## Responding to Shocks and Maintaining Stability in the WAEMU

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---

### Introduction and context
- WAEMU membership: Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo.
- Monetary framework: CFA franc pegged to the euro; delivers price and exchange rate stability but limits countries’ ability to respond to asymmetric (idiosyncratic) shocks.
- Key constraints: limited capital mobility, shallow financial markets, limited fiscal transfer mechanisms at the regional level.
- Implication: With limited scope for monetary policy and absent regional fiscal transfers, national fiscal policy—and deeper financial integration—are central for shock absorption and preserving union stability.

### Business cycle synchronization (findings)
- WAEMU-wide business cycle synchronization: average correlation about 0.2 over 1980–2012.
- Country synchronization span:
  - Togo: about –0.2 (the least synchronized).
  - Mali: about 0.5.
  - Burkina Faso: about 0.6 (the most synchronized).
- Time evolution:
  - Synchronization low in the 1990s, increased in the 2000s, and decreased again in the most recent years (post-2007), possibly reflecting political instability in Côte d’Ivoire, Guinea-Bissau, and Mali.
- Geography and trade patterns:
  - Landlocked countries (Burkina Faso, Mali, Niger) tend to have higher business cycle correlation with the WAEMU aggregate.
  - Countries with stronger extrazone trade links (Benin, Senegal, Togo) tend to have lower correlation.
- Correlation with external areas:
  - Correlation with the euro zone has increased for many WAEMU countries in recent periods, with notable exceptions (Côte d’Ivoire, Togo).
  - Correlation with China remains limited on average, except for Guinea-Bissau and Senegal.

### Shocks convergence (supply and demand shocks)
- Methodology:
  - Structural VAR with Blanchard and Quah (1989) long-term restrictions to identify supply, real demand, and nominal shocks.
  - Dynamic state-space model with Kalman filter to estimate time-varying convergence (βt), where βt closer to zero indicates increasing convergence.
- Findings on supply shocks:
  - Supply shocks remain heterogeneous across WAEMU members.
  - Supply shocks have become more asymmetric (less convergent) in Burkina Faso, Mali, Niger, and Senegal over 1994–2012.
  - In other WAEMU countries, supply shocks have become more symmetric.
- Demand shocks: similar analysis shows higher symmetry of demand shocks in the WAEMU.

### Monetary policy: scope, transmission, and impact
- Scope for active monetary policy:
  - Some scope exists because of limited capital mobility.
  - Peg to the euro constrains exchange-rate–based responses to shocks.
- Transmission channels:
  - Bank lending channel is the most important transmission channel in the region.
  - Correlation of about 0.5 between policy rates and interbank market rates after one to four quarters.
  - Asset and interest rate channels are weak due to absence of secondary government debt market and relatively illiquid equity and real estate markets.
- Quantified impact on credit:
  - An increase of 100 basis points in the main monetary policy rate is estimated to decrease private credit growth by about 3 percentage points after one quarter and 4 percentage points after one year (noncumulative).
  - Reserve requirements are found not to affect credit growth in the short term.
  - An index combining changes in interest rates and reserve requirements shows a higher overall impact of monetary policy.

### Other smoothing mechanisms (channels and limitations)
- Main smoothing channels:
  - Private insurance via international capital markets (diversified portfolios or explicit insurance).
  - Saving and borrowing via international credit markets.
  - Private transfers (remittances) and official transfers (foreign aid).
  - Fiscal risk sharing across countries (intraunion transfers).
- Current status and limitations:
  - Financial sector is relatively shallow (limited interbank liquidity, underdeveloped secondary debt markets, illiquid equity and real estate markets).
  - Limited development of regional financial markets reduces effectiveness of market-based smoothing mechanisms.
  - Given limited monetary-policy effectiveness for asymmetric shocks, fiscal policy and deeper financial integration are emphasized as primary tools for shock absorption.

### Policy implications and recommendations (derived in text)
- Fiscal policy importance:
  - National fiscal policy is the main available instrument to address asymmetric shocks in the absence of regional fiscal transfers.
  - Preserving debt sustainability and union stability requires strong coordination of fiscal policies across WAEMU members.
- Market and institutional reforms to strengthen shock absorption:
  - Further development of the regional financial market to improve market-based smoothing mechanisms.
  - Improve access to financial services to enhance private smoothing (saving, borrowing, insurance).
  - Strengthen regional surveillance and mechanisms that foster fiscal discipline to reduce negative externalities and credibly limit bailout expectations.

### Box 2. Measuring the Effectiveness of Smoothing Mechanisms — Methodology
- Framework follows Asdrubali, Sorensen, and Yosha (1996).
- GDP disaggregation: gross national product (GNP), net national income (NI), disposable national income (DNI), and the sum of government consumption and private consumption (G+C).
- GDP decomposition for each WAEMU state i:
  - GDPi = GNPi + (N Ii − DNIi) + (DNIi − (C i + Gi))
- Ratios and interpretations:
  - GDPi/GNPi variation captures smoothing via international income transfers.
  - GNPi/NIi captures smoothing through capital depreciation or unilateral transfers (foreign aid).
  - NIi/DNIi captures smoothing through net international transfers and taxes.
  - DNIi/(G+C)i captures smoothing through total saving.
- Full smoothing definition: total consumption remains unchanged when GDP varies.
- Estimation approach:
  - Log differences and panel regressions produce identity: 1 = βm + βd + βg + βv + βs + βu.
  - Each β measures the incremental percentage of smoothing by the corresponding channel; βu measures the unsmoothed part.
  - β coefficients estimated via a system of independent panel regressions with time fixed effects αt.
  - Negative β values indicate amplification rather than smoothing.
- Data note: capital depreciation (equation 4) and net tax and transfers (equation 5) channels reported jointly because of data availability.

### Box 2. Measuring the Effectiveness of Smoothing Mechanisms — Empirical findings (WAEMU)
- Overall conclusion: Shock smoothing, although on the rise, remains limited in WAEMU countries.
- Unsmoothed share of shocks to GDP: about 83 percent in the recent period.
- Reported percentage contributions (Table 3) and t-statistics:
  - Factors income flows:
    - 1980–2010: 0.068**  [– 1.91]
    - 1980–94: 0.170  [0.39]
    - 1995–2010: 0.205***  [2.84]
  - Capital depreciation and net tax and transfers:
    - 1980–2010: 0.098  [– 1.27]
    - 1980–94: 0.138  [1.30]
    - 1995–2010: – 0.006  [– 0.04]
  - Saving — Public:
    - 1980–2010: 0.004  [0.90]
    - 1980–94: 0.261  [0.51]
    - 1995–2010: 0.151  [1.24]
  - Saving — Private:
    - 1980–2010: 0.055  [0.46]
    - 1980–94: 0.087  [0.61]
    - 1995–2010: – 0.179  [– 0.54]
  - Unsmoothed:
    - 1980–2010: 0.878***  [8.56]
    - 1980–94: 0.884***  [7.94]
    - 1995–2010: 0.830***  [2.83]
- Statistical significance notation: ***, **, * denote significance at 1%, 5%, 10% respectively.
- Interpretation:
  - Factor income (most likely remittances, shown to be countercyclical) is the main statistically significant smoothing mechanism in the recent period.
  - Net taxes and transfers and public and private savings do not have a statistically significant effect on consumption smoothing in the recent period.
  - Smoothing has modestly increased over the past decades.
- Reasons for limited smoothing:
  - (i) Limited access to credit markets, reducing scope for countercyclical fiscal policies.
  - (ii) Most aid flows tend to be procyclical.
  - (iii) Absence of significant risk-sharing mechanisms at the regional level.
- Data caveat: relative contributions vary with data coverage.

### Box 3. Estimating the Disciplining Effect of the Regional Debt Market — Objective, data, and methodology
- Objective: assess relationship between interest rates requested by investors on the regional market and sovereign fiscal behavior.
- Dataset: all WAEMU countries during 1997–2011. All data annual.
- Dependent variable: the average short-term annual interest rate a country is charged by the market.
- Estimation technique: Arellano-Bond dynamic panel estimator (controls for time-invariant country characteristics).
- Explanatory variables included:
  - Overall fiscal balance as a share of GDP.
  - General government’s debt-to-GDP ratio (domestic debt used).
  - Level of excess bank reserves in the region.
  - WAEMU overall fiscal balance-to-GDP ratio (for each country excluding that country’s own fiscal balance).
  - Inflation rate.
  - Political risk (composite index from International Country Risk Guide).

### Box 3. Key estimation results (selected coefficients and p-values)
- Overall balance to GDP:
  - Coefficients: – 0.153*** and – 0.0577
  - p-values: (0.001) and (0.274)
- Domestic debt to GDP:
  - Coefficients: 0.0944** and 0.103***
  - p-values: (0.013) and (0.006)
- Inflation:
  - Coefficients: 0.0608** and – 0.0201
  - p-values: (0.016) and (0.487)
- Excess reserves:
  - Coefficients: – 0.787*** and – 1.290***
  - p-values: (0.000) and (0.000)
- WAEMU overall balance to GDP:
  - Coefficients: – 0.498*** and – 0.228*
  - p-values: (0.000) and (0.099)
- Political risk rating:
  - Coefficient: 0.0502***
  - p-value: (0.000)
- Lagged interest rate (L.Int Rate):
  - Coefficients: 0.736*** and 0.528***
  - p-values: (0.000) and (0.000)
- Observations: 52 and 47
- Note on significance: *p < 0.10, **p < 0.05, ***p < 0.01.
- Interpretation emphasized:
  - Supply and demand conditions (excess reserves and WAEMU fiscal balance) are among the most important determinants of yields in the WAEMU.
  - Results reflect a relatively shallow financial system: banks are the main investors, have limited alternative investment opportunities for excess reserves, and other investor types are quasi-absent.

### Box 3. Role of the regional surveillance framework
- Convergence criteria (first-order fiscal criteria):
  - Basic fiscal balance should record a surplus.
  - Overall public debt-to-GDP ratio should be less than 70 percent.
  - Governments should not accumulate arrears.
- Status and structural changes:
  - All WAEMU countries now have debt ratios way below the convergence criterion (70 percent), following substantial debt relief; Côte d’Ivoire reached the HIPC Initiative completion point in 2012.
  - The basic fiscal balance criterion has rarely been met; most countries repeatedly missed the target over the past 10 years.
- Excessive Deficit Procedure (EDP) and enforcement:
  - A deviating country is given 30 days to develop an adjustment strategy (which can include Union financial assistance).
  - Possible sanctions: publication of the country’s economic situation, withdrawal of Union assistance, recommendation to the BCEAO to review intervention policy, and suspension of financial support.
  - Procedure limitations: no clear timeline for corrective measures, no specification of mitigating circumstances, no monetary value of sanctions, no clear process if adjustment fails; financial sanctions have never been implemented.
  - Article 71 of the WAEMU Treaty allows unanimous WAEMU Council exemption from meeting part or all convergence criteria in exceptional circumstances.

### Box 3. Strengthening surveillance and market discipline — findings and policy proposals
- Deepening the regional market:
  - Expected effect: increased market discipline as sovereigns rely more on market financing and pricing improves with broader participation.
  - Complementary measures: improve information quality and availability for market pricing; enhance banks’ analytical capabilities.
  - Supervisory consideration: introduce a nonzero risk weight for government paper in financial institutions’ capital adequacy calculations.
- Debt ceiling reconsideration:
  - Current ceiling: 70 percent of GDP.
  - Suggested level: lower the ceiling to around 50 percent of GDP (suggested for countries with CPIA index lower than 3.75).
  - Guidance: treat the ceiling as a debt level to avoid reaching, not as an optimal level.
- Fiscal balance criterion redesign:
  - Issue: current definition excludes foreign-financed capital expenditure, which excludes a substantial source of debt accumulation and discriminates among financing sources.
  - Proposal: consider an overall deficit target to better control debt accumulation and avoid distortions.
  - Implementation challenge: setting an overall deficit ceiling that ensures debt sustainability while allowing countercyclical policy.
    - Euro-area approach: target the structural (cyclically adjusted) balance — may be difficult in WAEMU due to unclear business cycles and data constraints.
    - Alternative example: assume nominal GDP steady-state growth = 7 percent (5 percent real growth + 2 percent inflation). A deficit of 3.5 percent stabilizes the debt ratio at 50 percent. The ceiling could be set slightly below this level, with limited temporary exceedance allowed under exceptional circumstances.
- Monitoring and enforcement improvements:
  - WAEMU Commission faces difficulties collecting required information (e.g., data on fiscal arrears not easily available); timeliness may be an issue.
  - Improvements needed in availability, quality, and timeliness of fiscal information for effective regional surveillance.
  - Fundamental enforcement issue: member states’ readiness to accept strong oversight and possible peer sanctions — a political matter to be addressed over the medium term.
  - Proposed first step: increased transparency and dissemination of regional and national fiscal outcomes.

### Box 4. Various Approaches to Assess the Real Effective Exchange Rate — Methods
- Macroeconomic balance approach: estimates exchange rate adjustment necessary to close gap between equilibrium current account balance (based on fundamentals) and underlying current account projected over the medium term; uses WAEMU country-specific trade elasticities estimated by Tokarick (2010).
- Equilibrium real exchange rate (ERER) approach: estimates equilibrium real exchange rate as a function of medium-term fundamentals (e.g., terms of trade, openness, productivity differentials).
- External sustainability method: compares underlying current account balance with the balance that stabilizes net foreign assets at its 2011 level (48 percent of GDP).

### Box 4. Key quantitative results and conclusion
- Reported assessment results (Table 9) indicate relatively small deviations from equilibrium, both positive and negative, suggesting no significant misalignment.
- Table 9 (as reported) highlights:
  - Macrobalance: −3.9 −6.1 3.6
  - ERER: −5.2 (reported as “. . .  . . .−5.2”)
  - External sustainability: −3.7 −6.3 4.1
  - Note: “–” indicates undervaluation.
- Conclusion: The three approaches produce results that show relatively small deviations from equilibrium, both positive and negative, which suggest no significant misalignment.

*Source: IMF staff chapter “Shocks and Shocks Absorption in the WAEMU”; IMF staff estimates and analysis as presented in the supplied content.*

### 1. Monetary policy—Africa, West. 2. Fiscal policy—Africa, West.

### Responding to Shocks and Maintaining Stability in the WAEMU

### Introduction and context
- WAEMU membership: Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo.
- Monetary framework: CFA franc pegged to the euro; delivers price and exchange rate stability but limits countries’ ability to respond to asymmetric (idiosyncratic) shocks.
- Key constraints: limited capital mobility, shallow financial markets, limited fiscal transfer mechanisms at the regional level.
- Implication: With limited scope for monetary policy and absent regional fiscal transfers, national fiscal policy—and deeper financial integration—are central for shock absorption and preserving union stability.

### Business cycle synchronization (findings)
- WAEMU-wide business cycle synchronization has been modest: average correlation about 0.2 over 1980–2012.
- Country synchronization span reported: from about –0.2 (Togo, the least synchronized) to about 0.5 (Mali) and 0.6 (Burkina Faso, the most synchronized).
- Time evolution: synchronization low in the 1990s, increased in the 2000s, and decreased again in the most recent years (post-2007), possibly reflecting political instability in Côte d’Ivoire, Guinea-Bissau, and Mali.
- Landlocked countries (Burkina Faso, Mali, Niger) tend to have higher business cycle correlation with the WAEMU aggregate; countries with stronger extrazone trade links (Benin, Senegal, Togo) tend to have lower correlation.
- Correlation with external areas:
  - Business cycle correlation with the euro zone has increased for many WAEMU countries in recent periods, with notable exceptions (Côte d’Ivoire, Togo).
  - Business cycle correlation with China remains limited on average, except for Guinea-Bissau and Senegal.

### Shocks convergence (supply and demand shocks)
- Methodology summary:
  - Structural VAR with Blanchard and Quah (1989) long-term restrictions used to identify supply, real demand, and nominal shocks.
  - Dynamic state-space model with Kalman filter used to estimate time-varying convergence (βt), where βt closer to zero indicates increasing convergence.
- Finding on supply shocks:
  - Supply shocks remain heterogeneous across WAEMU members.
  - Supply shocks have become more asymmetric (less convergent) in Burkina Faso, Mali, Niger, and Senegal over 1994–2012.
  - In other WAEMU countries, supply shocks have become more symmetric.
- Note: Similar analysis shows higher symmetry of demand shocks in the WAEMU.

### Monetary policy: scope, transmission, and impact
- Scope for active monetary policy:
  - Some scope exists because of limited capital mobility.
  - Peg to the euro constrains exchange-rate–based responses to shocks.
- Transmission channels:
  - Bank lending channel is the most important transmission channel in the region.
  - Correlation of about 0.5 between policy rates and interbank market rates after one to four quarters.
  - Asset and interest rate channels are weak due to absence of secondary government debt market and relatively illiquid equity and real estate markets.
- Quantified impact on credit:
  - An increase of 100 basis points in the main monetary policy rate is estimated to decrease private credit growth by about 3 percentage points after one quarter and 4 percentage points after one year (noncumulative).
  - Reserve requirements are found not to affect credit growth in the short term.
  - An index combining changes in interest rates and reserve requirements shows a higher overall impact of monetary policy.

### Other smoothing mechanisms (channels and limitations)
- Main smoothing channels:
  - Private insurance via international capital markets (diversified portfolios or explicit insurance).
  - Saving and borrowing via international credit markets.
  - Private transfers (remittances) and official transfers (foreign aid).
  - Fiscal risk sharing across countries (intraunion transfers).
- Current status and limitations:
  - Financial sector is relatively shallow (limited interbank liquidity, underdeveloped secondary debt markets, illiquid equity and real estate markets).
  - Limited development of regional financial markets reduces effectiveness of market-based smoothing mechanisms.
  - Given limited monetary-policy effectiveness for asymmetric shocks, fiscal policy and deeper financial integration are emphasized as primary tools for shock absorption.

### Policy implications and recommendations (derived in text)
- Fiscal policy importance:
  - Fiscal policy at the national level is the main available instrument to address asymmetric shocks in the absence of regional fiscal transfers.
  - Preserving debt sustainability and union stability requires strong coordination of fiscal policies across WAEMU members.
- Market and institutional reforms to strengthen shock absorption:
  - Further development of the regional financial market to improve market-based smoothing mechanisms.
  - Improve access to financial services to enhance private smoothing (saving, borrowing, insurance).
  - Strengthen regional surveillance and mechanisms that foster fiscal discipline to reduce negative externalities and credibly limit bailout expectations.

*Source: IMF staff chapter “Shocks and Shocks Absorption in the WAEMU” from the provided PDF content.*

### Box 2 . Measuring the Effectiveness of Smoothing Mechanisms

### Box 2 . Measuring the Effectiveness of Smoothing Mechanisms

### Methodology
- The approach follows Asdrubali, Sorensen, and Yosha (1996).
- GDP is disaggregated into: gross national product (GNP), net national income (NI), disposable national income (DNI), and the sum of government consumption and private consumption (G+C).
- GDP decomposition (for each WAEMU state i) is expressed as:
  - GDPi = GNPi + (N Ii − DNIi) + (DNIi − (C i + Gi))
- Each ratio of these aggregates measures a specific smoothing mechanism:
  - GDPi/GNPi variation captures smoothing via international income transfers.
  - GNPi/NIi captures smoothing through capital depreciation or unilateral transfers (foreign aid).
  - NIi/DNIi captures smoothing through net international transfers and taxes.
  - DNIi/(G+C)i captures smoothing through total saving.
- Full smoothing of shocks occurs if total consumption remains unchanged when GDP varies.
- To measure each channel’s contribution, take logs and first differences of the decomposition, multiply each term by ∆ log GDPi, and divide cross-sectional variance in GDP by ∆ log GDPi to obtain:
  - 1 = βm + βd + βg + βv + βs + βu
- The β coefficients are estimated via a system of independent panel regressions:
  - Equation (3): Δ log(GNPit − GDPit) = αt + βm Δ log GDPit + εit
  - Equation (4): Δ log(GNPit − NIit) = αt + βd Δ log GDPit + εit
  - Equation (5): Δ log(NIit − DNIit) = αt + βg Δ log GDPit + εit
  - Equation (6.1): Δ log(DNIit − Gi) = αt + βp Δ log GDPit + εit
  - Equation (6.2): Δ log(DNIit + GCit − Gi) = αt + βs Δ log GDPit + εit
  - Equation (7): Δ log(CGit + GDPit) = αt + βu Δ log GDPit + εit
- Interpretation:
  - Each β measures the incremental percentage of smoothing achieved by the corresponding channel.
  - βu measures the part of the shock to GDP that is not smoothed.
  - β coefficients are not constrained; negative values indicate amplification rather than smoothing.
  - αt are time fixed effects.
- Note: Capital depreciation (equation 4) and net tax and transfers (equation 5) channels are reported jointly because of data availability.

### Empirical Findings (WAEMU)
- Overall conclusion: Shock smoothing, although on the rise, remains limited in WAEMU countries.
- A large share of shocks to GDP is not smoothed:
  - Unsmoothed share is about 83 percent in the recent period.
- Statistical significance and role of channels (see Table 3):
  - Factors income flows:
    - 1980–2010: 0.068**
    - 1980–94: 0.170
    - 1995–2010: 0.205***
    - t-statistics (in brackets): [– 1.91], [0.39], [2.84]
  - Capital depreciation and net tax and transfers:
    - 1980–2010: 0.098
    - 1980–94: 0.138
    - 1995–2010: – 0.006
    - t-statistics: [– 1.27], [1.30], [– 0.04]
  - Saving — Public:
    - 1980–2010: 0.004
    - 1980–94: 0.261
    - 1995–2010: 0.151
    - t-statistics: [0.90], [0.51], [1.24]
  - Saving — Private:
    - 1980–2010: 0.055
    - 1980–94: 0.087
    - 1995–2010: – 0.179
    - t-statistics: [0.46], [0.61], [– 0.54]
  - Unsmoothed:
    - 1980–2010: 0.878***
    - 1980–94: 0.884***
    - 1995–2010: 0.830***
    - t-statistics: [8.56], [  7.94], [2.83]
- Statistical notes:
  - Table 3 reports the percentage of smoothing achieved by each channel.
  - ***, **, * denote significance at 1%, 5%, 10% respectively.

### Interpretation and Drivers
- The main statistically significant smoothing mechanism in the recent period has been factor income (most likely remittances, shown to be countercyclical).
- Net taxes and transfers and public and private savings do not have a statistically significant effect on consumption smoothing in the recent period.
- Smoothing has modestly increased over the past decades.
- Reasons for limited smoothing in WAEMU:
  - (i) Limited access to credit markets, reducing scope for countercyclical fiscal policies (with possible adverse implications for investment volatility).
  - (ii) Most aid flows tend to be procyclical.
  - (iii) Absence of significant risk-sharing mechanisms at the regional level.
- Data caveat:
  - A relative contribution of each channel can vary as a function of data coverage.

*Source: IMF staff estimates*

### Box 3 . Estimating the Disciplining Effect of the Regional Debt Market

### Box 3 . Estimating the Disciplining Effect of the Regional Debt Market

### Objective, data, and methodology
- Objective: assess the relationship between interest rates requested by investors on the regional market and the fiscal behavior of sovereigns.
- Dataset: all WAEMU countries during 1997–2011. All data annual.
- Dependent variable: the average short-term annual interest rate a country is charged by the market.
- Estimation technique: Arellano-Bond dynamic panel estimator (controls for time-invariant country characteristics).
- Explanatory variables used:
  - (i) Fiscal variables: the overall fiscal balance as a share of GDP and the general government’s debt-to-GDP ratio (domestic debt used).
  - (ii) Level of excess bank reserves in the region.
  - (iii) WAEMU overall fiscal balance-to-GDP ratio (calculated for each country excluding the country’s own fiscal balance).
  - (iv) Inflation rate.
  - (v) Political risk (composite index from International Country Risk Guide).

### Key estimation results (Table 7)
- Overall balance to GDP:
  - Coefficients: – 0.153*** and – 0.0577
  - p-values: (0.001) and (0.274)
- Domestic debt to GDP:
  - Coefficients: 0.0944** and 0.103***
  - p-values: (0.013) and (0.006)
- Inflation:
  - Coefficients: 0.0608** and – 0.0201
  - p-values: (0.016) and (0.487)
- Excess reserves:
  - Coefficients: – 0.787*** and – 1.290***
  - p-values: (0.000) and (0.000)
- WAEMU overall balance to GDP:
  - Coefficients: – 0.498*** and – 0.228*
  - p-values: (0.000) and (0.099)
- Political risk rating:
  - Coefficient: 0.0502***
  - p-value: (0.000)
- Lagged interest rate (L.Int Rate):
  - Coefficients: 0.736*** and 0.528***
  - p-values: (0.000) and (0.000)
- Observations: 52 and 47
- Note on significance: *p < 0.10, **p < 0.05, ***p < 0.01.
- Interpretation emphasized in text:
  - Supply and demand conditions (excess reserves and WAEMU fiscal balance) are among the most important determinants of yields in the WAEMU.
  - Results reflect a relatively shallow financial system: banks are the main investors, have limited alternative investment opportunities for excess reserves, and other investor types are quasi-absent.

### Role of the regional surveillance framework
- Convergence criteria (first-order fiscal criteria):
  - Basic fiscal balance should record a surplus.
  - Overall public debt-to-GDP ratio should be less than 70 percent.
  - Governments should not accumulate arrears.
- Status and structural changes:
  - All WAEMU countries now have debt ratios way below the convergence criterion (70 percent), following substantial debt relief; Côte d’Ivoire reached the HIPC Initiative completion point in 2012.
  - The basic fiscal balance criterion has rarely been met; most countries repeatedly missed the target over the past 10 years.
- Excessive Deficit Procedure (EDP) and enforcement:
  - A deviating country is given 30 days to develop an adjustment strategy (which can include Union financial assistance).
  - Sanctions can include publication of the country’s economic situation, withdrawal of Union assistance, recommendation to the BCEAO to review intervention policy, and suspension of financial support.
  - The procedure does not specify a clear timeline for corrective measures, mitigating circumstances, the monetary value of sanctions, or how the process proceeds if adjustment fails; financial sanctions have never been implemented.
  - Article 71 of the WAEMU Treaty allows the unanimous WAEMU Council to exempt a member from meeting part or all convergence criteria in cases of exceptional circumstances.

### Strengthening the surveillance framework and market discipline — findings and policy proposals
- Deepening the regional market:
  - Expected effect: increased market discipline as sovereigns rely more on market financing and pricing improves with broader participation.
  - Complementary measures: improve information quality and availability for market pricing; enhance banks’ analytical capabilities.
  - Supervisory consideration: introduce a nonzero risk weight for government paper in financial institutions’ capital adequacy calculations.
- Debt ceiling reconsideration:
  - Current ceiling: 70 percent of GDP (set when debt ratios were much higher).
  - Suggested level: lower the ceiling to around 50 percent of GDP (level suggested by Bank and Fund staff for countries with low or medium quality of policies and institutions, i.e., CPIA index lower than 3.75).
  - Guidance: the ceiling should be treated as a debt level to avoid reaching, not as an optimal level.
- Fiscal balance criterion redesign:
  - Issue: current definition excludes foreign-financed capital expenditure, which:
    - Excludes a substantial source of debt accumulation.
    - Discriminates among financing sources, potentially disadvantaging regional financing.
  - Proposal: consider an overall deficit target to better control debt accumulation and avoid distortions.
  - Implementation challenge: setting an overall deficit ceiling that ensures debt sustainability while allowing countercyclical policy.
    - Euro-area approach: target the structural (cyclically adjusted) balance — may be difficult in WAEMU due to unclear business cycles and data constraints.
    - Alternative: set a deficit ceiling based on steady-state debt dynamics. Example provided:
      - Assume nominal GDP steady-state growth = 7 percent (5 percent real growth + 2 percent inflation).
      - A deficit of 3.5 percent stabilizes the debt ratio at 50 percent.
      - The ceiling could be set slightly below this level, with limited temporary exceedance allowed under exceptional circumstances.
- Monitoring and enforcement improvements:
  - WAEMU Commission faces difficulties collecting required information (e.g., data on fiscal arrears not easily available); timeliness may be an issue.
  - Improvements needed in availability, quality, and timeliness of fiscal information for effective regional surveillance.
  - Fundamental enforcement issue: member states’ readiness to accept strong oversight and possible peer sanctions — a political matter to be addressed over the medium term.
  - Proposed first step: increased transparency and dissemination of regional and national fiscal outcomes.

*Source: Central Bank of West African States; IMF staff estimates and analysis as presented in the supplied content.*

### Box 4.  Various Approaches to Assess the Real Effective Exchange Rate

### Box 4.  Various Approaches to Assess the Real Effective Exchange Rate

### Methods described
- Macroeconomic balance approach: estimates the exchange rate adjustment necessary to close the gap between the equilibrium current account balance, based on economic fundamentals, and the underlying current account projected over the medium term. The exchange rate adjustment is computed using WAEMU country-specific trade elasticities estimated by Tokarick (2010).
- Equilibrium real exchange rate (ERER) approach: estimates the equilibrium real exchange rate as a function of medium-term fundamentals (e.g., terms of trade, openness, productivity differentials).
- External sustainability method: compares the underlying current account balance with the balance that stabilizes net foreign assets at its 2011 level (48 percent of GDP).

### Key quantitative results (Table 9)
- Reported assessment results (as presented in Table 9) indicate relatively small deviations from equilibrium, both positive and negative, suggesting no significant misalignment.
- Table 9. WAEMU: Real Effective Exchange Rate Assessment (as reported)
  - CAB/GDP
  - REER
  - 1
  - NormUnderlying
  - Macrobalance −3.9−6.13.6
  - ERER   . . .  . . .−5.2
  - Ext. sustainability −3.7−6.34.1
  - Source: IMF staff estimates.
  - 1 “–” indicates undervaluation.

### Conclusion from the box
- The three approaches produce results that show relatively small deviations from equilibrium, both positive and negative, which suggest no significant misalignment.

*Source: IMF staff estimates; S. Tokarick, 2010, “A Method for Calculating Export Supply and Import Demand Elasticities,” IMF WP 10/180.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2013/_afr1307.pdf_