## 1wauea2024002 ## Source details **Canonical URL:** [1wauea2024002](https://www.imf.org/-/media/files/publications/cr/2024/english/1wauea2024002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1wauea2024002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1wauea2024002.pdf.json) --- ### Debt dynamics and fiscal trends - Regional economic growth averaged 5.9 percent in 2021-2023, largely owing to the service sector. - Fiscal balances and SFAs: - Fiscal deficit: 2.3 percent of GDP in 2019 → 5.5 percent of GDP in 2020 → 6.9 percent of GDP in 2022. - Stock-flow adjustments (SFAs) averaged 1.5 percent of GDP over the past decade and added about 13 percent of GDP to the regional debt-to-GDP ratio between 2013 and 2021. - Public debt: about 45 percent of GDP in 2019 → about 59 percent of GDP in 2022 → about 61 percent of GDP in 2023. - External and reserves: - Reserves reached $ 15.8 billion by end 2023 (3.3 months of prospective imports). - Current account deficits rose due to higher food and energy prices and large fiscal deficits. - Financial stability: - Sovereign exposures are at 38 percent of total banks’ assets at end-2022. - Increased public borrowing on the regional market constrains central bank liquidity management and can crowd out private credit. - Global financing environment: tighter international financing conditions and higher spreads reduced access to international capital markets and increased reliance on regional financing. ### Ensuring fiscal consolidation and fiscal rule design - Target and timeline: - Fiscal convergence towards a deficit of 3 percent of GDP should be achieved by 2025—barring exceptional circumstances. - Exceptions: Burkina Faso projected to converge in 2027 and Mali by 2026 (Mali not in an active IMF-supported program). - Debt and deficit ceilings: - Reintroduction of the regional fiscal rule (Pact) recommended with deficit ceiling 3 percent of GDP and debt ceiling 70 percent of GDP. - A debt ceiling of 70 percent of GDP remains appropriate; increasing it would raise debt servicing costs and fully offset the fiscal space intended. - Simulation insights: - Only scenario consistent with both debt stabilization and recovery of fiscal buffers is a deficit target of 3 percent of GDP in the absence of SFAs. - A 4 percent of GDP ceiling could stabilize debt at a higher level if SFAs were eliminated but would not restore buffers. - A deficit limit of 4 percent of GDP with SFAs at historical averages (1.5 percent of GDP annually) would lead to an explosive debt path. - Historical SFA used in scenarios = 1.5 percent of GDP annually. - Risks of delay: - Further delays in fiscal consolidation pose significant debt sustainability risks and constrain fiscal space; delays should be justified and contingent on financing consistent with debt sustainability. ### Domestic revenue mobilization and expenditure control - Revenue-side priorities: - Strengthen tax policy and administration; continue digitalization. - Broaden tax base; reduce VAT exemptions (noted in agribusiness, transportation, and construction). - Accelerate removal of business tax exemptions; streamline personal income tax; strengthen controls on fiscal evasion; rationalize excise taxes. - Implement dematerialized customs clearance and a single taxpayer identification number. - Expenditure constraints: - Contain wage bill growth to meet the target of 35 percent of tax revenue (as in the expired fiscal rule). - Maintain wage bill ceiling as a ratio to tax revenue (not total revenue) to avoid relaxing the constraint. - Fiscal expenditure snapshot (Text Table 1, percent of GDP; columns as in source: 2023 / 2015-2019 Avg. / change): - Total Expenditure 19.8 23.0 3.2 - Current Expenditure 12.9 15.1 2.2 - o/w wages 5.2 5.7 0.6 - o/w interest 1.2 2.2 0.9 - o/w goods and services 2.8 2.8 0.1 - Capital Expenditure 6.7 7.2 0.6 ### SFAs, debt correction mechanisms, and escape clauses - SFAs: - SFAs not captured by the deficit rule significantly and persistently contributed to debt creation; average SFA = 1.5 percent of GDP. - Ongoing WAEMU Commission missions aim to provide a comprehensive picture of SFAs and remedies. - Debt correction mechanism design considerations: - Timeframe: many fiscal rules require corrective action within one to two years (Belgium, Finland, France); some allow longer (example: Grenada). WAEMU requires careful study to identify suitable timeframe. - Adjustment measures: options range from prescriptive measures (wage freeze, spending cuts) to qualitative requirements (explain deviations to parliament) or full government discretion. - Avoid procyclicality: tightening in recessions may amplify downturns. - Examples of supporting arrangements: Colombia, Poland, Costa Rica. - Well‑designed escape clauses: - Activation based on exceptional exogenous events (severe recessions, major natural disasters, epidemics). - Example trigger: "GDP growth dropping by a certain amount—often 2 percentage points—below certain yearly moving average levels—e.g. the previous five-year average." - Revenues and growth should be measured as percent of GDP or rates, not nominal values. - Activation typically requires parliamentary approval and endorsement by an independent fiscal agency. - Return procedures often predefine timeframes (e.g., Panama: return within 3 years in equal annual adjustments; Germany: plan to reduce extra borrowing “within a reasonable time frame”). ### Debt ceiling, spreads, and interest costs - Empirical relationship: - Cited evidence: an increase in debt of 10 percentage points of GDP leads to an increase in sovereign spreads of 100–120 basis points for typical countries (Hadži-Vaskov and Ricci, 2022). - WAEMU implication example: - If raising debt limit from 70 percent to 80 percent of GDP resulted in 10 percent of GDP higher actual debt in the new steady state, it could raise interest rate by about 1.2 percentage points on non-concessional debt. - Based on current debt composition, this would add more than 1 percent of GDP in higher interest payments—reducing fiscal space by over 1 percent of GDP and fully offsetting the additional space from changing the deficit ceiling from 3 to 4 percent of GDP. - Broader caution: - Recent tightening of global financing conditions and surging spreads make higher debt limits more likely to inflate debt servicing bills and heighten debt sustainability risks. - For WAEMU, debt beyond 80 percent of GDP can lead to an unsustainable debt path when accounting for achievable primary surpluses, market sentiment risks, and heightened interest rate pressures. ### Key fiscal policy recommendations (concise) - Achieve fiscal convergence to a deficit of 3 percent of GDP by 2025—barring exceptional circumstances. - Emphasize domestic revenue mobilization and control expenditure, notably the wage bill (maintain wage bill ceiling as ratio to tax revenue and target 35 percent of tax revenue). - Reintroduce the regional fiscal rule (Pact) with deficit ceiling 3 percent of GDP and debt ceiling 70 percent of GDP. - Reduce SFAs substantially and implement remedies identified by WAEMU Commission missions. - Define credible debt correction mechanisms, exogenous escape clauses, and strengthen assessment, accountability, enforcement, and communication strategies. ### Rising debt servicing costs and rollover risk - Interest cost increases and rollover risk: - WAEMU is spending "0.9 percent of GDP more on interest in 2023 compared to 2015-2019". - If WAEMU debt at its current level and composition were to be fully rolled over at interest rates currently prevailing, higher interest rates would further increase the debt servicing bill by about 1.5 percent GDP (Panel 2.C). - Higher market rates make higher indebtedness both more costly and riskier; past low-rate environment masked market-rate sensitivity. ### Monetary policy operations and the BCEAO - Pre‑Covid operating procedures: - Prior to March 2020 the BCEAO provided pre-set amounts of refinancing via FQVR (fixed quantity variable rate) auctions at variable rates; FRFA (fixed-rate full allotment) allowed as well. - Shift to FRFA (March 2020) and rationale: - FRFA satisfied banks’ demand for liquidity in full at the minimum (policy) rate, conditional on collateral and sound counterparties. - FRFA policy rate lowered by 50 basis points to 2 percent in June 2020. - Fund staff recommended making FRFA permanent for better policy signaling and to mitigate liquidity premium on sovereign bond purchases. - Inflation and policy tightening (2022–2023): - Consumer prices peaked at 8.8 percent in August 2022. - MPC raised the FRFA rate (and marginal facility rate) by 25bps three times: June, September, December 2022. - Headline inflation declined to 7 percent at end-2022 and returned within BCEAO’s 1-3 percent target since August 2023. - Liquidity and reserves (end-2021 to early-2023): - BCEAO FX reserves: US$24.2 billion at end-2021; US$18.5 billion at end-2022; US$17.6 billion in February 2023. - Outstanding BCEAO refinancing at end-2022 was 49 percent higher than one year earlier; 89 percent of the increase occurred in H2 2022. - Return to FQVR (February 2023) and effects: - FX reserves fell to US$17.4 billion by end-February 2023, covering two-thirds of BCEAO’s sight liabilities and less than 4 months of prospective imports. - Under FQVR average bank refinancing rate rose above minimum bid to reach corridor ceiling at end-March 2023 (5 percent), implying effective monetary tightening of 300 bp from June 2022 to March 2023. - Maintaining FRFA would have required rates above 5 percent; BCEAO considered this excessive given receding headline inflation and growth objectives. - Operational consequences and market effects: - Quantitative allotment supplied less liquidity than banks demanded; average interest rates stuck at corridor ceiling and interbank rates exceeded it. - Discretionary allocations were applied when prorating would have left some banks underfunded, increasing uncertainty about access to refinancing and raising liquidity premia. - Reinstating FQVR created rollover and interest rate risks that disrupted the regional sovereign securities market: - Banks buy about 90 percent of WAEMU sovereign securities. - Subscription rate on auction segment plunged from near 100 percent to about 50 percent in March 2023; five auctions postponed or cancelled. - Average yield rose by 150 bp in February–March 2023 to reach 6.2 percent; average maturity was more than halved to 13.1 months. - By June 2023 average yields for auction issuances reached 7.3 percent; primary yield curve inversion for Côte d’Ivoire. ### BCEAO secondary market sovereign debt purchases and liquidity management - Purchases: - June 27, 2023: BCEAO announced purchases from banks of CFAF 1 trillion of sovereign securities with residual maturities between 3 months and 3 years. - September 21, 2023: similar purchase for CFAF 933 billion. - Combined BCEAO public debt purchases: CFAF 1.9 trillion. - Market and liquidity effects: - Outstanding refinancing provided by BCEAO at end-June 2023: CFAF 8.8 trillion. - Injection represented 22 percent of additional bank liquidity relative to outstanding CFAF 8.8 trillion. - Average residual maturity of securities purchased by BCEAO: about 2 years; average maturity of refinancing: about 2 weeks. - Additional liquidity injected was exclusively used for banks’ sovereign financing; lending capacity was fully invested back into primary sovereign security issuances organized concomitantly by UMOA-Titres. - Primary issuances matched volumes of BCEAO secondary purchases; accepted bids exceeded amounts sought by 10 percent for all sovereign issuers, totaling CFAF 2.1 trillion with average maturity 38.7 months and average yield 7.3 percent. - Monthly primary issuances reached CFAF 1.7 trillion in June 2023 and CFAF 1.4 trillion in September 2023. - Monetary policy and sterilization: - Weighted average rate on weekly refinancing at corridor top (5 percent) since end-March 2023; declined to 4.3 percent on June 27, 2023 after announcement of purchases. - Average weekly interbank rate remained below BCEAO marginal lending rate from early August to early November 2023. - By December 5, 2023 average weekly refinancing rate reached 4.7 percent; MPC decision on December 6, 2023 raised corridor by 25 bp to 3.50 percent (floor) and 5.50 percent (ceiling). - Despite increase, average refinancing rate again stuck at top of corridor; interbank rate finished year about 50 bps above corridor ceiling. - An unprecedented CFAF 1 trillion emergency lending facility injection was made in face of renewed banks’ reluctance to rollover sovereign debt. - From end-June to end-October 2023 BCEAO lowered refinancing provided through windows by CFAF 1.4 trillion, offsetting more than ¾ of liquidity injected via secondary purchases; additional CFAF 85 billion withdrawn in H2 2023 as purchased securities matured. - Reserve developments and placements: - Gross reserves rose by almost US$1.7 billion in December 2023, to US$15.6 billion (3.3 months of prospective imports). - BCEAO reserves rose to US$17.5 billion (3.5 months of imports) at end-January 2024 following Eurobond issuances: - Côte d’Ivoire Eurobonds in January 2024: US$1.1 billion 9-year sustainable bond at 7.875%, and US$1.5 billion 13-year conventional bond at 8.50%. - Benin bond placement in February 2024: US$750 million 14-year bond at 8.375%. - Projected supports to reserves in 2024: narrowing external current account via fiscal consolidation and coming on stream of new hydrocarbon exports from Niger and Senegal. - Policy guidance: - Future secondary market purchases for financial stability should be plain open market operations and not closely linked to new sovereign bank financing. - Impact of purchases on overall liquidity should be offset reasonably soon via lower bank refinancing on regular windows and higher policy rates to ensure consistency with monetary policy and reserve objectives. - BCEAO should raise policy rates to rebuild external buffers and better align policy rates and liquidity with monetary goals. - Enhanced monetary-fiscal coordination is essential; aggregate NDA should be compatible with NFA to restore reserves. - Establish a baseline path for NDA anchored to projection for underlying base money could inform fiscal authorities and incentivize alternative financing sources. ### Banking sector structure, risks, and reforms - Size and structure: - Total banking sector assets: CFAF 64 trillion—or 58 percent of regional GDP—at end-2022. - Banking sector share of financial system: around 72 percent; other financial institutions: around 28 percent. - Number of credit institutions at end-2022: 155; 132 were banks. - Geographic concentration: Côte d’Ivoire 34 percent of assets; Senegal 19 percent. - Regional banking groups: 34 groups holding nearly 85 percent of banking sector assets. - Asset and funding composition (end-2022): - Loans to non-financial corporations: about 58 percent of banking assets. - Securities: 35 percent (mostly issued by WAEMU sovereigns and held to maturity). - Other assets: 7 percent. - Funding: mainly short-term deposits and BCEAO refinancing. - Prudential reforms and regulatory framework: - Transition to Basel II/III completed in 2023 except liquidity requirements and Pillar II surcharges. - BCEAO decision to double minimum share capital to CFAF 20 billion. - 2023 regional banking law: expanded scope (payment institutions, electronic money, bank holding companies), strengthened approvals, macroprudential authority designation, early intervention/resolution arrangements, Islamic finance inclusion. - Credit and asset quality: - Private sector bank credit growth: 14.2 percent in 2022 and 10.3 percent in 2023. - Gross NPL ratio: 8.4 percent in 2022; 8.7 percent by June 2023. - Loan loss provisioning rates: 68 percent in 2022 (from 63.7 percent in 2010); cross-country range 39.6 percent (Niger) to 80.2 percent (Burkina Faso). - Average bank capital adequacy ratio (CAR): around 13 percent at end-2022 (regulatory minimum 11.25 percent). - Country outliers: Guinea-Bissau CAR at - 11.6 percent in June 2023; Togo CAR at 6.4 percent in June 2023. - Profitability (ROA): around 1.2–1.5 percent in recent years. - Concentration and liquidity risks: - Sectoral concentration: retail/wholesale trade, restaurants and hotels, manufacturing and other services: 63.5 percent of loans; agriculture lending 3 percent. - Median largest exposure ≈ 49 percent of regulatory capital; nearly 65 percent of banks (62 of 96) have their three largest exposures exceeding all their capital. - Deposit concentration: top 5 depositors 25 percent of deposits; largest depositor about 10 percent. - Liquid assets at end-2022: about 24 percent of total assets; cross-country heterogeneity (Benin 12.3 percent; Mali 31.6 percent). - Reliance on BCEAO refinancing increasing; interbank market shallow and segmented. - Interest rate and valuation risks: - Outstanding stock of sovereign bond securities issued during FRFA and held by banks in mid-June 2023: CFAF 8 trillion (around one-third of banks’ sovereign exposures). - Average residual maturity: 3.5 years. - Estimated average yield under current market conditions: about 7.5 percent; yield at issuance average: 5.7 percent; change since issuance: 1.8 percentage points higher. - Share of securities held for trading: less than 1 percent. - WAEMU FSAP 2022 stress-test adverse scenario: ROA could contract by up to 2.5 percentage points; capital ratios could decline by as much as 8 percentage points. - Estimated capital needs under adverse scenario: approximately 1.5 percent of regional GDP. - Sovereign-bank nexus and stress tests: - Public debt-to-GDP rose from 44.8 percent in 2019 to 59.1 percent in 2022. - Bank exposures to public debt instruments at end-2022: 38 percent of total banks’ assets (from 30 percent at end-2019). - Banks’ claims on public sector at end-2022: 21.7 percent of GDP (up from 14.2 percent at end-2019). - Claims on private sector: 24.7 percent of GDP in 2022 (up from 22.8 percent pre-pandemic). - Stress-test sovereign default scenario results (WAEMU FSAP 2022): - Default by Côte d'Ivoire: almost 50 banks would not have sufficient capital buffers. - Aggregate capital losses from contagion of all sovereign defaults: could reach 3.6 percent of 2021 regional GDP. - Maximum capital loss associated with Côte d'Ivoire default: 1.7 percent of regional GDP. - Additional capital needed to cover contagion risk: 1.4 percent of regional GDP (aggregate). - Policy recommendations for banking sector: - Strengthen buffers and contain sovereign exposure: concentration limits; positive risk weights on sovereign holdings; Pillar 1 or 2 capital surcharges. - Develop domestic institutional and retail investor base to diversify demand for government securities. - Calibrate additional capital requirement (Pillar 2) nonlinear beyond minimum concentration threshold based on exposure to specific sovereign relative to RWA. - Implement Basel-type liquidity ratios and monitor maturity mismatches and interest rate risk. - Operationalize banking resolution framework and reduce excessive reliance on BCEAO refinancing. ### Regulatory treatment and temporary forbearance (Niger) - Regulatory treatment of sovereign exposures: - Minimum capital requirements assume 0 percent risk weighting for sovereign exposures in local currency. - Large exposure framework excludes sovereigns; single counterparty large exposure limit set at 25 percent of Tier 1 capital for non-sovereign counterparties. - Niger temporary forbearance (January 22, 2024): - Forbearance exonerated Niger securities from classification as “non-performing” after 180 days to forestall adverse effects on bank capitalization. - Only securities subject: accounting for 88 percent of total bank exposure to Niger sovereign. - Direct loans: 12 percent of total bank exposures to Niger. - As of end-2023, over 80 percent of Niger debt issued through UMOA-Titres was held in other WAEMU countries and by BCEAO. - By February 5, 2024, Government of Niger accumulated CFAF 300 billion (about US$480 million, 2.9 percent of GDP) of arrears on debt service. - In 2024, CFAF 265 billion is due in debt service (CFAF 216 billion principal, CFAF 49 billion interest). - Niger government debt service arrears started on July 31, 2023. - On February 24, 2024, ECOWAS Commission issued decision to lift most sanctions on Niger with immediate effect. - Supervisory response: - BCEAO conducted stress tests to identify most exposed banks; instructed identified banks on capital preservation measures (e.g., dividend withholding) and intensified supervision. ### Systemic assessment and reform priorities - Systemic vulnerabilities: - Main ongoing vulnerabilities: credit, concentration, liquidity, and sovereign risks, with rising sovereign–bank nexus. - Banking sector heterogeneous in solvency, risk exposures, and performance. - Systemic vulnerability indicators generally low per heatmap analysis, but pockets of weakness persist. - Priority reforms: - Complete Basel II/III transition (liquidity and Pillar II remaining). - Operationalize banking resolution framework. - Implement targeted capital surcharges and concentration limits for sovereign exposures. - Strengthen macroprudential tools and supervisory capacity. ### Climate financing and adaptation needs - Climate finance needs: - Total estimated cost to implement NDCs in WAEMU over medium-term: $79 billion (about 39 percent of 2023 regional GDP). - Country range: between 21 to 70 percent of the 2023 GDP across member states. - Current flows and composition: - Climate finance flows to WAEMU: about $3.6 billion in 2020. - Almost 90 percent of climate finance flows in 2020 were from public sources. - Financing strategy recommendations: - Mobilize private climate finance via green finance, bolstering local/regional debt markets, de-risking (blending), debt-for-nature swaps. - Multilateral development banks and DFIs should design instruments to absorb risk and leverage private investment. - IMF Resilience and Sustainability Facility reforms aim to attract private climate finance (so far for Benin and Senegal; Côte d’Ivoire in pipeline). - Adaptation emphasis: - Adaptation likely to yield short-term growth gains and build resources for mitigation. - Adaptation costs in sub-Saharan Africa estimated around 2-3 percent of regional GDP annually over next decade. - Policy measures: improved seeds, irrigation, electricity and water access, financial buffers, telecommunication for early warnings, resilient housing and sanitation, stronger social safety nets. - Regional cooperation: - Develop regional guidelines and legal frameworks for adaptation; standardize methodology to assess climate finance needs; share technologies and data; regional public investment standards; facilitate digitalization for agriculture; pursue economic diversification and deeper trade integration. - Social/human-capital constraints to resilience: - Maternal mortality rate: 405 (per 100,000 births) vs 184 in LMICs. - Adolescent fertility rate: 119 (births per 1,000 women ages 15-19) vs 40 in LMICs. - Female enrollment: primary 89 percent vs 105 percent (LMICs); secondary 41 percent vs 76 percent; tertiary 7 percent vs 31 percent. - Tracking and mobilization: - Tracking private climate finance is challenging; standardized regional methodologies and expanded development partner support beyond disaster relief recommended. ### Gender gaps, economic costs, and policy priorities - Labor market and inclusion metrics: - Female labor force participation (ILO modeled, females ages 15+): WAEMU ~54 percent; LMICs 34 percent. - Gender gap in participation (male minus female): WAEMU 20 percentage points; LMICs 39 percentage points. - Share of businesses with at least one female owner: ~21 percent. - Gender wage gap: men earn about 43 percent higher than women in WAEMU. - Account ownership (female): WAEMU ~34 percent; LMICs 60 percent. Account ownership gap (male minus female): WAEMU 15 percentage points; LMICs 6 percentage points. - World Bank WBL law score: WAEMU 72; LMICs 69. - Economic impact estimates: - Regression coefficient on GII (t-1): LMICs -4.05*** (1.25); WAEMU -11.57** (4.84). Observations: LMICs 1210; WAEMU 232. - If median WAEMU country reaches median of LMICs on gender equality (0.15-point decline in GII), boost to per capita growth rate: about 1.7 percentage points on average. - If WAEMU achieves same decline in GII as 1990–2021 (about 0.1 points), predicted higher growth: 1.2 percentage points on average. - Local studies: potential long-run GDP gains from closing gender gaps range widely (examples: Burkina Faso 18 percent, Côte d’Ivoire 11 percent, Niger 31 percent, Senegal 17 percent). - Policy priorities: - Improve women’s access to health services; increase access and quality of education for girls; promote greater and more effective participation of women in the workforce; promote women’s financial inclusion; reform laws to level the playing field. - Emphasize coordinated, country-specific assessments at WAEMU level and a roadmap. - Regional and national initiatives: - WAEMU Commission 10-year Gender Strategy (2018); BCEAO Financial Inclusion Strategy (2016); country examples (Côte d’Ivoire, Senegal, Benin, Togo, Niger, Mali, Burkina Faso) implementing various gender-focused programs and reforms. - Shocks and complementarities: - Covid-19, climate change, and security challenges exacerbate gender disparities and increase urgency of reforms; policy complementarities (education, childcare, fertility, labor-market measures) needed to be effective. *Source: 1. Debt Dynamics and related chapters (excerpted from 1wauea2024002 — WEST AFRICAN ECONOMIC AND MONETARY UNION, INTERNATIONAL MONETARY FUND).* ### 1. Debt Dynamics __________________________________________________________________________ 8 ### 1. Debt Dynamics ### Overview: recent macro-fiscal developments and risks - Regional economic growth averaged 5.9 percent in 2021-2023, largely owing to the service sector. - Fiscal deficits and SFAs contributed to a large increase in public debt: - Fiscal deficit: 2.3 percent of GDP in 2019 → 5.5 percent of GDP in 2020 → 6.9 percent of GDP in 2022. - Stock-flow adjustments (SFAs) averaged 1.5 percent of GDP over the past decade. - Public debt: about 45 percent of GDP in 2019 → about 59 percent of GDP in 2022 → about 61 percent of GDP in 2023. - SFAs added about 13 percent of GDP to the regional debt-to-GDP ratio between 2013 and 2021. - External and reserves developments: - Reserves reached $ 15.8 billion by end 2023 (3.3 months of prospective imports), below IMF estimated reserve adequacy. - Current account deficits rose significantly in recent years due to higher food and energy prices and large fiscal deficits. - Financial stability and sovereign-bank nexus: - Sovereign exposures are at 38 percent of total banks’ assets at end-2022. - Increased public borrowing on the regional market weakens financial sector stability, constrains the central bank’s ability to tighten liquidity, and can crowd out private credit. - Global financing environment: - Tighter international financing conditions and higher spreads have reduced access to international capital markets and increased reliance on regional financing. ### Ensuring desired fiscal consolidation - Target and timeline: - Fiscal convergence towards a deficit of 3 percent of GDP should be achieved by 2025—barring exceptional circumstances—as envisaged by the authorities in several IMF programs. - Exceptions: Burkina Faso is projected to converge in 2027 and Mali (not in an active IMF-supported program) by 2026. - Risks of delay: - Further delays in fiscal consolidation could pose significant debt sustainability risks and further restrain fiscal space. - Delays should be based on strong justifications and contingent on financing consistent with debt sustainability. - Main policy emphasis: - Members’ adjustment plans should emphasize domestic revenue mobilization (DRM) while controlling expenditure, notably the wage bill. ### Domestic revenue mobilization and expenditure control - Revenue side priorities: - Strengthen tax policy and administration; continue digitalization efforts. - Broaden tax base, reduce VAT exemptions (noted in agribusiness, transportation, and construction), accelerate removal of business tax exemptions, streamline the personal income tax regime, strengthen controls on fiscal evasion, rationalize excise taxes. - Implement dematerialized customs clearance and a single taxpayer identification number. - Expenditure constraints: - Contain wage bill growth to meet the target of 35 percent of tax revenue (as in the expired fiscal rule). - Maintain wage bill ceiling defined as a ratio to tax revenue (not total revenue) to avoid relaxing the constraint. - Fiscal expenditure snapshot (as presented in the source Text Table 1, percent of GDP): - Total Expenditure 19.8 23.0 3.2 - Current Expenditure 12.9 15.1 2.2 - o/w wages 5.2 5.7 0.6 - o/w interest 1.2 2.2 0.9 - o/w goods and services 2.8 2.8 0.1 - Capital Expenditure 6.7 7.2 0.6 - (Table columns as in the source: 2023 / 2015-2019 Avg. / change) ### Establishing an appropriate and effective fiscal rule - Reintroduction of the regional fiscal rule: - Urgent need to reintroduce a regional fiscal rule via the Pact with the original ceilings to enhance credibility of fiscal commitments and complement fiscal consolidation. - Within re-establishment, the deficit and debt ceilings should remain at 3 percent and 70 percent of GDP, respectively. - Role of SFAs: - Significant efforts should be made to reduce SFAs to a minimum; ongoing missions by the WAEMU Commission aim to provide a comprehensive picture of SFAs and remedies. - Simulation-based insights: - The only scenario consistent with both debt stabilization and recovery of fiscal buffers is a deficit target of 3 percent of GDP in the absence of SFAs. - A 4 percent of GDP ceiling could stabilize debt at a higher level if SFAs were eliminated, but would allow no restoration of buffers. - A deficit limit of 4 percent of GDP with SFAs at historical averages (1.5 percent of GDP annually) would lead to an explosive debt path even in absence of further shocks. - Note: historical SFA used in scenarios = 1.5 percent of GDP annually. ### Debt ceiling, interest costs, and empirical evidence on spreads - Debt ceiling recommendation: - A debt ceiling of 70 percent of GDP remains appropriate; increasing it would raise debt servicing costs and fully offset the fiscal space the higher ceiling aims to create. - Empirical relationship and implications: - Empirical evidence cited: an increase in debt of 10 percentage points of GDP leads to an increase in sovereign spreads of 100–120 basis points for typical countries (Hadži-Vaskov and Ricci, 2022). - For WAEMU: if raising the debt limit from 70 percent to 80 percent of GDP resulted in 10 percent of GDP higher actual debt level in the new steady state, it could raise interest rate by about 1.2 percentage points on non-concessional debt. - Based on current debt composition, this would add more than 1 percent of GDP in higher interest payments—thus reducing fiscal space by over 1 percent of GDP and fully offsetting the additional space sought via changing the deficit ceiling from 3 to 4 percent of GDP. - Broader caution: - Recent tightening of global financing conditions and surging spreads make higher debt limits more likely to inflate debt servicing bills and heighten debt sustainability risks. - For WAEMU, a debt level beyond 80 percent of GDP can lead to an unsustainable debt path when accounting for achievable primary surpluses, market sentiment risks, and heightened interest rate pressures. ### Key policy recommendations (concise) - Achieve fiscal convergence to a deficit of 3 percent of GDP by 2025—barring exceptional circumstances. - Emphasize domestic revenue mobilization and control expenditure, notably the wage bill (maintain wage bill ceiling as ratio to tax revenue and target 35 percent of tax revenue). - Reintroduce the regional fiscal rule (Pact) with deficit ceiling 3 percent of GDP and debt ceiling 70 percent of GDP. - Reduce SFAs substantially and implement remedies identified by WAEMU Commission missions. - Define credible debt correction mechanisms, exogenous escape clauses, and strengthen assessment, accountability, enforcement, and communication strategies to secure fiscal discipline and credibility. *Source: 1. Debt Dynamics (chapter content) — March 1, 2024.* ### 12. Moreover, rolling over debt has become more expensive, which makes higher ### 1wauea2024002 - 12. Moreover, rolling over debt has become more expensive, which makes higher ### Rising debt servicing costs and rollover risk - WAEMU is spending "0.9 percent of GDP more on interest in 2023 compared to 2015-2019". - If "WEAEMU debt at its current level and composition were to be fully rolled over at the interest rates currently prevailing, the higher interest rates would further increase debt servicing bill by about 1.5 percent GDP (Panel 2.C)." - Higher market rates make higher indebtedness both more costly and riskier; past low-rate environment had masked market-rate sensitivity of WAEMU debt. - Interest payments as percent of GDP have already increased in recent years owing to both higher debt and higher interest rates; continued higher rates would further erode fiscal space and risk external viability. ### Need for a credible debt correction mechanism (supporting arrangements) - Rationale and current situation: - WAEMU debt rose "from 29 to 61 percent of GDP over the past 10 years". - Debt is very close to or exceeds the "70 percent of GDP ceiling in three member states". - SFAs not captured by the deficit rule have been significantly and persistently contributing to debt creation. - Core design considerations for a debt correction mechanism: - Timeframe for correction: - Many fiscal rules require corrective action "within one to two years (Belgium, Finland, and France)". - Some allow a longer period (example: Grenada). - A careful study is needed to identify a suitable timeframe for WAEMU. - Specifying adjustment measures: - Some rules are prescriptive (e.g., wage freeze in Slovakia or cutting spending). - Others require qualitative actions (explain deviations to parliament, submit supplementary budget). - Others leave full discretion to the government (Germany and Switzerland). - Avoiding procyclicality: - Tightening expenditure ceilings when debt exceeds thresholds may create strong procyclicality in recessions. - Examples of supporting arrangements cited: Colombia, Poland, Costa Rica. ### Well‑designed escape clauses - Purpose: allow flexibility for managing large exceptional shocks without undermining rule credibility. - Trigger design: - Activation should be based on exceptional events that are exogenous and outside government control (severe recessions, major natural disasters, states of emergency such as epidemics). - For measurable events, an example trigger is "GDP growth dropping by a certain amount—often 2 percentage points—below certain yearly moving average levels—e.g. the previous five-year average." - Revenues and growth should be measured "as percent of GDP or rates, as opposed to nominal values." - There should be "no criteria based on a gap between budget or growth projections versus past benchmarks" to preserve realistic budgeting incentives. - Procedure of activation and monitoring: - Activation typically requires parliamentary approval, often with endorsement by an independent fiscal agency (e.g., fiscal council). - European example: decision to invoke the general escape clause is based on a recommendation of the European Commission confirming conditions are met. - Return procedures: - Escape clauses often predefine timeframes to (i) re‑instating rule compliance; and/or (ii) correcting the cumulative deviation during suspension. - Examples: - Panama: requires returning to rule compliance "within 3 years, in equal annual adjustments without the need to compensate for the accumulated deviations." - Germany: requires "a plan to reduce the extra borrowing “within a reasonable time frame”." - Deeper analysis is needed to specify the appropriate WAEMU timeline for returning to the fiscal rule. ### Strengthening communication, monitoring, and accountability - Enhancements proposed: - Strengthen the role of the WAEMU Commission in preparing forecasts on fiscal performance, offering guidance on policy actions, assessing fiscal outcomes, and enforcing rules. - Implement an effective communication strategy to bolster credibility and transparency of the reintroduced fiscal rule. - Revisit and enhance institutional accountability and enforcement frameworks. ### Ensure adequate perimeter and consistent definitions of fiscal indicators - A consistent definition of deficit and debt perimeter across the region would: - Support equal treatment across countries. - Facilitate capturing all potential risks to debt creation and sustainability. - Proposals: - Use annexes to main legislation to elaborate parameters of deficit and debt criteria and set deadlines for harmonized adoption. - Compliance with the reporting standard could be a secondary surveillance focus (analogous to second-tier convergence criteria). - No carve-outs for spending on items like investments or security, as carve-outs would undermine target credibility. ### Conclusions: targets, priorities, and near‑term policy stance - Fiscal target: - "Fiscal consolidation to a deficit of 3 percent of GDP should be ensured by 2025 (unless otherwise agreed in the context of an IMF program)." - Reintroduce regional fiscal rules at original ceilings—"3 percent GDP for deficit and 70 percent GDP for debt." - Fiscal priorities: - Emphasize domestic revenue mobilization while controlling expenditure, notably the wage bill. - Bring the wage bill to the suspended Pact target of "35 percent of tax revenues." - Build fiscal buffers to cope with future shocks while avoiding large increases in indebtedness that threaten regional financing stability and foreign reserves. - SFAs: - SFAs have contributed to rising public debt, "averaging 1.5 percent of GDP." - Regional and national authorities should contain and address extra‑budgetary and below‑the‑line operations that increase debt. - Initial steps by the WAEMU Commission are welcome; efforts should intensify. - Broader mechanisms: - Introduce mechanisms for deviations and correction, assessment, accountability, and enforcement—including a credible debt correction mechanism, well‑designed escape clauses, and an effective communication strategy—to ensure appropriate near‑term fiscal adjustments and avoid uncertainty about rule resumption. ### Recent challenges to monetary policy (context for fiscal‑monetary coordination) - Recent WAEMU monetary developments and constraints: - Policy rates were hiked "by 75bp from June 2022 to end-2022" to curb inflation. - In February-March 2023, bank liquidity was rationed by shifting from FRFA to FQVR and a further "25 bp" policy rate hike. - Sovereign yields rose substantially; BCEAO initiated secondary market purchases of sovereign debt in June and September 2023. - To address reserve adequacy and financial stability, BCEAO later implemented two "25bp" policy rate hikes in September and December 2023 and gradually reduced bank refinancing, but end‑2023 bank liquidity tensions forced use of the marginal lending facility. - Monetary policy objectives and constraints: - Price stability target: "year-on-year CPI inflation rate of 2 percent with a margin of +/- 1 percentage point over a 24-month horizon." - BCEAO responsibilities also include financial stability and management of pooled FX reserves. - Article 76: MPC must reassess policies when "FX reserve coverage of the BCEAO’s sight liabilities... falls below 20 percent for three months." - Institutional arrangements: - The MPC defines stance and instruments; the Governor implements policy and decides on refinancing amounts and allotment method (fixed vs variable rates). - The shift from FRFA to FQVR and subsequent operations illustrate the growing need for monetary‑fiscal coordination to meet medium‑term reserves objectives. *Source: Excerpt from 1wauea2024002 (WAEMU Selected Issues chapter).* ### 7. Prior to the Covid crisis, the BCEAO traditionally provided banks with fixed quantities ### 1wauea2024002 - 7. Prior to the Covid crisis, the BCEAO traditionally provided banks with fixed quantities ### Monetary policy operating procedures and the Covid shock - Prior to March 2020 the BCEAO provided banks with pre-set amounts of refinancing through American weekly and monthly auctions (appels d’offre) at variable rates (FQVR). - In FQVR auctions: - the BCEAO serves banks’ bids with the highest rates first until the overall auctioned amount is exhausted; - the money market or marginal rate (taux marginal) is the rate of the last bid served, with bids at this rate being prorated; - the weighted average interest rate (taux moyen pondéré) is the weighted average rate across bids served during an auction. - The Monetary Policy Committee’s 2010 decision regarded variable interest rate auctions as the usual bank refinancing operating procedure, while allowing fixed-rate auctions. ### Shift to fixed-rate full allotment (FRFA) during Covid and rationale - In March 2020 the BCEAO shifted from FQVR to a FRFA bank refinancing procedure, satisfying banks’ demand for liquidity in full at the minimum (policy) rate, conditional on adequate collateral and counterparties’ financial soundness. - The FRFA system aimed at mitigating liquidity risk by ensuring commercial banks’ continued and sufficient access to central bank liquidity at a fixed rate. - The FRFA (policy) rate was lowered in June 2020 by 50 basis points to 2 percent in the context of a low inflation environment. - Fund staff recommended making FRFA permanent, arguing that FRFA: - can improve the effectiveness of monetary policy by providing a clear signal and enhancing the ability of the policy rate to steer financial conditions; - is useful where the interbank market is segmented and illiquid, preventing funding market freezes and disruptions in bank credit; - does not require the central bank to make exact projections of bank liquidity, which is more difficult under a fixed exchange rate regime; - can contribute to reducing the liquidity premium on sovereign bond purchases by banks by providing greater certainty about funding costs. ### Inflation dynamics and policy tightening (2021–2023) - Consumer prices accelerated in 2022 to a peak of 8.8 percent in August 2022, driven by global food and energy prices and a NEER depreciation. - The MPC raised the FRFA rate (and the marginal facility rate) by 25bps three times in June, September, and December 2022. - Headline inflation declined to reach 7 percent at end-2022, before returning within the BCEAO’s 1-3 percent target range since August 2023. - Non-food inflation declined from a peak of 5 percent (y/y) in February 2023 to 2.9 percent in November 2023. ### Liquidity, BCEAO refinancing, and FX reserves (end-2021 to early-2023) - BCEAO FX reserves: US$24.2 billion at end-2021, US$18.5 billion at end-2022, and US$17.6 (billion) in February 2023. - Drivers of reserve decline: persistently large fiscal deficits, a wide external current account deficit, and lower net portfolio inflows. - At end-2022 the outstanding amount of BCEAO refinancing was 49 percent higher than one year earlier, with 89 percent of this increase occurring in the second half of the year. - Despite a gradual tightening of the FRFA rate by a total of 75 bps, the BCEAO was providing more liquidity while raising interest rates. ### Return to FQVR in February 2023 and operational consequences - In mid-February 2023 the BCEAO shifted back to a fixed quantity variable rate (FQVR) allotment procedure, aiming to curb FX reserve erosion. - FX reserves fell to US$17.4 billion by end-February 2023, covering only two-thirds of the BCEAO’s sight liabilities (from about four-fifths at end-2021) and less than 4 months of prospective imports (from more than 5 months at end-2021). - Under the FQVR: - average bank refinancing rate quickly rose above the minimum bid rate to reach the ceiling of the monetary policy corridor at end-March 2023 (5 percent), implying an effective monetary policy tightening of 300 bp from June 2022 to March 2023. - maintaining FRFA could have required FRFA rate rises significantly above 5 percent to limit refinancing — a step the BCEAO considered excessive given receding headline inflation and its secondary growth-support objective. - The MPC raised benchmark rates by an additional 25bp in March 2023 and kept them unchanged in June 2023, while banks’ demand for BCEAO refinancing continued to significantly exceed supplied volumes. ### Operational challenges, discretionary allotment, and market effects - The quantitative allotment method supplied significantly less liquidity than banks demanded, leaving average interest rates in BCEAO auctions stuck at the monetary policy corridor ceiling between late March 2023 and end-June 2023, with the average interbank rate exceeding the same ceiling. - The BCEAO departed from strict prorating at the marginal rate when prorating would have left some banks with insufficient refinancing, applying discretionary allocations to safeguard financial stability. This practice increased uncertainty about access to central bank refinancing and raised liquidity premia. - Reinstating FQVR created rollover and interest rate risks that disrupted the regional sovereign securities market: - Banks buy about 90 percent of WAEMU sovereign securities (the main collateral for BCEAO refinancing). - Subscription rate on the auction segment plunged from near 100 percent to about 50 percent in March 2023; five auctions were postponed or cancelled. - The average yield rose by 150 bp in February–March 2023 to reach 6.2 percent and the average maturity was more than halved to 13.1 months. - By June 2023 average yields for auction issuances reached 7.3 percent, particularly pronounced for maturities between 3 months and 3 years, causing an inversion of the primary yield curve for Côte d’Ivoire (which accounts for more than 40 percent of the stock of sovereign securities issued in the WAEMU). ### Banks’ sovereign exposure and valuation issues - WAEMU banks’ sovereign claims as a share of total assets rose from 29 percent at end-2019 to 38 percent at end-2022. - More than four fifths of banks’ sovereign exposures take the form of securities; about two-thirds were issued at relatively low yields and increasing tenors under FRFA. - Banks mostly follow a buy-and-hold strategy; less than 1 percent of their security portfolio is recorded as for trading purposes, limiting the immediate impact of mark-to-market valuation losses on appetite for sovereign exposure. - Lower bank appetite for additional sovereign risk raised concerns about some member-States’ ability to cover funding needs, including debt rollover. ### BCEAO secondary market sovereign debt purchases (June and September 2023) - On June 27, 2023 the BCEAO announced purchases from banks of CFAF 1 trillion of sovereign securities with residual maturities between 3 months and 3 years. - On September 21, 2023 a similar secondary market purchase was announced for CFAF 933 billion. - These purchases were conducted through competitive tenders that closed on June 30 and September 26 respectively, with average maturities of securities bought averaging around 2 years (21 and 25 months respectively). - Concurrent primary issuances by UMOA-Titres matched overall volumes of BCEAO secondary purchases; accepted bids exceeded amounts sought by 10 percent for all sovereign issuers, totaling CFAF 2.1 trillion, with an average maturity of 38.7 months and an average yield of 7.3 percent. - Monthly primary issuances on the auction segment reached record levels of CFAF 1.7 trillion in June 2023 and CFAF 1.4 trillion in September 2023. - There is no information in the text on prices or yields at which the BCEAO’s secondary purchases took place; transactions were voluntary. *Excerpted from IMF staff analysis in the provided content unit.* ### 22. The BCEAO’s sovereign security purchases initially amounted to a significant monetary ### 22. The BCEAO’s sovereign security purchases initially amounted to a significant monetary ### Sovereign purchases and immediate liquidity impact - BCEAO public debt purchases: CFAF 1.9 trillion. - Outstanding amount provided by the BCEAO through its refinancing windows at end-June 2023: CFAF 8.8 trillion. - Injection represented: 22 percent of additional bank liquidity, relative to the outstanding amount of CFAF 8.8 trillion. - Average residual maturity of sovereign securities purchased by the BCEAO: about 2 years. - Average maturity of refinancing provided through BCEAO refinancing windows: about 2 weeks. ### Use of additional liquidity and market linkages - The additional liquidity injected through the BCEAO’s debt purchases was exclusively used for banks’ sovereign financing. - The additional lending capacity created by the purchases was fully invested back into primary sovereign security issuances organized concomitantly by UMOA-Titres. - The amounts of securities from each sovereign purchased by the BCEAO turned out very close to those sought through the concomitant primary issuances on the auction segment of the regional market. ### Effects on monetary policy operations and money markets - Weighted average rate on the BCEAO’s weekly refinancing window had been at the top of the policy corridor (5 percent) since end-March 2023. - Rate declined to 4.3 percent on June 27, 2023, upon announcement of the first set of secondary market purchases. - Average weekly BCEAO refinancing rate trended further down in July 2023 and remained around 20 bp above the minimum bid rate subsequently. - Average weekly interbank rate remained below the BCEAO’s marginal lending rate from early August to early November 2023. - By November 2023 the average weekly refinancing rate began to rise again; it reached 4.7 percent on December 5, 2023 (30 bp lower than the top of the policy corridor). - Monetary Policy Committee decision on December 6, 2023: raised the floor and the ceiling of the monetary policy corridor by 25 bp to 3.50 percent and 5.50 percent respectively. - Despite the increase, the average BCEAO refinancing rate became stuck again at the top of the new policy corridor. - Interbank rate finished the year about 50 bps above the ceiling of the monetary policy corridor. - An unprecedented liquidity injection of CFAF 1 trillion was made by the BCEAO through its emergency lending facility in the face of renewed banks’ reluctance to rollover sovereign debt. ### Sterilization, mopping-up operations, and reserve implications - From end-June to end-October 2023, the BCEAO lowered the amount of bank liquidity provided through its refinancing windows by CFAF 1.4 trillion, offsetting more than ¾ of the liquidity injected through its June and September secondary market purchases. - An additional CFAF 85 billion of liquidity was withdrawn in the second half of 2023 as some purchased sovereign securities matured. - Banks’ structural liquidity position deteriorated in the last quarter to reach CFAF 6.8 billion at end-2023, up from CFAF 5.5 billion at end-2022. - Large fiscal deficits and associated sovereign financing needs put pressure on the regional financial system and can run contrary to the monetary policy tightening cycle needed to contain FX reserve losses. - Such liquidity injections can put additional pressures on external reserves if not sterilized in a timely fashion by the BCEAO. ### Recent reserve developments and baseline outlook (end-2023 / early-2024) - Gross reserves rose by almost US$1.7 billion in December 2023, to US$15.6 billion, or 3.3 months of prospective imports. - BCEAO reserves rose to US$17.5 billion, or 3.5 months of imports at end January 2024, following issuance of Eurobonds by Côte d’Ivoire. - Côte d’Ivoire Eurobond placements in January 2024: US$1.1 billion 9-year sustainable bond at 7.875%, and US$1.5 billion 13-year conventional bond at 8.50%. - Benin bond placement in February 2024: US$750 million 14-year bond at 8.375%. - A successful placement by Benin in early February 2024 was expected to help support reserves. - Projected supports to reserves in 2024: narrowing of the external current account deficit via fiscal consolidation and coming on stream of new hydrocarbon exports from Niger and Senegal. - Baseline projection subject to downside risks. ### Policy recommendations and operational guidance - Secondary market purchases, if used in the future for financial stability reasons, should be undertaken as plain open market operations and not be closely linked to new sovereign bank financing. - The impact of such purchases on overall liquidity should be reasonably soon offset by lower bank refinancing on the BCEAO’s regular windows, including through higher policy rates, to ensure consistency with monetary policy and reserve objectives. - The BCEAO should raise policy rates to rebuild external buffers and to better align policy rates and liquidity levels towards monetary policy goals. - Enhanced monetary-fiscal policy coordination is essential: careful consideration of the compatibility of individual countries’ financing needs with the aggregate absorptive capacity of the regional banking system is needed. - Aggregate regional policy should ensure net domestic assets (NDA) are compatible with net foreign assets (NFA) to bring back reserves to an adequate level. - Establishing a baseline path for NDA over the medium-term and maintaining interest rates consistent with that baseline would be a useful intermediate policy instrument. - The baseline NDA path could be anchored to a projection for underlying base money (currency in circulation and required reserves), assumed to grow in line with historical trends (somewhat faster than nominal GDP). - Regular presentation by the BCEAO to national fiscal authorities of a baseline NDA path consistent with reserve objectives could: - Inform governments about the level of liquidity injection consistent with reserve adequacy. - Help governments formulate realistic projections on the availability of domestic financing. - Incentivize governments to seek alternative financing sources, including increased non-bank participation in the regional market and access to international markets. - Ease fiscal pressure on the regional banking sector and promote coordination among national authorities. ### Constraints, feasibility, and institutional implications - Rebuilding reserves will require a slowdown in increases in refinancing afforded to commercial banks and avoidance of new debt purchases, which limits a traditional avenue for governments to obtain domestic financing. - Fiscal discipline by WAEMU member states is essential to successful rebuilding of BCEAO reserves. - Feasibility of limiting NDA growth depends on successful fiscal consolidation and avoidance of debt-creating State Financial Assets (SFAs). - The BCEAO would need to keep interest rates consistent with the growth in NDA; slower NDA growth implies higher rates. - Given fixed exchange rate constraints, monetary tightening may be required even absent excess inflation to address reserve pressures. ### Annex I — Operationalization of an NDA baseline (key points) - NDA growth is a key policy variable to achieve a desired medium-term path for NFA because NFA can only increase if NDA grows more slowly than base money. - The BCEAO can influence NDA via refinancing, outright bond purchases, or direct loans. - Underlying base money (currency in circulation and required reserves) historically grew faster than nominal GDP: - Over 2013–2022, nominal GDP grew by 90 percent; currency in circulation grew by 136 percent; required reserves grew by 245 percent. - The baseline NDA path combined with assumptions about deposit growth and private sector credit can estimate the sustainable capacity of the WAEMU banking system to finance governments. - Illustrative balance-sheet dynamics: - T0: NFA + NDA = MB. - T1: NFA ↔ + NDA ↑ = MB ↑ (initial liquidity injection increases excess reserves). - T2: NFA ↓ + NDA ↔ = MB ↓ (drawdown of excess reserves to finance imports leads to decline in NFA and MB). - The baseline NDA exercise promotes policy coherence and clarifies that securing external stability is a joint responsibility of monetary and fiscal authorities. *International Monetary Fund — WEST AFRICAN ECONOMIC AND MONETARY UNION (excerpts from the chapter).* ### 1. The WAEMU’s financial system is dominated by banks, which had total assets of CFAF ### The WAEMU’s financial system is dominated by banks, which had total assets of CFAF 64 trillion—or 58 percent of regional GDP—at end-2022 ### Overview - Total banking sector assets: CFAF 64 trillion—or 58 percent of regional GDP—at end-2022. - Banking sector share of the financial system: around 72 percent (based on 2020 data); other financial institutions (microfinance, insurance, and pension funds, as well as securities custodians) account for around 28 percent. - Number of credit institutions at end-2022: 155; of which 132 were banks. - Geographic concentration of bank assets: Côte d’Ivoire 34 percent; Senegal 19 percent. - Regional banking groups: 34 groups holding nearly 85 percent of banking sector assets. - Composition of bank ownership capital: unaffiliated domestic private and public banks—four-fifths and one-fifth of banks’ capital respectively. - Public majority-owned banks: 13 banks (public ownership over 50 percent of total capital) holding 10 percent of banking assets and 13 percent of banking capital. ### Bank business model and funding structure - Asset composition at end-2022: - Loans to non-financial corporations: about 58 percent of banking assets (mostly short to medium-term). - Securities: 35 percent (mostly issued by WAEMU sovereigns and held to maturity). - Other assets: 7 percent. - Funding sources: mainly short-term deposits and recourse to refinancing from the regional central bank (BCEAO). - Market structure: segmentation between banks with excess liquidity (no BCEAO refinancing need) and banks with structural liquidity deficits (significant reliance on BCEAO refinancing). - Interbank market: shallow and concentrated on transactions among members of banking groups. - Deposit composition (2021 data): large corporations 40 percent; households 37 percent; public sector 12 percent. - Depositor concentration: five largest depositors account for 25 percent of deposits; largest depositor averages 10 percent of total deposits. - Deposit type structure (June 2022): sight deposits 49 percent; term deposits 20 percent; other deposits 3 percent; interbank loans 7 percent; loans from BCEAO 11 percent; equity and reserves 10 percent. ### Prudential reforms and regulatory framework - New prudential framework in force since 2018 introduced macroprudential instruments: - Countercyclical capital buffer (CCyB) - Capital conservation buffer - Systemic capital buffer - Borrower-based measures for real estate lending - Transition to Basel II/III: completed in 2023, except for introducing liquidity requirements and Pillar II capital and liquidity surcharges. - BCEAO decision: to double the minimum share capital of banks to CFAF 20 billion. - 2023 regional banking law measures: - Extended scope to payment institutions, electronic money institutions, bank holding companies and financial companies. - Strengthened approval procedures and conditions for banking activity. - Designated responsible macroprudential authority, outlining its status and power. - Incorporated Islamic finance and macroprudential supervision. - Strengthened supervision of banking groups on a consolidated basis. - Outlined arrangements for early intervention, resolution, and liquidation measures. - Support measures: progress on banking supervisor’s independence and resources through amendments to the Annex to the Convention governing the Banking Commission. ### Credit risks and trends - Private sector bank credit growth: 14.2 percent in 2022 and 10.3 percent in 2023. - Credit gap for the union: stabilized at around a modest 1 percent in 2022 (based on BIS credit-to-GDP gap estimates using a Hodrick-Prescott one-sided filter with λ=400,000). - Credit gap: negative in Benin, Niger, and Togo. - Credit-to-GDP trend determination: Hodrick-Prescott one-sided filter with λ=400,000; shaded area in figures represents the part exceeding trend by more than 2 percentage points. - Risks from rapid lending expansion: potential credit risk accumulation due to weak economic diversification, information asymmetries on debtors, and structural constraints. ### Asset quality, provisioning, and capital adequacy - Gross NPL ratio for WAEMU banks: 8.4 percent in 2022; increased to 8.7 percent by June 2023. - Country-level NPLs noted as elevated: Niger 16.1 percent; above WAEMU average in Guinea-Bissau, Mali, and Senegal. - Loan loss provisioning rates: improved from 63.7 percent in 2010 to 68 percent in 2022; cross-country range from 39.6 percent in Niger to 80.2 percent in Burkina Faso. - Average bank capital adequacy ratio (CAR) for WAEMU: around 13 percent at end-2022 (exceeds regulatory minimum of 11.25 percent). - Country capital outliers: - Guinea-Bissau: CAR at - 11.6 percent in June 2023. - Togo: CAR at 6.4 percent in June 2023 (below regulatory minimum). - Profitability: return on assets (ROA) persistently around 1.2–1.5 percent in recent years (increasing); system profitability lags peers. - Pandemic impact: COVID-19 had no significant effect on system profitability. ### Concentration risks - Sectoral concentration of loan portfolio (2022): - Retail, wholesale trade, restaurants and hotels; manufacturing; and other services: 63.5 percent of total. - Agriculture lending: 3 percent of bank loans to the private sector. - Exposure concentration to private borrowers: - Median largest exposure ≈ 49 percent of regulatory capital. - Nearly 65 percent of banks (62 out of 96) have their three largest exposures exceeding all their capital. - Regulatory large exposure limit: 35 percent of Tier 1 capital (many banks non-compliant). - Funding base concentration: deposit base skewed toward large amounts; top 5 depositors 25 percent of deposits; largest depositor about 10 percent. ### Liquidity risks - Liquid assets at end-2022: about 24 percent of total assets (heterogeneity across countries: Benin 12.3 percent; Mali 31.6 percent). - Trend: banks’ liquid assets have been declining in recent years; liquid asset positions decreasing. - Reliance on BCEAO refinancing: increasing; several banks persistently depend on central bank funding. - Secondary market conditions: illiquidity of secondary markets for government securities and high deposit concentration hamper banks’ ability to mitigate liquidity shocks. - Net own liquidity definition: banks' own financing sources (deposits and reserves) minus uses (domestic credit). ### Interest rate risks - Business-model vulnerability: banks’ net income and asset valuation can be adversely impacted by a high-interest rate environment due to: - Rapid pass-through to funding costs for wholesale-funded banks. - Slow pass-through to income because of fixed-rate loans. - Potential for higher loan losses as borrowers face higher borrowing costs. - Depreciation in bond and debt security values as interest rates rise. - WAEMU-specific exposures: - Increased share of government securities on balance sheets, typically longer maturity than funding. - Higher refinancing costs expected to impact net interest margins; yields on assets expected to rise gradually given long duration of government securities—typically held to maturity. - Competition for deposits could push deposit costs higher amid decreased access to low-cost funding. - Tightening financial conditions and deepening bank-sovereign nexus could adversely affect banks if high inflation expectations and declining foreign reserves require BCEAO to hike interest rates or maintain them at a high level for an extended period. ### Systemic assessment and remaining vulnerabilities - Systemic vulnerability indicators: generally low per heatmap analysis, but pockets of weakness persist. - Main ongoing vulnerabilities: credit, concentration, liquidity, and sovereign risks, particularly with a rising sovereign–bank nexus. - Key reform priority: effective implementation of recent reforms in line with 2022 FSAP recommendations to enhance macroprudential policy effectiveness and banking supervision frameworks. - Supervisory and regulatory levers highlighted: completion of Basel II/III transition (except liquidity and Pillar II surcharges), doubling of minimum share capital to CFAF 20 billion, and 2023 banking law enhancements. *Prepared by IMF staff; extracted from the document text provided.* ### 15. However, potential valuation losses on sovereign securities due to rising yields are ### 1wauea2024002 - 15. However, potential valuation losses on sovereign securities due to rising yields are ### Interest rate and valuation risk in banks' sovereign portfolios - Outstanding stock of sovereign bond securities issued during FRFA and held by banks in mid-June 2023: CFAF 8 trillion. - These securities represent around one-third of WAEMU banks’ sovereign exposures. - Average residual maturity: 3.5 years. - Estimated average yield under current market conditions: about 7.5 percent. - Yield at issuance (average): 5.7 percent. - Change in yield since issuance: 1.8 percentage points higher. - Share of securities held for trading purposes: less than 1 percent of the securities portfolio, implying limited potential valuation losses for banks holding such securities. - WAEMU FSAP 2022 interest rate stress-test base scenario inflation: 2 percent over the period. - Adverse scenario peak inflation: rising to 7 percent before decreasing. - Under the adverse scenario (highest risk), ROA could contract by up to 2.5 percentage points. - Under the adverse scenario, capital ratios could decline by as much as 8 percentage points. - Estimated capital needs under the adverse scenario: approximately 1.5 percent of regional GDP. ### Sovereign-bank nexus: exposures, drivers, and concentration - Public debt-to-GDP ratio rose from 44.8 percent in 2019 to 59.1 percent in 2022. - Bank exposures to public debt instruments (including securities and direct loans) at end-2022: 38 percent of total banks’ assets (from 30 percent at end-2019). - Factors contributing to increased sovereign exposure: - Rapid expansion of the regional market for government securities mainly purchased by WAEMU banks. - Increasing financing needs during the pandemic. - Preferential (zero) regulatory risk weight treatment of sovereign debt. - Relatively lower perceived risk of public versus private assets. - Limited availability of alternative safe collateral. - National bias in bank sovereign securities portfolios (as of June 2022): securities issued by the state where banks reside ranged from 4 to 19 percent of assets, depending on country. - Ivoirian banks: sovereign exposure significantly concentrated in securities issued by the Côte d'Ivoire government. - Securities issued by governments of Côte d’Ivoire and Burkina Faso represent the second-largest shares in banks’ security portfolios. - Large holdings concentrated in medium-sized banks: 40 banks accounting for 45 percent of the banking system's assets hold government securities representing 20 to 40 percent of their respective assets and have the lowest solvency ratios. - A few banks (representing 7 percent of banking system’s assets) hold government securities of more than 50 percent of their assets and show high solvency ratios. - Banks’ claims on the public sector at end-2022: 21.7 percent of GDP (up from 14.2 percent at end-2019). - Claims on the private sector: grew from 22.8 percent of GDP before the pandemic to 24.7 percent as of 2022. ### Maturity mismatches and funding risks - Banks buy securities with relatively long maturities and generally hold them to maturity, while relying on short-term funding (including BCEAO short-term funding). - Resulting risks: - Increased maturity mismatches in bank balance sheets. - Greater asset-liability mismatch risk. - Risk of contraction in interest rate margins should interest rates rise. - Limited market options to hedge these risks. ### Stress test scenarios and results (WAEMU FSAP 2022) - Simulation scenario: default by sovereign issuers on their short-term domestic debt maturities (outstanding maturities due by end-2022). - Outstanding debt maturing by 2022 represented 34 percent of total outstanding securities at end-September 2021 (range: 20 percent in Togo to 48 percent in Niger). - Number of banks (of 100 included) that would not have sufficient capital buffers under sovereign default scenarios: - Default by Côte d'Ivoire: almost 50 banks. - Default by Senegal: 7 banks. - Default by Togo: 11 banks. - Default by Niger: 16 banks. - Default by Mali: 13 banks. - Default by Burkina Faso: 13 banks. - Default by Benin: 9 banks. - Default by Guinea-Bissau: 6 banks. - Aggregate bank capital losses due to contagion from all sovereign defaults in the WAEMU: could reach 3.6 percent of the 2021 regional GDP. - Maximum capital loss associated with a Côte d'Ivoire default: 1.7 percent of the regional GDP. - Capital losses from defaults in Burkina Faso, Niger, and Mali: about 0.4 percent of regional GDP each. - Capital losses from defaults in Senegal, Togo, and Benin: about 0.2 percent of regional GDP each. - Capital losses from default in Guinea-Bissau: about 0.06 percent of regional GDP. - Additional total amount of capital needed to cover contagion risk from common sovereign exposures (based on capital buffers at that time): 1.4 percent of regional GDP. - Additional capital needs by defaulting sovereign: - Côte d'Ivoire: up to 0.8 percent of regional GDP. - Guinea-Bissau: 0.04 percent of regional GDP. - (Other sovereigns fall between these values as indicated in Figure 13.) ### Credit crowding-out and macrofinancial feedbacks - Rapid expansion of sovereign debt exposure could crowd out private sector credit in the future despite the simultaneous increase in private claims to GDP through 2022. - Interconnectedness channels that amplify vulnerabilities: - Exposure channel: direct holdings of government debt, potential market value declines, collateral impacts, and tightened capital constraints. - Safety net channel: government guarantees to banks may be limited if sovereign distress reduces government support capacity. - Macroeconomic channel: weaker sovereign balance sheet elevates borrowing costs, may require fiscal consolidation (tax increases or expenditure reductions), increases policy uncertainty, and can crowd out private credit. ### Risk differentiation across WAEMU sovereigns - Côte d’Ivoire’s sovereign rating: BB- (highest in the region). - Published IMF debt sustainability analyses indicate: - Overall debt sustainability risk is high in Guinea-Bissau. - Other WAEMU member countries face a medium risk. - Benin, Côte d'Ivoire, and Senegal generally have access to international capital markets, with average spreads in the performing bond category. ### Policy recommendations and prudential measures - Strengthen buffers and contain sovereign exposure by: - Using concentration limits. - Introducing positive risk weights on sovereign holdings. - Discouraging excessive risk concentrations by applying Pillar 1 or 2 capital surcharges. - Caution: avoid unintended consequences such as a significant decrease in liquidity, bond market pressures, or other undesirable macrofinancial dynamics. - Develop the domestic institutional and retail investor base to diversify demand for government securities and mitigate the sovereign-bank nexus. - Specific Pillar 2 recommendation: - Calibrate an additional capital requirement to discourage banks' excessive concentration of sovereign exposures. - Calibration should be nonlinear, with the requirement increasing gradually beyond a minimum concentration threshold based on a bank’s exposure to a specific sovereign relative to its risk-weighted assets. ### Conclusions and systemic assessment - Banking assets account for almost three quarters of total financial sector assets and amount to over half of WAEMU's GDP. - WAEMU banks face: - High portfolio concentration. - Limited capital and liquidity buffers. - Relatively persistent nonperforming loans. - Substantial sovereign exposures. - While banks remained stable through COVID-19 supported by BCEAO liquidity and supportive policies, vulnerabilities have been increasing: - Concentration, contagion, and interest rate risks are rising, partly linked to high sovereign exposures. - The banking sector remains heterogeneous in solvency, risk exposures, and performance. - Systemic risks from the sovereign-bank nexus are elevated and could potentially threaten financial stability, especially given: - Elevated fiscal vulnerabilities and limited access to international financing. - Contractionary monetary policy and tighter financial conditions. - Regional insecurity and geopolitical tensions that could exacerbate macro-financial stability risks. - Increased holdings of sovereign debt by banks could limit banks' capacity to extend private credit. *Source: WEST AFRICAN ECONOMIC AND MONETARY UNION — INTERNATIONAL MONETARY FUND (excerpts from the WAEMU FSAP 2022 chapter).* ### 38. While the financial sector has remained resilient in the face of recent shocks, the ### 1wauea2024002 - 38. While the financial sector has remained resilient in the face of recent shocks, the ### Financial sector resilience and recent regulatory reforms - Significant regulatory progress in 2023: new statutes for the banking and microfinance sectors adopted by the WAEMU Council of Ministers. - Supervisory framework improvements: - More risk-oriented supervision. - Increased supervisory resources. - Supervisor’s independence statutorily assured. - Prudential regulation enhanced and aligning with Basel II/III standards; implementation ongoing. - BCEAO decision to double the minimum share capital of banks to help promote resilience within the banking system and enhance financial stability. - Despite improvements, pockets of vulnerabilities persist; authorities should remain vigilant and be prepared to act if vulnerabilities intensify. ### Policy recommendations to strengthen system resilience (from WAEMU FSAP 2022) - Imposed measures to consider: - Imposing extra capital requirements within the Basel Pillar 2 framework to address interest rate and concentration risks. - Ensuring the full operationalization of the banking resolution framework. - Introducing new measures to reduce the excessive reliance of certain banks on BCEAO refinancing. - Improving the monitoring of maturity mismatches and interest rate risk. - Implementing Basel-type liquidity ratios to enhance resilience to liquidity shocks. - Adopting measures to mitigate balance sheet risks. - Considering the activation and implementation of the broad-based capital (CCyB) tool in the event of an increase in cyclical risks. - Authorities’ ambitious regulatory reform has consolidated the prudential base and established conditions for stronger supervision and more effective macroprudential policy. ### Macroprudential measures in use (key calibrations and dates) - Countercyclical capital buffer (CCyB): - Regulatory ceiling: no more than 2.5% of total RWAs. - Activation criteria determined by BCEAO instruction. - January 2018. - This rate is currently 0%. - Capital conservation buffer (CCoB): - Framework same as Basel III; permanent CET1 buffer. - Phase-in path and effective rates: - Effective January 1, 2018: 0.625%. - Effective January 1, 2019: 1.25%. - Planned increase to 1.875% as of January 1, 2020 was delayed; remained at 1.25% end-2020. - Effective January 1, 2021: increased from 1.25% to 1.875%. - Effective January 1, 2022: increased from 1.87% to 2.5%. - January 2022. - If annual required levels are not met, banks face an earnings conservation requirement based on the CET1 ratio. - Limit on leverage ratio: - Minimum leverage ratio of 3% (Tier 1 core capital to total exposures). - Systemically important banking institutions (SIBIs) may face a higher leverage ratio. - January 2018. - Limit on distributions (based on CET1 ratio): - CET1 between 5% and 5.625%: retain at least 100% of distributable profits. - CET1 between 5.625% and 6.25%: retain at least 80%. - CET1 between 6.25% and 6.875%: retain at least 60%. - CET1 between 6.875% and 7.5%: retain at least 40%. - CET1 7% or above: retain 0%. - January 2018. - Capital surcharges for systemically important institutions: - List of SIBIs adopted March 27, 2020. - Capital buffer target set to 1% effective March 27, 2020 with transitional provisions: - effective June 30, 2021: 0.40%; - effective June 30, 2022: 0.70%; - effective June 30, 2023: 1%. - June 2022. - Liquidity tools: - Provisional liquidity ratio (liquid and marketable short-term assets up to three months over short-term current liabilities or commitments by signature). - April 2018. - Household sector capital requirements: - Retail exposures: risk weight of 75%. - Residential property eligible for 35% weight if: - debt service coverage ratio must not exceed 40%; - LTV ratio must not exceed 90%. - January 2018. - Corporate sector capital requirements: - Risk weights between 20% and 150% for corporate exposures. - LTV ratio must not exceed 90% to be eligible for commercial real estate weighting of 75% under Pillar 1. - January 2018. - Limits on foreign exchange positions: - Banks not allowed to maintain open foreign exchange positions because of surrender requirement, but BCEAO dispensations allow working balances up to the equivalent of 5% of total customer demand deposits. - January 2018. - Additional risk weights on exposures between financial institutions: - If a financial institution fails to comply with solvency ratios: exposure weighted at 250%. - If an institution has negative capital: exposure deducted from capital (weight of 1250%). - January 2018. ### Regulatory treatment of banks’ sovereign exposures - No explicit regulatory restrictions on bank lending—direct and indirect—to sovereigns under current BCEAO Prudential framework. - Large exposures framework excludes sovereigns; large exposure limit to a single counterparty set at 25 percent of Tier 1 capital (exposures equal to or above 10 percent of Tier 1 capital) (PF:451, PF:457); regulator (BCEAO) may introduce concentration limits for sovereigns (PF:460) but has not done so. - Minimum capital requirements (Pillar 1) assume 0 percent risk weighting for sovereign exposures in local currency (PF:117). - For WAEMU Eurobonds and exposures to other sovereigns in the banking book, risk-weighting ranges from 0 percent to 150 percent depending on external rating (PF:115). - WAEMU FSAP 2022 recommendations: - Targeted additional capital surcharges for banks most exposed to sovereign concentration risk (short-term priority), feasible under Pillar 1 or Pillar 2. - Recommend concentration limits for assets under BCEAO’s collateral framework to encourage diversity of eligible assets for refinancing; these recommendations are under consideration by BCEAO and the Banking Commission-CBU. ### Default treatment and the Niger regulatory forbearance scenario - Default treatment for sovereign exposures: - Classification as non-performing occurs after 180 days of default (Ins.26:8 and PF:155), compared with standard 90 days; provisioning is optional (Ins.26:16). - Once classified as non-performing, risk weighting jumps from 0 to 100 percent (if provision coverage is at least 20 percent) or to 150 percent (if provision coverage is smaller than 20 percent) for the uncovered portion (PF:157). - Box 1 — Temporary Regulatory Forbearance for Niger Sovereign Securities: - On January 22, 2024 BCEAO issued regulatory forbearance exonerating Niger securities from classification as “non-performing” after 180 days to forestall adverse effects on bank capitalization; intended as temporary until political impasse resolved. - Only securities subject to forbearance: accounting for 88 percent of total bank exposure to Niger sovereign. - Direct loans account for 12 percent of total bank exposures to Niger (mostly held by Nigerien banks) with no spillovers beyond affected loans. - BCEAO conducted stress tests to identify banks most exposed; identified banks to be instructed on capital preservation measures (such as dividend withholding) and subjected to intensified supervision. - In absence of forbearance, exposures not serviced by Niger would have been classified as non-performing after 180 days, causing risk weight jumps (0 percent to at least 100 percent, likely to 150 percent) and reducing capital adequacy ratios via higher RWAs and provisioning impacts. - As of end-2023, over 80 percent of Niger debt issued through the auction segment of the regional sovereign security market (UMOA-Titres) was held in other WAEMU countries and by the BCEAO. - By February 5, 2024, Government of Niger accumulated CFAF 300 billion (about US$480 million, 2.9 percent of GDP) of arrears on debt service. - In 2024, CFAF 265 billion is due in debt service (of which CFAF 216 billion principal, and CFAF 49 CFAF interest payments). - Niger government debt service arrears started on July 31, 2023. - On February 24, 2024, ECOWAS Commission issued a decision to lift most sanctions (notably economic and financial ones) on Niger with immediate effect. *Prepared from the specified IMF chapter content.* ### References ### References ### Bibliographic citations - Athanasios Orphanides and Simon (November 2022). “The Unreliability of Output-Gap Estimates in Real Time.” The Review of Economics and Statistics, Vol. 84, No. 4. - Bank for International Settlements (2014). Basel Committee on Banking Supervision – Standards – Supervisory framework for measuring and controlling large exposures - Bank for International Settlements (March 2014). Quarterly Review. - Bank for International Settlements (2017).” The regulatory treatment of sovereign exposures,” BCBS Discussion Paper: December 2017. - Bank for International Settlements (2021). Voluntary disclosure of sovereign exposures. - Bank for International Settlements (2022). Basel Committee on Banking Supervision - Calculation of RWA for credit risk CRE20- Standardised approach: individual exposures. - Christian Castro, Ángel Estrada and Jorge Martínez (2016). “The Countercyclical Capital Buffer in Spain: An Analysis of Key Guiding Indicators.” Bank of Spain Working Paper No. 1601. - Deghi, Andrea and Fendoglu, Salih and Tabarraei, Hamid and Iyer, Tara and Xu, Yizhi and Yenice, Mustafa (2022). “The Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pandemic.” IMF Working Paper No. 22/223. - Dell'Ariccia, Giovanni and Laeven, Luc A. and Popov, Alexander A., and Ferreira, Caio and Jenkinson, Nigel and Martin, Alberto and Minoiu, Camelia (2018). “Managing the Sovereign-Bank Nexus. “ IMF Departmental Paper No. 18/16. - Global Financial Stability Report (April 2022), “Chapter 2: The Sovereign-Bank Nexus in Emerging Markets: A Risky Embrace”. - International Monetary Fund (2022). “West African Economic and Monetary Union Financial System Stability Assessment.” IMF Country Report No. 22/136. - Mathias Drehmann and Kostas Tsatsaronis (March 2014), “The credit-to-GDP gap and countercyclical capital buffers: questions and answers.” BIS Quarterly Review. - Rochelle M. Edgea and Ralf R. Meisenzahl (December 2011). “The Unreliability of Credit-to-GDP Ratio Gaps in Real Time: Implications for Countercyclical Capital Buffers.” International Journal of Central Banking. - S&P Global Ratings (2023). “Fallout from Niger Coup on Other WAMEU Members' Creditworthiness Should Remain Contained.” Bulletin: August 1, 2023. ### Climate trends in the WAEMU — key findings - Temperatures have been rising in the region, particularly starting from the 1980s; average temperatures during 2017-2021 were higher by 0.4-0.9 Celsius in all WAEMU countries compared to long-run averages since the 1900s. - There were 232 climate-related disasters in WAEMU over 1966-2022; about 65 percent (151 out of 232) took place since 2000, and 35 percent during 1966-1999. - Frequency of events: about 7 disasters per year in the region since the 2000s versus around 2 per year pre-2000. - Types of events: droughts and floods represent 218 out of 232 events. - Severity: about two-thirds of disasters (150 out of 232) estimated to affect the lives and livelihoods of more than 10,000 people. - Coverage: all countries except Guinea-Bissau experienced more than 15 events since 1966. - Data caveat: climate-related disaster data are generally subject to underreporting. ### Macro-criticality of climate change — impacts and projections - Exposure and dependence: - Around 53 percent of the WAEMU population is estimated to depend on agricultural employment; rates are particularly high for Burkina Faso, Mali and Niger. - Agriculture contributes 26 percent to the region’s GDP. - Productivity and growth impacts: - Evidence (Dell et al. 2012): a 1 Celsius increase in temperatures is associated with a 3-percentage points reduction in agricultural production. - Analysis for sub-Saharan Africa: monthly economic activity would decline by 1 percentage point if temperatures exceed the long-run average by 0.5 Celsius. - Projected GDP losses by 2050 without adaptation: 7 percent in Burkina Faso, 11 percent in Mali, and 12 percent in Niger. These three countries represent about 30 percent of regional GDP, corresponding to a 3 percent GDP loss in the WAEMU from those countries alone. - Climate change estimated to lead to around 30-40 percent loss in agricultural productivity in WAEMU countries (Ortiz-Bobea et al. 2021). - Food security and inflation: - Around 47 percent of the WAEMU population faced insufficient food consumption in 2022-23. - Around 9 percent of the WAEMU population (about 11 million people) estimated to be either facing extreme food crisis or at risk as of mid-2023. - Evidence (IMF 2020): food insecurity intensifies by 5–20 percentage points following floods or droughts. - Disruptions to agricultural production can add to inflationary pressures on food products, a major contributor to overall inflation. - Fiscal and external balances: - Climate-related shocks lead to a persistent decline in economic growth by around 1 percentage points in sub-Saharan Africa (IMF 2020). - Post-disaster dynamics: lower government revenues, increased spending for infrastructure damage and social/health needs, raising risks to fiscal sustainability and the need to rebuild fiscal buffers. - External positions: foreign assistance or remittances rarely fully offset declines in agricultural exports and increased imports for reconstruction; countries experience increases in current account and fiscal deficits following climate-related disasters (IMF 2020). - Social and development effects: - Long-lasting effects on growth via damaged infrastructure and potential undermining of financial development where the financial sector depends on climate-sensitive sectors. - Poverty and income inequality can worsen given limited buffers, low education, lack of social safety nets, and limited healthcare (Islam and Winkel 2017). - Gender disparities likely worsen; burden of disasters likely falls on women (UNDP 2014). - Climate shocks can lead to migration, local conflicts, and social unrest (Diallo and Tapsoba 2022). - Disruptions to accumulation of human capital from deaths, malnutrition, or lower school enrollment pose a drag on development (Caruso et al. 2023). ### Climate adaptation and financing — findings and policy options - Distinction of measures: - Mitigation: reducing greenhouse gas emissions and alleviating impacts of existing greenhouse gases (e.g., carbon taxes, emissions trading, forestation). - Adaptation: building resilience (address exposure and vulnerability) and enhancing coping mechanisms (e.g., disaster relief). - Mitigation options for WAEMU (examples): - Introducing carbon taxes, phasing out energy subsidies, transforming energy sources to green ones, reforestation, and regulations to restrict investment in polluting capital. - Policy choice should align with Nationally Determined Contributions (NDCs) and development objectives. - Note: evaluate risks to the economy and financial sector from such measures (Sever and Perez-Archila 2021). - Emphasis on adaptation: - WAEMU accounts for about 0.4 percent of global greenhouse gas emissions but is at substantial risk of humanitarian crises led by climate change. - WAEMU countries show low performance on adaptation dimensions and high vulnerability and limited readiness. - Rapid implementation of adaptation policies can promote short-term economic growth and help accumulate resources for mitigation. - Costs and constraints: - Adaptation costs in sub-Saharan Africa estimated around 2-3 percent of regional GDP on average each year over the next decade; cost of inaction is estimated to be larger (IMF 2020). - WAEMU faces tight financial conditions, pressures on public and external balances, and ongoing security and political issues that constrain allocation to adaptation without crowding out spending in education and health. - Financing instruments and recommendations: - Financing options include (i) concessional financing, (ii) private finance via climate-linked debt instruments, and (iii) climate-related insurance products (Belianska et al. 2022, IMF 2023). - Development partners should expand support beyond disaster relief toward building resilience and coping mechanisms, including insurance products. - Development partner–financed resilient infrastructure estimated to achieve the same welfare level as frequent disaster relief at at least a 30 percent lower cost (Cantelmo et al. 2019). - Climate finance from the international community should be additional to current aid flows. - International financial institutions can help unlock financing for adaptation via instruments (loans, guarantees) and by reducing investment risk. *WEST AFRICAN ECONOMIC AND MONETARY UNION — INTERNATIONAL MONETARY FUND.* ### 11. Climate financing in the WAEMU remains much lower than the needs, and is ### 11. Climate financing in the WAEMU remains much lower than the needs, and is ### Climate finance needs and current flows - Total estimated cost to implement nationally determined contributions (NDCs) in the WAEMU over the medium-term: $79 billion (encompassing both adaptation and mitigation). - This corresponds to about 39 percent of the 2023 regional GDP. - Country range: between 21 to 70 percent of the 2023 GDP across the member states. - Climate finance flows to the WAEMU remain limited relative to needs: - About $3.6 billion in 2020. - Almost 90 percent of climate finance flows in 2020 were from public sources (multilateral development finance institutions, bilateral funding, and other donors), according to the June 2023 Technical Report by SPARC. ### Dominance of public sources and need to mobilize private finance - Dominance of public sources points to the need for new mechanisms to mobilize private investment, potentially at the regional level. - Possible approaches to mobilize private climate finance: - Making use of green finance. - Bolstering local and regional debt markets. - De-risking approaches (i.e., via blending public and private sector finance). - Debt-for-nature swaps. - Role of development institutions: - Multilateral development banks and development finance institutions can design and implement innovative financial instruments to provide risk absorption capacity and to leverage private sector investment (IMF 2022). - IMF’s Resilience and Sustainability Facility reforms (so far for Benin and Senegal, with Cote d’Ivoire in the pipeline) also aim to attract more private climate finance flows to the region. - Note on data and tracking: - Tracking private climate finance is subject to challenges, as explained by the Climate Policy Initiative (CPI). ### Adaptation measures, linkages to economic outcomes, and policy priorities - Building awareness of links across adaptation and economic outcomes is a first step for WAEMU governments to develop comprehensive strategies. - Examples of adaptation and resilience-enhancing measures: - Improved seeds, insecticide, fertilizer, irrigation, and reliable access to electricity and water. - Better access to finance to provide financial buffers to the most vulnerable. - Telecommunication services to improve access to early warning systems. - Robust housing and sanitation. - Improving social safety nets (e.g., for poorer households and small and medium enterprises). - Evidence on impacts: - Such efforts are found to reduce the likelihood of post-shock food insecurity in sub-Saharan Africa up to 30 percentage points (IMF 2020). - Institutional and macroeconomic measures: - Strong institutions should support enforcement and effectiveness of regulations addressing weather sensitivity of infrastructure and production. - Climate-related stress tests can assess risks from climate change in the financial system. - Macroeconomic policies and structural reforms to create fiscal space, build external buffers and promote economic diversification (e.g., addressing high reliance on agriculture) can help avoid forgoing other development needs while limiting and mitigating effects of climate shocks. ### Regional cooperation and coordination recommendations - Effective adaptation is a continuous process of identifying climate risks, planning adaptation, implementing measures, and monitoring/evaluating (UNFCCC 2020); operationalizing this requires coordination across government ministries and development partners. - Regional (WAEMU-level) actions that can support adaptation and climate finance mobilization: - Develop regional guidelines on appropriate institutional and legal frameworks and clarify roles/responsibilities for adaptation and mitigation bodies; complement with capacity building at the WAEMU level to accelerate national implementation. - Consider regional regulations and directives for climate-resilient public investment management standards. - Use regional initiatives to overcome data limitations that impede identifying and forecasting climate-related risks and vulnerabilities. - Establish a standardized methodology at the WAEMU level to assess the magnitude and sectoral distribution of climate finance needs. - Share technologies, expertise, knowledge, and institutional practices across member countries to increase efficiency and effectiveness of adaptation measures. - Facilitate digitalization across the region to help farmers use early warning systems and improve access to financial resources for adaptation. - Pursue reforms for greater economic diversification and deeper regional and global trade integration (particularly for agricultural inputs and products), combined with resilient storage and transport infrastructures, to provide opportunities for the private sector and incentivize climate-resilient investment in agriculture (Baptista et al. 2022). - Develop regional markets for agricultural products to help lower food prices and improve food security in the WAEMU. ### Key regional social and human-capital indicators relevant to resilience and adaptation - Maternal mortality rate in the WAEMU: 405 (per 100,000 births) versus 184 in LMICs. - Adolescent fertility rate in the WAEMU: 119 (births per 1,000 women ages 15-19) versus 40 in LMICs. - Education indicators (WAEMU versus LMICs): - Primary school female gross enrollment rate: 89 percent versus 105 percent. - Secondary school female enrollment rate: 41 percent versus 76 percent. - Tertiary female enrollment rate: 7 percent versus 31 percent. - These education and health gaps constrain resilience and the ability of women and households to adapt to climate shocks. *Source: Chapter 11, “Climate financing in the WAEMU remains much lower than the needs, and is ...”, WEST AFRICAN ECONOMIC AND MONETARY UNION, INTERNATIONAL MONETARY FUND.* ### 6. The WAEMU appears to outperform LMICs regarding female labor force participation, ### 6. The WAEMU appears to outperform LMICs regarding female labor force participation, ### Labor market participation and gaps - Female labor force participation (females ages 15 and above, ILO modeled): WAEMU ~54 percent; LMICs 34 percent. - Gender gap in labor force participation (male minus female participation rates): WAEMU 20 percentage points; LMICs 39 percentage points. - Caveat: higher participation in WAEMU coexists with large informality and part-time work, which are typically less secure, less stable and pay less. - Structural frictions noted: gender-based segregation, lack of higher education, limited skills, limited career prospects, and wage gap. ### Business ownership and wage outcomes - Share of businesses with at least one female owner in the WAEMU: ~21 percent (World Bank Enterprise Surveys). - Gender wage gap (average monthly earnings, ILO data): men earn about 43 percent higher than women in the WAEMU. - Implication: low female business ownership and high gender wage gap reflect disparities in entrepreneurship, positions of power, and likely the large gender gap in higher education; these gaps are linked to wider income inequality, poverty rates, and spending on children’s health and education. ### Financial inclusion and legal rights - Account ownership (female): WAEMU ~34 percent; LMICs 60 percent. - Account ownership gap (male minus female): WAEMU 15 percentage points; LMICs 6 percentage points. - Law score (World Bank WBL index, 0-100): WAEMU 72; LMICs 69. Interpretation: women have around 72 percent of the economic rights enjoyed by men in the WAEMU. - Noted legal shortfalls: equal pay provisions, equal economic rights for spouses, fair treatment of parents with a child, equal asset ownership rights, discrimination in access to credit and hiring, domestic violence protections. - Emphasis on strengthening de jure–to–de facto link: laws must be implemented in practice to improve gender equality in outcomes. ### Empirical association between gender inequality and growth - Regression results (Table 1): coefficient on GII (t-1) - LMICs: -4.05*** (1.25) - WAEMU: -11.57** (4.84) - Observations: LMICs 1210; WAEMU 232. - R-squared: LMICs 0.15; WAEMU 0.26. - Interpretation: higher gender inequality is negatively associated with economic growth in both LMICs and the WAEMU. ### Estimated economic gains from improving gender equality - If the median WAEMU country in 2021 reaches the median of LMICs regarding gender equality (a 0.15-point decline in GII), boost to per capita growth rate: about 1.7 percentage points on average. - If the WAEMU achieves the same amount of decline in GII as observed from 1990 to 2021 (about 0.1 points), predicted higher growth rate: 1.2 percentage points on average. - Local projections (Jorda 2005): cumulative boost in real GDP per capita of around 8 percentage points over a 10-year period for a 0.1-point decrease in GII. - Model and empirical estimates from literature: - Malta et al. (2019b) for Senegal: GDP can increase up to 10 percent if gender disparities in education and labor market are addressed. - Ouedraogo and Gomes (2023) for Niger: bridging education gaps can boost GDP by around 11 percent. - Cuberes and Teignier (2016) (five WAEMU countries, GDP gains): Burkina Faso (18 percent), Côte d’Ivoire (11 percent), Mali (11 percent), Niger (31 percent), Senegal (17 percent). - Pennings (2022): closing gender-based gaps in labor markets could increase WAEMU per capita GDP by at least about 18 percent in the long-run; country estimates: Senegal 26 percent, Mali 20 percent, Côte d’Ivoire 18 percent. - IMF WAEMU Selected Issues Paper 2019: GDP growth can increase by about 0.2-0.5 percentage points if gender-based disparities are brought to levels observed in several African and Asian benchmark countries. ### Policy conclusions and recommended priorities - Overall conclusion: despite progress, significant gender-based disparities remain and hold the region back; addressing these can unlock large economic gains. - Recommended policy priorities (paragraph 13): - (i) improving accessibility of health services for women; - (ii) increasing access and quality of education for girls, ensuring their stay in school and entry into employment after education; - (iii) achieving a greater and more effective participation of women in the workforce; - (iv) promoting women’s financial inclusion; and - (v) reforming the laws to level the playing field for women and men. - Emphasis on comprehensive, country-specific assessments coordinated at WAEMU level and setting a roadmap. ### Existing regional and national initiatives - Regional: - WAEMU Commission: adopted a 10-year Gender Strategy in 2018 with two pillars—developing frameworks for gender mainstreaming and supporting initiatives for women’s empowerment; aims include training to raise awareness and guidelines for gender budgeting; launched a network to support women entrepreneurs (operations limited by constrained resources). - BCEAO: Financial Inclusion Strategy adopted by the Council of Ministers in 2016 emphasizing women’s access to financial services; Regional Financial Education Program to improve financial literacy of women and girls. - National examples: - Côte d’Ivoire: launched a program allocating financial support and agricultural equipment and inputs to women in food production; steps to facilitate women’s access to health services; policies to improve women’s financial inclusion. - Senegal: implementing gender budgeting for 7 years; accounting for gender impact in public investment strategy; planning to increase social spending targeting women; addressing girls’ transition from primary to secondary education; providing training and credit to female entrepreneurs. - Benin: implementing gender budgeting; initiatives addressing gender gaps in tax code, strengthening legal protections against gender-based violence, expanding women’s access to health services, improving women’s political representation, and keeping girls in school (e.g., free secondary education). - Togo: enacted legislative reforms improving women's rights (social protection, inheritance, criminal law) and implementing gender budgeting reforms with IMF technical assistance. - Niger: adopted a new National Gender Policy aiming to close gender disparities in primary and secondary education enrollment by 2027. - Mali: introduced gender quotas in public agencies and worked with women's rights organizations to increase women’s participation in decision-making. - Burkina Faso: engaged in gender budgeting since 2014 and mainstreamed gender issues since the 2018 budget circular. ### Complementarities and risks from shocks - Policy complementarities matter: labor market measures without closing tertiary education gaps, or school retention programs without addressing adolescent fertility and childcare, will have limited effect. - Legal autonomy, public education campaigns, and coordinated policies increase effectiveness of interventions. - Recent shocks exacerbate gender disparities and increase urgency: - Covid-19: disproportionate effect on women’s employment; school closures increased girls’ dropouts. - Climate change: more frequent/larger climate-related disasters worsen inequalities (women have limited resources, more unpaid care duties, lower education, higher exposure in agriculture). - Security challenges: Burkina Faso, Mali and Niger had 2.7 million internally displaced persons (IDPs) in those three states; conflicts and forced migration likely widen gender disparities and increase gender-based violence. - Call to action: timely, holistic approach at WAEMU level to accelerate policies supportive of gender equality. *Source: 1wauea2024002 - Chapter section on gender outcomes and policies (WAEMU).* ### References ### 1wauea2024002 - References ### Works on COVID-19 and gender - Alon, Titan, Matthias Doepke, Jane Olmstead-Rumsey, and Michèle Tertilt. “The impact of COVID-19 on gender equality.” No. w26947. National Bureau of Economic Research, 2020. - Flor, Luisa S., Joseph Friedman, Cory N. Spencer, John Cagney, Alejandra Arrieta, Molly E. Herbert, Caroline Stein et al. "Quantifying the effects of the COVID-19 pandemic on gender equality on health, social, and economic indicators: a comprehensive review of data from March, 2020, to September, 2021." The Lancet 399, no. 10344 (2022): 2381-2397. - United Nations (UN). 2020. “Policy Brief: The Impact of COVID-19 on Women.” United Nations Entity for Gender Equality and the Empowerment of Women (UN Women). ### Labor market, employment, and informality - Bertay, Ata Can, Ljubica Dordevic, and Can Sever. "Gender Inequality and Economic Growth: Evidence from Industry-Level Data." International Monetary Fund Working Papers 2020, no. 119 (2020). - Cuberes, David, and Marc Teignier. “Aggregate effects of gender gaps in the labor market: A quantitative estimate.” Journal of Human Capital 10, no. 1 (2016): 1-32. - International Labour Organization. 2018. “Women and Men in The Informal Economy: A Statistical Picture”. - Malta, Vivian, Lisa L. Kolovich, Angelica Martinez, and Marina Mendes Tavares. “Informality and gender gaps going hand in hand”. No. 2019-112. International Monetary Fund, 2019a. - Malta, Vivian, Angelica Martinez, and Marina Mendes Tavares. “A Quantitative Analysis of Female Employment in Senegal.” No. 2019-241. International Monetary Fund, 2019b. - Pennings, Steven Michael. "A Gender Employment Gap Index (GEGI): A Simple Measure of the Economic Gains from Closing Gender Employment Gaps, with an Application to the Pacific Islands." World Bank (2022). - Sever, Can. "Gendered laws and labour force participation." Applied Economics Letters 30, no. 19 (2023): 2681-2687. DOI: 10.1080/13504851.2022.2103078. - Sahay, Ratna, and Martin Cihak. “Women in Finance: a Case for Closing Gaps.” International Monetary Fund Staff Discussion Notes No. 2018/005, 2018. - Ouedraogo, Rasmane, and David Stenzel. “The Heavy Economic Toll of Gender-Based Violence: Evidence from Sub-Saharan Africa.” International Monetary Fund, no 277 (2021). ### Education, fertility, and demographic impacts - McQueston, Kate, Rachel Silverman, and Amanda Glassman. "Adolescent fertility in low-and middle-income countries: effects and solutions." Center for Global Development Working Paper 295 (2012). - Schultz, T. Paul. "Why governments should invest more to educate girls." World Development 30, no. 2 (2002): 207-225. - Ouedraogo, Rasmané, and Diego Gomes. "Macroeconomic Gains from Closing Gender Educational Gaps in Niger." Selected Issues Papers 2023, no. 006 (2023). ### Gender equality, economic growth, and diversification - Gonzales, Christian, Sonali Jain-Chandra, Kalpana Kochhar, Monique Newiak, and Tlek Zeinullayev. “Catalyst for change: Empowering women and tackling income inequality.” International Monetary Fund Staff Discussion Note, no. 20, 2015. - Kazandjian, Romina, Lisa Kolovich, Kalpana Kochhar, and Monique Newiak. “Gender equality and economic diversification.” International Monetary Fund Working Paper No. 2016/140, 2016. - Kochhar, Kalpana, Sonali Jain-Chandra, and Monique Newiak, eds. “Women, work, and economic growth: leveling the playing field.” International Monetary Fund, 2017. - Pennings, Steven Michael. "A Gender Employment Gap Index (GEGI): A Simple Measure of the Economic Gains from Closing Gender Employment Gaps, with an Application to the Pacific Islands." World Bank (2022). - Sever, Can. “Legal Gender Equality as a Catalyst for Convergence.” International Monetary Fund Working Papers 2022, no. 155 (2022). ### Fragility, conflict, climate, and gender-based vulnerabilities - Buvinic, Mayra, Monica Das Gupta, Ursula Casabonne, and Philip Verwimp. "Violent conflict and gender inequality: An overview." The World Bank Research Observer 28, no. 1 (2013): 110-138 - United Nations Development Programme (UNDP). 2014. “Overview of linkages between gender and climate change.” Available at https://www.undp.org/publications/gender-and-climate-change-africa. - International Monetary Fund and World Bank. “Millennium Development Goals: Confronting the Challenges of Gender Equality and Fragile States.” in Global Monitoring Report. (2007). ### Regional and policy reports relevant to Western & Central Africa and WAEMU - International Monetary Fund. WAEMU Selected Issues Paper. “Sharing the Dividends of Growth”. Prepared by Hippolyte Weneyam Balima and Monique Newiak, no 91 (2019). - World Bank. “Advancing Gender Equality: A Regional Gender Action Plan for Western & Central Africa 2023-2027.” (2023). ### Methodology and quantitative tools - Jordà, Òscar. "Estimation and inference of impulse responses by local projections." American Economic Review 95, no. 1 (2005): 161-182. - Cuberes, David, and Marc Teignier. “Aggregate effects of gender gaps in the labor market: A quantitative estimate.” Journal of Human Capital 10, no. 1 (2016): 1-32. ### Other systemic and global reports - International Monetary Fund. "Annual Report." (2017). - World Bank. "World Development Report." (2012). - World Bank. “Levelling the Field: Improving Opportunities for Women Farmers in Africa.” (2014). - World Economic Forum. “The Global Gender Gap Report.” (2014). - OECD and International Labour Organization (2019), " Addressing the gender dimension of informality" in “Tackling Vulnerability in the Informal Economy”. Available at https://doi.org/10.1787/d1c75109-en. *References as listed in the source PDF "1wauea2024002 - References".* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1wauea2024002.pdf_