019; -7.6 in 2020; -7.6 in 2021).
  - Overall fiscal balance, incl. grants: -5.6 percent of GDP in 2022 (-2.3 in 2019; -5.6 in 2020; -5.9 in 2021).
  - Total public debt: 57.1 percent of GDP in 2022 (45.2 in 2019; 51.9 in 2020; 55.6 in 2021).
- Recommendations:
  - Urgently design a credible fiscal strategy anchoring debt sustainability, based on clear and adequate deficit and debt regional ceilings.
  - Reintroduce and revamp regional fiscal rules with enhanced supporting elements: a credible fiscal correction mechanism, well-designed escape clauses, and enforcement mechanisms.
  - Control all debt-increasing flows (such as below-the-line and extra-budgetary operations).
  - Any delay of the envisaged convergence of fiscal deficits to 3 percent of GDP in 2024 should be limited to one year, strongly justified, and financeable.
  - Enhance domestic revenue mobilization and public financial management; control stock-flow adjustment operations to preserve debt sustainability while protecting priority spending.
  - Composition of fiscal adjustment should be conducive to inclusive and sustainable economic growth; medium-term spending pressures should be funded via enhanced domestic revenues rather than debt.

### Monetary Policy — Findings and Recommendations
- Findings:
  - Monetary policy tightened in 2022 via three consecutive 25 basis points hikes.
  - Broad money growth: 8.1 percent in 2022 (10.3 in 2019; 16.5 in 2020; 8.0 in 2021).
  - Net foreign assets contribution to broad money: 6.0 percent in 2022 (6.6 in 2019; 0.7 in 2020; 2.5 in 2021).
- Recommendations:
  - Further monetary tightening seems warranted unless large risks that second-round effects may derail inflation dissipate.
  - Authorities should stand ready to further tighten monetary policy as needed to contain inflationary pressures and, together with tighter fiscal policies, help strengthen external reserve adequacy.
  - Monetary tightening would also help contain the risk that reserves fall below adequacy thresholds.

### Financial Sector — Findings and Recommendations
- Findings:
  - The financial system appears resilient but faces vulnerabilities from increased bank exposure to sovereigns and from refinancing dependence on the BCEAO.
  - Credit to the economy: 0.6 percent annual change in 2022 (4.2 in 2019; 4.1 in 2020; 2.6 in 2021).
  - Gross international reserves in 2022: US$24,194 million (in months of next year's imports: 5.6 in 2022; 5.8 in 2021; 5.4 in 2020; 5.6 in 2019).
- Recommendations:
  - Finalize operationalization of the bank resolution framework.
  - Introduce “targeted” Pillar 2 capital surcharges and liquidity requirements to address concentrated sovereign exposures.
  - Enhance supervisory independence and implement an emergency liquidity assistance scheme.
  - Enhance depth and liquidity of the sovereign security market.
  - Enhance AML/CFT supervision and assess climate-related risks in the financial sector in line with the 2022 FSAP recommendations.

### Structural Policies and Regional Integration
- Findings:
  - Growth prospects would benefit from more robust structural reforms, regional trade integration, and greater coordination and pooled resources to implement regional development projects.
  - Acceleration needed in projects particularly in energy, digital and physical infrastructure, and food resilience.
- Recommendations:
  - Accelerate progress in regional reforms and development projects.
  - Implement structural reforms to foster productivity growth and private investment to counteract Covid-19 scarring and facilitate intra-regional transactions.
  - Increase coordination and pooled resources for regional development projects.

### Key Quantitative Indicators (selected)
- GDP at constant prices: 5.9 percent in 2022; projected 6.1 percent for 2023; 5.1 percent for 2024; 6.2 percent for 2025.
- Consumer prices (average): 3.6 percent in 2022; projected 2.5 percent for 2023; 7.5 percent for 2024; projected decline to 3.3 percent in 2025.
- Current account, excl. grants: -7.0 percent of GDP in 2022; projected -6.8 percent for 2023; -8.5 percent for 2024.
- External public debt: 36.5 percent of GDP in 2022; projected 35.1 percent for 2023; 34.6 percent for 2024.
- Gross international reserves (in millions of US dollars): 24,194 in 2022; projected 24,898 for 2023; 18,490 for 2024.
- Nominal GDP (billions of CFA francs): 99,054 in 2022; projected 106,762 for 2023; 108,834 for 2024.
- Nominal GDP per capita (US dollars): 1,322 in 2022; projected 1,394 for 2023; 1,263 for 2024.
- Poverty and social indicators (latest available): Headcount ratio at $1.90 a day (2011 PPP): 22.0; Undernourishment: 12.3 percent; GDP per capita (2021, US Dollars): 1,322; Total population (2020, millions): 130.9; Urban population (2020, percent of total): 40.4; Life expectancy at birth (2020, years): 61.7; Gini index: 39.1.

*Source: IMF staff report on common policies of WAEMU member countries (staff report completed January 17, 2023; Executive Board discussion concluded February 1, 2023).*

### 1.       The health impact of the pandemic has

### 1wauea2023001 - 1.       The health impact of the pandemic has

### Health and vaccination
- The health impact of the pandemic has been less severe than in the rest of SSA.
- Covid vaccination rollout is at about 23 percent; rollout remains slow due to the perception of an abating pandemic together with vaccine hesitancy.

### Security situation
- The WAEMU continues to face major security issues.
- Security deterioration in the Sahel since 2012, with Burkina Faso, Mali, and Niger particularly impacted.
- Irregular changes in government: Mali in August 2020 and May 2021; Burkina Faso in January and September 2022.
- Deepening insecurity during 2022 spilled over to northern regions of coastal WAEMU countries.
- International pressure obtained commitments to restore democratic rule by 2024, though challenges remain.

### Macroeconomic rebound and inflation
- Growth rebounded to 5.9 percent in 2021 from 1.8 percent in 2020.
- Food production declined by 8.1 percent in 2021 due to adverse weather conditions.
- Inflation rose above the BCEAO target band (1-3 percent) to reach 3.5 percent on average in 2021.
- External current account deficit widened to 6.2 percent of GDP in 2021 from 4.0 percent of GDP in 2020.
- External reserves increased in 2021 to cover 5.6 months of prospective imports at end-2021 (from 5.4 months at end-2020).

### Impact of Russia’s war in Ukraine and 2022 dynamics
- Quarterly GDP estimated to have grown at about 5½ percent (yoy) on average in H1-2022, compared to about 6 percent in H1-2021.
- Worsening terms-of-trade from global food and energy price increases and Euro depreciation widened the regional current account deficit by 0.9 percentage points of GDP in H1-2022 relative to H1-2021.
- External reserves were depleted by about 20 percent in 2022; preliminary December data show import coverage of 4.5 months (still within adequate range).
- Headline inflation accelerated in 2022, reaching 8.0 percent in November 2022.
- Inflation drivers: 2021 shortfall in regional food supply (inclement weather and security issues) and higher transportation costs; 2022 compounded by pass-through from global food and energy prices and recent NEER depreciation.
- Some effects contained by subsidies and price controls.

### Financial sector resilience and inclusion
- Private sector credit growth averaged 14.5 percent in the first 8 months of 2022.
- Average CAR rose from 11.5 prior to the Covid crisis to 12.6 at end-June 2022.
- NPL ratio fell to 10.0 percent at end-June 2022 from 11.4 percent at end-2019.
- At end-2021, close to 95 percent of loans that had benefitted from the repayment deferral scheme in 2020 were repaid or performing.
- Financial inclusion: share of individuals using financial services reached 67 percent of the WAEMU population at end-2021, up from 60 percent at end-2019.

### Fiscal developments and public debt
- The WAEMU Convergence Pact expired at end-2020 following its suspension in April 2020.
- Average overall fiscal deficit increased from 2.3 percent of GDP in 2019 to 5.6 percent of GDP in 2020.
- Overall fiscal deficit remained at 5.6 percent of GDP in 2021 despite a rebound in government revenues by 1 percentage point of GDP in 2021, due to higher capital expenditure, a grant shortfall, and larger security spending in some countries; partly financed by the 2021 SDR allocation.
- Significant extra-budgetary and below-the-line operations (SFAs of about 3.6 and 1.4 percent of regional GDP in 2020 and 2021, respectively) implied public debt to GDP rose by close to 12 percentage points of GDP over these two years, to 57.1 percent of GDP at end-2021.

### Monetary policy stance and changes
- March 2020: BCEAO shifted to a FRFA procedure—fully meeting banks’ demand for central bank liquidity at a set interest rate (the minimum bid-rate).
- June 2020: policy rate lowered by 50bps to 2 percent.
- 2021: BCEAO extended maturity of refinancing to 6 and 12 months.
- These measures eased regional financing conditions (interbank rate declined close to the minimum bid-rate and yields on sovereign securities fell).
- 2022: BCEAO raised benchmark rates by 25bps three times (June, September, December 2022) to prevent de-anchoring of inflation expectations, increasing the interbank market rate and tightening sovereign financing conditions somewhat.

### Outlook and projections
- Real GDP growth projected to decrease to 5.1 percent in 2022 from 5.9 percent in 2021.
- Medium-term growth expected to converge to about 6 percent, after a rebound in 2023-24, aided by coming on stream of hydrocarbon projects in Niger and Senegal.
- Regional fiscal deficit projected to increase to about 6 percent of GDP in 2022 due to measures limiting economic and social impacts of surging food and energy prices and addressing security concerns.
- Most country authorities consider necessary to delay until 2025 the convergence of their fiscal deficit to 3 percent of GDP (envisaged for 2024 before the war in Ukraine).
- Staff projections: regional fiscal adjustment of about 3 percentage points of GDP over 2022-25 is expected to result from lower expenditures (1.9 percent of GDP) and higher revenues (1.5 percent of GDP).
- Debt-to-GDP ratio expected to decline to 50.4 percent in 2027 (based on assumption that SFAs would remain around zero).
- Average annual inflation projected to peak at 7.5 percent in 2022 and converge back to the BCEAO’s target range by 2024.
- Current account deficit forecast to peak at 7.7 percent of GDP in 2022.
- Import coverage of reserves estimated at about 4.5 months of imports at end-2022 and projected at about 4.6 months of imports in the medium term.
- Negative NIIP was -44.9 percent of GDP at end-2020; 43 percent of liabilities are FDI and 12 percent are portfolio investment flows.

### Risks to the outlook
- Risks tilted to the downside:
  - More severe impact from terms-of-trade deterioration, protracted war in Ukraine, further supply-chain disruptions.
  - Accelerated tightening of global financial conditions could deepen borrowing and refinancing difficulties, further depleting official reserves and pressuring regional financial markets, potentially generating system-wide liquidity stress.
  - Worsening regional security and political uncertainty, high perceptions of corruption and weak governance, delays in hydrocarbon projects, and climate-related risks.
  - New Covid outbreaks given low vaccination rates remain a downside risk.
- Upside possibilities: European efforts to reduce reliance on Russian energy imports could increase hydrocarbon-related investments; additional investment related to recent oil and gas discoveries may raise growth.

### Authorities’ views
- Regional authorities broadly agreed with IMF staff on the economic outlook and risks; project medium-term growth similar to staff while noting risks.
- Authorities expect member states will converge to the 3 percent of GDP deficit target by 2025.
- BCEAO projects inflation at 2.9 percent in 2024 and is more optimistic on FX reserve coverage (4.5 months of imports by end-2023 versus 4.4 in staff projections; and 5.9 months by end-2027 versus 4.6 in staff projections).

### Policy recommendations and discussions
- Short-term macroeconomic environment is challenging with limited policy space; trade-offs are difficult.
- Fiscal policy:
  - A credible fiscal anchor needs to be urgently re-established due to delayed fiscal consolidation, increasing debt ratios (SFAs added an estimated 13 ppt of debt/GDP over 2013-21), absence of a new Convergence Pact, and considerations to raise deficit/debt ceilings or exclude security spending from deficit targets.
  - Staff advised to place fiscal consolidation plans and possible review of fiscal targets within a credible fiscal strategy and revamped fiscal framework to ensure adequate debt dynamics, fiscal sustainability, and external viability.
  - Staff strongly advised against loosening deficit and debt ceilings.
    - New targets in a renewed Convergence Pact need to address SFAs and ensure debt sustainability compatible with market access, adequate reserves, and regional financial stability.
    - Keeping a deficit ceiling of 3 percent of GDP without tackling SFAs would be equivalent to a de-facto deficit ceiling of about 4½ percent of GDP, not stabilizing debt.
    - Increasing the deficit ceiling to 4 percent of GDP with SFAs at historical levels would set debt on an explosive path.
    - Increasing the debt ceiling beyond 70 percent of GDP would not be advisable.
  - Revised fiscal rules should include:
    - A credible and well-defined fiscal correction mechanism following breaches of deficit and/or debt ceilings.
    - A global approach encompassing all factors affecting debt dynamics, including SFAs; oppose excluding security spending from the fiscal deficit target.
    - A credible enforcement mechanism and well-designed escape clauses with open communication.
    - Operational frameworks based on intermediate and complementary targets (e.g., revenues or wage bill).
  - Delays in fiscal consolidation should be adequately justified and accompanied by reasonable financing plans:
    - Widening deficit in 2022 and 2023 while external capital market access is impaired risks stressing regional financial markets and crowding out private investment; unlocking donor financing is critically important.
    - Any extension of convergence to a 3 percent deficit should be limited to one year and based on strong justifications and reasonable financing expectations.
    - Promote fiscal adjustment composition supportive of sustainable and inclusive growth: protect priority social expenditure and essential infrastructure; some member states should take actions toward observing the 35 percent regional ceiling on the wage bill to tax revenue ratio.
    - Staff advised against relaxing the 35 percent ceiling by broadening the denominator to overall government revenue.

- Monetary policy:
  - Needs to balance emerging second-round effects from food inflation and the risk of de-anchoring inflation expectations against adverse economic impacts of higher interest rates while containing reserve declines.
- Financial supervision:
  - Needs to remain vigilant against adverse effects from higher interest rates and other risks.
- Medium-term priorities:
  - Strengthen resilience of the regional banking system, develop regional financial markets, and promote regional integration.

*Source: IMF — WEST AFRICAN ECONOMIC AND MONETARY UNION (chapter content).*

### 23.      The fiscal strategy needs to envisage a significant improvement in domestic revenue

### 1wauea2023001 - 23.      The fiscal strategy needs to envisage a significant improvement in domestic revenue

### Fiscal strategy and domestic revenue mobilization
- Mobilizing domestic revenues is imperative to:
  - create fiscal space for spending needs associated with development, social, and security issues,
  - strengthen countries’ debt service capacity, and
  - eventually rebuild buffers.
- Continuing to rely largely on increasing debt financing, as in the past decade, is unsustainable.
- Efforts should focus on:
  - broadening the tax base, and
  - rationalizing widespread tax preferences, including for the VAT and the various regimes offering tax incentives.
- The broader fiscal strategy would also benefit from enhancing efforts to broaden the perimeter of the deficit and debt definitions.

### Public financial management (PFM) and fiscal transparency
- Staff encouraged accelerating implementation of regional PFM directives to:
  - reduce the scope for extra-budgetary and below-the-line operations, and
  - enhance fiscal transparency.
- Bottlenecks to address include:
  - limitations of national budgetary and accounting systems,
  - challenges in implementing accrual accounting, and
  - relatively limited access to budgetary information by the general public.
- Work underway with member states aims to harmonize the coverage for the fiscal deficit and debt to contribute to reducing SFAs going forward.

### Authorities’ views on fiscal ceilings and convergence
- Regional authorities indicated:
  - ongoing shocks have led to a suspension of fiscal convergence and prompted consideration of a relaxation of the fiscal ceilings,
  - higher spending needs associated with responses to the pandemic, the war in Ukraine, and security issues justify a delay in fiscal convergence and may call for raising the fiscal deficit and debt ceilings,
  - main priority remains to preserve debt and external sustainability.
- Authorities agreed:
  - containing extra-budgetary and below-the-line operations is crucial for debt sustainability,
  - reinstating fiscal rules complemented with supporting arrangements would enhance fiscal credibility and predictability,
  - ongoing work on defining proposals for introducing more explicitly an escape clause and a macroeconomic stabilization fund.

### Monetary policy: anchoring inflation expectations and preserving external viability
- Recent developments and risks:
  - Risks of second-round inflationary effects are rising while reserves are declining.
  - Food inflation historically has been the main driver of inflationary bouts, generally short-lived and without broader impact on non-food inflation.
  - Non-food inflation has been increasing, market expectations of inflation have continued to worsen, and staff estimates of inflation persistence and inflation diffusion have been rising steeply in recent months.
  - Reserves declined in 2022, while the ECB raised policy rates (which may put some pressure on WAEMU, despite capital controls).
- Staff recommendations:
  - further monetary tightening via higher policy rates to ensure that inflation returns within the BCEAO’s target range over a 24-month period and help prevent external buffers from falling below adequacy thresholds,
  - BCEAO should further tighten monetary policy rates unless downside risks to current baseline inflation and external buffer forecasts improve (Annex IV),
  - monetary policy should be data-dependent, with particular attention to: regional food production in coming months, international food and energy price developments and prospects, non-food inflation in the WAEMU and its likelihood of becoming entrenched into second round effects, adverse reserves developments relative to baseline, market inflation expectations, and monetary policy in the EA.
- Considerations and trade-offs:
  - authorities should act timely to prevent a reserve decline to below adequate levels through additional fiscal consolidation to help curb aggregate demand,
  - delayed fiscal consolidation would heighten the need for monetary tightening with adverse feedback effects on domestic spending and fiscal accounts and risk fostering fiscal dominance,
  - divergence in economic performance, debt levels, and fiscal policies across the region can decrease the efficiency of common policies and increase macroeconomic stability risks.
- FRFA and collateral framework:
  - The FRFA procedure has enhanced monetary policy transmission by reducing uncertainty around banks’ access to refinancing and volatility of rates.
  - The BCEAO applies a uniform 10 percent haircut to all assets used as collateral for its refinancing operations; staff highlighted that greater differentiation based on credit and liquidity risks would help protect the BCEAO’s balance sheet and promote fiscal discipline.

### SDR sales and reserves
- Recent SDR operations:
  - In August and September 2022, the BCEAO sold SDR2,228 million of its SDR holdings on behalf of its members, against apportioned amounts of the hard currencies composing the SDR basket.
  - Proceeds have been invested in the form of remunerated deposits in the original currency at major international institutions, thereby avoiding exchange rate risk from these transactions so far.
  - As of end-  November 2022, the net SDR regional position of the BCEAO recorded a small surplus close to 0   percent of regional GDP, suggesting that further SDR sales may expose the BCEAO’s balance sheet to interest rate risks.

### Safeguards and central bank governance
- The BCEAO has implemented all recommendations provided in the 2018 safeguards assessment; an update assessment is planned for 2023.
- The central bank agreed with IMF staff on the importance of containing second-round effects and reserve losses, and stated its readiness to tighten monetary policy if necessary.
- The central bank does not share the IMF staff recommendation to preserve the FRFA procedure and considers authorities should be free to use all available tools, including a flexible-rate fixed-quantity system to quickly adjust the amount of liquidity.

### Fostering financial stability and inclusion
- FSAP findings and banking sector resilience:
  - An FSAP conducted in 2021 and completed in April 2022 found that while the banking sector appears resilient to shocks some banks remain insufficiently capitalized.
  - Sovereign exposures have increased markedly in recent years and some banks are highly dependent on BCEAO refinancing.
  - Bank regulation has been largely aligned with the Basel framework; supervision has become more risk oriented; a new resolution framework is in the process of being operationalized.
- Key risks and vulnerabilities:
  - Some banks’ capital buffers are not commensurate with factors amplifying credit risk (exposure concentration and interbank linkages).
  - Banks’ capital positions are weaker than appears from their increasing CAR—in the context of the transition to Basel II/III—as full provisioning of NPLs would mostly absorb existing Tier 1 capital buffers.
  - Liquidity risks are exacerbated by deposit concentration: the five largest depositors on average hold 25 percent of deposits.
  - Underdevelopment of the interbank market elevates liquidity risks.
- Recommended supervisory and regulatory actions:
  - make the banking resolution framework fully operational; PRPs have been produced by all 34 banks of systemic importance (EBIS) and resolution plans are expected to be adopted for all EBIS in 2023,
  - strengthen frequency and intensity of onsite supervision, particularly inspection of banks’ governance and risk management,
  - take necessary actions for weak banks and enforce minimum capital requirements decisively,
  - introduce “targeted” Pillar 2 capital surcharges and liquidity requirements for banks most exposed to concentration and liquidity risks,
  - timely introduction of the Basel III liquidity ratios,
  - enhance supervisory independence by explicitly enunciating the principle of independence in the Banking Commission’s Statute and restricting appellate jurisdiction to the WAEMU’s Court of Justice.
- Other measures:
  - introduce an emergency liquidity assistance scheme supported by appropriate risk-mitigation mechanisms and usage conditions,
  - require banks very dependent on BCEAO refinancing to implement funding plans to gradually reduce recourse to such refinancing,
  - strengthen AML/CFT risk-based supervisory program; a cartography of ML/TF risks is being finalized and a draft regional AML/CFT law is expected to be finalized in 2023,
  - continue restructuring of the MFI sector and promote financial literacy to address over-indebtedness and fraud,
  - BCEAO plans to investigate the need for a CBDC to potentially promote financial inclusion, fintech, and digitalization while assessing related risks (cybercrimes, money laundering, and terrorism financing).
- Sovereign securities market:
  - Progress has been made to increase depth and liquidity of the secondary market, but issuance of benchmark securities declined in 2022 and market fragmentation persists.
  - UMOA-Titres has developed a draft plan to increase incentives for security dealers and made progress toward an electronic trading platform, but no significant progress toward greater fungibility between syndicated and auctioned securities.
- Climate-related financial risks:
  - Staff advised adopting a comprehensive strategy to assess climate-related risks in the financial system, starting with raising supervisors’ and financial institutions’ awareness and setting prudential expectations to integrate climate-related risks into risk management systems and disclosure frameworks.

### Structural policies to support medium- and long-term growth
- Regional structural reforms in energy, infrastructure, and food resilience could boost productive capacity and foster inclusive growth.
- Notable plans and recommendations:
  - Authorities have introduced plans to quadruple energy production to 25,000 MW by 2033; details on financing and implementation are yet to be finalized.
  - Infrastructure investments are needed; the WAEMU Commission adopted a Regional Development Strategy in 2020 that runs through 2040. Authorities should ensure coordination of investments and pooling of resources to exploit synergies from regional transportation, digital, and energy networks.
  - To increase food resilience and reduce external food dependence, authorities should promote broader diversification of agricultural products and measures to increase agricultural productivity.
- Regional integration challenges:
  - Intra-regional trade remains limited despite free customs duties, due to lack of harmonized customs documentation, limited regional supply chains, and misalignments in national labor market laws and governance.
  - Efforts to reduce non-tariff barriers, improve traceability of products (including forest degradation and child labor concerns), and enhance the regional competition framework should be intensified.
- Authorities’ plans:
  - raise funds from donors in 2023 for the regional development strategy,
  - develop the legal and institutional framework for public-private partnerships in the WAEMU,
  - strengthen governance of the FAIR and the FRDA.

### Staff appraisal and outlook
- The WAEMU’s economy has shown resilience, with recent global shocks moderately affecting the recovery owing to supportive policies and a favorable initial macroeconomic environment.
- Economic prospects remain favorable in the medium term, with growth stabilizing around 6 percent.

*International Monetary Fund — WAEMU staff report excerpt*

### 51.      However, global and regional risks are tilted to the downside. Economic prospects could

### 1wauea2023001 - 51.      However, global and regional risks are tilted to the downside. Economic prospects could

### Downside risks and debt sustainability
- Global and regional risks are "tilted to the downside."
- Economic prospects could be adversely impacted by:
  - "a   prolonged war in Ukraine,"
  - "tightening global financial conditions,"
  - "a deterioration of the security and political situation in the region."
- Public debt increased by "12 percentage points of GDP since the pandemic," partly due to "large extra-budgetary and below-the-line operations."
- The recent increase in public debt "could impair debt sustainability in the absence of fiscal adjustment."

### Fiscal rules, Convergence Pact, and fiscal framework
- Urgent need to "reintroduce the regional fiscal rules and adopt a credible medium-term fiscal framework to ensure fiscal sustainability and preserve external viability."
- Credibility of the fiscal strategy is being eroded as "fiscal consolidation is being repeatedly delayed," and "a new Convergence Pact is yet to be re-instated."
- Any delay in convergence of fiscal deficits to "3 percent of GDP" should:
  - "be limited to one year,"
  - "justified, and supported by reasonable expected financing."
- Justification could be "exceptional spending needs."
- Additional financial needs from delayed consolidation should be "identified and adequately communicated."
- "The composition of fiscal adjustment needs to remain conducive to inclusive and sustainable economic growth."
- The Convergence Pact should be "reintroduced and revamped" with:
  - "a credible fiscal correction mechanism in case of breaches of the fiscal deficit and/or debt ceiling,"
  - controls on "extra-budgetary and below-the-line operations,"
  - "a credible enforcement mechanism as well as well-designed escape clauses."

### Revenue mobilization and fiscal space
- Continued efforts to mobilize domestic revenues are "critical to finance social, development, and security spending."
- Increased domestic revenue mobilization would help:
  - create fiscal space,
  - "strengthen debt service capacity,"
  - "establish buffers for unanticipated future needs,"
  - pave the way to "a more sustainable growth path."

### Monetary policy guidance
- Staff recommends "further monetary tightening to ensure inflation returns within the BCEAO’s target range over a 24-month period and to maintain external buffers above adequacy thresholds."
- Inflation dynamics:
  - "Inflation is rising mainly driven by food inflation, affected by weather shocks and global pass-through from high prices."
- Reserves declined due to "a wider current account deficit and more difficult access to international capital markets," amid "tightening global financial conditions."
- Monetary policy stance:
  - "Monetary policy should remain data dependent,"
  - "the BCEAO should further tighten unless downside risks to inflation and external buffers dissipate."
- Conflicting operational notes in the text:
  - Figure caption: "BCEAO raised the policy rate three times by 0.25 bps since June 2022."
  - Annex summary: "The BCEAO increased its policy rate three times by 25bps in June, September and December 2022."

### External position and policy mix
- WAEMU’s external position in 2021 was assessed as "broadly in line with the level implied by fundamentals and desirable policy setting."
- "Monetary and fiscal policy normalization in the near term will support external sector stability."
- If external reserves erode "below adequate levels," this would:
  - make monetary tightening "more urgent,"
  - make fiscal consolidation "more important, to mitigate aggregate demand pressures."
- Delays in fiscal consolidation could have an inflationary effect, which "would call for monetary tightening."

### Financial sector risks and regulatory recommendations
- The financial sector "has remained resilient to the pandemic shock and high inflation," but "it encompasses risks."
- Key risks and vulnerabilities:
  - "Increased exposure of banks to sovereigns and refinancing from the BCEAO."
- Staff recommendations:
  - finalize the "bank resolution framework;"
  - introduce "“targeted” Pillar 2 capital surcharges and liquidity requirements;"
  - "enhance supervisory independence;"
  - implement an "emergency liquidity assistance scheme;"
  - increase depth and liquidity of "the secondary market for sovereign securities" and address "market fragmentation;"
  - "assess climate-related risks in the financial sector;"
  - "enhance AML/CFT supervisory capacity and implement a fully risk-based approach to AML/CFT supervision in line with the FSAP recommendations."

### Structural reforms and regional development projects
- Need to "accelerat[e] regional reforms and development projects."
- Structural reforms should aim to:
  - "boost productivity and private investment,"
  - "promote intra-regional transactions,"
  - "foster inclusive growth."
- Priority areas: "energy, digital and physical infrastructure, and food resilience."
- Call for "increased coordination and pooled resources to implement regional development projects."

### Medium-term prospects and heterogeneity (high-level points from figures)
- GDP growth is projected to "converge back to around 6 percent in the medium-term," sustained by "strong private consumption and investment."
- Consolidation towards the regional deficit ceiling is "slated to start in 2023," gradually moderating "the high debt service levels."
- The current account deficit is expected to widen in 2022 before converging to "around 4.0 percent of GDP."
- Reserves would eventually stabilize at "about 4.6 months of prospective imports."
- Significant heterogeneity across member countries in:
  - inflation dispersion and rising average inflation rates,
  - fiscal adjustment needs and composition (expenditure rationalization vs. revenue mobilization),
  - financial depth and lending/deposit rate differentials despite a single monetary policy.

*Source: 1wauea2023001 (WAEMU chapter), INTERNATIONAL MONETARY FUND.*

### Annex II. Risk Assessment Matrix

### Annex II. Risk Assessment Matrix

### Global risks: spillovers, commodity shocks, and financial tightening
- Intensifying spillovers from Russia’s war in Ukraine  
  - Likelihood: High  
  - Expected Impact if Realized: High  
  - Recommended Policy Response: Strengthen automatic passthrough of global commodity price changes, notably in the energy sector, provide targeted support to the vulnerable, and ensure food supply resilience through forward-looking planning.

- Commodity price shocks (continuing supply disruptions and negative demand shocks)  
  - Likelihood: High  
  - Expected Impact if Realized: High  
  - Recommended Policy Response: To mitigate the possible budgetary cost, adjust domestic energy prices to reflect changes in international prices. Mitigate adverse effects on the most vulnerable through targeted fiscal transfers.

- Volatility in oil prices affecting growth, inflation, and fiscal positions (WAEMU is a net oil importer)  
  - Likelihood: High  
  - Expected Impact if Realized: High  
  - Recommended Policy Response: Ensure transparency and effectiveness of fiscal measures and social spending. Improve spending efficiency, mitigate corruption, and reprioritize spending to enhance social safety nets.

- Systemic social unrest from rising inflation, declining incomes, and worsening inequality  
  - Likelihood: High  
  - Expected Impact if Realized: High  
  - Recommended Policy Response: Ensure transparency and effectiveness of fiscal measures and social spending. Improve spending efficiency, mitigate corruption, and reprioritize spending to enhance social safety nets.

- De-anchoring of inflation expectations and stagflation risk (supply shocks; tighter monetary policy)  
  - Likelihood: Medium  
  - Expected Impact if Realized: Medium  
  - Recommended Policy Response: Tighten monetary policy, as needed, to anchor expectations and support reserves. Maintain a prudent fiscal policy stance to protect the peg and alleviate crowding-out in the regional market. Accelerate the implementation of the structural reform agenda to support capital flows (in particular FDI) and confidence.

- Abrupt global slowdown or recession (synchronized sharp growth slowdown)  
  - Likelihood: Medium  
  - Expected Impact if Realized: Medium  
  - Recommended Policy Response: Continue using countercyclical fiscal policy (where fiscal space is adequate) in the short term, and strengthen fiscal and external resilience while promoting growth-oriented policies in the medium term.

### Global risks: pandemic, geo-economic fragmentation, and climate-related disasters
- Local Covid-19 outbreaks or vaccine-resistant variants causing renewed lockdowns  
  - Likelihood: Medium  
  - Expected Impact if Realized: Low  
  - Recommended Policy Response: Prioritize spending and target support to vulnerable households. Mobilize greater donor support to accelerate vaccine rollout. Ramp up domestic campaigns to address vaccine hesitancy.

- Deepening geo-economic fragmentation and geopolitical tensions (deglobalization, fragmentation of payments/technology)  
  - Likelihood: High  
  - Expected Impact if Realized: High  
  - Recommended Policy Response: Boost the resilience of the economy and key supply chains, including through diversification.

- Natural disasters related to climate change (floods, droughts)  
  - Likelihood: Medium  
  - Expected Impact if Realized: High  
  - Recommended Policy Response: Invest in climate adaptation and improve shock response mechanisms to cope with floods and droughts. Enhance food security, including through irrigation and productivity in agriculture. Mitigate the impact on the poor through targeted fiscal transfers and other types of public spending.

### Regional risks: security, fiscal space, and hydrocarbon project delays
- Intensified security risks, including regional spillovers  
  - Likelihood: Medium  
  - Expected Impact if Realized: High  
  - Recommended Policy Response: Create space for crisis response through better revenue mobilization and improved spending efficiency. Ensure that the pace of medium-term consolidation is gradual, but consistent with fiscal stability. Improve fiscal transparency and governance when scaling up security budget. Reach out to the international community to increase external financing and technical assistance.

- Delays in the realization of oil and gas projects in Niger and/or Senegal  
  - Likelihood: Medium  
  - 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.

### Key numeric and risk-assessment points (as presented)
- Likelihood classifications: "low" < 10 percent, "medium" 10–30 percent, "high" 30–50 percent.  
- Risks may interact and materialize jointly.  
- Pandemic-era fiscal support withdrawal and fiscal consolidation could delay regional fiscal convergence and adversely affect the external position.

*Source: 1wauea2023001 - Annex II. Risk Assessment Matrix*

### 11.      Trade performance. Over the past few years, the CA balance has marginally worsened,

### 11. Trade performance. Over the past few years, the CA balance has marginally worsened,

### Trade performance: recent developments
- Current account (CA) balance:
  - About -4.5 percent of GDP on average between 2012 and 2015.
  - -4.8 percent of GDP on average between 2016 and 2019.
- Exports over GDP:
  - 25.7 percent on average in 2012-15.
  - 23 percent in 2016-19.
- Composition of exports:
  - Bulk constituted by raw materials including gold, cotton, unrefined oil, and agricultural commodities.
  - Manufacturing exports account for about 17.8 percent of total merchandise exports.
- Conclusion: Improving trade performance requires enhancing competitiveness and diversification of the WAEMU’s export sector; structural factors continue to hinder competitiveness despite broadly favorable exchange rate trends.

### Price and non-price competitiveness
- Real Effective Exchange Rate (REER):
  - REER has depreciated in the past decade, indicating favorable trends in price competitiveness.
  - EBA-Lite methodology indicates REER is minimally overvalued by 2.8 percent based on fundamentals (current account method).
  - Implication: Limited space for further improvements in price competitiveness in the near term.
- Non-price competitiveness constraints (structural):
  - Governance: 2021 World Bank governance indicators (WGI) show WAEMU countries fall behind key competitors in Africa and Asia in areas such as government effectiveness, control of corruption, regulatory quality, and rule of law. Governance indicators use a (0 = worst; 5 = best) scale.
  - Business environment: 2019 World Economic Forum Global Competitiveness Report suggests relatively low scores on dealing with insolvency regulations and paying taxes.
  - Infrastructure: Low scores notably on road quality and access to electricity.
  - Trade logistics: World Bank’s Logistics Performance Index (LPI) suggests quality of trade connectivity has not improved significantly between 2010 and 2018; underperformance on customs procedures ease and timeliness of shipments.

### Intra-regional trade
- Policy framework: Trade in local products is by law free of customs duties within the WAEMU and ECOWAS.
- Observed trade integration:
  - Between 2010 and 2017, exports to other WAEMU countries were broadly stable at about 15 percent of total exports; ratio roughly maintained during the Covid-19 pandemic.
  - Majority of trade exchanges occur with countries outside the WAEMU.
- Contributing factors to low integration:
  - Export structure dominated by non-transformed commodity and agricultural goods; limited regional supply-chains.
  - Non-tariff barriers: lack of common documentation for customs procedures and ad hoc levies charged for road transit (WTO 2018).

### Policy measures to alleviate competitiveness constraints
- National-level measures:
  - Enhance provision of infrastructure, particularly road connectivity and electricity provision.
  - Improve business climate via governance improvements (for example, stronger anti-corruption agencies).
  - Simplify tax payments and insolvency procedures.
  - Foster industrialization (for example, through carefully targeted fiscal incentives) to reduce concentration on non-transformed commodities.
- Regional-level measures:
  - Targeted incentives and financing to promote infrastructure projects with positive regional spillovers.
  - Harmonize customs procedures.
  - Remove non-tariff trade barriers.

### Annex IV — Factors for monetary policy decision-making in the WAEMU
- Context and objectives:
  - Current high inflation combined with external and internal downside risks requires sound data-dependent and rules-based monetary policy decisions.
  - Appropriate monetary policy is crucial to ensure inflation returns within the BCEAO’s target range as well as to prevent external buffers from falling below adequacy thresholds.
  - Adequate monetary policy response should aim to anchor expectations and ensure inflation returns to the target within 2 years.
- Decision process and analytics:
  - Monetary Policy Committee (MPC) meets at least four times a year, in the last month of each quarter.
  - MPC decisions are based on forward-looking macroeconomic analyses assessing real, fiscal, monetary, and external factors and consider an extended version of the Taylor rule.
  - Data-driven quantitative models are imperative given high uncertainty.
- Conditions that would warrant monetary policy tightening (qualitative list):
  - Further impairments on regional food production and distribution (weather conditions, security issues).
  - Further increases in international food and energy prices.
  - Worsening of inflation expectations (BCEAO monitors expectations monthly via a survey of about 1,600 companies across eight member states).
  - Further increase in inflation persistence (persistence has been steadily increasing since mid-2021).
  - Further increase in the diffusion index (higher share of items facing growing prices above chosen thresholds; SIP uses thresholds 2 percent and 3 percent).
  - Adverse developments of reserves relative to the baseline:
    - BCEAO statute: review and remedial actions if, for three consecutive months, average of foreign exchange reserves falls below 20 percent of its sight liabilities.
    - The 20 percent threshold was broadly equivalent to 1.3 months of imports in December 2022 (reserves were about 63 percent of the BCEAO’s sight liabilities at that time).
    - At end-2016, BCEAO tightened monetary policy when this ratio dropped below 70 percent.
  - Challenges in ensuring gradual fiscal consolidation or maintaining price controls and subsidies.
  - A negative and widening differential of monetary policy rates with respect to advanced economies that could place financial pressures and trigger the need to follow foreign interest rate increases.

### Annex V — Financial inclusion in the WAEMU (overview)
- Focus and recent trends:
  - Three pillars: e-money, banking sector, and MFIs.
  - Persistent improvements in financial inclusion in the years preceding the pandemic; Covid shock led to gains consolidated in 2021.
  - E-money has been a strong driver of financial inclusion; room for improvement remains in banking and MFIs.
  - Central Bank Digital Currency (CBDC) may offer an opportunity to boost financial inclusion.
- Key statistics (end-2021):
  - MFI sector credit outstanding: about 2 percent of GDP.
  - Bank credit to the private sector: about 24 percent of GDP.
  - Total value of e-money transactions including digital payments: about 65 percent of GDP during 2021.
- Usage of financial services:
  - Share of individuals using financial services (MFI credit, e-money, banking services) increased from 22 percent of adult population by end-2010 to 60 percent by end-2019.

*Source: IMF staff report excerpts provided in the content unit.*

### 4.      The progress in financial inclusion since the 2010s has been supported by both e-

### 4.      The progress in financial inclusion since the 2010s has been supported by both e-

### Progress in financial inclusion (2010s to end-2021)
- From December 2010 to December 2019:
  - The number of e-money accounts reached 66 percent of adult population from about zero.
  - The number of accounts in MFIs rose to 21 percent of adult population from 14 percent.
  - The number of bank accounts increased to 15 percent of adult population from 9 percent.
- Overall use of financial services:
  - Share of individuals who use financial services rose from 60 percent of adult population (end-2019) to 64 percent (end-2020), and to 67 percent of adult population by end-2021.
- E-money and banking developments during the Covid shock:
  - E-money accounts as a share of adult population climbed from 66 percent (end-2019) to 76 percent (end-2020), and to 80 percent by end-2021.
  - Bank accounts as a share of adult population increased from 15 percent (end-2019) to 16 percent (end-2020), and to 19 percent by end-2021.
  - MFI credit-related accounts as a ratio to adult population remained close to about 21 percent from December 2019 to December 2020 and showed no notable change by end-2021.

### The impact of the Covid shock
- Challenges:
  - Lockdowns, mobility restrictions, and social distancing led to deterioration of credit quality and disruption in face-to-face financial services.
  - The MFI sector was particularly hit due to engagement with lower income individuals and small firms, disruptions to collection of repayments, and disruptions to operations.
  - MFI portfolio quality was adversely affected and structural vulnerabilities in the sector persisted.
- Opportunities and policy responses:
  - Need for contactless transactions and BCEAO measures (reducing fees in various e-money transactions and relaxing conditions for opening e-money accounts during 2020) contributed to broadening digital financial services.
  - Mobile cash transfers by governments (example: Novissi program in Togo) supported e-money adoption.
  - BCEAO measures in 2020 encouraged MFIs to postpone debt repayments of affected but assessed-as-solvent customers without reclassifying claims as non-performing; bank loans to eligible MFIs became eligible as collateral for a special BCEAO refinancing window to facilitate MFI access to bank financing.

### Heterogeneity across WAEMU member states in financial inclusion (end-2021)
- Country-level extremes reported:
  - Niger: 14 percent of adult population using financial services.
  - Mali: 55 percent of adult population using financial services.
  - Benin and Togo: about 86 percent of adult populations using financial services.

### CBDC as an untapped opportunity
- Potential benefits of a CBDC for the WAEMU:
  - Alleviate barriers to financial inclusion by broadening reach of financial instruments and services, particularly in remote and rural areas or for those who do not meet banking requirements.
  - Decrease cost and increase efficiency of financial transactions.
  - Offer a strategically important alternative to cryptocurrencies.
  - Facilitate adaptation of digital payments and fintech, complementing private sector efforts and amplifying gains from e-money.
  - Facilitate interoperability among different domestic payment systems and collaboration between local financial service providers and the BCEAO.
  - If facilitating cross-border transactions, lower the cost of remittances.
  - Facilitate government delivery of targeted transfers and the collection of taxes.

### Risks, challenges, and design considerations for a CBDC
- Legal and institutional:
  - Absent a sound legal foundation, the BCEAO could incur legal and reputational risks; users could face legal and financial risks.
  - Issuance requires careful analysis of legal and institutional frameworks and possible legal adjustments under public and private laws.
- Operational and technical:
  - New human capital and resource challenges for the central bank.
  - Cyber-risks need careful assessment and mitigation.
  - Possible rapid obsolescence of technological platforms and unclear international interoperability across future CBDCs create uncertainty and potential adaptation costs.
- Compliance, privacy, and financial integrity:
  - Data privacy and AML/CFT strategies should be revised.
  - ML/TF risks related to a CBDC should be assessed before finalizing design; necessary mitigating measures and amendments to AML/CFT institutional framework, laws and regulations should be implemented prior to launch to ensure effective implementation of the FATF Standards.
- Macro-financial risks:
  - Careful design necessary to avoid bank disintermediation, increased currency substitution, and capital account volatility.
- Structural and access constraints:
  - Long-standing obstacles include lack of access to internet and electricity and limited financial literacy.

### Policy perspective and recommendations
- Do not view CBDC as a silver bullet; assess whether private sector initiatives (particularly e-money) could deliver similar results in inclusion, efficiency, and safety if adequately regulated.
- Before issuing a CBDC, undertake:
  - Careful legal and institutional analysis to ensure a sound legal foundation.
  - ML/TF risk assessment and necessary AML/CFT framework adjustments to align with FATF Standards.
  - Cybersecurity and data privacy strategies and resource planning for central bank capacity and technological maintenance.
  - Design choices to minimize bank disintermediation and preserve financial stability.
- Continue complementary measures:
  - Strengthen e-money regulation and oversight.
  - Address structural barriers (internet, electricity, financial literacy) to ensure broad-based access to digital financial services.

_International Monetary Fund — Chapter section on financial inclusion, WAEMU report._

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1wauea2023001.pdf_