## _cr1108

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### Executive Summary — Major assessments and priorities
- Economy: average growth slowdown of 1 percent in 2009 and inflation below 2 percent; most WAEMU countries weathered the crisis because of limited global financial integration, favorable terms of trade, and Côte d’Ivoire’s post-conflict recovery.
- Public finance: government revenues held up well in most countries, but deficits increased by an average of 2 percent of GDP in 2009 due to higher capital and current spending.
- Monetary policy: the central bank adjusted its stance once second-round inflation risks from the 2007–08 food and fuel shocks had passed; it lowered its refinancing rate and provided significant direct credits and refinancing guarantees to governments.
- Economic outlook: growth is expected to return to pre-crisis levels in 2010, assuming a gradual global recovery.
- Exchange rate policy: despite eroded competitiveness and convergent but inconclusive indications of a modest exchange rate overvaluation, the Union is not at risk of external instability.
- Financial sector: weathered the crisis undamaged but is underdeveloped and not well supervised.
- Policy priorities: resist current spending pressure; prepare to tighten monetary policy if inflationary pressures reemerge.
- Government domestic arrears: BCEAO exceptional lending following the SDR allocation allowed reductions in outstanding arrears, but more is needed to avoid reemergence and strengthen fiscal discipline.
- Competitiveness: boost growth, create jobs, and reduce the cost of doing business to attract more FDI; priority on financial sector and WAEMU market integration.
- Financial stability: implement FSAP recommendations, improve compliance with prudential ratios, and develop risk-based prudential and financial crisis-resolution frameworks.
- Trade policy: promote regional integration with ECOWAS while resisting protectionist pressures.

### I. Economic policy responses and recent developments
- Zone-wide real GDP growth: estimated to have declined by just 1 percent in 2009, to 3 percent.
- Inflation: annual average harmonized CPI estimated to decline to 1.1 percent in 2009 from 7.4 percent in 2008; expected to remain close to the 2 percent target in 2010.
- External position and reserves:
  - Pooled international reserves maintained well above 5 months of import cover in 2009 in gross terms.
  - The SDR allocation represented half a month of imports.
  - Foreign exchange proceeds from a privatization in Mali represented a fifth of a month of imports.

### II. Fiscal developments
- Pre-crisis trends: deficits were rising before the global crisis due to subsidies, pre-election slippage (Benin), and capital spending tied to one-off revenues (Niger).
- Fiscal impact of the crisis:
  - All member countries except Guinea Bissau and Senegal experienced deteriorated fiscal deficits in 2009 compared to 2008.
  - Zone-wide fiscal deficit estimated to have risen to 3.7 percent of GDP in 2009 (including grants), from 2 percent in 2008.
- Revenues and expenditures:
  - Revenues remained broadly stable in most WAEMU countries in 2009.
  - Government expenditures increased from an average of 22½ percent of GDP in 2008 to 24½ percent in 2009.
- Role of fiscal policy: fiscal policy was appropriately eased in 2009, but not as a result of explicit countercyclical measures.

### III. Fiscal strategy and risks
- Medium-term stance:
  - Projections assume modest fiscal retrenchment beginning in 2010; aggregate retrenchment falls short of returning the regional primary fiscal deficit to its pre-2009 level.
  - No member country appears to face significant increased risks to debt sustainability under current projections.
- Revenue risks:
  - Risk of lower than expected tax revenues starting in 2010 due to volatile commodity prices and pending tax exemptions or reductions.
  - Cocoa prices projected to decline by over 30 percent in 2010.
  - WAEMU commission allowed countries to introduce a zero VAT rate on a limited number of goods, opening the way to tax shortfalls.
- Expenditure composition risks:
  - Central government wage bill increased as a share of GDP in all countries except Côte d’Ivoire and Niger.
  - Steep capital spending increases in countries like Benin may undermine quality of spending and spill over into 2010 and beyond.
- Staff recommendation: rebalance expenditure away from emergency food and fuel measures toward affordable social safety nets and investment, potentially through regional initiatives.

### IV. Policy discussions on fiscal stance
- Staff advice: tighten fiscal policy once recovery is confirmed or if inflationary or external pressures return.
- Countries at risk: Côte d’Ivoire, Guinea-Bissau, and Togo have not yet recovered a sustainable debt position or are still at medium risk of debt distress.
- Identified risks: pre-electoral spending pressures (Togo, Côte d’Ivoire, Burkina Faso in 2010, Benin in 2011) and large post-food/fuel-crisis spending programs could prolong deficits, increase arrears, crowd out private investment, and spur inflationary and external pressures.
- Authorities’ views:
  - Council of Ministers called for unwinding fiscal easing in its December 2009 communiqué.
  - BCEAO expressed concern about prolonged easing, market absorption capacity, and payment arrears.
  - WAEMU commission emphasized weighing macro stability against infrastructure bottlenecks.

### V. Monetary policy — stance, instruments, and operations
- Objective: BCEAO’s main objective is price stability, keeping inflation below 2 percent (aligned with ECB target).
- Inflation dynamics: WAEMU inflation more volatile than euro zone because of larger food share; core inflation (excluding food and fuel) is less volatile.
- Policy rate actions:
  - BCEAO increased policy rate twice (August 2006 and August 2008) to 4.75 percent.
  - In June 2009 BCEAO reduced the rate to 4.25 percent once inflation eased.
- Liquidity operations:
  - After December 2008, BCEAO injected substantial liquidity through weekly auctions; scaled down injections in Q2 2009.
  - Launched a one-month standing refinancing window at a fixed rate with no ceiling to meet structural bank needs.
- Reserve requirements:
  - In June 2009 BCEAO reduced reserve requirement ratio for banks in Benin, Mali, and Niger as part of unifying reserve requirements.
  - Average reserve requirement reduced from 7.5 to 6 percent; spread between maximum and minimum reserve requirements reduced from 12 to 6 percentage points.
- Interbank rate corridor: since June 2009 BCEAO steered interbank rates within the corridor between its policy rate and the marginal liquidity injection rate.
- BCEAO readiness: central bank signaled readiness to tighten monetary policy if needed in 2010 and to use all instruments to achieve a target inflation rate of 2.2 percent.

### VI. Domestic arrears — stock, causes, and exceptional measures
- Stock of arrears: estimated at CFAF 1,400 billion as of April 2009, equivalent to 4.3 percent of WAEMU GDP.
- Distribution: all WAEMU countries except Benin run domestic arrears; Togo and Guinea-Bissau have a disproportionate share.
- Causes: lack of coordination of fiscal and monetary policies, weak regional liquidity management, and weak public financial management.
- Impact: arrears harm private sector suppliers and threaten commercial banks’ balance sheets.
- WAEMU exceptional measures (September 2009):
  - Reversed 2003 suspension: BCEAO to lend the domestic currency equivalent of the Fund’s general SDR allocation for 10 years at 3 percent interest; loans amount to the equivalent of 1.5 percent of WAEMU GDP.
  - Made eligible for refinancing an equal amount of government bonds with a maturity of seven years issued for arrears clearance.
  - CFAF 700 billion injected in the regional economy from these efforts at year-end 2009.
- Specific tranche: 0.6 percent of GDP were issued under this initiative.
- Mission concerns:
  - Significant liquidity injections and refinancing by BCEAO may harbor inflationary potential if fiscal discipline is not restored and may weaken external position.
  - Risk that governments may use direct BCEAO financing for current expenditure or to substitute for other financing rather than reduce arrears.
- Policy recommendations to prevent reemergence:
  - WAEMU institutions should recommend governments adopt more realistic revenue projections and step up spending controls.
  - BCEAO should improve liquidity management and coordination in issuance of government papers so treasuries can meet liquidity needs promptly.
- Operational changes:
  - BCEAO moved to systematic liquidity projections based on autonomous factors, including WAEMU Treasuries’ needs.
  - November 2009 Council measures: BCEAO to collect annual government issuance plans and coordinate schedules; a review mechanism to be launched in Q1 2010 to share bond issuance experience.

### VII. Public financial management and institutional reform
- PFM weaknesses:
  - Inadequate budget procedures, weak ex-post controls, limited independence and capacity of parliaments and government accounting offices, and ineffective medium-term planning contributed to arrears.
- WAEMU PFM reform program:
  - WAEMU commission launched an ambitious PFM reform with Fund technical assistance.
  - In 2009 WAEMU countries adopted six regional PFM guidelines covering the budget cycle; most reforms to be effective by 2016.
  - Implementation supported by a multi-donor assistance and capacity-building program.
- Implementation priorities: country-specific programs with strong ownership and well-identified priorities; peer reviews to facilitate knowledge exchange.
- Conclusion: forceful implementation of WAEMU PFM guidelines would prevent reemergence of arrears.

### VIII. Financial sector development, soundness, and supervision
- Structural deficits:
  - Financial sectors less developed than rest of SSA: private credit remained below 20 percent of GDP; Ghana/Kenya/Nigeria surpassed 30 percent in 2008.
  - Access to bank services limited: about 5 percent of the population have access to a bank.
  - Capital markets underdeveloped: no secondary markets, low market capitalization, high fees; securities market dominated by government issuers.
- Soundness and supervision:
  - Sector resilient during the crisis; nonperforming loans significant but did not rise markedly; profitability unaffected broadly, though low in Benin.
  - Compliance with prudential requirements low; decline in 2009 linked to phased increase in minimum capital requirement.
  - Banking Commission expects compliance by year-end 2010 through mergers and acquisitions if necessary.
- Recommended actions:
  - Improve compliance with prudential regulations; upgrade legal and regulatory frameworks; establish crisis resolution framework; extend supervision to large microfinance institutions.
  - Prepare preventive contingency plans and bank restructuring strategies; act swiftly through recapitalization or devolution when severe vulnerabilities identified.
  - Accelerate institutional reform including divestiture of public sector holdings in banks; align prudential framework with best practices; upgrade to risk-based supervision and financial stability analysis; enforce minimum capital by year-end 2010.
- Observations: high number of prudential violations concentrated in small banks; larger and international banks account for a large share of deposits (40 percent of financial institutions hold 80 percent of deposits).

### IX. Competitiveness, trade policy, and regional integration
- Structural competitiveness constraints: frequent electricity outages, inadequate transportation system, and high cost of capital are the three most disruptive production factors.
- REER and export performance:
  - REER appreciated by 27 percent since 1994 devaluation; stood at 83 percent of its pre-devaluation value at end-2009.
  - WAEMU market share in world exports declined by 23 percent since 1999; rest of SSA increased share.
- FDI developments: annual FDI inflow grew from 2 percent of GDP in 2000 to 3.3 percent in 2008; projected to have reached the SSA average in 2009, driven by large mining projects.
- Trade agreements and risks:
  - Negotiation of a full EPA between the EU and West Africa ongoing; goods negotiations postponed several times; services expected to begin in 2010.
  - ECOWAS-wide CET would add a fifth band at 35 percent, higher than WAEMU CET maximum 20 percent.
  - EPA adoption could lead to revenue losses smoothed over 10–15 years and offset by EU financial compensation.
  - Risks of trade diversion from cheaper imports to more expensive EU or ECOWAS non-WAEMU products; mitigants include limiting product selection and duration.
- Regional plans:
  - REP launched in 2006: scale up integration-enhancing spending by CFAF 2900 billion (9 percent of 2009 GDP), of which about CFAF 2400 million covered by external assistance; 78 percent of REP resources programmed for infrastructure; 40 percent of resources secured by end-July 2009.
- Policy recommendations:
  - Minimize inflationary pressures; improve structural competitiveness by lowering transportation costs and ensuring reliable electricity; enforce business-friendly WAEMU rules that promote regional integration and competition; harmonize and modernize financial sector.

### X. External sustainability, REER assessment, and scenarios
- EREER findings:
  - Actual REER exceeded equilibrium REER by 3.9–11.3 percent in 2008 depending on method (Johansen and FMOLS/Pedroni).
- MB and ES findings:
  - Overvaluation implied by macroeconomic balance and external sustainability approaches ranges from 5.1 percent to 7.7 percent.
  - WAEMU CA deficit widened from 4.6 percent of GDP in 2002–2004 to 6.6 percent in 2009.
  - Staff projections: deficit would reach an average of 7.1 percent over the 2010–2014 period.
  - Balance of payments projections suggest CA deficit is financed without reserve depletion through increased capital inflows; projection assumes increasing inflows of net FDI.
- ES approach scenarios:
  - Baseline: stabilize NFAP at end-2008 level.
  - Alternative: net stocks of FDI and portfolio investment reach upper bound of low middle-income countries; under alternative scenario WAEMU NFA position will be -55 percent of GDP in the medium-term.
- Key methodological inputs:
  - Elasticity of current account to REER shocks used: -0.65 (from Tokarick).
- Interpretation:
  - REER overvaluation is modest and does not warrant radical adjustment given margin of error; risks include euro appreciation that could hurt competitiveness.

### XI. Staff appraisal and policy recommendations
- Macroeconomic stance:
  - Recovery prospects for 2010 are good, supported by 2009 easing and projected upturn in trade partners.
  - Inflation fell sharply in 2009; mild uptick projected in 2010 while official reserves kept stable.
  - Moderate risks: sluggish global economy and excessively accommodative policies could jeopardize competitiveness.
- Recommended sequencing:
  - Tighten economic policies once recovery is confirmed or if inflationary/external pressures return.
  - Fiscal adjustment should come first in countries less affected by the crisis or with unsustainable deficits, large domestic arrears, and financing constraints.
  - Monetary expansion in 2010 should not exceed nominal GDP growth; raising interest rates should not be precluded.
  - Improve liquidity management and coordinate issuance of T-bills and government bonds regionally to alleviate financing constraints and prevent arrears reemergence.
  - Unification of reserve requirements expected to help develop regional financial markets.
- Structural and institutional priorities:
  - PFM reforms to foster fiscal discipline and transparency; reassess roles of BCEAO and WAEMU commission in fiscal coordination; prioritize lowering cost of doing business, attracting FDI, integrating domestic markets, and developing financial sector.
  - Continue implementing FSAP recommendations and negotiate a balanced EPA with adequate financial compensation.

### XII. Key data highlights (selected exact figures)
- REER overvaluation range (2008): actual REER exceeded equilibrium REER by 3.9–11.3 percent.
- MB/ES implied overvaluation: 5.1 percent to 7.7 percent.
- WAEMU CA deficit: 4.6 percent of GDP in 2002–2004; 6.6 percent in 2009; projected average 7.1 percent over 2010–2014.
- REP: CFAF 2900 billion (9 percent of 2009 GDP) total spending; about CFAF 2400 million covered by external assistance; 78 percent for infrastructure; 40 percent of resources secured by end-July 2009.
- FDI inflows: 2 percent of GDP in 2000; 3.3 percent in 2008; projected to reach SSA average in 2009.
- Access to bank services: about 5 percent of the population.
- Private credit: below 20 percent of GDP in WAEMU; Ghana/Kenya/Nigeria surpassed 30 percent of GDP in 2008.
- Selected WAEMU projections and figures (Table 1, selected):
  - GDP at constant prices: 2009 = 2.8; 2010 projection = 3.9; 2011 = 4.8; 2014 = 5.6 (annual percentage change).
  - Consumer prices (BCEAO avg): 2009 = 1.2; 2010 = 2.5; 2014 = 2.3 (annual averages).
  - Gross domestic savings: 2009 = 14.4 percent of GDP; 2014 projection = 17.4 percent.
  - Gross domestic investment: 2009 = 20.2 percent of GDP; 2014 projection = 23.4 percent.
  - Government total revenue, excl. grants: 2009 = 17.5 percent of GDP; 2014 projection = 18.8 percent.
  - Government expenditure: 2009 = 24.6 percent of GDP; 2014 projection = 25.5 percent.
  - Overall fiscal balance, excl. grants: 2009 = -7.1 percent of GDP; 2014 projection = -6.7 percent.
  - Current account, incl. grants: 2009 = -6.9 percent of GDP; 2014 projection = -6.1 percent.
  - External public debt: 2009 = 29.1 percent of GDP; 2014 projection = 25.1 percent.
- REP financing and coverage: CFAF 2900 billion; about CFAF 2400 million by external assistance; 40 percent of resources secured by end-July 2009.
- At year-end 2009, CFAF 700 billion injected into the regional economy from arrears clearance efforts.

### XIII. BCEAO and banking sector aggregates (selected exact series)
- BCEAO reserves (selected points): 823 (2005 Sep), 651 (2005 Dec), 813 (2006 Sep), 649 (2006 Dec), 992 (2007 Sep), 878 (2007 Dec), 923 (2008 Sep), 973 (2008 Dec), 1,193 (2009 Sep).
- Net domestic assets (BCEAO): 3,868 (2005 Sep), 4,107 (2005 Dec), 4,324 (2006 Sep), 4,661 (2006 Dec), 5,167 (2007 Sep), 5,618 (2007 Dec), 5,999 (2008 Sep), 6,195 (2008 Dec), 6,816 (2009 Sep).
- Net credit to the economy (BCEAO): 3,669 (2005 Sep), 3,893 (2005 Dec), 3,929 (2006 Sep), 4,227 (2006 Dec), 4,434 (2007 Sep), 4,888 (2007 Dec), 5,121 (2008 Sep), 5,404 (2008 Dec), 5,657 (2009 Sep).
- Broad money (regional): 5,921 (2005 Sep), 6,305 (2005 Dec), 6,398 (2006 Sep), 6,976 (2006 Dec), 7,461 (2007 Sep), 8,301 (2007 Dec), 8,444 (2008 Sep), 9,020 (2008 Dec), 9,331 (2009 Sep).
- Commercial banks aggregate net foreign assets: 3,024 (2005 Sep), 3,090 (2005 Dec), 3,553 (2006 Sep), 3,629 (2006 Dec), 4,195 (2007 Sep), 4,338 (2007 Dec), 4,299 (2008 Sep), 4,288 (2008 Dec), 4,389 (2009 Sep).
- Cover ratio (memorandum): 117.8 (2005 Sep), 119.2 (2005 Dec), 118.1 (2006 Sep), 117.5 (2006 Dec), 114.3 (2007 Sep), 114.1 (2007 Dec), 111.0 (2008 Sep), 113.5 (2008 Dec), 110.0 (2009 Sep).

*Executive Summary (from the IMF staff report Executive Summary, _cr1108).*

### Executive Summary ......................................................................................................

### Executive Summary

### Major assessments — Challenges Going Forward
- Economy: With an average growth slowdown of 1 percent in 2009 and inflation below 2 percent, most WAEMU countries have weathered well the second crisis in three years because of limited global financial integration, favorable terms of trade, and Côte d’Ivoire’s post-conflict recovery.
- Public finance: While government revenues held up well in most countries, deficits increased by an average of 2 percent of GDP in 2009, pushed by higher capital and current spending.
- Monetary policy: The central bank adjusted its stance to changes in economic and liquidity conditions once the risks of second-round inflation effects of the 2007–08 food and fuel price shocks had passed. It lowered its refinancing rate and provided governments with significant direct credits and refinancing guarantees.
- Economic outlook: Growth is expected to return to pre-crisis levels in 2010, assuming a gradual global recovery.
- Exchange rate policy: Despite eroded competitiveness and convergent but inconclusive indications of a modest exchange rate overvaluation, the Union is not at risk of external instability.
- Financial sector: The financial sector weathered the crisis undamaged but is underdeveloped and not well supervised.
- Policy priorities: Key near-term challenges are to resist current spending pressure and prepare to tighten monetary policy if inflationary pressures reemerge.
- Government domestic arrears: The BCEAO’s exceptional lending to governments following the SDR allocation had allowed them to reduce outstanding arrears, but more is needed to avoid arrears reemerging and to strengthen fiscal discipline — including by improving regional liquidity management, better coordinating fiscal and monetary policies, and strengthening public finance management procedures.
- Competitiveness: Medium-term challenges include boosting growth, creating jobs, and reducing the cost of doing business to attract more FDI; priority should be given to the financial sector and the integration of WAEMU country markets.
- Financial stability: Member countries should continue implementing FSAP recommendations by improving compliance with prudential ratios and developing risk-based prudential and financial crisis-resolution frameworks.
- Trade policy: Promote regional integration with other ECOWAS countries while resisting pressures for more protection.

### I. Economic policy responses — The global crisis and other recent developments
- Zone-wide real GDP growth is estimated to have declined by just 1 percent in 2009, to 3 percent.
- Inflation: Compared to 7.4 percent in 2008, annual average increase in the union’s harmonized CPI is estimated to decline to 1.1 percent in 2009 and to remain close to the target of 2 percent in 2010.
- External position and reserves:
  - Pooled international reserves were maintained well above 5 months of import cover in 2009 in gross terms.
  - The SDR allocation represented half a month of imports.
  - Foreign exchange proceeds from a privatization in Mali represented a fifth of a month of imports.

### II. Fiscal developments — Government spending on the rise across the Union
- Pre-crisis trends: Deficits were already on the rise before the global crisis due to subsidies (2007–08 food and fuel crisis), pre-election slippage (Benin), and capital spending tied to one-off revenues (Niger).
- Fiscal impact of the crisis:
  - All member countries except Guinea Bissau and Senegal experienced deteriorated fiscal deficits in 2009 compared to 2008.
  - Zone-wide fiscal deficit is estimated to have risen to 3.7 percent of GDP in 2009 (including grants), from 2 percent in 2008.
- Revenues and expenditures:
  - Revenues are estimated to have remained broadly stable in most WAEMU countries in 2009.
  - Government expenditures are believed to have increased from an average of 22½ percent of GDP in 2008 to 24½ percent in 2009.
- Role of fiscal policy: Fiscal policy was appropriately eased in 2009, but not as a result of explicit countercyclical measures.

### III. Fiscal strategy — Strengthening revenue capacity and rebalancing expenditure
- Medium-term stance:
  - Projections assume a modest fiscal retrenchment beginning in 2010; aggregate retrenchment falls short of bringing the regional primary fiscal deficit back to its pre-2009 level.
  - No member country appears to face significant increased risks to debt sustainability under current projections.
- Revenue risks:
  - Risk of lower than expected tax revenues starting in 2010 due to volatile commodity prices and pending tax exemptions or reductions.
  - Cocoa prices are projected to decline by over 30 percent in 2010.
  - The WAEMU commission opened the way to tax shortfalls by allowing countries to introduce a zero VAT rate on a limited number of goods.
- Expenditure composition risks:
  - Central government wage bill increased as a share of GDP in all countries except Côte d’Ivoire and Niger; reversal will require firm regional resolve.
  - Steep capital spending increases in countries like Benin may undermine quality of spending and spill over into 2010 and beyond.
- Staff recommendation: Rebalance expenditure away from measures to mitigate the food and fuel crisis and toward affordable social safety nets and investment, potentially through regional initiatives.

### IV. Policy discussions on fiscal stance
- Staff advice: Tighten fiscal policy once recovery is confirmed or if inflationary or external pressures return.
- Countries at risk: Côte d’Ivoire, Guinea-Bissau, and Togo have not yet recovered a sustainable debt position or are still at medium risk of debt distress.
- Identified risks: Pre-electoral spending pressures (Togo, Côte d’Ivoire, Burkina Faso in 2010, Benin in 2011) and large post-food/fuel-crisis spending programs could prolong deficits, increase arrears, crowd out private investment, and spur inflationary and external pressures when 2009 favorable factors dissipate.
- Authorities’ views:
  - Council of Ministers called for unwinding the fiscal easing in its December 2009 communiqué.
  - BCEAO expressed concern about prolonged easing, market absorption capacity, and payment arrears.
  - WAEMU commission emphasized weighing macro stability against infrastructure bottlenecks (energy and transport).

### V. Monetary policy — Underlying conditions affecting policy
- Objective: BCEAO’s main objective is price stability, keeping inflation in the WAEMU zone below 2 percent (aligned with ECB target).
- Inflation dynamics: WAEMU inflation is more volatile than the euro zone because of larger food share in the harmonized CPI; core inflation (excluding food and fuel) is less volatile.
- Policy rate actions:
  - BCEAO increased its policy rate twice, in August 2006 and August 2008, to 4.75 percent in response to food and fuel-driven inflationary pressures.
  - In June 2009 the BCEAO reduced the rate to 4.25 percent once inflation eased; the ECB reduced rates later and by more.
- Interbank rates: Interbank interest rates tracked the BCEAO policy rate decline but remained substantially different from euro zone rates due to limited capital mobility.

### VI. Monetary policy stance — An appropriately accommodating stance
- Liquidity operations:
  - After December 2008, BCEAO injected substantial amounts of liquidity through weekly auctions; started scaling down injections in the second quarter of 2009.
  - Launched a one-month standing refinancing window at a fixed rate with no ceiling to respond to structural bank needs.
- Reserve requirements:
  - In June 2009 BCEAO reduced the reserve requirements ratio for banks in Benin, Mali, and Niger as part of unifying reserve requirements.
  - This reduced the average reserve requirement from 7.5 to 6 percent and the spread between the maximum and the minimum reserve requirements from 12 to 6 percentage points.
- Interbank rate corridor: Since June 2009 BCEAO has succeeded in steering interbank interest rates within the corridor between its policy rate and the marginal rate of liquidity injections, suggesting better transmission from the central bank.
- Liquidity injections: BCEAO reacted proactively to the financial crisis and provided liquidity as needed, including large injections during 2009.

### VII. Addressing the domestic arrears issue
- Stock of arrears: The stock of government domestic arrears is estimated at CFAF 1,400 billion as of April 2009, the equivalent of 4.3 percent of WAEMU GDP.
- Distribution: All WAEMU countries except Benin run domestic arrears; Togo and Guinea-Bissau have a disproportionate share of the total.
- Causes: Lack of coordination of fiscal and monetary policies, weak management of liquidity on the regional financial market, and weak public financial management.
- Impact: Arrears negatively affect private sector government suppliers, impair their ability to repay bank loans, and threaten the health of the financial sector.
- WAEMU exceptional measures (September 2009):
  - Reversed a 2003 decision to suspend central bank direct financing of member governments; BCEAO would lend the domestic currency equivalent of the Fund’s general SDR allocation for 10 years at 3 percent interest. These loans amount to the equivalent of 1.5 percent of WAEMU GDP.
  - Made eligible for refinancing an equal amount of government bonds with a maturity of seven years that would be issued for arrears clearance.
  - During the last quarter of 2009, government bonds for the equivalent of (text truncated in source).

### VIII. Financial sector and competitiveness priorities
- Financial sector: Weathered the crisis undamaged but remains underdeveloped and not well supervised.
- Priorities:
  - Implement FSAP recommendations: improve compliance with prudential ratios and develop risk-based prudential and financial crisis-resolution frameworks.
  - Promote financial sector development and market integration across WAEMU to support competitiveness, growth, job creation, and poverty reduction.
- Trade policy: Promote regional integration with other ECOWAS countries and resist protectionist pressures.

*Executive Summary (from the IMF staff report Executive Summary, _cr1108).*

### 0.6 percent of GDP  were issued under

### _cr1108 - 0.6 percent of GDP  were issued under

### Economic policy responses: Discussions on the monetary policy stance and domestic arrears
- 0.6 percent of GDP were issued under this initiative.
- The BCEAO is considering refinancing government paper used as a counterpart for specific country arrears clearance operations, including to commercial banks.
- The mission expressed concern about the macroeconomic impact of the exceptional measures taken in late 2009 to address the arrears:
  - Significant liquidity injections and refinancing of government paper by the BCEAO may harbor inflationary potential, especially if there is no return to fiscal discipline, and weaken the Union’s external position.
  - There is a risk governments may use direct BCEAO financing for current expenditure that leads to a more expansionary fiscal stance or for purposes other than reducing domestic arrears, such as to substitute for other types of financing.
- The recently adopted action plan to reduce government domestic arrears will improve the liquidity of the private sector and commercial bank balance sheets, but it does not guarantee an effective and durable reduction in domestic claims on government.
- Policy recommendations to prevent reemergence of arrears:
  - WAEMU institutions should recommend that governments adopt more realistic revenue projections and step up efforts to control spending.
  - The BCEAO should improve liquidity management and coordination in the issuance of government papers so country treasuries can cover their liquidity needs promptly and avoid payment delays.
- BCEAO monetary stance and instruments:
  - The BCEAO is ready to tighten monetary policy if need be in 2010.
  - The central bank underlined that it was willing to use all instruments to achieve its monetary targets for next year, to keep the inflation rate at 2.2 percent.
  - To limit monetary expansion, the BCEAO would reduce liquidity injections or cancel liquidity auctions, limit injection through the standing one-month facility, and, if needed, issue central bank bills.
- Staff views and response:
  - The mission agreed that short-term inflationary risks are remote but underlined longer-term risks of accommodating larger fiscal deficits, including through direct loans to governments backed by the general SDR allocation.
  - Staff called for vigilance on the part of the BCEAO should governments fail to implement fiscal restraint in 2010.

### Coordinating domestic policies: Regional liquidity management and forecasting
- November 2009 Council of WAEMU Economic Ministers measures to improve coordination of government bond issues and market liquidity:
  - The BCEAO will collect annual government issuance plans and discuss with national treasuries a schedule that ensures governments can access regional financial markets when they most need to during their budget implementation cycle.
  - A review mechanism will be launched in the first quarter of 2010 to share experience with bond issuance among member countries.
- BCEAO liquidity forecasting changes:
  - Moved from liquidity projections based on commercial banks' cash flow forecasts to a systematic liquidity projection exercise, based on the central bank’s projections of the autonomous factors of liquidity, including WAEMU Treasuries needs.
- The WAEMU authorities have moved to better manage liquidity.

### Coordinating domestic policies: Public financial management
- Inadequate budget procedures and institutions contributed to domestic arrears:
  - Weak rules and controls for budget execution eased recourse to unfunded spending commitments and extra-budgetary expenditures, directly contributing to the steep increase in domestic arrears in several countries.
  - Parliaments and Government Accounting Offices do not have the independence and the means for proper budget oversight.
  - Medium-term planning is rarely effective despite improvements in budget preparation and approval in several WAEMU countries.
  - Several WAEMU countries are considered to have stronger than average budget planning and negotiation capacity compared to the average SSA country (see Dabla-Norris, et al., 2010). However, capacity to plan fiscal policy over the medium term is low.
- WAEMU PFM reform program:
  - The WAEMU commission has launched, with Fund technical assistance, an ambitious program of PFM reform in the region.
  - In 2009 the WAEMU countries adopted six regional PFM guidelines, covering all aspects of the budget cycle; most reforms should be effective by 2016.
  - Implementation is facilitated by a multi-donor program of assistance and capacity-building for the region.
- Implementation priorities:
  - Progress on PFM reforms will depend on the design of country-specific programs with strong ownership and well-identified priorities.
  - Peer reviews could facilitate a more effective knowledge exchange between members and help accelerate change.
- Key conclusions:
  - Weak expenditure execution and ex-post controls facilitated accumulation of arrears.
  - Forceful implementation of the new WAEMU PFM guidelines would prevent the reemergence of arrears.

### Coordinating domestic policies: Fiscal and monetary policies in the region and the institutional reform
- Context and constraints:
  - The build-up of domestic arrears has put the spotlight on the intensity of fiscal pressures in WAEMU countries.
  - Suspension of direct central bank financing of governments since 2003 and the scheduled repayment of outstanding BCEAO advances to member countries have increased governments’ domestic financing needs.
  - The distribution of savings and investment across countries is uneven, providing a rationale for the development of a regional financial market.
- BCEAO statutes and Article 18:
  - The new statutes of the BCEAO, which go into effect soon, ban direct central bank financing of governments.
  - Article 18 foresees that the new Monetary Policy Committee will impose a limit on the total outstanding claims of the BCEAO on governments (as a percentage of prior year fiscal revenues), which constrains commercial banks’ access to central bank refinancing of government paper. This is an indirect way to impose a financing constraint on governments.
- Fiscal convergence and enforcement challenges:
  - Compliance of governments with the WAEMU fiscal convergence framework is poor. A large proportion of member countries do not meet convergence criteria, including maintenance of a basic fiscal surplus.
  - The WAEMU authorities are concerned about excessive public deficits and government recourse to commercial bank financing. These may tilt the policy-mix toward tighter monetary policy (to protect the exchange rate peg) and risk crowding out the private sector.
  - The regional central bank cannot by itself enforce fiscal discipline; this may distract the BCEAO from its main objective–price stability–and expose it to further risks of fiscal dominance.
  - Central bank ceilings on financing have been repeatedly circumvented, mainly through arrears accumulation.
  - Fiscal convergence in the Union is likely to remain a challenge. The multilateral framework put in place by the WAEMU treaty in 1994 to ensure fiscal discipline has not delivered.
  - Refinements in the definition of the convergence criteria to make them less sensitive to the business cycle may help.
  - A robust process of peer review and increased budget transparency will be key to ensuring that countries adopt fiscal policies consistent with regional objectives.
- Treaty ratification status note:
  - To enter into effect, the treaty needs to be ratified by the parliaments of each member country. As of mid-February 2010, only the Beninese parliament had not yet ratified it.

### External stability assessment: Exchange rate and the current account
- Real effective exchange rate (REER) developments:
  - The REER has appreciated by 27 percent since the 1994 CFA franc devaluation and stood at 83 percent of its pre-devaluation value at the end of 2009.
- The various approaches of external sustainability are described in detail in the source.

*Source: BCEAO and IMF staff estimates; IMF, African Department database; Dabla-Norris, et. Al. Forthcoming.*

### Appendix II

### _cr1108 - Appendix II

### Exchange rate and external sustainability
- Actual REER exceeded equilibrium REER by 3.9–11.3 percent in 2008 depending on the method (single-country (Johansen) and multiple-country (FMOLS)).  
- Overvaluation implied by the macroeconomic balance and external sustainability approaches ranges from 5.1 percent to 7.7 percent.  
- These are moderate increases relative to the 2007 assessment (0.7 percent and 9.9 percent respectively with the same methods).  
- WAEMU’s external current account (CA) deficit widened from 4.6 percent of GDP in 2002–2004 to 6.6 percent in 2009.  
- Staff projections: the deficit would reach an average of 7.1 percent over the 2010–2014 period.  
- The exchange rate is modestly overvalued in spite of a growing current account deficit.  
- The CA deficit exceeds both the CA norm estimated by the macroeconomic balance approach and the CA that stabilizes net foreign assets (NFA) at the 2008 level.  
- Balance of payments projections suggest the CA deficit is being financed without depletion of international reserves through increased capital inflows; projection assumes increasing inflows of net foreign direct investment (FDI).

### Structural competitiveness and growth
- Weak structural competitiveness, including high factor costs, drags on productivity and growth.  
- Three most disruptive factors of production: frequent electricity outages, inadequate transportation system, and high cost of capital.  
- Continued appreciation of the REER could presage a new period of sluggish growth. Authorities report long-term growth has been disappointing compared with SSA outside the currency union.  
- WAEMU market share in world exports has declined by 23 percent since 1999; rest of SSA has been increasing its share.  
- FDI developments: annual FDI inflow grew from 2 percent of GDP in 2000 to 3.3 percent in 2008, and is projected to have reached the SSA average in 2009, reflecting several large mining projects expected to raise exports in the medium term. Authorities note sustained FDI acceleration could spur long-term growth.

### Policy recommendations on exchange rate and external sustainability
- The WAEMU REER overvaluation is modest and, given the margin of error, does not warrant any radical adjustment.  
- Risks: resumption of euro appreciation (to which the WAEMU CFA franc is pegged) would further hurt competitiveness and weigh on long-term growth and export performance.  
- Authorities should:  
  - minimize inflationary pressures;  
  - improve structural competitiveness by lowering transportation costs and ensuring reliable electricity supply to businesses;  
  - better enforce business-friendly WAEMU rules and policies that promote regional integration, in particular competition rules;  
  - move forward with structural reforms aimed at harmonizing and modernizing the financial sector.  
- Authorities’ view: REER appreciation is a concern; committed to fighting inflation and note the appreciating trend of the euro against the dollar may not last.  
- Authorities expect growth and investment to be sustained by the Regional Economic Plan (REP) launched in 2006: scale up regional priority integration-enhancing spending by CFAF 2900 billion (9 percent of 2009 GDP), of which about CFAF 2400 million are covered by external assistance; 78 percent of REP resources programmed for infrastructure; at end-July 2009, 40 percent of financial resources had been secured.

### Financial sector development and modernization
- Financial sectors are less developed in WAEMU than in the rest of SSA: private credit remained below 20 percent of GDP while countries like Ghana, Kenya, and Nigeria surpassed 30 percent of GDP in 2008.  
- Access to bank services is limited: only about 5 percent of the population have access to a bank.  
- Capital markets underdeveloped: no secondary markets, market dealers charge high fees, low market capitalization as percent of GDP relative to peers.  
- Securities market dominated by government issuers and government-controlled financial institutions as main purchasers.  
- Conclusion: The union needs a stronger financial system to support investment and long-run growth.

### Financial sector soundness and supervision
- The financial sector proved resilient during the recent global financial crisis; nonperforming loans remained significant but did not increase much.  
- Some tightening of trade finance from foreign correspondents and slowing remittances observed, but return on equity largely unaffected; profitability particularly low in Benin.  
- Compliance with prudential requirements is low; decline in 2009 appears related to a two-step increase in the minimum capital requirement. The Banking Commission (BC) expects most banks to comply with the final step by year-end 2010, through mergers and acquisitions if necessary.  
- BCEAO and BC near-term challenges:  
  - improving compliance with prudential regulations;  
  - upgrading legal and regulatory frameworks;  
  - establishing a crisis resolution framework;  
  - extending supervision to large microfinance institutions.  
- Recommended actions: prepare preventive contingency plans and a bank restructuring strategy; act swiftly through recapitalization or devolution once severe vulnerabilities are identified; accelerate institutional reform including divestiture of public sector holdings in banks; align prudential framework with best practices; upgrade prudential framework for risk-based supervision and financial stability analysis; enforce minimum capital requirements by year-end 2010 to accelerate restructuring.  
- Observations: high number of prudential violations concentrated in small banks; larger and international banks are more compliant and account for a large proportion of deposits (40 percent of financial institutions hold 80 percent of deposits). Market indicators show improving conditions (more foreign banks, differentiated risk premia, some banks offering up to 8 year term-deposits).

### Trade agreements and regional integration risks
- Negotiation of a full Economic Partnership Agreement (EPA) between the EU and the West Africa region (ECOWAS plus Mauritania) is underway in two steps: goods (postponed several times) and services (expected to begin in 2010). Main stumbling blocks: length of transition period and level of EU access to West African market.  
- Envisaged ECOWAS-wide Common External Tariff (CET) would provide higher protection than WAEMU CET (WAEMU CET has four bands and a 20 percent maximum rate); ECOWAS agreed to expand WAEMU CET with a fifth band at 35 percent.  
- EPA adoption could lead to revenue losses for WAEMU countries, expected to be smoothed over a 10–15 year transition and offset by EU financial compensation (amount still under discussion). Revenue impact of the ECOWAS CET is not yet known.  
- Potential issue: trade diversion from cheaper imports to more expensive EU or ECOWAS non-WAEMU products, possibly causing losses for WAEMU consumers; mitigants include limiting product selection and duration. WAEMU authorities are discussing selection criteria with ECOWAS countries.  
- An ECOWAS-wide currency union timeline: WAMZ common currency postponed until 2015, ECOWAS until 2020; substantial convergence required and schedule is ambitious.

### Staff appraisal: macroeconomic stance and structural priorities
- Recovery prospects for 2010 are good, supported by monetary and fiscal easing in 2009 and projected upturn in main trade partners.  
- Inflation fell sharply in 2009 due to commodity price declines; mild uptick projected in 2010 while official reserves are kept stable.  
- Moderate risks: sluggish global economy could slow recovery; excessively accommodative fiscal and monetary policies could fail to keep inflation below euro zone level and jeopardize competitiveness.  
- Recommendation: tighten economic policies once recovery is confirmed or if inflationary or external pressures return. Fiscal adjustment should come first in countries less affected by the crisis or with unsustainable deficits, large domestic arrears, and financing constraints. Monetary expansion in 2010 should not exceed nominal GDP growth; raising interest rates should not be precluded to achieve this. Improve liquidity management and coordinate issuance of T-bills and government bonds on the regional market to alleviate financing constraints and prevent reemergence of domestic arrears; envisaged unification of reserve requirements should help develop regional financial markets.

### Structural and institutional reform priorities
- Reforms of WAEMU institutions, once ratified by all member countries, offer opportunities for modernized monetary policy conduct.  
- BCEAO’s role in ensuring fiscal discipline through ceilings on direct and indirect financing of governments is questionable and goes beyond price stability; a reassessment of respective roles of central bank and WAEMU commission in fiscal coordination and convergence is warranted.  
- Priority should be given to PFM reforms to foster fiscal discipline and transparency.  
- Given REER appreciation and peg to the euro, the Union risks protracted constraints on exports and growth; to boost development and reduce poverty, highest priorities are reducing the cost of doing business, attracting more FDI, integrating domestic markets, and developing the financial sector.  
- Progress on implementing 2007 FSAP recommendations is slow; compliance with prudential ratios remains low; Union lacks risk-based prudential and financial crisis-resolution plans.  
- Continue efforts to negotiate a balanced EPA and determine adequate financial compensations for revenue losses from tariff reduction on EU imports.  
- Proposed: maintain regional discussions with WAEMU authorities on the standard 12-month consultation cycle.

### Key data highlights (selected exact figures from tables and text)
- REER overvaluation did not exceed 11.3 percent in 2008; actual REER exceeded equilibrium REER by 3.9–11.3 percent.  
- Macroeconomic balance/external sustainability implied overvaluation: 5.1 percent to 7.7 percent.  
- WAEMU CA deficit: 4.6 percent of GDP in 2002–2004; 6.6 percent in 2009; projected average 7.1 percent over 2010–2014.  
- REP: CFAF 2900 billion (9 percent of 2009 GDP) total spending; about CFAF 2400 million covered by external assistance; 78 percent for infrastructure; 40 percent of resources secured by end-July 2009.  
- FDI inflows: 2 percent of GDP in 2000; 3.3 percent in 2008; projected to reach SSA average in 2009.  
- Access to bank services: about 5 percent of the population.  
- Private credit ratio: below 20 percent of GDP in WAEMU; Ghana/Kenya/Nigeria surpassed 30 percent of GDP in 2008.  
- WAEMU fiscal and external indicators (Table 1, selected):  
  - GDP at constant prices: 2009 = 2.8; 2010 projection = 3.9; 2011 = 4.8; 2014 = 5.6 (annual percentage change).  
  - Consumer prices (BCEAO avg): 2009 = 1.2; 2010 = 2.5; 2014 = 2.3 (annual averages).  
  - Gross domestic savings: 2009 = 14.4 percent of GDP; 2014 projection = 17.4 percent.  
  - Gross domestic investment: 2009 = 20.2 percent of GDP; 2014 projection = 23.4 percent.  
  - Government total revenue, excl. grants: 2009 = 17.5 percent of GDP; 2014 projection = 18.8 percent.  
  - Government expenditure: 2009 = 24.6 percent of GDP; 2014 projection = 25.5 percent.  
  - Overall fiscal balance, excl. grants: 2009 = -7.1 percent of GDP; 2014 projection = -6.7 percent.  
  - Current account, incl. grants: 2009 = -6.9 percent of GDP; 2014 projection = -6.1 percent.  
  - External public debt: 2009 = 29.1 percent of GDP; 2014 projection = 25.1 percent.  
- External public debt (WAEMU total): 2005 = 44.3 percent of GDP; 2009 = 29.1 percent; 2014 projection = 25.1 percent.  
- Effective exchange rates (WAEMU REER index): 2009 WAEMU real effective exchange rates index = 80.0 (2000 = 100); nominal effective exchange rates 2009 = 66.3 (2000 = 100).

*Source: _cr1108 - Appendix II*

### 13.  WAEMU:

### 13. WAEMU

### Summary accounts of the central bank (BCEAO): 2005–2010 (selected aggregates)
- Reserves: 823 (2005 Sep), 651 (2005 Dec), 813 (2006 Sep), 649 (2006 Dec), 992 (2007 Sep), 878 (2007 Dec), 923 (2008 Sep), 973 (2008 Dec), 1,193 (2009 Sep)
- Net foreign assets: 92 (2005 Sep), 146 (2005 Dec), 36 (2006 Sep), 183 (2006 Dec), -41 (2007 Sep), 184 (2007 Dec), 60 (2008 Sep), 33 (2008 Dec), -47 (2009 Sep)
  - Gross foreign assets: 505 (2005 Sep), 495 (2005 Dec), 473 (2006 Sep), 597 (2006 Dec), 561 (2007 Sep), 617 (2007 Dec), 608 (2008 Sep), 608 (2008 Dec), 535 (2009 Sep)
  - Foreign liabilities: 414 (2005 Sep), 349 (2005 Dec), 437 (2006 Sep), 414 (2006 Dec), 602 (2007 Sep), 433 (2007 Dec), 548 (2008 Sep), 575 (2008 Dec), 582 (2009 Sep)
- Net domestic assets: 3,868 (2005 Sep), 4,107 (2005 Dec), 4,324 (2006 Sep), 4,661 (2006 Dec), 5,167 (2007 Sep), 5,618 (2007 Dec), 5,999 (2008 Sep), 6,195 (2008 Dec), 6,816 (2009 Sep)
  - Net credit to the government: 87 (2005 Sep), 119 (2005 Dec), 259 (2006 Sep), 286 (2006 Dec), 436 (2007 Sep), 417 (2007 Dec), 468 (2008 Sep), 368 (2008 Dec), 652 (2009 Sep)
    - Claims on central government: 847 (2005 Sep), 877 (2005 Dec), 981 (2006 Sep), 1,053 (2006 Dec), 1,377 (2007 Sep), 1,413 (2007 Dec), 1,472 (2008 Sep), 1,399 (2008 Dec), 1,610 (2009 Sep)
    - Central government deposits: 760 (2005 Sep), 758 (2005 Dec), 722 (2006 Sep), 767 (2006 Dec), 941 (2007 Sep), 996 (2007 Dec), 1,004 (2008 Sep), 1,031 (2008 Dec), 958 (2009 Sep)
  - Net credit to the economy: 3,669 (2005 Sep), 3,893 (2005 Dec), 3,929 (2006 Sep), 4,227 (2006 Dec), 4,434 (2007 Sep), 4,888 (2007 Dec), 5,121 (2008 Sep), 5,404 (2008 Dec), 5,657 (2009 Sep)
    - Claims on private sector: same as net credit to the economy series above
  - Other items, net: 111 (2005 Sep), 95 (2005 Dec), 136 (2006 Sep), 149 (2006 Dec), 298 (2007 Sep), 314 (2007 Dec), 411 (2008 Sep), 423 (2008 Dec), 507 (2009 Sep)
- Net refinancing from the central bank: -816 (2005 Sep), -639 (2005 Dec), -812 (2006 Sep), -626 (2006 Dec), -957 (2007 Sep), -750 (2007 Dec), -731 (2008 Sep), -756 (2008 Dec), -959 (2009 Sep)
  - Borrowing: 7 (2005 Sep), 12 (2005 Dec), 1 (2006 Sep), 23 (2006 Dec), 36 (2007 Sep), 128 (2007 Dec), 192 (2008 Sep), 217 (2008 Dec), 233 (2009 Sep)
- Deposits (banking system): 4,097 (2005 Sep), 4,203 (2005 Dec), 4,416 (2006 Sep), 4,685 (2006 Dec), 5,221 (2007 Sep), 5,663 (2007 Dec), 5,819 (2008 Sep), 5,968 (2008 Dec), 6,561 (2009 Sep)
  - Demand deposits: 2,080 (2005 Sep), 2,159 (2005 Dec), 2,204 (2006 Sep), 2,427 (2006 Dec), 2,708 (2007 Sep), 2,958 (2007 Dec), 2,979 (2008 Sep), 2,963 (2008 Dec), 3,269 (2009 Sep)
  - Time deposits: 2,017 (2005 Sep), 2,044 (2005 Dec), 2,212 (2006 Sep), 2,257 (2006 Dec), 2,514 (2007 Sep), 2,705 (2007 Dec), 2,841 (2008 Sep), 3,005 (2008 Dec), 3,292 (2009 Sep)
- Foreign liabilities (BCEAO): 369 (2005 Sep), 305 (2005 Dec), 386 (2006 Sep), 355 (2006 Dec), 541 (2007 Sep), 375 (2007 Dec), 492 (2008 Sep), 519 (2008 Dec), 510 (2009 Sep)
- Other items, net (sign convention negative in monetary survey): -111 (2005 Sep), -95 (2005 Dec), -136 (2006 Sep), -149 (2006 Dec), -298 (2007 Sep), -314 (2007 Dec), -411 (2008 Sep), -423 (2008 Dec), -507 (2009 Sep)

### Commercial banks: summary (selected country aggregates, 2005–09)
- Aggregate BCEAO (commercial banks total) net foreign assets: 3,024 (2005 Sep), 3,090 (2005 Dec), 3,553 (2006 Sep), 3,629 (2006 Dec), 4,195 (2007 Sep), 4,338 (2007 Dec), 4,299 (2008 Sep), 4,288 (2008 Dec), 4,389 (2009 Sep)
- Aggregate BCEAO foreign assets: 3,731 (2005 Sep), 3,736 (2005 Dec), 3,964 (2006 Sep), 4,030 (2006 Dec), 4,695 (2007 Sep), 4,796 (2007 Dec), 4,878 (2008 Sep), 4,825 (2008 Dec), 5,181 (2009 Sep)
- Aggregate BCEAO foreign liabilities: 707 (2005 Sep), 646 (2005 Dec), 411 (2006 Sep), 401 (2006 Dec), 500 (2007 Sep), 458 (2007 Dec), 579 (2008 Sep), 537 (2008 Dec), 792 (2009 Sep)
- Memorandum:
  - Short term domestic liabilities: 3,167 (2005 Sep), 3,133 (2005 Dec), 3,357 (2006 Sep), 3,429 (2006 Dec), 4,107 (2007 Sep), 4,204 (2007 Dec), 4,396 (2008 Sep), 4,250 (2008 Dec), 4,712 (2009 Sep)
  - Cover ratio (in percent): 117.8 (2005 Sep), 119.2 (2005 Dec), 118.1 (2006 Sep), 117.5 (2006 Dec), 114.3 (2007 Sep), 114.1 (2007 Dec), 111.0 (2008 Sep), 113.5 (2008 Dec), 110.0 (2009 Sep)
- Country-level figures (examples from table):
  - Benin net foreign assets: 291 (2005 Sep), 320 (2005 Dec), 397 (2006 Sep), 438 (2006 Dec), 505 (2007 Sep), 523 (2007 Dec), 540 (2008 Sep), 575 (2008 Dec), 509 (2009 Sep)
  - Côte d'Ivoire net foreign assets: 581 (2005 Sep), 614 (2005 Dec), 729 (2006 Sep), 783 (2006 Dec), 933 (2007 Sep), 1,005 (2007 Dec), 928 (2008 Sep), 892 (2008 Dec), 890 (2009 Sep)

### BCEAO: foreign assets and regional monetary aggregates (2005–09)
- Net foreign assets (regional): 3,116 (2005 Sep), 3,236 (2005 Dec), 3,589 (2006 Sep), 3,812 (2006 Dec), 4,153 (2007 Sep), 4,521 (2007 Dec), 4,321 (2008 Sep), 4,536 (2008 Dec), 4,367 (2009 Sep.Dec)
  - Country contributions to net foreign assets (examples): Benin 341 (2005 Sep), 375 (2005 Dec), 450 (2006 Sep), 521 (2006 Dec), 595 (2007 Sep), 659 (2007 Dec), 765 (2008 Sep), 689 (2008 Dec), 667 (2009 Sep)
- Net domestic assets (regional): 4,622 (2005 Sep), 4,932 (2005 Dec), 4,779 (2006 Sep), 5,130 (2006 Dec), 5,378 (2007 Sep), 5,621 (2007 Dec), 6,099 (2008 Sep), 6,632 (2008 Dec), 7,228 (2009 Sep)
- Net credit to government (regional): 567 (2005 Sep), 691 (2005 Dec), 419 (2006 Sep), 456 (2006 Dec), 339 (2007 Sep), 431 (2007 Dec), 338 (2008 Sep), 453 (2008 Dec), 841 (2009 Sep)
  - Selected country examples: Côte d'Ivoire 387 (2005 Sep), 379 (2005 Dec), 323 (2006 Sep), 345 (2006 Dec), 365 (2007 Sep), 431 (2007 Dec), 415 (2008 Sep), 400 (2008 Dec), 562 (2009 Sep)
- Credit to the economy (regional): 3,688 (2005 Sep), 3,912 (2005 Dec), 3,945 (2006 Sep), 4,246 (2006 Dec), 4,450 (2007 Sep), 4,905 (2007 Dec), 5,416 (2008 Sep), 5,627 (2008 Dec), 5,840 (2009 Sep)
- Broad money (regional): 5,921 (2005 Sep), 6,305 (2005 Dec), 6,398 (2006 Sep), 6,976 (2006 Dec), 7,461 (2007 Sep), 8,301 (2007 Dec), 8,444 (2008 Sep), 9,020 (2008 Dec), 9,331 (2009 Sep)
  - Country broad money examples: Côte d'Ivoire 1,907 (2005 Sep), 2,081 (2005 Dec), 2,011 (2006 Sep), 2,295 (2006 Dec), 2,462 (2007 Sep), 2,837 (2007 Dec), 2,767 (2008 Sep), 2,997 (2008 Dec), 2,825 (2009 Sep)

### Fund relations with WAEMU member countries (selected institutional and program milestones)
- Membership and Article VIII acceptance:
  - Senegal and Togo joined the IMF in 1962; Benin, Burkina Faso, Côte d’Ivoire, Niger, and Mali in 1963; Guinea-Bissau in 1977.
  - Article VIII obligations accepted June 1996 by WAEMU members except Guinea-Bissau (accepted January 1, 1997).
- Selected country program chronology and milestones:
  - Benin: three-year ECF arrangement approved August 2005; extended through August 2009; additional augmentation of access of 15 percent of the quota (about $14 million); Article IV consultation concluded June 2008; HIPC completion point March 2003; MDRI January 2006.
  - Burkina Faso: three-year ECF approved April 2007; fifth review concluded December 14, 2009; HIPC completion point April 2002; MDRI January 2006.
  - Côte d'Ivoire: three-year ECF approved March 2009; Article IV and first review concluded November 18, 2009.
  - Guinea-Bissau: reached HIPC decision point December 2000; EPCA provided in January 2008 and June 2009.
  - Mali: three-year ECF approved May 28, 2008; second review July 2009; HIPC completion point March 2003; MDRI January 2006.
  - Niger: three-year ECF approved May 29, 2008; second review May 2009; Article IV completed December 19, 2008; HIPC completion point April 2004; MDRI January 2006.
  - Senegal: PSI approved November 2007; fourth PSI review December 16, 2009; ESF increase from 30 percent to 75 percent of quota and extension from 12 to 18 months; Article IV June 2008; HIPC completion point April 2004; MDRI January 2006.
  - Togo: three-year ECF approved April 2008; 3rd ECF review on lapse of time November 18, 2009; Article IV and 2nd ECF review April 2009; HIPC decision point November 2008.
- Safeguards and institutional reform:
  - Updated safeguards assessment of the BCEAO near completion; operational controls present but governance should be strengthened by addition of an audit committee and fuller implementation of IFRS reporting framework.
  - Institutional Reform of the WAEMU and the BCEAO planned for 2010 expected to address governance weaknesses.
- Exchange system:
  - Regional currency: CFA franc; pegged to the euro since January 1, 1999 at the rate of CFAF 655.957 per euro.
- Regional surveillance and technical assistance:
  - Regional Article IV consultations integrated into Article IV of WAEMU member countries (Board decision No. 13656-(06/1), January 6, 2006).
  - Regional WAEMU FSAP conducted in 2007/08; follow-up country FSAPs: Mali and Burkina Faso (2008); Niger and Côte d’Ivoire (2009); Senegal FSAP in 2001 with update in 2004.
  - AFRITAC does not provide direct TA to WAEMU/BCEAO; MCM technical assistance to BCEAO absent in recent years.
  - Fiscal Affairs Department technical assistance missions listed for 2000–2010 on taxation, public expenditure management, tax policy, government finance statistics, and PFM directives.

### Appendix II — External sustainability in the WAEMU: methodology and main findings
- Overall assessment:
  - The study applies the equilibrium real effective exchange rate (EREER), the macroeconomic balance (MB), and the external sustainability (ES) approaches (consistent with IMF methodology) and finds a modest overvaluation of the exchange rate, slightly higher than previous staff assessments.
  - The analysis excludes Guinea-Bissau.
- EREER approach:
  - Econometric estimation over 1990–2008; long-term REER driven by terms of trade, real per capita income relative to partners (productivity), government consumption, investment share of GDP, and openness.
  - Cointegration techniques applied: Johansen for single regional aggregated exchange rate equation and Pedroni panel technique for seven WAEMU countries.
  - Johansen / Pedroni long-run coefficient estimates (Table II.1):
    - ln(terms of trade): Johansen 0.3 [1.83] (one asterisk denoting significance at 0.10); Pedroni 0.09 [2.15] (two asterisks denoting significance at 0.05)
    - ln(government consumption): Johansen 0.97 [8.91] (three asterisks); Pedroni 0.26 [4.93] (three asterisks)
    - ln(technological progress): Johansen 0.13 [1.38]; Pedroni 0.26 [6.71] (three asterisks)
    - ln(investment): Johansen -0.33 [-2.83] (three asterisks); Pedroni -0.09 [-4.66] (three asterisks)
    - ln(openness): Johansen -0.01 [-0.06]; Pedroni -0.25 [-3.35] (three asterisks)
    - Constant: 1.89
    - ECM coefficients: -0.13* [-1.92]
    - Note: significance: three, two, and one asterisks denote 0.01, 0.05, and 0.10 levels; t-statistics in brackets.
- MB approach:
  - Underlying external current account (CA) computed at prevailing exchange rate and compared with CA norm estimated from a CA equation.
  - Table II.2 macroeconomic balance regression estimates (dependent variable: CA/GDP):
    - Fiscal balance coefficient 0.1893 (standard error 0.0426)
    - Old-age dependency -0.1234 (0.0483)
    - Population growth -1.0285 (0.4035)
    - Oil balance 0.1688 (0.0300)
    - Relative income 0.0196 (0.0109)
    - Output growth -0.1570 (0.0789)
    - Asia crisis dummy 0.0345 (0.0058)
    - Banking crisis dummy 0.0103 (0.0065)
    - Financial center dummy 0.0311 (0.0037)
    - Lagged CA/GDP 0.3656 (0.0883)
    - Constant -0.0029 (0.0039)
  - Regression estimated using panel data over a sample of 45 developed, emerging and developing countries.
- ES approach and scenarios:
  - Elasticity of current account to REER shocks used: -0.65 (from Tokarick).
  - Underlying CA approximated by medium-term projected external CA (constant REER, smoothed).
  - ES approach defines CA norm as the CA that stabilizes the region’s net foreign assets position (NFAP) at a reference level.
  - Two scenarios examined:
    - Baseline (least favorable): stabilizing NFAP at end-2008 level.
    - Alternative (most favorable): WAEMU net stocks of FDI and portfolio investments reach upper bound of low middle-income countries in the medium term; debt kept at end-2008 level (with caveats about Côte d’Ivoire and other post-HIPC countries); reserves kept around 5 months of imports. Under the alternative scenario, the WAEMU region’s NFA position will be -55 percent of GDP in the medium-term.
- Key interpretation:
  - While the gap between the underlying current account and the NFA-stabilizing current account appears large, the implied REER overvaluation is modest because the elasticity of the current account to REER shocks is relatively high.
  - The CA that stabilizes NFA at a reference level is calculated using the formula involving NFAs (reference NFA level), g (region’s real GDP growth), and π (medium-term U.S. inflation) as specified in the appendix.

*Source: IMF, International Financial Statistics.*

### Appendix II. External sustainability in the

### Appendix II. External sustainability in the WAEMU (4)

### Benchmark NFAPs and Current Account Outcomes
- Table II.3: Benchmark NFAPs for External Sustainability Assessment (as presented)
  - Baseline: End-2008 -33.2 -7.1 -2.0
  - Alternative scenario (see description above) -55 -7.1 -3.4
- Current Account (Percent of GDP) — table heading preserved as presented

### Overvaluation Estimates (summary of approaches)
- Table II.4: Summary of overvaluation from different approaches (values as presented)
  - 2007 Report / 2008
  - EREER Approach
    - Single Equation Technique (Johansen) 9.9 11.3
    - Panel Data Technique (Pedroni) 0.7 3.9
  - MB Approach 5.1
  - ES Approach
    - Baseline: End-2008 7.7
    - Alternative scenario (see description above) 5.7

### Appendix III — Status of Implementation of Recommendations from 2008 FSAP
- Supervision and Operational Framework of the Banking Sector
  - Gradually align prudential norms to international best practice: i.e., CAR, credit exposure, delinquent loan classification threshold — Not implemented – but implementation scheduled to begin in 2010
  - Enforce the minimum statutory capital requirement to encourage bank mergers and end BCEAO and government participation in the capital structure of banks — In progress
  - Strengthen the BC-WAEMU and make it accountable for (i) more strictly enforcing regulations; (ii) putting in place early warning procedures for when prudential action is needed in response to distress in a credit institution; and (iii) establishing a procedure resolving banking crises, especially in a systemic case — In progress
- Open Market Operations and Public Securities Markets
  - Enhance the effectiveness of the operational framework for monetary policy by, e.g., open market operations are collectivized with prime quality assets, a bank liquidity monitoring committee to provide daily forecasts, and active national cash committees — In progress
  - Produce reliable annual schedules of issues — In progress
  - Issue all public debt securities by auction — Implemented
  - Put in place a network of primary dealers — In progress
  - Establish a regional legal framework for repurchase operations — Not implemented
  - Set up a government bond issues coordination committee under the authority of the Council of Ministers — Not implemented
- Securities and Exchange Market and Accounting and Audit Framework
  - Complete the study to restructure the market and address issues: (i) number of enterprises that can be listed; (ii) potential for venture capital; (iii) possibility of platforms shared by several exchanges (Nigeria, Ghana); (iv) potential afforded by institutional savings; and (v) incentives to attract foreign investment — Not implemented
  - Gradually align bank accounting and auditing with international standards (IFRS and ISA) while maintaining financial reporting in accordance with the prudential rules — Not implemented
  - Ease accounting requirements for companies that wish to list their shares on the exchange by reducing the number of audited fiscal years required from five to three — Not implemented
  - Encourage training in public accounting and finance in the union, harmonize CPA and Financial Analyst diplomas, and improve the quality of published information — In progress – should be operational in 2010
  - Determine under what conditions the guarantee system could be replaced with ratings — Not implemented
  - Harmonize securities taxation in the WAEMU. Review pricing of services with a view to significantly lowering the cost of transactions — Not implemented – should be adopted in 2010
  - Ease or abolish the 25 percent limit on the lending portfolio of the BOAD and the other regional financial institutions that can be financed through bond issuances on the regional market — Not implemented – but under review

*Statement by Laurean Rutayisire on WAEMU — March 3, 2010*

### Recent developments and macroeconomic policies (key points)
- Growth and inflation
  - Staff estimates economic growth to have declined only by 1percent in 2009, to 3 percent.
  - Inflation: reached 7.4 percent in 2008; declined to 1.1 percent in 2009; expected to remain close to the union target of 2 percent in 2010.
- External sector
  - The Union posted international reserves of 5 months of imports.

### Fiscal policy (key points and measures)
- Deficits and fiscal stance
  - Regional deficit worsened from 2 percent in 2008 to 3.7 percent of GDP in 2009 (including grants).
  - Authorities emphasize balancing macroeconomic stability with infrastructure spending to support recovery.
- Domestic arrears and remedial actions
  - Exceptional steps in September 2009: direct financing of member governments by BCEAO following the Fund general SDR allocation; issuance of government bonds to be refinanced by BCEAO for arrears clearance.
  - At year-end 2009, CFAF 700 billion injected in the regional economy from these efforts.
  - Authorities view fiscal consolidation choices (trade-offs between wage bills and payments to private suppliers) as a main cause of arrears buildup.
- Debt relief advocacy
  - Three WAEMU countries — Côte d’Ivoire, Guinea Bissau and Togo — have not yet benefited from the HIPC Initiative; authorities urge the Fund and World Bank to advance HIPC-MDRI processes.

### Monetary policy and financial sector development
- Monetary policy
  - BCEAO policy of inflation targeting helped keep inflation in check during the food and fuel price hikes.
  - Authorities note staff view that the WAEMU REER overvaluation is modest and, given margin of error, does not warrant adjustment; authorities express reservations about some staff assumptions.
- Financial sector development
  - WAEMU financial sector indicators lag SSA peers; credit to private sector below 20 percent of GDP versus over 30 percent in Ghana, Kenya, Nigeria in 2008.
  - Authorities call for diversification of financial products, innovative intermediation institutions, and lessons from other regions to finance start-ups, SMEs, and new investment ideas.
  - Measures adopted in November 2009 to improve coordination of government bond issuance and improve market liquidity to avoid excess supply, late interventions, and crowding out of private sector.

### Other structural reforms and development issues
- Competitiveness and factor costs
  - High factor costs seen as drag on productivity and growth; authorities pursuing reforms in judicial system, one-stop investment centers to reduce red tape and costs.
- Regional investment plan
  - Regional Economic Plan worth CFAF 2900 billion, of which 40 percent had been secured at end-July 2009, aimed to boost investment and growth.
- Infrastructure and contracts
  - Need to assess and enforce contracts in energy, telephone, and water sectors to enable necessary investments and replace aging infrastructure.
  - Preference for giant regional infrastructures to supply low-cost production factors.
- Regional integration initiatives
  - Engagement with ECOWAS on projects: ECOWAS-wide Common External Tariff to replace current WAEMU CET (potential to enhance trade) and exploration of an ECOWAS-wide common currency (preparatory studies being strengthened).
  - Ongoing consideration of Economic Partnership Agreement with the EU, with careful preparatory analysis.

### Conclusion (authorities' stance)
- Recent crises and coordinated regional responses reinforced the need for deeper integration and institutional strengthening.
- Zone-wide prospects suffered little from global slowdown, but authorities recognize substantial reforms remain to unleash growth potential and reduce poverty.
- WAEMU authorities welcome continued Fund support to implement the policy agenda agreed at the Heads of State summit.

*Appendix II. External sustainability in the — content unit as provided*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1108.pdf_