## WEST AFRICAN ECONOMIC AND MONETARY UNION — STAFF REPORT ON COMMON POLICIES FOR MEMBER COUNTRIES ## Source details **Canonical URL:** [WEST AFRICAN ECONOMIC AND MONETARY UNION — STAFF REPORT ON COMMON POLICIES FOR MEMBER COUNTRIES](https://www.imf.org/-/media/files/publications/cr/2024/english/1wauea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1wauea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1wauea2024001.pdf.json) --- ### Context — resilience and vulnerabilities - Growth averaged 5.4 percent in 2013-2019 and 5.8 percent in 2021-2023. - Human Development Index increased from 0.44 in 2013 to 0.48 in 2021. - Despite resilience to multiple shocks, persistent fiscal and external pressures have significantly drained reserves and put pressures on liquidity. - Monetary tightening by the BCEAO and increased external financing in recent weeks have helped reserve prospects improve, though reserves remain below adequate levels. ### Recent developments — external position and macro indicators - Growth was estimated at 5.1 percent in 2023. - Inflation has fallen rapidly from its 2022 peaks and is now within the 1-3 percent target range. - External reserves fell by about US$2.6 billion in 2023, to about 3.3 months of imports, though they rebounded by US$1.8 billion in January. - The central bank raised interest rates by a cumulative 150 basis points over 2022-2023 and limited the amount of bank refinancing. - Selected indicators (2020–28 projections prepared in February 2024): - GDP at constant prices: 2020 Act. 1.5; 2021 6.3; 2022 6.1; 2023 6.2; 2024 5.1; 2025 6.8; 2026 6.8; 2027 5.8; 2028 5.7. - GDP per capita at constant prices: 2020 Act. -1.3; 2021 3.3; 2022 3.1; 2023 3.3; 2024 2.1; 2025 3.8; 2026 3.8; 2027 2.8; 2028 2.7. - Consumer prices (average): 2020 Act. 2.0; 2021 3.6; 2022 7.5; 2023 3.3; 2024 3.7; 2025 3.2; 2026 2.6; 2027 2.2; 2028 2.0. - Gross international reserves (in millions of US dollars): 2020 21,727; 2021 24,172; 2022 18,398; 2023 17,398; 2024 15,764; 2025 17,872; 2026 20,623; 2027 23,500; 2028 27,340; 2029 31,489. - Gross international reserves (in months of next year's imports): 2020 5.4; 2021 5.2; 2022 4.1; 2023 4.4; 2024 3.3; 2025 3.5; 2026 3.8; 2027 4.0; 2028 4.4; 2029 4.7. - Current account, incl. grants (percent of GDP): 2020 -4.3; 2021 -5.9; 2022 -8.3; 2023 -6.4; 2024 -7.9; 2025 -4.8; 2026 -3.6; 2027 -3.6; 2028 -3.5; 2029 -3.4. - Total public debt (percent of GDP): 2020 51.1; 2021 56.8; 2022 59.4; 2023 56.6; 2024 61.0; 2025 59.6; 2026 57.9; 2027 57.0; 2028 56.3; 2029 55.5. - Nominal GDP (2022, millions of US Dollars): 178,348. - GDP per capita (2022, US Dollars): 1,243. - Population total (2020, millions): 133.4. - Headcount ratio at $1.90 a day (2011 PPP): 24.1. - Undernourishment (percent of population): 10.1. - Life expectancy at birth (2020, years): 60.9. - Gini index: 38.5. ### Outlook and growth drivers - Growth projection: - Growth is projected to rise to about 6.8 percent in 2024-2025 due to the start of new hydrocarbon production (noting large hydrocarbon projects in Niger and Senegal) and hover near 6 percent in the longer term. - Completion of hydrocarbon projects, together with fiscal consolidation, is expected to quickly narrow the current account deficit and contribute to gradual rebuilding of external reserves. - Key downside risks: - Regional security situation and political uncertainty. - Fiscal slippages including new SFAs, delays in hydrocarbon exploitation, worse terms-of-trade, climate disasters, and volatility in international markets. ### Executive Board assessment and priorities - Executive Directors agreed with the staff appraisal: welcomed resilience, strong growth, and inflation reverting to target; noted persistent fiscal and external imbalances and significant decline in reserves; highlighted considerable risks from regional security and political instability. - Emphasized the need for a prudent policy mix to ensure macroeconomic stability, rebuild external buffers, promote financial stability, and advance structural reforms for inclusive growth. ### Key policy recommendations — fiscal - Ensure a credible medium-term commitment to debt sustainability while keeping deficits consistent with available financing. - WAEMU governments’ commitment to bring fiscal deficits back to 3 percent of GDP by 2025 (unless otherwise defined in an IMF-supported program) is critical. - Address unidentified sources of debt creation (stock-flow adjustments, SFAs) and/or budget underperformance. - Reintroduce the WAEMU Convergence Pact with previous fiscal deficit and debt ceilings of 3 and 70 percent of GDP, respectively, and enhance it to include a debt correction mechanism and escape clauses. - Fiscal adjustment should be driven by revenue mobilization to protect development, social, and security spending; if reserve adequacy pressures continue in 2024, spending or revenue may need further adjustment. ### Key policy recommendations — monetary - BCEAO should further tighten monetary policy to rebuild external buffers and contain financial risks despite inflation being within the 1-3 percent target band. - Tighten liquidity and raise policy rates to ensure consistency with liquidity management and medium-term reserves objectives. - Enhance monetary-fiscal policy coordination to mitigate the short-term risk of straining the regional debt market. ### Key policy recommendations — financial sector - Adopt a medium-term plan to address the sovereign-bank nexus while avoiding disruptions in the regional debt market. - Consider measures to contain bank concentration risk from sovereign lending, for example by introducing targeted Pillar 2 capital surcharges. - Pursue reforms to broaden governments’ non-bank domestic sources of financing. - Build on progress to implement FSAP recommendations and operationalize the bank resolution framework; implement the new AML/CFT law to help facilitate removal of WAEMU members on the FATF grey list. ### Key policy recommendations — structural and regional - Strengthen political cohesion, deepen economic integration, and strengthen institutional frameworks and infrastructure. - Increase common productive capacity in energy, infrastructure, and food resilience as called for in the WAEMU Commission’s Regional Development Strategy. - Reduce non-tariff barriers by adopting regional trade regulations and labor market laws; expand road connectivity and access to electricity; promote supply chains; enhance governance and regional institutions; leverage digital finance. - BCEAO’s fast payments plan could promote regional integration and reduce costs by offering interoperable services across payment platforms. - Pursue policies to mitigate gender disparities and address climate-related and corruption vulnerabilities to promote inclusive and sustainable growth. ### External imbalances and current account (findings) - Average current account deficit rose from 4.8 percent of GDP in 2013-2019 to about 7.4 percent in 2021-2023. - Staff estimates: current account deficit narrowed from 8.3 percent of GDP in 2022 to 7.9 percent of GDP in 2023. - Authorities’ estimate: current account deficit in 2023 at 7 percent of GDP (owing to lower imports). - Financial inflows (net capital and financial account) remained little changed at near 6 percent of GDP over 2021-2023. - Large current account deficits contributed to a significant decline in external reserves. ### Fiscal outcomes and public debt (findings) - Average fiscal deficit: 2.3 percent of GDP in 2019; jumped to 5.5 percent of GDP in 2020. - Fiscal deficit averaged 5.9 percent in 2021-2023. - Increases relative to 2015-2019 average: current spending (mostly interest payments and wage bill) increased by 2 percent of GDP; capital spending increased by 1.5 percent of GDP. - Public debt increased from about 45 percent of GDP in 2019 to 61 percent of GDP in 2023. - Stock-flow adjustments (SFAs) averaged almost 1.5 percent of GDP over the past decade and are an important driver of indebtedness. - Staff projection: most WAEMU members will gradually reduce fiscal deficit to 3 percent of GDP by 2025 (exceptions: Burkina Faso projected to converge in 2027 and Mali by 2026). - Debt levels range from just over 50 percent of GDP in Niger, Mali, and Benin to 80 percent of GDP in Senegal. - Baseline scenario: debt peaks at almost 61 percent of GDP in 2023 and declines gradually thereafter in the absence of SFAs, with debt service remaining high throughout the projection period. ### Reserves and external position (details) - Reserves: fell from US$24.2 billion to US$18.4 billion in 2022, then to US$15.8 billion in 2023 (about 3.3 months of prospective imports). - IMF net disbursements in 2023: about US$1.5 billion. - BCEAO net foreign assets: from US$9.4 billion at end-2022 to about US$5.2 billion at end-2023. - Reserve increase in December 2023: US$1.8 billion (on IMF disbursements and seasonal factors). - Reserves recovered in January 2024 to US$17.5 billion (3.6 months of imports), supported by a Eurobond issuance by Côte d’Ivoire. - Côte d’Ivoire Eurobond placements in January 2024: US$1.1 billion 9-year sustainable bond at 7.875 percent and US$1.5 billion 13-year conventional bond at 8.50 percent. - Benin issuance in February 2024: US$750 million 14-year bond at 8.375 percent. - Part of sovereign bond proceeds intended to repay existing external debt under liquidity management operations, limiting reserve impact. ### Monetary policy, inflation, and liquidity operations - Inflation: fell from a peak of 8.8 percent (y/y) in August 2022 to 2.6 percent in August 2023 and was 2.5 percent in December 2023 (within the 1-3 percent target band). - Disinflation driver: moderation in food prices (food prices rose by 1.1 percent in December 2023, compared to 12.6 percent in November 2022). - BCEAO policy response: policy rates raised by a cumulative 150 bps since mid-2022. - End of FRFA in February 2023 pushed effective weekly refinancing rate from under 3 percent in January 2023 to 5.5 percent (ceiling of the policy corridor) by end-December 2023. - Interbank rate and three-month Treasury bills: from 2.2 and 2.3 percent respectively at end-January 2023 to 5.8 and 6.7 percent as of end-January 2024. - Bank sovereign financing increased by CFAF 3.1 trillion in 2021 and CFAF 4.1 trillion in 2022; bank net credit to governments was virtually flat in 2023. - BCEAO purchased CFAF 1,933 billion in sovereign securities from banks in July and September 2023; access to marginal lending facility reached CFAF 975 billion at the end of 2023. - Total system liquidity increased by about CFAF 800 billion in 2023 (compared with CFAF 3 trillion in 2022). ### Financial stability and banking-sector risks - Aggregate CAR improved from 12.4 to 13.2 percent between end-2021 and June 2023—above the 11.5 percent regulatory threshold. - NPLs fell from 10.3 percent at end-2021 to 8.7 percent at end-June 2023. - y/y growth of bank credit to the private sector slowed from 14.2 percent in 2022 to 10.3 percent in 2023. - Banks’ sovereign exposures: about 38 percent of domestic assets in 2023, up from 30 percent at end-2019. - Median concentration of the largest exposure represents about 50 percent of capital as of 2022; regulatory largest exposure limit is 35 percent of capital. - Authorities’ stress tests confirm vulnerabilities to credit, liquidity, and sovereign shocks (including missed payments on Nigerien government securities). - In January 2024, BCEAO introduced temporary regulatory forbearance on securities not serviced by Niger’s government. - Some banks remain non-compliant with solvency regulations and decisive action is yet to be taken. ### Security, political fragmentation, and regional risks - Security situation worsened in the Sahel, reaching record fatalities in 2023, particularly in Burkina Faso, Mali, and Niger. - Irregular changes of government occurred in Burkina Faso, Mali, and Niger; Niger experienced a revision of 2023 GDP growth estimate from about 7 to 1.3 percent due to sanctions (now mostly removed), causing public sector payment arrears and banking system difficulties. - Burkina Faso, Mali, and Niger formed an Alliance of Sahelian States (AES) in September 2023 and notified ECOWAS in January 2024 of intention to leave ECOWAS. - ECOWAS lifted most sanctions against Niger on February 24, which may reduce tensions and the risk of additional regional fragmentation. - Preliminary analysis suggests direct trade channel impacts of AES departures are small; broader spillovers could increase risks. ### IMF support and programmatic responses - New IMF arrangements approved in 2023 for Côte d’Ivoire, Senegal, Burkina Faso, and Guinea-Bissau; a new arrangement approved for Togo on March 1, 2024. - Reviews completed for Benin, Niger, and Guinea-Bissau. - Benin, Senegal, and Niger initiated arrangements under the Resilience and Sustainability Facility (RSF); Côte d’Ivoire reached staff-level agreement on an RSF on February 16. - These arrangements would support efforts to bring fiscal deficit to 3 percent of GDP by 2025 (unless otherwise defined in an IMF-supported program). ### Introduction of supporting arrangements — design features and priorities - Proposes supporting arrangements, including well-designed escape clauses based on exogenous indicators to accommodate future shocks without indefinite suspension of fiscal rules. - Recommends a debt correction mechanism to prevent excessive debt increases via adjustments following breaches of deficit or debt ceilings, and a credible enforcement mechanism. - Notes that interest rates can be expected to increase by about 1.2 percentage points on non-concessional debt (as estimated in Hadzi-Vaskov and Ricci, 2022); based on current composition of debt, this would add more than 1 percent of GDP in higher interest payments. - Revenue mobilization should drive fiscal adjustment to protect development, social, and security spending while controlling wage bill growth. - Domestic revenue mobilization is projected to account for most of the fiscal consolidation over the medium term; achieving the regional target of 20 percent of GDP will require additional measures. - Tax priorities include: strengthen tax administration and digitalization; broaden the tax base (including medium-sized firms); reduce VAT and business tax exemptions; streamline personal income tax; strengthen controls on fiscal evasion; rationalize excise taxes. - IMF stands ready to support regional authorities’ reform efforts through technical assistance, including to strengthen VAT administration and regional budget execution and control. ### Monetary policy operational guidance - BCEAO should raise policy rates to rebuild external buffers while ensuring alignment between liquidity management and policy rates. - Operational prescriptions: - Refrain from asset purchases similar to those completed in 2023 and conduct only unconditional open market operations offset by reduction of other liquidity injections within a reasonable timeframe. - Foster the interbank market to improve monetary policy transmission. - Tighten liquidity while marginal rates are at the ceiling suggests a need to raise policy rates to better align rates and liquidity and avoid rationing of refinancing. - Coordination: - Enhanced monetary-fiscal policy coordination is needed to address short-term risks and meet medium-term reserves objectives. - National and regional coordination should assess compatibility of countries’ domestic financing needs (currently projected at over CFAF 2 trillion for 2024, overall) with the regional banking system’s aggregate absorptive capacity. ### Financial sector reform milestones and priorities - Regulatory progress in 2023: amended Convention governing the CBU (March 2023); new AML/CFT law (March 2023); new banking law (June 2023); legal framework for microfinance institutions (December 2023). - Decision to double the minimum share capital of banks to CFAF 20 billion. - Staff recommends introducing targeted Pillar 2 capital surcharges, Basel III liquidity ratios, higher liquidity requirements for banks most exposed to liquidity risks, and an emergency liquidity assistance (ELA) scheme with risk-mitigation mechanisms. - Resolution planning: resolution plans adopted for 20 systemic banks in 2023; CBU expected to adopt plans for remaining 12 by mid-2025. - A BCEAO working group will propose guidelines for Treasury Securities Dealers (TSDs) to increase secondary market depth and diversify the investor base. - Progress on AML/CFT is needed to facilitate removal of WAEMU members on the FATF grey list (Burkina Faso, Mali, and Senegal). ### Financial inclusion and digital finance - WAEMU financial inclusion rate reached 71 percent in 2022, up by 24 percentage points since 2016. - Mobile transactions: number reached 3.3 billion in 2022; value reached CFAF10.2 trillion in 2022. - Merchant payments: around two-thirds of value; grew by 6.4 times in volume between 2020 and 2022; grew by 145 percent in value between 2020 and 2022. - Bill payments: volume up 91 percent; value up 33 percent between 2020 and 2022. - Electronic payroll payments: volume up 7.2 percent; value up 157 percent between 2020 and 2022. - Mobile credit purchases: around four-fifths of total mobile transactions; volume up 81 percent; value up 61 percent between 2020 and 2022. - BCEAO’s fast payments plan and exploration of a CBDC could support regional integration, financial inclusion, and digitalization (with associated risk assessments). ### External sector assessment — adequacy and drivers - WAEMU’s external position in 2023 was assessed as moderately weaker than implied by medium-term fundamentals and desirable policy settings (EBA-lite CA model). - NIIP deteriorated to -47.3 percent of union GDP at end-2021 from -45.8 percent at end-2020. - Over 40 percent of WAEMU external liabilities are FDI; portfolio investments are relatively small. - CA deficit (including grants) estimated to have widened to 7.6 percent of GDP in 2022 and 7.2 percent in 2023 (Fall 2023 WEO data); EBA-Lite CA norm for 2023: -5.4 percent of GDP versus adjusted CA balance of -6.9 percent of GDP. - ARA-CC approach estimates minimum adequate reserves of 4.0 to 6.0 months of prospective import coverage for WAEMU; end-2023 reserves (3.2 months) are below the assessed adequate level. ### Risk Assessment Matrix — key risks and policy responses - Country-specific risks: - Intensified conflict in the Sahel: Likelihood: High; Economic Impact: High. Responses: targeted fiscal support, accelerate revenue mobilization, seek concessional financing, strengthen anti-corruption. - Delays in hydrocarbon production in Senegal or Niger: Likelihood: High; Economic Impact: High. Responses: medium-term fiscal adjustment, seek concessional financing. - Lack of liquidity leads to financing difficulties: Likelihood: Medium; Economic Impact: High. Responses: accelerate fiscal consolidation, seek concessional financing, prudential measures, deepen local financial markets. - Conjunctural/global shocks: - Intensification of regional conflicts or commodity price volatility: Likelihood: High; Economic Impact: High/Medium. Responses: targeted fiscal support, concessional financing, maintain flexible energy prices. - Structural risks: - Deepening geoeconomic fragmentation and extreme climate events: Likelihood: High/Medium; Economic Impact: Medium/High. Responses: targeted support, mobilize resources, adopt medium-term fiscal and climate adaptation reforms. ### Security and political instability — incidence and economic implications - Since 2020, seven successful or attempted irregular changes in government in WAEMU; these account for 47 percent of SSA irregular changes since 2020. - Niger irregular change in government: July 26, 2023; ECOWAS sanctions imposed July 30, 2023; ECOWAS announced lifting of most sanctions on February 24, 2024. - Fatalities linked to security incidents in WAEMU in 2023: over 14,000 (compared to around 10,500 in 2022 and 5,950 in 2021). - IMF studies: a conflict causing 79 fatalities per million estimated to have a negative impact of 0.7 percent of annual GDP (WAEMU-specific SIPs, 2021); nearby conflicts reduce growth by 0.8–1.0 percent per intensity unit (de Groot et al., 2022). ### Regional reforms, integration, and institutional priorities - Reduce non-tariff barriers, adopt common trade regulations and labor market laws, and implement WAEMU Commission’s Vision 2040 growth diagnostic. - Support industrialization of non-transformed commodities to improve export returns, food independence, and macroeconomic resilience. - Expand road connectivity and access to electricity; promote supply chains; enhance governance and regional institutions. - Strengthen anti-corruption agencies, simplify tax payments, mitigate gender disparities, and address climate vulnerabilities. - BOAD capital raising and engagement in cross-country projects cited as concrete evidence of regional institution roles. ### Operational and timetable notes - Regional discussions held in hybrid format over January 16-31, 2024; staff report completed on March 1, 2024. - WAEMU membership: Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. - All projections presented were prepared in February 2024 and do not incorporate any further developments. *Source: IMF staff report on common policies for WAEMU member countries (staff report completed on March 1, 2024; Executive Board conclusions issued March 15, 2024).* ### 2024. Based on information available at the time of these discussions, the staff report ### WEST AFRICAN ECONOMIC AND MONETARY UNION — STAFF REPORT ON COMMON POLICIES FOR MEMBER COUNTRIES ### Context — resilience and vulnerabilities - Growth averaged 5.4 percent in 2013-2019 and 5.8 percent in 2021-2023. - Human Development Index increased from 0.44 in 2013 to 0.48 in 2021. - Despite resilience to multiple shocks, persistent fiscal and external pressures have significantly drained reserves and put pressures on liquidity. - Monetary tightening by the BCEAO and increased external financing in recent weeks have helped reserve prospects improve, though reserves remain below adequate levels. ### Recent developments — external position and macro indicators - Growth was estimated at 5.1 percent in 2023. - Inflation has fallen rapidly from its 2022 peaks and is now within the 1-3 percent target range. - External reserves fell by about US$2.6 billion in 2023, to about 3.3 months of imports, though they rebounded by US$1.8 billion in January. - The central bank raised interest rates by a cumulative 150 basis points over 2022-2023 and limited the amount of bank refinancing. - Selected indicators (2020–28 table, projections prepared in February 2024): - GDP at constant prices: 2020 Act. 1.5; 2021 6.3; 2022 6.1; 2023 6.2; 2024 5.1; 2025 6.8; 2026 6.8; 2027 5.8; 2028 5.7. - GDP per capita at constant prices: 2020 Act. -1.3; 2021 3.3; 2022 3.1; 2023 3.3; 2024 2.1; 2025 3.8; 2026 3.8; 2027 2.8; 2028 2.7. - Consumer prices (average): 2020 Act. 2.0; 2021 3.6; 2022 7.5; 2023 3.3; 2024 3.7; 2025 3.2; 2026 2.6; 2027 2.2; 2028 2.0. - Gross international reserves (in millions of US dollars): 2020 21,727; 2021 24,172; 2022 18,398; 2023 17,398; 2024 15,764; 2025 17,872; 2026 20,623; 2027 23,500; 2028 27,340; 2029 31,489. - Gross international reserves (in months of next year's imports): 2020 5.4; 2021 5.2; 2022 4.1; 2023 4.4; 2024 3.3; 2025 3.5; 2026 3.8; 2027 4.0; 2028 4.4; 2029 4.7. - Current account, incl. grants (percent of GDP): 2020 -4.3; 2021 -5.9; 2022 -8.3; 2023 -6.4; 2024 -7.9; 2025 -4.8; 2026 -3.6; 2027 -3.6; 2028 -3.5; 2029 -3.4. - Total public debt (percent of GDP): 2020 51.1; 2021 56.8; 2022 59.4; 2023 56.6; 2024 61.0; 2025 59.6; 2026 57.9; 2027 57.0; 2028 56.3; 2029 55.5. - Nominal GDP (2022, millions of US Dollars): 178,348. - GDP per capita (2022, US Dollars): 1,243. - Population total (2020, millions): 133.4. - Headcount ratio at $1.90 a day (2011 PPP): 24.1. - Undernourishment (percent of population): 10.1. - Life expectancy at birth (2020, years): 60.9. - Gini index: 38.5. ### Outlook and growth drivers - Growth is projected to rise to about 6.8 percent in 2024-2025 due to the start of new hydrocarbon production (noting specifically large hydrocarbon projects in Niger and Senegal) and hover near 6 percent in the longer term. - The completion of hydrocarbon projects, together with fiscal consolidation, is expected to quickly narrow the current account deficit and contribute to a gradual rebuilding of external reserves. - The region remains subject to downside risks, including the regional security situation and political uncertainty. ### Executive Board assessment and priorities - Executive Directors agreed with the staff appraisal: welcomed resilience, strong growth, and inflation reverting to target; noted persistent fiscal and external imbalances and significant decline in reserves; highlighted considerable risks from regional security and political instability. - Emphasized the need for a prudent policy mix to ensure macroeconomic stability, rebuild external buffers, promote financial stability, and advance structural reforms for inclusive growth. ### Key policy recommendations — fiscal, monetary, financial, structural - Fiscal policy: - Ensure a credible medium-term commitment to debt sustainability while keeping deficits consistent with available financing. - WAEMU governments’ commitment to bring fiscal deficits back to 3 percent of GDP by 2025 (unless otherwise defined in an IMF-supported program) is critical. - Address unidentified sources of debt creation (stock-flow adjustments, SFAs) and/or budget underperformance. - Reintroduce the WAEMU Convergence Pact with previous fiscal deficit and debt ceilings of 3 and 70 percent of GDP, respectively, and enhance it to include a debt correction mechanism and escape clauses. - Fiscal adjustment should be driven by revenue mobilization to protect development, social, and security spending; if reserve adequacy pressures continue in 2024, spending or revenue may need further adjustment. - Monetary policy: - BCEAO should further tighten monetary policy to rebuild external buffers and contain financial risks despite inflation being within the 1-3 percent target band. - Tighten liquidity and raise policy rates to ensure consistency with liquidity management and medium-term reserves objectives. - Enhance monetary-fiscal policy coordination to mitigate the short-term risk of straining the regional debt market. - Financial sector: - Adopt a medium-term plan to address the sovereign-bank nexus while avoiding disruptions in the regional debt market. - Consider measures to contain bank concentration risk from sovereign lending, for example by introducing targeted Pillar 2 capital surcharges. - Pursue reforms to broaden governments’ non-bank domestic sources of financing. - Build on progress to implement FSAP recommendations and operationalize the bank resolution framework; implement the new AML/CFT law to help facilitate removal of WAEMU members on the FATF grey list. - Structural and regional policies: - Strengthen political cohesion, deepen economic integration, and strengthen institutional frameworks and infrastructure. - Increase common productive capacity in energy, infrastructure, and food resilience as called for in the WAEMU Commission’s Regional Development Strategy. - Reduce non-tariff barriers by adopting regional trade regulations and labor market laws; expand road connectivity and access to electricity; promote supply chains; enhance governance and regional institutions; leverage digital finance. - BCEAO’s fast payments plan could promote regional integration and reduce costs by offering interoperable services across payment platforms. - Pursue policies to mitigate gender disparities and address climate-related and corruption vulnerabilities to promote inclusive and sustainable growth. ### Financial and operational notes - The regional discussions were held in a hybrid format over January 16-31, 2024; the staff report was completed on March 1, 2024. - The WAEMU comprises eight countries: Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. - All projections presented were prepared in February 2024 and do not incorporate any further developments. *Source: IMF staff report on common policies for WAEMU member countries (staff report completed on March 1, 2024; Executive Board conclusions issued March 15, 2024).* ### 2. But external imbalances have ### 2. But external imbalances have ### External imbalances and current account - Average current account deficit rose from 4.8 percent of GDP in 2013-2019 to about 7.4 percent in 2021-2023. - Staff estimates: current account deficit narrowed from 8.3 percent of GDP in 2022 to 7.9 percent of GDP in 2023. - Authorities’ estimate: current account deficit in 2023 at 7 percent of GDP (owing to lower imports). - Financial inflows (net capital and financial account) remained little changed at near 6 percent of GDP over 2021-2023. - Large current account deficits contributed to a significant decline in external reserves. ### Fiscal outcomes and public debt - Average fiscal deficit: 2.3 percent of GDP in 2019; jumped to 5.5 percent of GDP in 2020. - Fiscal deficit averaged 5.9 percent in 2021-2023. - Increases relative to 2015-2019 average: current spending (mostly interest payments and wage bill) increased by 2 percent of GDP; capital spending increased by 1.5 percent of GDP. - Public debt increased from about 45 percent of GDP in 2019 to 61 percent of GDP in 2023. - Stock-flow adjustments (SFAs) averaged almost 1.5 percent of GDP over the past decade and are an important driver of indebtedness. - Staff projection: most WAEMU members will gradually reduce fiscal deficit to 3 percent of GDP by 2025 (exceptions noted: Burkina Faso projected to converge in 2027 and Mali by 2026). - Debt levels range from just over 50 percent of GDP in Niger, Mali, and Benin to 80 percent of GDP in Senegal. - Baseline scenario: debt peaks at almost 61 percent of GDP in 2023 and declines gradually thereafter in the absence of SFAs, with debt service remaining high throughout the projection period. ### Reserves and external position - Reserves: fell from US$24.2 billion to US$18.4 billion in 2022, then to US$15.8 billion in 2023 (about 3.3 months of prospective imports). - IMF net disbursements in 2023: about US$1.5 billion. - BCEAO net foreign assets: from US$9.4 billion at end-2022 to about US$5.2 billion at end-2023. - Reserve increase in December 2023: US$1.8 billion (on IMF disbursements and seasonal factors). - Reserves recovered in January 2024 to US$17.5 billion (3.6 months of imports), supported by a Eurobond issuance by Côte d’Ivoire. - Côte d’Ivoire Eurobond placements in January 2024: US$1.1 billion 9-year sustainable bond at 7.875 percent and US$1.5 billion 13-year conventional bond at 8.50 percent. - Benin issuance in February 2024: US$750 million 14-year bond at 8.375 percent. - Part of sovereign bond proceeds intended to repay existing external debt under liquidity management operations, limiting reserve impact. ### Growth and outlook - Growth: staff estimates slowed from 6.1 percent in 2022 to 5.1 percent in 2023; authorities estimate 5.7 percent in 2023. - Projection: WAEMU growth projected to increase from 5.1 percent in 2023 to about 6.8 percent in 2024-2025, and hover near 6 percent in the longer term. - Drivers: start of hydrocarbon production in Niger and Senegal expected to raise growth and later reduce import demand and generate exports from 2024. - Expectations: current account and reserve coverage expected to improve in the medium term; improving current account coupled with enhanced prospects for financial inflows to contribute to gradual rebuilding of external reserves. - Risks to projections: fiscal slippages including new SFAs, delays in hydrocarbon exploitation, worse terms-of-trade, climate disasters, further deterioration in security and socio-political stability, and volatility in international markets. ### Monetary policy and inflation - Inflation: fell from a peak of 8.8 percent (y/y) in August 2022 to 2.6 percent in August 2023 and was 2.5 percent in December 2023 (within the 1-3 percent target band). - Disinflation driver: moderation in food prices (food prices rose by 1.1 percent in December 2023, compared to 12.6 percent in November 2022). - BCEAO policy response: policy rates raised by a cumulative 150 bps since mid-2022. - End of FRFA in February 2023 pushed effective weekly refinancing rate from under 3 percent in January 2023 to 5.5 percent (ceiling of the policy corridor) by end-December 2023. - Interbank rate and three-month Treasury bills: from 2.2 and 2.3 percent respectively at end-January 2023 to 5.8 and 6.7 percent as of end-January 2024. - BCEAO enforced foreign exchange regulations strictly but did not impose new foreign exchange restrictions. ### Liquidity operations and financial sector implications - Bank sovereign financing increased by CFAF 3.1 trillion in 2021 and CFAF 4.1 trillion in 2022; bank net credit to governments was virtually flat in 2023. - BCEAO purchased CFAF 1,933 billion in sovereign securities from banks in July and September 2023, with understanding banks would purchase new government debt. - Access to marginal lending facility reached CFAF 975 billion at the end of 2023. - Total system liquidity increased by about CFAF 800 billion in 2023 (compared with CFAF 3 trillion in 2022), and at substantially higher rates. ### Financial stability and banking-sector risks - Aggregate CAR improved from 12.4 to 13.2 percent between end-2021 and June 2023—above the 11.5 percent regulatory threshold. - NPLs fell from 10.3 percent at end-2021 to 8.7 percent at end-June 2023. - y/y growth of bank credit to the private sector slowed from 14.2 percent in 2022 to 10.3 percent in 2023. - Banks’ sovereign exposures: about 38 percent of domestic assets in 2023, up from 30 percent at end-2019. - Median concentration of the largest exposure represents about 50 percent of capital as of 2022; regulatory largest exposure limit is 35 percent of capital. - Authorities’ stress tests confirm vulnerabilities to credit, liquidity, and sovereign shocks (including missed payments on Nigerien government securities). - In January 2024, BCEAO introduced temporary regulatory forbearance on securities not serviced by Niger’s government. - Some banks remain non-compliant with solvency regulations and decisive action is yet to be taken. ### Security, political fragmentation, and regional risks - Security situation worsened in the Sahel, reaching record fatalities in 2023, particularly in Burkina Faso, Mali, and Niger. - Irregular changes of government occurred in Burkina Faso, Mali, and Niger; Niger experienced a revision of 2023 GDP growth estimate from about 7 to 1.3 percent due to sanctions (now mostly removed), causing public sector payment arrears and banking system difficulties. - Burkina Faso, Mali, and Niger formed an Alliance of Sahelian States (AES) in September 2023 and notified ECOWAS in January 2024 of intention to leave ECOWAS. - ECOWAS lifted most sanctions against Niger on February 24, which may reduce tensions and the risk of additional regional fragmentation. - Preliminary analysis suggests direct trade channel impacts of AES departures are small; broader spillovers could increase risks. ### IMF support and programmatic responses - New IMF arrangements approved in 2023 for Côte d’Ivoire, Senegal, Burkina Faso, and Guinea-Bissau; a new arrangement approved for Togo on March 1, 2024. - Reviews completed for Benin, Niger, and Guinea-Bissau. - Benin, Senegal, and Niger initiated arrangements under the Resilience and Sustainability Facility (RSF); Côte d’Ivoire reached staff-level agreement on an RSF on February 16. - These arrangements would support efforts to bring fiscal deficit to 3 percent of GDP by 2025 (unless otherwise defined in an IMF-supported program). ### Policy recommendations (fiscal and regional coordination) - Maintain a credible medium-term commitment to debt sustainability and bring fiscal deficits back to 3 percent of GDP by 2025 (unless otherwise decided in an IMF-supported program). - Ensure spending or revenue are adjusted if financing availability is lower than expected; coordinate member-states on financing needs to manage aggregate impact on the regional market and avoid sudden stops. - Reintroduce an enhanced Convergence Pact urgently via member state agreement, retaining ceilings on debt and fiscal deficit at 70 and 3 percent of GDP, respectively. - Contain unidentified sources of debt creation (SFAs) and budget underperformance; strengthen capacity and coordination in monitoring public debt to ensure increases align with approved budget laws and revisions. - Strengthen efforts to ensure planned revenue measures (including VAT collection and corporate income taxation) materialize from 2024 onwards; hydrocarbon revenues in Senegal and Niger to contribute in the medium term. - Avoid relaxing Pact ceilings as higher indebtedness would increase interest spending and erode fiscal space; staff simulations indicate only a deficit target of 3 percent of GDP in the absence of SFAs is consistent with debt stabilization and recovery of fiscal buffers. *Source: WEST AFRICAN ECONOMIC AND MONETARY UNION — International Monetary Fund (excerpts).* ### introduction of supporting arrangements, ### Introduction of supporting arrangements ### Fiscal framework, debt, and escape clauses - Proposes introduction of supporting arrangements, including well-designed escape clauses based on exogenous indicators to accommodate future shocks without indefinite suspension of fiscal rules. - Recommends a debt correction mechanism to prevent excessive debt increases via adjustments following breaches of deficit or debt ceilings, and a credible enforcement mechanism. - Notes that interest rates can be expected to increase by about 1.2 percentage points on non-concessional debt (as estimated in Hadzi-Vaskov and Ricci, 2022). - Based on the current composition of debt, this would add more than 1 percent of GDP in higher interest payments. ### Revenue mobilization and fiscal consolidation - Revenue mobilization should drive fiscal adjustment to protect development, social, and security spending while controlling wage bill growth. - Domestic revenue mobilization is projected to account for most of the fiscal consolidation over the medium term; achieving the regional target of 20 percent of GDP will require additional measures. - Specific tax policy and administration priorities: - Strengthen tax administration and digitalization. - Broaden the tax base, including by reaching medium-sized firms. - Reduce VAT exemptions and business tax exemptions. - Streamline the personal income tax regime. - Strengthen controls on fiscal evasion. - Rationalize excise taxes. - Governance and multilateral coordination: - The WAEMU Commission should leverage its multilateral surveillance role and resources to support revenue efforts. - Some members should act toward observing the 35 percent regional ceiling on the wage bill to tax revenue ratio; this ratio should not be relaxed to encompass total revenue. ### IMF support and technical assistance - The IMF stands ready to support regional authorities’ reform efforts through technical assistance (TA). - The Fund is delivering TA to strengthen VAT administration within the WEAMU region, to better mobilize VAT revenue closer to its potential, and to improve regional budget execution and control. ### Authorities’ views on fiscal policy - Regional authorities agreed with IMF staff on the importance of fiscal consolidation and indicated consolidation is on track, supported by active IMF arrangements. - Authorities noted high fiscal deficits since 2020 reflect several shocks; financing prospects improved in 2024 after a difficult 2023. - Authorities intend to reintroduce the Convergence Pact and keep original deficit and debt ceilings unchanged. - Ongoing efforts to harmonize definitions of public sector deficit and debt and to broaden public financial reporting (TOFE) aim to lower stock-flow adjustments (SFAs). - WAEMU Commission missions (completed in five member countries in late 2023, with three remaining in 2024) will provide a more comprehensive picture of SFAs, their sources, and remedies. ### Monetary policy and external buffers - Recommendation: The BCEAO should raise policy rates to rebuild external buffers while ensuring alignment between liquidity management and policy rates. - Rationale: - Monetary policy must preserve external viability and financial stability while keeping inflation under control. - Inflation is back within its target band, but further monetary tightening is necessary to bring external reserves back to adequate levels and contain financial stability risks. - The BCEAO projects reserves to recover to 4 months of imports in 2024; IMF staff projects a smaller increase insufficient to restore reserve adequacy this year (difference mainly relates to imports). - Operational issues and prescriptions: - Repeated convergence of the refinancing rate to the ceiling of the policy rate corridor highlights the challenge of operating two related policy instruments (rates and liquidity) toward two objectives (financial stability and external viability). - Tightening liquidity while marginal rates are at the ceiling suggests a need to raise policy rates to better align rates and liquidity and avoid rationing of refinancing. - In the context of fixed-quantity refinancing, liquidity management is crucial. - The BCEAO should refrain from asset purchases similar to those completed in 2023 and only conduct unconditional open market operations that are offset by a reduction of other liquidity injections within a reasonable timeframe. - Efforts should continue to foster the interbank market to improve monetary policy transmission. - Coordination and contingency: - Enhanced monetary-fiscal policy coordination is needed to address short-term risks and meet medium-term reserves objectives. - A joint effort to adjust fiscal consolidation (reducing pressure on the regional financial market) while tightening monetary policy (containing reserve loss) would be essential if risks to reserve recovery materialize. - National and regional coordination should assess compatibility of individual countries’ domestic financing needs (currently projected at over CFAF 2 trillion for 2024, overall) with the regional banking system’s aggregate absorptive capacity and with changing interest rates and NDA compatible with NFA objectives that maintain reserve adequacy. - Continuing efforts to enhance monetary policy communication would reinforce effectiveness. - Additional data point: - The BCEAO projects a current account deficit of around 3.5 percent of GDP in 2024, below IMF staff projections, based on lower imports, particularly related to large infrastructure projects. ### Safeguards assessment - The last assessment of the BCEAO, completed in August 2023, found well-established audit arrangements and a strong control environment. - The BCEAO is addressing the assessment’s recommendation to align its Statute with changes in the 2019 cooperation agreement with France. ### Financial sector resilience and reform - Regulatory progress in 2023: - WAEMU Council of Ministers approved an amended Convention governing the CBU (March 2023), a new AML/CFT law (March 2023), a new banking law (June 2023), and a legal framework for microfinance institutions (December 2023). - The new banking law extended scope of supervision to payment institutions, e-money institutions, bank holding companies, and financial companies; strengthened approval procedures; and designated the BCEAO as the macroprudential authority. - The Convention governing the CBU was amended to enshrine independence and require commissioners have relevant qualifications and be appointed by the WAEMU Council of Ministers. - Sovereign-bank nexus and capital/liquidity measures: - Decision to double the minimum share capital of banks to CFAF 20 billion is welcome and will help promote resilience. - Rise in banks’ sovereign exposures may pose risks; introducing “targeted” Pillar 2 capital surcharges would help manage concentration and interest rate risks. - Staff highlighted the importance of introducing Basel III liquidity ratios and Pillar 2 higher liquidity requirements for banks most exposed to liquidity risks, as well as establishing an emergency liquidity assistance (ELA) scheme. - Liquidity regulations have not yet incorporated Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) advancements; their introduction will help banks internalize liquidity risks and differentiate requirements under Pillar 2. - An ELA should be supported by appropriate risk-mitigation mechanisms and usage conditions. - Resolution and market development: - All systemically important banks produced preventative restructuring plans; resolution plans were adopted for 20 systemic banks in 2023, and the CBU is expected to adopt resolution plans for the remaining 12 by mid-2025. - Progress is needed to increase the depth and liquidity of the secondary market for sovereign securities. - A BCEAO working group will formulate proposals and guidelines for Treasury Securities Dealers (TSDs), with strategies to set market share targets for third-party transactions, diversify the investor base beyond credit institutions, and promote the regional public debt market. - AML/CFT and FSAP follow-up: - The new AML/CFT law strengthens risk-based supervision; national authorities are encouraged to transpose and implement it to facilitate removal of WAEMU members currently on the FATF grey list (Burkina Faso, Mali, and Senegal). - The CBU adjusted its risk-based supervision methodology and published sanctions against some financial institutions for AML/CFT failures. - Specific country-related vigilance: - Authorities should pay close attention to implications of non-servicing of Nigerien sovereign securities, though lifting of most ECOWAS sanctions and January regulatory forbearance should allow normalization over time. - Financial inclusion and microfinance: - WAEMU financial inclusion rate reached 71 percent in 2022, up by 24 percentage points since 2016, largely due to increased ownership of financial and mobile money accounts, and digital payments. - The microfinance sector represents about 7 percent of the banking sector in terms of deposits and loans; several fragile institutions have failed in the past and some recently underwent restructuring or termination. - A new legal framework for authorized activities, governance, and supervision of microfinance institutions aims to enhance inclusion and sector resilience. - Authorities are exploring fast payments and investigating a CBDC (Annex VII) which may contribute to financial inclusion. ### Climate risk and supervisory work - BCEAO simulated a drought to assess climate risk, finding deterioration in banks’ commitments to the “agriculture, forestry, and fishing” sector but overall banking system resilience. - A draft climate policy strategy is under preparation to enhance supervisors’ and financial institutions’ awareness of climate-related issues. - Work is ongoing to define prudential expectations for integrating climate and environmental risks into financial institutions’ risk management systems and disclosures. ### Authorities’ views on monetary and financial policies - The BCEAO agreed on the importance of forestalling reserve losses and expects a return to reserve adequacy in 2024, citing lower imports than IMF staff projections and recent Eurobond issuances by Côte d’Ivoire and Benin. - The BCEAO noted it presents an integrated WAEMU macroeconomic framework to ministers to guide domestic policymaking and agreed regional policy coordination could be improved. - The BCEAO affirmed it would tighten policy further if necessary to maintain reserves and has no intention to conduct further bond purchases similar to those in 2023. - Authorities concurred that the financial sector is resilient but vulnerable to credit, liquidity, and sovereign risks; they highlighted slowing credit growth due to tight monetary policy and reiterated commitment to implement outstanding FSAP recommendations (Annex V). ### Regional and structural policies for growth and integration - Deepening economic integration and enhancing infrastructure are key to the union’s viability and prosperity. - Regional priorities include increasing common productive capacity in energy, infrastructure, and food resilience; expanding road connectivity and access to electricity; and leveraging digital finance to improve financial system efficiency, development, and inclusion. - The BCEAO’s fast payments plan aims to promote regional integration and reduce costs by offering interoperable services across the region’s platforms. - The BCEAO is examining feasibility of a CBDC to potentially foster financial inclusion, cross-border transactions, fintech, and digitalization while evaluating associated risks such as cybercrimes, money laundering, and terrorism financing. *Source: Introduction of supporting arrangements (1wauea2024001 - introduction of supporting arrangements).* ### 39. Regional structural reforms aiming at strengthening common institutions and ### Regional structural reforms aiming at strengthening common institutions and regulations are needed to promote intra-regional trade. ### Regional integration, trade, and industrialization - WAEMU institutions should continue to reduce non-tariff barriers by adopting common trade regulations and common labor market laws. - The WAEMU Commission’s Vision 2040 growth diagnostic could help identify further priorities and help the region leverage regional integration to capture more value-added in global supply chains. - Measures to support the industrialization of the regional sector of non-transformed commodities would improve export returns, food independence, and macroeconomic resilience. - Expanding road connectivity and access to electricity, promoting supply chains, and leveraging digital finance (including the BCEAO’s fast payments plan to offer interoperable services across the region’s many payment platforms) would promote regional integration and reduce costs. ### Governance, inclusion, and vulnerabilities - Stronger governance is needed to improve the business climate by reinforcing anti-corruption agencies and simplifying tax payments. - The authorities should pursue policies to mitigate gender disparities and address climate-related and corruption vulnerabilities to promote inclusive and sustainable economic growth. - Addressing gender inequalities in outcomes and opportunities and containing potentially acute effects of climate change would contribute to unleashing the economic potential of the WAEMU. ### Economic performance, outlook, and external position - Economic growth since the pandemic has averaged about 6 percent. - WAEMU growth is projected to rise to almost 7 percent in 2024-2025, due to the start of hydrocarbon production in Niger and Senegal, and hover near 6 percent in the longer term. - The current account deficit widened substantially since the COVID-19 pandemic and remains large, contributing to a significant decline in external reserves. - The external position of WAEMU in 2023 is assessed to have been moderately weaker than the level implied by medium-term fundamentals and desirable policy settings. - Public debt reached 61 percent of GDP in 2023. - Successful consolidation (supported by Fund arrangements) would reduce deficits in most member states to 3 percent of GDP by 2025. - The completion of hydrocarbon infrastructure projects and commencement of exports would significantly improve the current account and reserve outlook. - Projections are subject to downside risks, including debt accumulation due to SFAs, delays in hydrocarbon production, further deterioration in socio-political stability, or other external shocks. ### Fiscal policy, consolidation, and revenue mobilization - The envisaged fiscal consolidation towards a 3 percent deficit in 2025 (unless otherwise defined in an IMF-supported program) is crucial for domestic and external stability. - Even modest slippages in the projected consolidation path could cause debt to continue to rise, increase risks to financial stability, and crowd out private sector credit. - Fiscal discipline should be supported via the reintroduction of an enhanced Convergence Pact with the previous ceilings of debt and deficits at 70 and 3 percent of GDP, respectively. - The Pact should be supported by well-designed escape clauses, a debt correction mechanism, and a credible enforcement mechanism. - Revenue mobilization should drive the fiscal adjustment to protect development, social, and security spending. - Measures include broadening the tax base (including by reaching medium-sized firms), reducing VAT exemptions, accelerating the removal of business tax exemptions, streamlining the personal income tax regime, strengthening controls on fiscal evasion, and rationalizing excise taxes. - Member states must coordinate on financing needs and the aggregate impact on the regional market if market absorption of further debt issuances is limited. ### Monetary policy, reserves, and coordination - The BCEAO response to pressures has been broadly appropriate by tightening monetary policy via raising rates and by containing the quantities of liquidity injected into the regional banking system. - Inflation has fallen within its target range, but further monetary tightening might be necessary to bring reserves back to adequate levels and contain financial stability risks. - The BCEAO should raise policy rates to rebuild external buffers while ensuring alignment between liquidity management and policy rates. - Repeated convergence of the refinancing rate to the ceiling of the policy rate corridor highlights the challenge of operating two related policy instruments (rates and liquidity) towards two objectives (financial stability and external viability). - Enhanced monetary-fiscal policy coordination would help address short-term risks and help the BCEAO meet medium-term reserves objectives: - In the short term, members and the BCEAO may need to coordinate towards a tighter stance if risks to reserve recovery materialize. - A joint effort to adjust fiscal consolidation (reducing pressure on the regional financial market) while tightening monetary policy (containing reserve loss) is recommended. - Coordination should consider compatibility of individual countries’ financing needs with the aggregate absorptive capacity of the regional banking system and with an evolution of interest rates and NDA compatible with NFA objectives that bring reserves back to adequate levels. ### Financial sector stability and reforms - The banking system remains resilient but maintains large exposures to regional sovereigns. - Adopting a medium-term plan to address the sovereign-bank nexus will mitigate risks to financial stability. - The BCEAO should consider measures to contain bank concentration risk from sovereign lending, for example by introducing targeted Pillar 2 capital surcharges. - Regional and national authorities should pursue reforms to help broaden governments’ domestic sources of financing beyond banks. - Authorities should continue implementation of FSAP recommendations: - Continue progress supporting supervisor independence and resources. - Timely introduction of Basel III liquidity requirements to help banks internalize liquidity risks, with differentiation over time by banks’ liquidity profile (under Pillar 2). - Pillar 2 capital surcharges to manage concentration and interest rate risk. - Full implementation of the resolution framework by mid-2025 as planned. - National authorities are strongly encouraged to transpose and implement the new AML/CFT law to facilitate removal of WAEMU members currently on the FATF grey list. ### Authorities’ stance and regional institutions - The authorities reaffirmed commitment to the reform agenda despite serious political challenges, noting decision-making at the regional level remains operational and a broad consensus on economic development priorities persists. - Recent capital raising by BOAD and its subsequent engagement in new projects across member states is cited as concrete evidence of the role of regional institutions in promoting regional economic convergence. - WAEMU prosperity depends on maintaining political cohesion, deepening economic integration, strengthening the institutional framework, and investing in infrastructure and common productive capacity in energy, infrastructure, and food resilience. *Source: Excerpt from IMF staff appraisal and recommendations on WAEMU regional reforms and policies.* ### 54. The discussions with the WAEMU authorities will be on the 12-month cycle in ### The discussions with the WAEMU authorities will be on the 12-month cycle in accordance with Decision No. 13656-(06/1), as amended. ### Monetary and Financial Indicators (selected findings) - Reserves fell by US$ 2.8 billion in 2023 but rose by US$1.8 billion in January 2024, reaching 3.6 months of imports. - Most WAEMU members have contributed to changes in BCEAO's foreign assets roughly in line with their share of regional GDP. - Banks remain reliant on central bank refinancing for liquidity. - Bank credit growth to the private sector stood at 10.3% y/y in December 2023. - Credit growth has been financed in part by an increase in foreign liabilities, leading to a decline in bank NFA. - At end-2023, the coverage measure of reserves to sight liabilities is estimated to have reached 57 percent; by the relationship authorities monitor, 4 months of import coverage would translate to about 67 percent. ### External sector assessment — status, drivers, and trajectories - Overall Assessment - WAEMU’s external position in 2023 was weaker than the level implied by fundamentals and desirable policy settings, based on the IMF’s EBA-lite current account model. - The current account (CA) deficit widened in 2022 and 2023, reflecting high prices for imported food and energy, investments in hydrocarbon projects (which will start generating new exports in 2024), and a continued weak fiscal position. - The level of reserves dipped below levels suggested by reserve adequacy metrics in 2023, contributing to a weakened external position. - Net International Investment Position (NIIP) and liabilities - NIIP deteriorated to -47.3 percent of union GDP at end-2021 from -45.8 percent at end-2020. - 2021 (percent of GDP): NIIP: -47.3%; Gross Assets: 38.7%; Gross Liab.: 86.1%. - Over 40 percent of WAEMU external liabilities are constituted by foreign direct investments (FDI); portfolio investments constitute a relatively small proportion. - External debt levels vary widely across WAEMU (about 25 of GDP in Mali and Togo to almost 60 percent of GDP in Senegal), with composition differences (official concessional creditors versus commercial creditors). - Current Account (CA) - Based on Fall 2023 WEO data, CA deficit (including grants) is estimated to have widened to 7.6 percent of GDP in 2022 (from 5.6 percent in 2021) and 7.2 percent in 2023. - EBA-Lite CA model estimates a CA norm of -5.4 percent of GDP for 2023 versus an adjusted CA balance of -6.9 percent of GDP. - Adjustors of 0.6 percent of union GDP are applied to avoid temporary factors (large imports for Niger and Senegal hydrocarbon projects) disproportionately impacting union-level assessment. - Projection: CA deficit is expected to narrow quickly as hydrocarbon projects come on stream and reduce imports/increase exports; over the medium term CA deficit would progressively improve towards 3.5 percent of GDP. - Real Exchange Rate (REER) - CFAF REER depreciated about 14.3 percent between the 2008-09 peak and 2019 trough; appreciated cumulatively 4.7 percent over 2019 in 2020–21; depreciated about 3.1 percent in 2022. - EBA-Lite REER model estimates an undervaluation of approximately 9.3 percent relative to fundamentals. - EBA-Lite CA model suggests a moderate overvaluation of 8.3 percent for 2023 assuming REER elasticity to CA deficit of -0.2. - Where models conflict, the CA deficit model is preferred—thus REER assessed as moderately weaker than fundamentals. - Capital and financial accounts - Net capital inflows decreased to 5.0 percent of GDP in 2022 from 6.2 percent in 2021, largely driven by portfolio flows as fewer countries accessed the Eurobond market. - FDI held broadly stable at 2.5 percent of GDP in 2022 (from 2.7 percent in 2021). - Over the medium term, financial account projected to remain in the 3.5-4.5 percent range as FDI weakens slightly after hydrocarbon projects come to fruition and portfolio flows stabilize around 1.5 percent of GDP. - Market perceptions were broadly favorable in 2022, but in 2023 governments relied more on domestic and regional financing amid global tightening, contributing to reserve losses. - FX intervention and reserves adequacy - Pooled reserves: about 14 trillion CFAF (about €21 billion, or 5.3 months of prospective imports) at end-2021; about 11.4 trillion CFAF in 2022 (about €17.4 billion, or 4.2 months); and under 10 trillion CFAF in 2023 (about €15 billion, or 3.2 months). - The ARA-CC approach (based on 2022 data) estimates minimum adequate reserves of 4.0 to 6.0 months of prospective import coverage for WAEMU. - Based on ARA-CC, end-2023 reserves (3.2 months of imports) are below the assessed adequate level. - Expected drivers of reserve recovery: improving CA balance, fiscal consolidation, enhanced prospects for financial inflows (including recent Eurobond placements by Côte d’Ivoire and Benin). ### Policy responses and recommendations - Fiscal and structural policies - Over the medium term, continued growth-friendly fiscal consolidation as planned is critical. - Compliance with a reinstated fiscal rule in the context of the Convergence Pact is important. - Implementation of structural reforms is necessary to support the external position and to enhance competitiveness. - Monetary and financial policies - Tighter monetary policy will help return reserves to the adequate range more quickly. - Ensuring the soundness of the macroeconomic framework will be important to boost capital inflows and market confidence. - External financing and reserves - Policies to attract and stabilize capital inflows (including improving competitiveness and macroeconomic stability) are recommended to help rebuild reserves. - Manage reliance on central bank refinancing by strengthening bank liquidity buffers and reducing dependence on central bank support where feasible. *Prepared by IMF staff based on the WAEMU chapter and Annex I: External Sector Assessment.* ### Annex II. Risk Assessment Matrix ### Annex II. Risk Assessment Matrix ### Country Specific Risks - Intensified conflict in the Sahel region with increasing spillovers into the coastal member states. - Likelihood: High - Economic Impact: High - Consequences: - Lower growth, rising inflation, weaker external balance. - Rising pressure on the budget and reserves. - Increased risks to debt sustainability. - Risk of social tensions. - Policy Responses: - Provide targeted fiscal support to the most vulnerable. - Accelerate revenue mobilization and promote transparency in scaling up security budget. - Seek concessional external financing. - Strengthen anti-corruption efforts. - Delays in hydrocarbon production and export in Senegal or Niger. Production increases are delayed past 2024 due to technical or political issues. - Likelihood: High - Economic Impact: High - Consequences: - Weaker external balance, lower reserves, lower growth. - Increased risks to debt sustainability and vulnerability to external shocks. - More difficult access to external financing. - Policy Responses: - Adopt a medium-term fiscal adjustment plan covering the entire public sector including off-budget entities involved in the projects. - Seek additional concessional external financing to fill any financing gap. - A lack of liquidity leads to financing difficulties. Regional banks are unable to absorb sovereign financing needs, leading governments to accumulate arrears. - Likelihood: Medium - Economic Impact: High - Consequences: - Banks incur significant capital impairment because of their large exposures to regional sovereigns, requiring recapitalization. - Damage to banks’ ability to finance the regional economy. - Policy Responses: - Accelerate fiscal consolidation. - Seek additional concessional external financing. - Take prudential measures to address the sovereign-bank nexus. - Deepen the local financial market. ### Conjunctural Shocks and Scenarios (Global) - Intensification of regional conflict(s). Escalation of Russia’s war in Ukraine or other regional conflicts and resulting economic sanctions disrupt trade (e.g., energy, food, tourism, and/or critical supply chain components), remittances, FDI and financial flows, and payment systems, and lead to refugee flows. - Likelihood: High - Economic Impact: High - Consequences: - Lower economic growth, rising inflation, and weaker external balance. - Rising pressure on the budget and reserves. - Increased risks to debt sustainability. - Risk of social tensions. - Policy Responses: - Provide additional temporary and targeted fiscal support to the most vulnerable within the existing budget envelope. - Seek concessional external financing for additional budget support, as needed. - Pursue medium-term reforms to increase resilience. - Commodity price volatility. A succession of supply disruptions (e.g., due to conflicts, uncertainty, and export restrictions) and demand fluctuations causes recurrent commodity price volatility, external and fiscal pressures in EMDEs, contagion effects, and social and economic instability. - Likelihood: High - Economic Impact: Medium - Consequences: - Lower economic growth, rising inflation, and weaker external balance. - Rising pressure on the budget and reserves. - Increased risks to debt sustainability. - Risk of social tensions. - Policy Responses: - Maintain flexible energy prices to mitigate budget impact. - Provide targeted fiscal support to the most vulnerable within the existing budget envelope. - Seek additional concessional external financing to fill any financing gap. ### Structural Risks (Global) - Deepening geoeconomic fragmentation. Conflict(s) and weakened international cooperation result in a more rapid reconfiguration of trade and FDI, supply disruptions, protectionism, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial systems, and lower potential growth. - Likelihood: High - Economic Impact: Medium - Consequences: - Regional tensions would further reduce the demand for WAEMU’s trade services and increase pressures on security and social spending. - Policy Responses: - Provide targeted fiscal support to the most vulnerable. - Expand the budget envelope by mobilizing reducing tax expenditures. - Adopt a medium-term fiscal adjustment plan covering the entire public sector. - Extreme climate events. Extreme climate events driven by rising temperatures cause loss of human lives, infrastructure damage, supply disruptions, lower growth, and financial instability. - Likelihood: Medium - Economic Impact: High - Consequences: - WAEMU is one of the most vulnerable regions to climate change, including drought and desertification. - Policy Responses: - Provide targeted support to the vulnerable. - Pursue medium-term reforms to increase climate change adaptation. ### Notes on the RAM - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. - The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline: - “low” is meant to indicate a probability below 10 percent, - “medium” a probability between 10 and 30 percent, - “high” a probability between 30 and 50 percent. - The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. - Non-mutually exclusive risks may interact and materialize jointly. - The conjunctural shocks and scenario highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. - Structural risks are those that are likely to remain salient over a longer horizon. *Annex II. Risk Assessment Matrix — content provided in the source PDF.* ### Annex VI. Security and Irregular Changes in Government in ### Annex VI. Security and Irregular Changes in Government in WAEMU ### Recent trends in irregular changes in government - Since 2020 there have been "fifteen successful or attempted irregular changes in government in nine different SSA countries," according to the Powell and Clayton (2011) database. - The Powell and Clayton database reports "491 irregular changes in government worldwide since 1950." - "More than 85 percent happened between 1950 and 1999, while around 10 percent happened in the period of 2000-2019." - Despite the global decline since the 2000s, Sub-Saharan Africa (SSA) accounted for "about 60 percent of all global cases in 2000-2019 (compared to a share of 32 percent in the 1950-1999 period)." - In the four years since 2020, "all irregular changes in government except one happened in SSA" (the exception is Myanmar in 2021). ### WAEMU-specific incidence and political outcomes - "There have been seven successful or attempted irregular changes in government in the WAEMU since 2020." - These seven cases account for "47 percent" of SSA irregular changes since 2020 and "41 percent" of global cases in the same period. - Burkina Faso, Mali, and Niger are now military-led; leaders have "promised the return to elections after a transition period," with transition terms remaining uncertain in some cases. - The pattern is consistent with "promissory coups" (Bermeo, 2016) where coup leaders promise to return to constitutional order rather than operate an open-ended coup. ### Niger case, sanctions, and regional responses (key dates and measures) - Irregular change in government in Niger: July 26, 2023. - ECOWAS imposed sanctions on Niger with immediate effect on July 30, 2023, including: closing land and air borders; suspending all financial and commercial transactions with Niger; freezing state assets in ECOWAS Central Banks, including the BCEAO; freezing Niger state enterprises and parastatals in commercial banks; and suspending financial assistance to Niger within ECOWAS. - WAEMU Conference of Heads of State and Government imposed similar sanctions on July 30, 2023; these were ruled legal by the WAEMU Court of Justice on November 16, 2023, "implying that these sanctions would continue to be applied by WAEMU even if Niger ceased to be a member of ECOWAS." - ECOWAS recognized that the Government of President Bazoum had been overthrown and set up a task force on December 14, 2023. - "ECOWAS announced the lifting of most sanctions on February 24, 2024." ### Drivers and stressors of coups in WAEMU (findings from Cebotari et al., 2024) - Political, economic and security destabilizations act as the "main stressors for coup." - "When there are overlapping stressors, these would amplify each other both in increasing the probability of a coup when present and in reducing faster that probability when receding." - For 2020-2022 in WAEMU countries, the "top 5 drivers are always either demographic/development indicators (Figure 2, in blue) or sociopolitical stability (in orange)," except for Niger in 2022 where real GDP growth was the third driver. - Key sources of fragility identified: (i) demographic pressures (rapid population growth and younger population); (ii) weak structural fundamentals that drive poverty and low economic and political inclusion; and (iii) higher history of coups. - On average for 2020-2022 the three main drivers in the region were: (i) the recent history of coups (years since the last coup); (ii) the share of elder population in the total population (a small share of elders to young people is a predictor of violence); and (iii) the number of coups before. ### Violence, fatalities, and geographic spillovers - "Burkina Faso, Mali, and Niger showed the highest levels of fatalities among WAEMU countries for the past six years" with a risk of spreading further to other WAEMU countries. - In 2023 the number of fatalities linked to security incidents in WAEMU was "the highest ever, with over 14,000 fatalities compared to around 10,500 in 2022 and 5,950 in 2021." - Fatalities also recently increased in Benin and Togo. Both share their northern border with Burkina Faso, and Benin also borders Niger. - The average of fatalities linked to security incidents between 2015 and 2019 was "21.6 in Benin and 14.4 in Togo"; for 2023 it was "219 in Benin and 103 in Togo," respectively "10.1 times and 7.2 times higher than the average." ### Relationship between violence and irregular changes in government - The link between violence and irregular changes in government is "uneven" in recent events. Literature is divided on violence as a predictor of coups (Singh, 2014). - Example: violence had spread in Mali and Burkina Faso in months leading up to irregular changes in government, but "it had declined in Niger in 2022 and beginning of 2023" after President Bazoum prioritized the fight against terrorism when he took office in 2021. ### Economic impacts of conflict and security spillovers - IMF WAEMU SIPs (2021) study using night lights estimates: "a conflict causing 79 fatalities per million is estimated to have a negative impact of 0.7 percent of annual GDP." This result is tailored to WAEMU and "is two times smaller compared to SSA on average." - Possible explanations for the smaller WAEMU effect: conflict intensity relatively less important and conflicts concentrated in peripheral regions more distant from important economic centers. - A recent study (de Groot et al., 2022) found countries "economically suffer from nearby conflicts": the spillover effect corresponds to "a decrease of 0.8 percent to 1 percent GDP growth per additional intensity unit (on a scale from 0 to 10) in a conflict." - Economic consequences of elevated violence include: decreases in foreign capital inflows; reorientation of public spending towards security (crowding out investment and development expenditures); and population displacements — all presenting clear risks to economic development. *Prepared by Fiona Hesse-Triballi (AFR) and annex text authors; sources cited within the Annex.* ### 3.3 billion in 2022, while the value of such transactions rose by a bit more than twofold to reach CFAF10.2 ### 1wauea2024001 - 3.3 billion in 2022, while the value of such transactions rose by a bit more than twofold to reach CFAF10.2 ### Mobile transactions: scale, composition, and growth (2020–2022) - Number of mobile transactions reached 3.3 billion in 2022. - Value of mobile transactions reached CFAF10.2 trillion in 2022. - Merchant payments: - Accounted for around two-thirds of the value of mobile transactions. - Grew by 6.4 times in volume between 2020 and 2022. - Grew by 145 percent in value between 2020 and 2022. - Bill payments: - Number of transactions increased by 91 percent between 2020 and 2022. - Value of transactions increased by 33 percent between 2020 and 2022. - Electronic payroll payments: - Number of transactions increased by 7.2 percent between 2020 and 2022. - Transaction values rose by 157 percent between 2020 and 2022. - Mobile credit purchases: - Represent around four-fifths of total mobile transactions. - Volume rose by 81 percent between 2020 and 2022. - Transaction values increased by 61 percent between 2020 and 2022. ### I. Introduction and overview: recent performance and risks - Growth and macroeconomic pressures: - Average economic growth was about 6 percent during the past decade. - Policy accommodation in response to shocks (Covid-19, security deterioration, Sahel instability) led to macroeconomic imbalances: higher fiscal deficits, higher debt ratios, and higher inflation. - Current account position and reserves coverage ratios deteriorated. - Policy responses and outcomes: - Member states undertaking significant fiscal consolidation efforts, with IMF-supported programs facilitating adjustment. - BCEAO gradually tightened policy to help rebuild reserves and control inflation. - Inflation declined from the peak of 8.8 percent in August 2022 to 2.6 percent in August 2023, and remained contained within the 1-3 percent target band since. - Successful Eurobond issuances by Côte d’Ivoire and Benin—first time African countries tapped international capital markets since Covid-19—expected to reduce demand pressure on regional financial markets and help strengthen debt sustainability via more favorable terms. - Medium-term prospects and risks: - Average annual growth rate is projected to rebound to 6 percent over the medium term, supported by large oil and gas production in Côte d'Ivoire, Niger, and Senegal. - Inflation should decline further and remain within the BCEAO’s target range. - Noted risks: prolonged tightening of global financing conditions; political fragmentation and instability; security challenges in the Sahel. - Regional integration note: - On the announcement of three countries to exit from ECOWAS (Burkina Faso, Mali, and Niger), members reiterated commitment to remain with WAEMU and deepen regional integration. Free movement agreements expected to mitigate potential impacts. ### II. Common policies - General stance: - Authorities broadly agree with staff’s appraisal and recommendations on strengthening institutions and deepening regional integration, but differ on external sector assessment driven mainly by import projections. a. Fiscal policies - Commitment and targets: - Authorities committed to maintain fiscal sustainability and strengthen coordination. - Council of Ministers committed to achieve fiscal convergence towards the 3 percent-of-GDP deficit target by 2025 for all countries in the region except as otherwise specified in an IMF program. - Mali (no active IMF program): convergence expected in 2026. - Burkina Faso: convergence expected in 2027. - Strategy: - Initial consolidation via expenditure cuts; going forward, consolidation expected to be driven by revenue mobilization to create fiscal space for priority development, social, and security spending. - Progress to renew the Convergence Pact; WAEMU Commission laid groundwork and welcomed IMF Staff’s technical contribution. - Staff advised reintroducing a new pact based on previous fiscal deficit and debt ceilings (3 and 70 percent of GDP, respectively), enhanced with a debt correction mechanism and escape clauses—authorities consider careful calibration given socio-economic and security context. - Members expressed readiness for additional revenue and expenditure measures if reserve pressures continue in 2024 and took steps to address stock-flow adjustments and better control fiscal deficits. b. Monetary policy - Mandate and recent actions: - BCEAO committed to price and external stability; increased policy rates in response to inflation. - Contraction in aggregate demand and favorable weather helped bring inflation within the target range. - Authorities ready to tighten monetary policy further as needed, based on data. - External considerations: - With the currency pegged to the Euro, euro-area policy rates and international developments will inform BCEAO’s response alongside domestic data. - Policy coordination and market development: - Focus on rebuilding buffers and preserving financial stability; steps to strengthen fiscal-monetary coordination via WAEMU Council of Ministers and WAEMU Commission. - Plans to better integrate fiscal constraints to deficit financing in regional markets through: development of a regional sovereign yield curve across maturities, enhanced coordination of sovereign debt issuance, capacity building for primary dealers, and reforms to market microstructure. - Exchange rate assessment: - Authorities view the external sector assessment as broadly in line with fundamentals and expect improvements as investment-related imports for oil and gas projects give way to exports. - Safeguards: - A safeguard assessment of the BCEAO conducted in 2023 concluded governance and policies were in line with international standards, previous recommendations implemented, and suggested further improvements on cybersecurity protection and aligning statutes with 2019 reforms. c. Financial sector policy - Regulatory and supervisory reforms: - New banking law adopted; BCEAO vested with macro-prudential regulation powers. - Comprehensive overhaul of regulatory and supervisory framework for microfinance institutions. - Reforms addressed main FSAP recommendations; authorities committed to addressing remaining recommendations. - Financial soundness and vulnerabilities: - Banking sector resilience: capital adequacy and nonperforming loan ratios improved significantly. - Tier one capital requirements were doubled to strengthen banks. - Banking system liquidity remained strained, prompting central bank interventions to preserve stability. - High concentration of bank exposures to sovereign borrowers and reliance on central bank refinancing continue to pose sovereign-bank nexus risks and distort regional debt markets. - Measures to address vulnerabilities: - Consideration of capital surcharges targeted to banks with concentration risks. - Reforms to deepen and broaden governments’ non-bank domestic sources of financing. - Supervision and AML/CFT: - Strengthened supervisory capacity of the Banking Commission of the West African Monetary Union; additional staffing for banking inspections to provide more uniform supervision and promote banking integration. - Steps taken to enhance the AML/CFT framework. - Financial inclusion and digital finance: - Authorities seek to deepen financial inclusion and leverage digital finance. - BCEAO launched a fast payments plan—an interoperable payment services initiative across the region—aimed to foster competition, lower transaction costs, and facilitate secure digital payments across platforms. d. Structural reforms - Vision and priorities: - Deepening union-wide structural reforms anchored by Vision 2040 to enhance competitiveness and regional growth. - WAEMU Commission set a regional development plan targeting energy, transport, food, and security sectors to build infrastructure (notably a regional roads network) and green energy projects. - A dedicated fund is being set up to support the agenda; BOAD (regional development bank) with recently increased capital will continue financing cross-country projects. - Social and environmental considerations: - Authorities agree on importance of addressing climate and gender issues to increase growth potential and resilience. - Welcomed staff’s analyses and advice in the Staff’s Selected Issues paper (SIP). - Authorities designed strategies and policies at regional and national levels to address gender disparities. - Climate-related steps include following through on staff’s advice, including RSF-supported programs. ### III. Conclusion and requests - Commitment: - WAEMU authorities committed to implement sound macroeconomic and structural policies at regional and member-state levels. - Authorities appreciate Fund’s regional policy advice and financial and technical assistance. - Request: - Based on strong policy commitments, authorities seek Executive Directors’ support for the conclusion of the 2024 regional consultation on WAEMU’s common policies. *Statement by Facinet Sylla, Executive Director for the West African Economic and Monetary Union, Regis N'Sonde, Alternate Executive Director and Abdoulaye Tall, Senior Advisor to the Executive Director — March 15, 2024* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1wauea2024001.pdf_