## _cr1259 ## Source details **Canonical URL:** [_cr1259](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1259.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1259.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1259.pdf.json) --- ### Introduction — context and recent shocks and outlook - 2011 shocks and impacts: - Côte d’Ivoire political crisis and armed conflict after the November 2010 presidential election, ending in April 2011; crisis had a severe economic impact and prompted an ambitious investment-led recovery. - Rising food and fuel prices early 2011; drought in the Sahel in second half of 2011. - Implementation of some prior recommendations hindered; macroeconomic policies broadly in line with Fund advice; structural reform progress slower than expected. - 2011 aggregate outcomes (selected): - Regional growth in 2011: 0.8 percent. - Côte d’Ivoire annual GDP decline in 2011: 5.8 percent. - Drought-related cereal production declines (Burkina Faso, Mali, Niger, [and Senegal]): 7 to 27 percent. - Annual consumer price inflation, 2011: 3.8 percent. - Area-wide overall fiscal deficit (excluding grants): 5.5 percent of GDP in 2010 → 7.9 percent of GDP in 2011. - Average public debt, 2011: about 42 percent of GDP. - Current account deficit, 2011: 5.7 percent of GDP (about 5 percent in 2010). - Foreign exchange reserves at end-2011: about six months’ imports (excluding intra-WAEMU trade). - 2012 outlook and key risks: - Projected regional growth, 2012: could reach 7 percent. - Projected inflation, 2012: around 3.5 percent. - Main downside risk: protracted euro-area debt crisis; staff estimated the downside scenario (Appendix I) would reduce regional growth by about 1.5 percentage point. - Other risks: reductions in aid, insecurity and sociopolitical risks, continued drought effects in the Sahel. ### Monetary policy stance, liquidity management, and exchange rate - Monetary policy stance and inflation: - The monetary policy stance remains appropriate; a relaxation may be necessary if downside risks materialize. - Inflation expected to remain moderate; current stance could be maintained in 2012. - Risks to monitor: - Possible impact on core inflation of the drought in the Sahel. - Inflationary pressure in Côte d’Ivoire if recovery stronger than expected. - Possibility to relax policy and meet banks’ liquidity needs if global slowdown and commodity price declines occur. - Interbank market and liquidity management (key findings and actions): - Monetary policy implementation hampered by excess liquidity. - Limited development of the interbank market is an important reason for excess liquidity. - A deeper interbank market would enable liquidity trading, reduce need for BCEAO injections, and foster a benchmark rate. - Effective liquidity management requires more accurate liquidity forecasts, notably forecasting net government positions with the banking system. - Governments can improve liquidity management, including by setting up single treasury accounts with BCEAO assistance. - BCEAO has modernized tools for analyzing and forecasting inflation; scope remains for further IMF technical assistance. - Implementation update: BCEAO expects interbank market reforms in 2012; technical platform being tested; legal work prepared introduction of repurchase operations (repos). - Exchange rate, reserves, and external stability: - Real effective exchange rate (REER) broadly aligned with fundamentals; three methods generate deviations ranging from -2 percent (ERER) to +4 percent (ES). - Staff analysis: devaluation not required by fundamentals. - NEER and REER: trended upward until end-2009; decreased markedly in 2010; modest appreciation in 2011 (less than 2 percent). - Foreign exchange reserves: CFAF 7,445 billion (about $15 billion) at end-2011. - Coverage of imports: more than 6 months. - Coverage of broad money: 60 percent. - Reserves cover close to 100 percent of short-term domestic liabilities. - Optimal reserves model suggests optimal levels ranging from 5 to 10 months of imports; 4-5 percent opportunity cost probably a credible range for WAEMU. - The peg to the euro is guaranteed by the French Treasury, an important risk mitigation factor. ### Banking sector soundness, stress tests, and crisis preparedness - Key banking sector statistics and vulnerabilities: - Risk-weighted capital adequacy ratio (authorities’ assessment at end-2010): 13 percent. - Nonperforming loans (NPLs): about 17 percent of all loans. - Provisioning rate: 65 percent. - About a third of banks did not observe the new minimum capital requirement at end-2011. - Some prudential norms remain low and not fully aligned with international standards (e.g., risk concentration). - Stress-test results and implications: - Banking system resilient on average but vulnerable mainly to credit risk. - Under the most damaging scenario, recapitalization cost to meet minimum capital requirements would remain limited (at most 1.5 percent of GDP, in Senegal). - Liquidity run simulated for 10 consecutive business days (no emergency funds) — resilience varies: - More resilient: Mali, Senegal. - More vulnerable: Benin, Guinea Bissau, Togo. - Overall liquidity position described as rather strong. - Data caveats: most data were June 2011 except for Benin, Guinea-Bissau, Mali, Niger (December 2010); data quality and detail varied; NPL classification and required provisions data not available for most countries. - Sovereign risk currently weighted zero in WAEMU capital adequacy calculations — issue to revisit given Côte d’Ivoire crisis. - Financial crisis prevention, resolution and supervision — staff recommendations: - Increase transparency: compile and publish financial soundness indicators routinely. - Establish an early warning system with regular stress tests. - Accelerate an electronic reporting platform for credit institutions. - Align prudential rules with international best practices; strengthen credit risk analysis and compliance. - Allocate more resources to bank supervision, including for banking groups operating in the union and other regions. - Consider introducing a deposit insurance system in due course and strengthen regulator’s role in bank resolution. - Authorities’ stance: broadly agreed; plan to increase Banking Commission resources substantially; considering creation of a financial stability fund. ### Financial deepening, markets, and policy priorities - Current state and key statistics: - Financial sector remains shallow; access to financial services limited. - Credit to the private sector: about 18 percent of GDP on average in the union. - Bank accounts held by only about 5 percent of the population. - Transactions on regional interbank and stock markets limited; no secondary market in government securities. - Despite excess liquidity, SMEs face difficulties accessing bank loans; financing concentrated in few large enterprises and governments. - Banks perform limited maturity transformation. - Priority actions for financial deepening (2012): - Develop the interbank market. - Strengthen the public debt market. - Review prudential rules that may excessively restrict access to credit (e.g., transformation ratio). - Consider a more accommodating regulatory approach to early-stage financial innovation (e.g., mobile banking). - Box 3 — financial deepening since 2006 (selected figures): - Ratio of broad money to GDP: increased from 24 percent in 2006 to 31 percent in 2010. - Regional stock market: market capitalization as share of GDP increased from 24 percent in 2006 to 31 percent in 2010; number of listed firms declined from 40 to 38. - Government securities market: by end-2011 annual issuances of government securities represented almost 10 percent of GDP; issuances increased sixfold in 2009–11. - Country examples (Broad Money % of GDP, 2010 / 2006 ordering shown): Mali 28.5 / 33.8; Senegal 19.5 / 14.1; Burkina Faso 27.1 / 30.3; Niger 24.1 / 17.8; Benin 26.5 / 37.5; Togo 26.3 / 19.1; Côte d'Ivoire 37.5 / 42.7; Guinea-Bissau 34.0 / 25.8. - Domestic credit to private sector (% of GDP, 2010 / 2006 ordering shown): Mali 18.8 / 17.9; Burkina Faso 22.7 / 14.2; Senegal 17.1 / 16.8; Côte d'Ivoire 8.4 / 2.1; Togo 18.4 / 17.6; Benin 25.9 / 18.1; Niger 23.0 / 23.1; Guinea-Bissau 12.6 / 6.2. - Policy implications: - Financial deepening desirable to raise potential growth and reduce poverty; acceleration of FSAP recommendations needed. - Authorities emphasize need to preserve financial stability while deepening markets. - Market-development measures suggested: issuance predictability, creation of a secondary market led by primary dealers, broaden participation to nonbank institutions and, over time, to nonresidents. ### Regional integration, Côte d’Ivoire recovery, and trade policy - Impact of Côte d’Ivoire recovery: - End of the crisis improves growth prospects for the region. - Trade between Côte d’Ivoire and the region was severely affected by the 2011 crisis and prior instability; rebound in goods, services, and factor flows expected to benefit landlocked countries and attract foreign investors if regional integration deepens. - Remaining integration gaps: - Regional integration remains limited; non-tariff barriers to intraregional trade persist. - Insufficient transportation and energy infrastructures hinder common market benefits. - Staff advice to accelerate regional integration: - Eliminate all barriers to intra-WAEMU trade, including non-tariff barriers, import fees and export licensing. - Further facilitate labor mobility. - Pursue elimination of obstacles to trade within ECOWAS forcefully. - Complete study on impact of an EPA between West Africa and the EU to assess business and public finance impacts and plan transition support. - Tariff reform concern: - Planned introduction of a fifth tariff band at 35 percent (to include all ECOWAS countries) is regrettable according to staff. - Fifth band applies to products deemed sensitive by five relatively vague criteria (product vulnerability, economic diversification, regional integration, sectoral promotion, producer effort), replacing the previous degree-of-processing criterion. - Risks: increased weighted average tariff rate, negative impact on resource allocation efficiency. - Recommendation: keep the list of products subject to the 35 percent band as short as possible. ### Fiscal policy, tax harmonization, and petroleum pricing - Fiscal stance and gaps: - Area-wide fiscal deficit widened in 2011; fiscal stance expected to narrow somewhat in 2012, but maintaining fiscal sustainability requires further deficit reduction beyond 2012. - Convergence performance mixed; most countries did not meet fiscal deficit criterion in 2011. - Ongoing review of the convergence debt criterion welcomed; staff suggests a broader approach to fiscal sustainability, including disentangling cyclical vs structural factors. - Tax harmonization and petroleum pricing advice: - Further tax harmonization could be considered to prevent excessive tax competition. - Petroleum pricing work should continue regionally; direct transfers often more efficient and equitable than price subsidies. - Authorities: WAEMU Commission seeks to play a more active role and expressed interest in continued IMF technical assistance. ### Appendix I — adverse global scenario and simulated impacts - Adverse scenario: January 2012 WEO downside scenario assumptions: - Global real GDP growth about 2 percentage points lower than baseline. - Euro zone output reduced by 4 percentage points. - Oil prices and non-oil commodity prices 10-20 percent below baseline. - Euro expected to depreciate during first year; consumption drops, inflation decreases. - Transmission channels and exposures: - Euro zone remains largest trade partner; decline in euro-area demand likely to significantly affect WAEMU exports. - In 2011, half of region’s exports were commodities (fuel products, gold, cotton, cocoa). - Remittances estimated to average 4 percent of WAEMU GDP; likely to decline with euro-area labor demand fall. - Financial integration limited; banks fund themselves domestically and liquidity is abundant. - Quantitative simulation results (adverse vs baseline): - WAEMU real GDP: about 1.5 percentage points below baseline in first two years. - Exports decline by about 3 percent. - Domestic consumption lower by about 0.5 percent. - Real investment lower by about 4 percent. - Current account deficit widens by about 0.3 percentage points of GDP. - Fiscal balance deteriorates by 2/3 percentage point of GDP. - Government debt accumulates to a 2.5 percentage point higher level. - Cross-country heterogeneity: impacts differ substantially across WAEMU members depending on export composition and exposure to Europe (e.g., Burkina Faso, Guinea-Bissau, Mali less affected; Senegal and Côte d’Ivoire more affected). ### Appendix III — impact of Côte d’Ivoire recovery on WAEMU (selected quantitative links) - Côte d’Ivoire medium-term projections (selected): - Real GDP at constant prices: 2010 Act. 2.4; 2011 Est. -5.8; 2012 Proj. 8.5; 2013 Proj. 6.0; 2014 Proj. 6.0; 2015 Proj. 5.5; 2016 Proj. 5.2; 2017 Proj. 5.2. - Consumer price index (average): 2010 Act. 1.4; 2011 Est. 5.1; 2012 Proj. 2.8. - Overall fiscal balance (percent of GDP): 2010 Act. -2.3; 2011 Est. -8.1; 2012 Proj. -4.4. - Central government investment (percent of GDP): 2010 Act. 3.1; 2011 Est. 2.9; 2012 Proj. 5.0. - Nominal GDP (CFAF billions): 2010 Act. 11,352; 2011 Est. 11,150; 2012 Proj. 12,400. - Short-term regional multipliers (accounting exercise): - A 1 percentage point higher real growth in Côte d’Ivoire raises regional growth by 0.3 percentage point. - A 1 percentage point decline in Côte d’Ivoire inflation lowers regional inflation by 0.4 percentage point. - A 1 percentage point improvement in Ivorian fiscal deficit improves the area-wide fiscal deficit by about 0.3 percentage point. - A 1 percentage point improvement in its current account improves the WAEMU current account by 0.2 percentage point. - Financial market and borrowing implications: - Total domestic debt in Côte d’Ivoire at end-June 2011: about 14.5 percent of GDP. - Creditor composition: regional securities market investors 60 percent; BCEAO 25 percent. - Côte d’Ivoire restructured CFAF 600 billion of short-term paper in late 2011; participation exceeded 90 percent at end-2011. - Projected net issuances of government securities (total by country, CFAF billions): - Total: 2011 Est. 468; 2012 Proj. 664; 2013 Proj. 462. - Côte d’Ivoire net borrowing needs in 2012 budget: CFAF 450 billion (3.5 percent of Côte d’Ivoire GDP and 1.1 percent of regional GDP). - With increased regional issuance (Senegal planning CFAF 178 billion), regional borrowing expected to increase almost 40 percent—risks of issuance bunching and tighter financing conditions. - Medium-term opportunities: - If Côte d’Ivoire grows about 6 percent annually for next 10 years, its economy size would almost double, creating positive externalities for the region. - Opportunities to accelerate integration: remove trade barriers, coherent common external trade policy, accelerate Regional Economic Program implementation. ### Staff appraisal, priorities and Executive Board perspectives - Staff appraisal (selected): - Growth outlook favorable for 2012 due to Côte d’Ivoire recovery; regional inflation moderate. - Macroeconomic stance broadly appropriate; fiscal sustainability requires further deficit reduction beyond 2012. - Reserves at about six months of imports adequate; no area-wide real exchange rate misalignment. - Financial sector well capitalized and highly liquid overall, but stability could be increased via better prudential regulation, better observance of rules, and more formal crisis management. - Regional integration and financial deepening are opportunities to raise potential growth. - Data and transparency should be further improved; directives on public financial management should be implemented as soon as possible. - Executive Directors (Public Information Notice highlights): - Commended containment of inflation and maintenance of financial stability in 2011 despite shocks. - Urged reduction of area-wide fiscal deficit over medium term while attending infrastructure needs. - Recommended prompt implementation of public financial management directives, containment of wages and salaries, broad-based tax reforms, and replacing petroleum price subsidies with well-targeted social safety nets. - Considered monetary stance broadly appropriate but urged strengthening liquidity management and forecasting and expedited inter-bank market reforms. - Encouraged implementation of FSAP recommendations and acceleration of regional integration. ### Selected macroeconomic projections and key indicators (WAEMU aggregate, selected exact values) - Real GDP (annual percent change): 2008 4.2; 2009 2.9; 2010 4.6; 2011 0.8 (Est.); 2012 7.0 (Proj.); 2013 5.6 (Proj.); 2014 5.8 (Proj.); 2015 5.7 (Proj.); 2016 5.7 (Proj.) - GDP per capita at constant prices (annual percent change): 2008 1.4; 2009 0.2; 2010 1.8; 2011 -1.9; 2012 4.1; 2013 2.8; 2014 3.0; 2015 2.9; 2016 2.9 - Consumer prices (average, annual percent change): 2008 7.4; 2009 0.4; 2010 1.4; 2011 3.8; 2012 3.6; 2013 2.5; 2014 2.5; 2015 2.4; 2016 2.4 - Reserves in months of imports (excl. intra-WAEMU imports): 2008 5.7; 2009 6.2; 2010 6.3; 2011 6.2; 2012 6.0; 2013 6.1; 2014 6.1; 2015 6.0; 2016 7.9 - Government total revenue, excluding grants (percent of GDP): 2008 17.6; 2009 17.4; 2010 18.0; 2011 16.5; 2012 18.3; 2013 18.7; 2014 19.0; 2015 19.2; 2016 19.4 - Government expenditure (percent of GDP): 2008 22.4; 2009 23.9; 2010 23.5; 2011 24.4; 2012 25.3; 2013 25.4; 2014 25.3; 2015 25.2; 2016 25.1 - Overall fiscal balance, excl. grants (percent of GDP): 2008 -4.8; 2009 -6.5; 2010 -5.5; 2011 -7.9; 2012 -7.0; 2013 -6.6; 2014 -6.3; 2015 -6.0; 2016 -5.7 - Current account, incl. grants (percent of GDP): 2008 -7.1; 2009 -3.6; 2010 -4.9; 2011 -5.7; 2012 -7.4; 2013 -7.7; 2014 -7.1; 2015 -6.9; 2016 -6.6 - External public debt (percent of GDP): 2008 33.8; 2009 35.6; 2010 32.3; 2011 32.2; 2012 32.6; 2013 32.8; 2014 33.3; 2015 33.0; 2016 32.4 - Nominal GDP (in billions of CFA francs): 2008 31,205; 2009 32,551; 2010 34,660; 2011 35,977; 2012 39,800; 2013 42,988; 2014 46,490; 2015 50,162; 2016 54,169.7 *Source: 2012 REPORT WAEMU, INTERNATIONAL MONETARY FUND — content unit _cr1259* ### INTRODUCTION __________________________________________________________________________________ 4 ### INTRODUCTION ### Context and recent shocks - 2011 was a challenging year for the WAEMU: Côte d’Ivoire experienced a political crisis and armed conflict after the November 2010 presidential election, ending in April 2011 when President Ouattara took control; the crisis had a severe economic impact and the new government embarked on an ambitious investment-led recovery. - The early part of 2011 saw rising food and fuel prices; the second half of 2011 was marked by a drought that severely affected cereal production in the Sahel countries. - The 2011 context hindered the implementation of some prior recommendations. Macroeconomic policies were broadly in line with Fund advice, but progress on some structural reforms was slower than expected. - In the financial sector, authorities prioritized containing contagion from the Ivorian crisis and successfully limited its spread. The crisis also impeded progress on regional integration. ### Recent developments and outlook - Regional growth in 2011 was 0.8 percent and was affected by the Ivorian crisis and the drought in the Sahel countries. - Côte d’Ivoire’s economic activity contracted sharply in early 2011, with an estimated annual GDP decline of 5.8 percent despite subsequent recovery. - Drought-induced cereal production declines in Burkina Faso, Mali, Niger, [and Senegal] were estimated to range from 7 to 27 percent, exposing millions to food insecurity. - Food and fuel price surges pushed inflation to a peak in spring 2011; year-on-year inflation dropped quickly and was below 3 percent at year-end. Annual consumer price inflation is estimated at 3.8 percent in 2011. - The area-wide overall fiscal deficit (excluding grants) widened from 5.5 percent of GDP in 2010 to 7.9 percent of GDP in 2011, mainly because of the Côte d’Ivoire crisis; other contributors included higher electricity subsidies in Senegal, the use of privatization revenue for investment in Mali, and lower tax revenue in Benin. - Average public debt is estimated to have remained at about 42 percent of GDP in 2011. - The region’s current account deficit rose to 5.7 percent of GDP in 2011 (from about 5 percent of GDP in 2010), reflecting lower worker remittances, larger mining-related imports in Burkina Faso and Niger, and higher food and fuel prices. - Foreign exchange reserves increased and amounted to about six months’ imports (excluding intra-WAEMU trade) at end-2011 thanks to strong capital inflows. - Convergence performance was mixed: while all countries met the inflation criterion in 2009, only a minority did so in 2011; most countries did not meet the fiscal deficit criterion in 2011. Progress on indebtedness occurred due to HIPC/MDRI debt relief for Togo and Guinea-Bissau. ### 2012 outlook and risks - Regional growth is expected to increase sharply in 2012 despite a deteriorating international environment; growth could reach 7 percent in 2012 before easing in the medium term. - Inflation is expected to be around 3.5 percent in 2012, aided by lower international food and commodity prices despite drought impacts. - The main downside risk is a further weakening of the external environment, particularly a protracted euro-area debt crisis. Staff estimated the downside scenario in Appendix I would reduce regional growth by about 1.5 percentage point. - Other risks include reductions in aid from traditional donors, insecurity and sociopolitical risks, and continued drought effects in the Sahel. ### Key numeric indicators (selected) - Regional growth in 2011: 0.8 percent - Côte d’Ivoire annual GDP decline in 2011: 5.8 percent - Drought-related cereal production declines (Burkina Faso, Mali, Niger, [and Senegal]): 7 to 27 percent - Annual consumer price inflation, 2011: 3.8 percent - Area-wide overall fiscal deficit (excluding grants): 5.5 percent of GDP in 2010 → 7.9 percent of GDP in 2011 - Average public debt, 2011: about 42 percent of GDP - Current account deficit, 2011: 5.7 percent of GDP (about 5 percent in 2010) - Foreign exchange reserves at end-2011: about six months’ imports (excluding intra-WAEMU trade) - Projected regional growth, 2012: could reach 7 percent - Projected inflation, 2012: around 3.5 percent - Estimated downside growth impact from WEO January 2012 downside scenario: about 1.5 percentage point *Source: INTRODUCTION, 2012 REPORT WAEMU, INTERNATIONAL MONETARY FUND* ### 16. The monetary policy stance remains ### 16. The monetary policy stance remains ### Monetary policy stance and inflation outlook - The monetary policy stance remains appropriate, but a relaxation may be necessary if downside risks materialize. - Inflation is expected to remain moderate for a number of reasons (e.g., output gap in Côte d’Ivoire, softening of international prices), and therefore the current monetary policy stance could be maintained in 2012. - Risks to monitor: - Possible impact on core inflation of the drought in the Sahel countries. - Any inflationary pressure in Côte d’Ivoire if the recovery proves stronger than expected. - Conversely, if a further global slowdown and decline in commodity prices occurs, monetary policy could be relaxed, and the BCEAO should stand ready to meet banks’ liquidity needs. ### Interbank market development and liquidity management - Key findings: - Monetary policy implementation is seriously hampered by the presence of excess liquidity. - An important reason for excess liquidity is the limited development of the interbank market. - A deeper interbank market would enable banks to trade liquidity, reduce the need for injections by the BCEAO, and foster emergence of a benchmark rate for the conduct of monetary policy. - Effective liquidity management will require more accurate liquidity forecasts, notably improved capacity to forecast net government positions with the banking system. - Governments have significant scope to improve management of their own liquidity, including by setting up, with BCEAO assistance, single treasury accounts. - Good progress has been made in modernizing the BCEAO’s tools for analyzing and forecasting inflation, but there is scope for pursuing these efforts further with IMF technical assistance. - Authorities’ view: - The authorities broadly agreed with these recommendations. - On fiscal policy sustainability, they expressed concern about the new risks raised by the rapid increase in domestic/regional borrowing (related to higher public investment and deficits in some countries) and emphasized the need for all member countries to persist with revenue mobilization efforts. - Regarding infrastructure gaps, they underscored that not only more investment was needed, but also improving the quality of public expenditure was desirable. - Implementation update: - The BCEAO expects the interbank market reforms to be implemented in 2012. - Substantial progress has been made in developing a technical platform, which is being tested. - Significant legal work prepared the introduction of repurchase operations (repos) among banks to allow collateralization of operations and overcome reluctance of certain banks to trade with other banks. ### Real effective exchange rate, reserves, and external stability - Exchange rate assessment: - The real effective exchange rate is broadly aligned with fundamentals. - The equilibrium approach, the macroeconomic balance approach and the external sustainability approach all suggest the exchange rate is broadly in line with fundamentals for the region. - Staff analysis suggests that devaluation is not required by fundamentals. - REER/NEER dynamics: - Both NEER and REER trended upward until end-2009, contributing to an erosion of price competitiveness. - In 2010, NEER and REER decreased markedly in the wake of the depreciation of the euro vis-à-vis third currencies. - In 2011, both NEER and REER recorded a modest appreciation on average (less than 2 percent). - All three methodologies generate only small deviations from equilibrium, ranging from -2 percent (ERER approach) to +4 percent (ES approach). - Foreign exchange reserves: - Reserves amounted to CFAF 7,445 billion (about $15 billion) at end-2011. - By traditional metrics: - Coverage of imports: with more than 6 months. - Coverage of broad money: 60 percent. - Reserves also cover close to 100 percent of short-term domestic liabilities. - Optimal reserves (cost-benefit approach): - For countries with a fixed exchange rate and significant volatility, the optimal level of reserves may exceed 3 months of imports. - Applied to WAEMU actual data, the model suggests optimal levels ranging from 5 to 10 months, depending on the opportunity cost of holding reserves (with 4-5 percent probably constituting a credible range for the WAEMU). - The peg to the euro is guaranteed by the French Treasury, which constitutes an important risk mitigation factor. ### Banking sector soundness and stress tests - Key statistics and findings: - Risk-weighted capital adequacy ratio: 13 percent (authorities’ assessment at end-2010). - Nonperforming loans (NPLs): about 17 percent of all loans. - Provisioning rate: 65 percent. - About a third of the banks did not observe the new minimum capital requirement at end-2011. - Some prudential norms remain low and some rules are not in line with international standards (e.g., on risk concentration). - Stress test results: - Stress tests suggest the banking system is resilient on average but vulnerable mainly to credit risk. - Under the most damaging scenario, the cost of recapitalization to meet minimum capital requirements would remain limited (at most 1.5 percent of GDP, in Senegal). - Liquidity shocks simulated as a run for 10 consecutive business days (no recourse to emergency funds) show varying resilience: - More resilient: Mali, Senegal. - More vulnerable: Benin, Guinea Bissau, Togo. - Overall, the liquidity position is rather strong. - Data and methodology caveats: - Data used were mostly June 2011, except for Benin, Guinea-Bissau, Mali, and Niger (December 2010). - Degree of detail and data quality varied significantly across countries, limiting some tests and interpretation. - NPL classification and required provisions data were not available for most countries. - In measuring capital adequacy, sovereign risk is weighted zero in the WAEMU, an issue that may need revisiting in light of the recent Côte d’Ivoire crisis. ### Financial crisis prevention, resolution, and supervision - Staff recommendations to reinforce the framework: - Increase transparency through compilation and routine publication of financial soundness indicators. - Establish an early warning system with regular stress tests. - Accelerate establishment of an electronic platform for reporting by credit institutions to make data available more quickly. - Enhance prudential regulation by aligning some rules with international best practices, pushing banks to strengthen credit risk analysis, and improving compliance with prudential rules. - Allocate more resources to bank supervision, including for banking groups operating in the union and other regions. - Consider introducing a deposit insurance system in due course and strengthen the regulator’s role in the bank resolution process. - Authorities’ views and planned actions: - Authorities welcomed discussion on convergence criteria and suggested a broader review of fiscal criteria might be needed. - WAEMU Commission highlighted ongoing work on finding criteria that prevent excessive debt accumulation while leaving space for development needs and counter-cyclical policies. - Authorities welcomed staff support. - Authorities broadly agreed on need to strengthen financial system stability, welcomed technical exchanges on stress tests, plan to reconsider prudential regulation in move to Basel II, and intend to increase resources of the Banking Commission substantially. - Authorities are considering creation of a financial stability fund to address systemic crises, such as the one experienced in Côte d’Ivoire. ### Regional integration and raising potential growth - Impact of Côte d’Ivoire recovery: - The end of the crisis in Côte d’Ivoire improves growth prospects for the region. - Trade between Côte d’Ivoire and the rest of the region was severely affected by the 2011 crisis and by a decade of political instability. - Rebound in flows of goods, services, and production factors is expected to especially benefit landlocked countries and could make the entire area more attractive to foreign investors if regional integration deepens. - Remaining integration gaps: - Regional integration remains limited. - Non-tariff barriers to intraregional trade persist in the union and at the West African level (ECOWAS). - Insufficient transportation and energy infrastructures hinder benefits of the common market. - Staff advice: - Accelerate regional integration to make the most of Côte d’Ivoire’s recovery: - Eliminate all barriers to intra-WAEMU trade, including non-tariff barriers, import fees and export licensing. - Further facilitate labor mobility. - Pursue elimination of obstacles to trade within ECOWAS forcefully. - Complete the study on the impact of an economic partnership agreement (EPA) between West Africa and the European Union as soon as possible to: - Assess impact on businesses in the region and on public finances. - Prepare businesses for stronger competition and plan for a smooth tax transition. - Agree between WAEMU and the EU on the amount of financial support for the region during the transition. *Source: _cr1259 - 16. The monetary policy stance remains* ### 32. The planned introduction of a fifth ### _cr1259 - 32. The planned introduction of a fifth ### Tariff reform: planned fifth tariff band at 35 percent - The planned introduction of a fifth tariff band at 35 percent in the context of broadening the common external tariff to include all the ECOWAS countries is regrettable. - This band will apply to products deemed sensitive on the basis of five relatively vague criteria: product vulnerability, economic diversification, regional integration, sectoral promotion, and producer effort. - The adoption of these criteria, instead of the degree-of-processing criterion hitherto used in the WAEMU, reduces the consistency of the tariff from an incentives perspective. - The fifth band may also lead to a substantial increase in the weighted average rate of the union’s tariff and have a negative impact on the efficiency of resource allocation in the region. - Recommendation: The list of products subject to this tariff band should be as short as possible. ### Authorities’ views on regional recovery and integration - Authorities stressed the importance for the region of the recovery in Côte d’Ivoire and concurred on the need to accelerate regional integration. - They hoped that Côte d’Ivoire would quickly reach the HIPC Initiative’s completion point and benefit from debt relief, which would support the recovery. - They underscored that regional integration is one of the main purposes of the Regional Economic Program (PER). - Lessons were drawn from the relatively slow and incomplete implementation of the PER’s first phase; progress has been made in preparing the second phase scheduled for 2012 and to be reflected in the medium-term budgetary frameworks prepared by member countries. ### Financial sector: current state and key statistics - Despite recent progress, the WAEMU financial sector remains shallow and access to financial services limited. - Credit to the private sector amounts to only about 18 percent of GDP on average in the union. - Bank accounts are held by only about 5 percent of the population. - Transactions on the regional interbank and stock markets are limited; there is no secondary market in government securities. - Although the banking system has excess liquidity, small and medium-sized enterprises experience difficulties in access to bank loans, with financing provided mostly to a few large enterprises and governments. - Banks do limited maturity transformation. ### Staff’s advice on financial deepening (priority actions for 2012) - Financial sector deepening is desirable to help raise potential growth and reduce poverty. - The 2008 Financial Sector Assessment Program (FSAP) and authorities’ analyses led to recommendations; acceleration of reform implementation is needed. - Priority actions for 2012: - Develop the interbank market. - Strengthen the public debt market. - Review certain prudential rules that may excessively restrict access to credit, such as the transformation ratio. - Consider a more accommodating regulatory approach to financial innovation in early stages to facilitate diffusion of new financial services such as mobile banking. ### Authorities’ views on financial deepening and stability - Authorities saw further financial deepening as a priority and noted that access to financial services is greater if microfinance is taken into account. - Reported reforms include securitization and development of a mortgage market as steps to develop the financial system. - Emphasized need to preserve financial stability: - Government debt market development has diversified financing sources and enabled raising funds denominated in local currency. - New challenges for borrowers: manage debt with higher costs and shorter maturities. - Investors need capacity to assess sovereign risk. - Market institutions should improve functioning through better issuance predictability and coordination, creation of a secondary market led by primary dealers, broaden participation to nonbank institutions and, over time, to nonresidents. ### Box 3: Financial deepening since 2006 — key measures and statistics - Ratio of broad money to GDP in the WAEMU increased from 24 percent in 2006 to 31 percent in 2010. - In terms of annual percentage growth, countries with fastest rates: Guinea-Bissau, followed by Côte d’Ivoire, Togo, Benin, Burkina Faso, Niger, and Senegal. - Ratio of domestic credit to the private sector to GDP recorded similar evolution; highest annual growth rates in Guinea-Bissau, Niger, Benin, Togo, Côte d’Ivoire, and Senegal. - Regional stock market: market capitalization as a share of GDP increased from 24 percent in 2006 to 31 percent in 2010, although number of listed firms declined from 40 to 38. - Liquidity (value of stocks traded as a share of GDP) remained very low and decreased marginally. - Government securities market: by end-2011 annual issuances of government securities represented almost 10 percent of GDP. - Fastest growth observed in 2009–11: issuances of government securities increased sixfold, both in nominal terms and as a share of GDP and tax revenue. - Despite growth, government borrowing in the regional market is mainly short term. - Even after deepening in 2006–2010, financial intermediation remains very low: - Ratio of broad money to GDP in sub-Saharan Africa (excluding WAEMU and South Africa) was 38 percent in 2010, against 31 percent in the WAEMU. - Figures cited in Box 3 (selected): - Broad Money (% of GDP) — examples by country and year shown: Mali 28.5 / 33.8, Senegal 19.5 / 14.1, Burkina Faso 27.1 / 30.3, Niger 24.1 / 17.8, Benin 26.5 / 37.5, Togo 26.3 / 19.1, Côte d'Ivoire 37.5 / 42.7, Guinea-Bissau 34.0 / 25.8 (2010 / 2006 ordering as shown in figures). - Domestic credit to private sector (% of GDP) — examples by country and year shown: Mali 18.8 / 17.9, Burkina Faso 22.7 / 14.2, Senegal 17.1 / 16.8, Côte d'Ivoire 8.4 / 2.1, Togo 18.4 / 17.6, Benin 25.9 / 18.1, Niger 23.0 / 23.1, Guinea-Bissau 12.6 / 6.2 (2010 / 2006 ordering as shown in figures). ### Other reforms to improve economic efficiency - Nonprice competitiveness must increase for potential growth to rise; requires improving quality of institutions and infrastructures, reducing factor costs, and deepening the regional market. - Sectoral policies to ensure energy security, free flow of workers, and investment in human capital contribute to these objectives. - Tax harmonization: - Has progressed swiftly since 1994; on average about 75 percent of the tax revenue of member countries stems from harmonized or coordinated taxes. - Reflects conviction that proper functioning of the common market requires a certain level of tax harmonization. - Energy price subsidies remain significant in most countries: - Most countries have automatic adjustment pricing policies for petroleum products, but these policies have not been fully implemented. - Implicit subsidies vary by product and country and can be significant. - Price disparities with neighboring countries (e.g., Ghana, Nigeria) foster informal trade and arbitrage. - Electricity price subsidies further affect fiscal accounts. ### Staff’s advice on tax harmonization and petroleum pricing - Further tax harmonization could be considered in certain areas; recent IMF technical assistance suggested measures to prevent excessive tax competition among member states to attract foreign investment. - Work on pricing of petroleum products should continue in a coordinated way at the regional level: - Could be done in context of implementing recommendations of the regional workshop organized by the WAEMU Commission with IMF support in August 2011. - Any subsidization in favor of petroleum products should take into account need to prevent distortions in the common regional market and incidence of the subsidy. - Direct transfers are often more efficient and equitable than price subsidies. - Authorities’ view: WAEMU Commission wishes to play a more active role, disseminating analytical and factual information to encourage compliance with regional directives and expressed interest in continued TA from the Fund. ### Staff appraisal: outlook, risks, and priorities - Growth outlook: - After a sharp decline in 2011, regional growth is expected to experience a rebound in 2012. - Growth in 2011 was severely affected by the Côte d’Ivoire crisis and, to a lesser extent, by the drought in Sahel countries. - Despite weakening external environment, a strong postcrisis recovery in Côte d’Ivoire and other domestic factors are expected to lead to high regional growth in 2012. - Regional inflation would remain moderate in 2012 and over the medium term. - Macroeconomic policy stance: - Remains appropriate. - Fiscal stance was looser in 2011, but the area-wide deficit is expected to narrow somewhat in 2012. - Maintaining fiscal sustainability in the medium term will require a further reduction of deficits beyond 2012. - Monetary policy was appropriate in 2011 and remains so; contagion from the Ivorian crisis was prevented and inflation receded in the second half of the year. - Risks and policy response: - Risks are to the downside; a sharper than envisaged slowdown in the euro area could require a loosening of monetary policy and differentiated fiscal policy responses because it could affect countries asymmetrically and fiscal space varies across countries. - Financial and regional stability: - At about six months of regional imports, reserves are adequate and staff estimates suggest there is no area-wide real exchange rate misalignment. - Improvements to the regional surveillance framework should be explored, starting with provision and publication of better and timelier data. - Ongoing review of the convergence criterion on debt is welcome; a broader approach to fiscal sustainability could be considered. - Although stress tests and the recent crisis in Côte d’Ivoire suggest the regional financial sector is well capitalized overall and highly liquid, its stability could be increased through: - Better prudential regulation. - Better observance of prudential rules (requiring strengthened supervision). - A more formal crisis management framework. - Regional integration and financial deepening: - Offer opportunities to raise potential growth. - Côte d’Ivoire’s return to stability could be a game changer for the whole region, but reaping full benefits requires rekindling the regional integration agenda. - Financial deepening would help increase potential growth and inclusion. - Authorities’ plans to make the interbank market operational and to broaden the government debt market in 2012 are important steps. - Other regional reforms aimed at improving nonprice competitiveness and economic efficiency should be pursued (tax harmonization, petroleum product pricing). - Data and transparency: - Although data are adequate for Fund surveillance purposes, transparency and information availability should be further improved. - Staff welcomes efforts by the BCEAO and the WAEMU Commission and urges continuation to make best practices more widespread. - Directives on public financial management should be implemented by WAEMU countries as soon as possible. - Financial soundness indicators should be compiled and published routinely. *Source: 2012 REPORT WAEMU, INTERNATIONAL MONETARY FUND* ### 50. Staff welcomes the regional ### _cr1259 - 50. Staff welcomes the regional ### Staff response and consultation cycle - Staff welcomes the regional authorities’ interest in closer relations with the Fund, and will explore ways to assist them most effectively. - It is proposed that regional discussions with the WAEMU authorities remain on the standard 12-month consultation cycle. ### Key macroeconomic projections and indicators (WAEMU aggregate, selected) - Real GDP (annual percent change): 2008 4.2; 2009 2.9; 2010 4.6; 2011 0.8 (Est.); 2012 7.0 (Proj.); 2013 5.6 (Proj.); 2014 5.8 (Proj.); 2015 5.7 (Proj.); 2016 5.7 (Proj.) - GDP at constant prices excluding Côte d'Ivoire (annual percent change): 2008 4.9; 2009 2.6; 2010 5.5; 2011 3.2; 2012 6.5; 2013 5.5; 2014 5.8; 2015 5.8; 2016 5.9 - GDP per capita at constant prices (annual percent change): 2008 1.4; 2009 0.2; 2010 1.8; 2011 -1.9; 2012 4.1; 2013 2.8; 2014 3.0; 2015 2.9; 2016 2.9 - Broad money to GDP (annual percent change): 2008 -3.5; 2009 9.5; 2010 8.9; 2011 6.6 - Consumer prices (average, annual percent change): 2008 7.4; 2009 0.4; 2010 1.4; 2011 3.8; 2012 3.6; 2013 2.5; 2014 2.5; 2015 2.4; 2016 2.4 - Terms of trade (annual percent change): 2008 12.0; 2009 4.0; 2010 -4.5; 2011 1.3; 2012 2.8; 2013 1.8; 2014 -0.1; 2015 0.9; 2016 0.8 ### National accounts and investment - Gross domestic savings (percent of GDP): 2008 12.8; 2009 15.5; 2010 13.5; 2011 13.5; 2012 13.5; 2013 13.8; 2014 14.6; 2015 15.3; 2016 15.9 - Gross domestic investment (percent of GDP): 2008 19.8; 2009 18.6; 2010 19.1; 2011 19.3; 2012 20.9; 2013 21.6; 2014 21.7; 2015 22.2; 2016 22.5 - Public investment (percent of GDP): 2008 5.9; 2009 7.1; 2010 6.6; 2011 7.0; 2012 8.2; 2013 8.5; 2014 8.6; 2015 8.6; 2016 8.7 - Resource gap (percent of GDP): 2008 -7.0; 2009 -3.1; 2010 -5.5; 2011 -5.7; 2012 -7.5; 2013 -7.8; 2014 -7.1; 2015 -6.9; 2016 -6.6 ### Money, credit and reserves - Net foreign assets (annual change in percent of beginning-of-period broad money): 2008 0.3; 2009 5.8; 2010 3.1; 2011 5.5 - Net domestic assets (annual change): 2008 12.4; 2009 10.8; 2010 14.6; 2011 8.9 - Broad money (annual change): 2008 9.0; 2009 14.7; 2010 15.7; 2011 12.7 - Broad money (percent of GDP, memorandum): 29.5; 32.3; 35.2; 37.5 (years unspecified in memorandum line) - Foreign exchange cover ratio (Gross official reserves / short term domestic liabilities): 2008 96.8; 2009 98.9; 2010 99.9; 2011 97.2 (estimate refers to end-Oct) - Reserves in months of imports (excl. intra-WAEMU imports): 2008 5.7; 2009 6.2; 2010 6.3; 2011 6.2; 2012 6.0; 2013 6.1; 2014 6.1; 2015 6.0; 2016 7.9 ### Government finances (percent of GDP) - Government total revenue, excluding grants: 2008 17.6; 2009 17.4; 2010 18.0; 2011 16.5; 2012 18.3; 2013 18.7; 2014 19.0; 2015 19.2; 2016 19.4 - Government expenditure: 2008 22.4; 2009 23.9; 2010 23.5; 2011 24.4; 2012 25.3; 2013 25.4; 2014 25.3; 2015 25.2; 2016 25.1 - Overall fiscal balance, excl. grants: 2008 -4.8; 2009 -6.5; 2010 -5.5; 2011 -7.9; 2012 -7.0; 2013 -6.6; 2014 -6.3; 2015 -6.0; 2016 -5.7 - Official grants (percent of GDP): 2008 2.9; 2009 3.0; 2010 2.3; 2011 3.1; 2012 3.0; 2013 3.1; 2014 3.1; 2015 3.1; 2016 3.1 - Overall fiscal balance, incl. grants: 2008 -1.9; 2009 -3.5; 2010 -3.2; 2011 -4.8; 2012 -3.9; 2013 -3.5; 2014 -3.1; 2015 -2.8; 2016 -2.7 - Basic fiscal balance, incl. grants & HIPC: 2008 -1.8; 2009 -1.3; 2010 -0.8; 2011 -2.5; 2012 -1.9; 2013 -1.3; 2014 -0.9; 2015 -0.7; 2016 -0.5 ### External sector (percent of GDP) - Exports of goods and services: 2008 22.1; 2009 26.6; 2010 27.7; 2011 29.0; 2012 29.0; 2013 28.4; 2014 27.7; 2015 27.1; 2016 26.9 - Imports of goods and services (excluding intra-regional trade as estimated by BCEAO up to 2013): 2008 35.8; 2009 32.0; 2010 34.8; 2011 36.8; 2012 37.9; 2013 37.1; 2014 35.8; 2015 34.9; 2016 34.3 - Current account, excl. grants: 2008 -8.7; 2009 -5.7; 2010 -6.8; 2011 -7.7; 2012 -9.2; 2013 -9.2; 2014 -8.5; 2015 -8.3; 2016 -7.9 - Current account, incl. grants: 2008 -7.1; 2009 -3.6; 2010 -4.9; 2011 -5.7; 2012 -7.4; 2013 -7.7; 2014 -7.1; 2015 -6.9; 2016 -6.6 - External public debt (percent of GDP): 2008 33.8; 2009 35.6; 2010 32.3; 2011 32.2; 2012 32.6; 2013 32.8; 2014 33.3; 2015 33.0; 2016 32.4 ### Memorandum items (selected) - Nominal GDP (in billions of CFA francs): 2008 31,205; 2009 32,551; 2010 34,660; 2011 35,977; 2012 39,800; 2013 42,988; 2014 46,490; 2015 50,162; 2016 54,169.7 - Nominal GDP per capita (in US dollars): 2008 750; 2009 722; 2010 713; 2011 757; 2012 754; 2013 791; 2014 828; 2015 865; 2016 905 - CFA franc per US dollars, average: 2008 448; 2009 472; 2010 495; 2011 471 - Euro per US dollars, average: 2008 0.68; 2009 0.72; 2010 0.76; 2011 0.72 ### Cross-group comparison (selected aggregates) - Real GDP (annual percent change): WAEMU 2008 4.2; 2009 2.9; 2010 4.6; 2011 0.8; 2012 7.0; 2013 5.6; 2014 5.8; 2015 5.7; 2016 5.7 - Inflation (annual averages): WAEMU 2008 7.9; 2009 1.0; 2010 1.2; 2011 3.4; 2012 3.6; 2013 2.5; 2014 2.5; 2015 2.4; 2016 2.4 - Overall fiscal balance, incl. grants: WAEMU 2008 -1.9; 2009 -3.5; 2010 -3.2; 2011 -4.8; 2012 -3.9; 2013 -3.5; 2014 -3.1; 2015 -2.8; 2016 -2.7 - External current account, incl. grants: WAEMU 2008 -7.1; 2009 -3.6; 2010 -4.9; 2011 -5.7; 2012 -7.4; 2013 -7.7; 2014 -7.1; 2015 -6.9; 2016 -6.6 ### Country-level breakdowns (selected WAEMU country highlights) - Real GDP (2008–2016, annual percent change, selected): Benin 5.0; 2.7; 2.6; 3.1; 3.5; 4.7; 4.8; 4.8; 4.9. Burkina Faso 5.2; 3.2; 7.9; 5.6; 5.8; 6.4; 6.8; 6.8; 7.0. Côte d'Ivoire 2.3; 3.8; 2.4; -5.8; 8.5; 6.0; 6.0; 5.5; 5.2. Niger 9.6; -0.9; 8.0; 2.3; 14.2; 6.6; 7.3; 6.9; 7.0. - Inflation (annual averages, selected countries 2008–2016): Benin 8.0; 2.2; 2.6; 2.7; 5.7; 3.5; 3.4; 3.3; 3.2. Côte d'Ivoire 6.3; 1.0; 1.4; 4.9; 2.0; 2.5; 2.5; 2.5; 2.5. - Gross domestic investment (percent of GDP, selected): Senegal 34.1; 29.8; 31.4; 30.7; 32.6; 32.5; 32.7; 32.8; 32.8. Niger 32.3; 33.0; 38.6; 39.0; 41.4; 36.1; 28.6; 28.6; 25.9. ### External balances and debt (country and aggregate) - External current account (incl. grants, selected countries 2008–2016): Côte d'Ivoire 1.9; 7.0; 1.1; 2.7; -2.0; -4.5; -5.0; -5.1; -4.9. Niger -13.0; -25.0; -21.1; -28.5; -26.6; -20.8; -14.1; -13.5; -11.5. - External public debt (percent of GDP, WAEMU): 2008 33.8; 2009 35.6; 2010 32.3; 2011 32.2; 2012 32.6; 2013 32.8; 2014 33.3; 2015 33.0; 2016 32.4 - Government total debt (WAEMU total, percent of GDP): 2008 42.6; 2009 44.5; 2010 42.2; 2011 42.3; 2012 42.0; 2013 41.9; 2014 42.1; 2015 41.4; 2016 40.5 ### Monetary survey, banking soundness and financial sector indicators (selected) - Broad Money (billions of CFA francs, Dec 2009—Sep 2011 snapshots): 10,348; 10,306; 10,858; 11,030; 11,972; 12,060; 12,270; 12,435 - Net foreign assets (billions of CFA francs, Dec 2009—Sep 2011 snapshots): 5,061; 5,047; 5,188; 4,980; 5,385; 5,144; 5,423; 5,549 - Banking sector solvency (percent, selected years): Regulatory capital to risk weighted assets 2006 8.4; 2007 6.8; 2008 9.8; 2009 10.2; 2010 13.0. Tier I capital to risk-weighted assets 2006 8.0; 2007 6.0; 2008 9.4; 2009 9.8; 2010 12.8. - Asset quality (percent, selected): Gross NPLs to total loans 2006 18.5; 2007 18.9; 2008 19.2; 2009 17.9; 2010 17.2. Provisioning rate 2006 62.5; 2007 65.7; 2008 68.0; 2009 63.6; 2010 64.5. - Profitability (percent): ROE 2006 23.4; 2007 4.8; 2008 1.9; 2009 11.2; 2010 10.4. Net intermediation margin to total assets (NIMA) 2006 7.4; 2007 7.5; 2008 8.0; 2009 7.6; 2010 8.0. ### Socioeconomic and trade features (2010 snapshot, selected) - Population (millions, 2010): WAEMU total 95.9 (Benin 8.8; Burkina Faso 16.5; Côte d'Ivoire 19.7; Guinea-Bissau 1.5; Mali 15.4; Niger 15.5; Senegal 12.4; Togo 6.0) - GNP (billions of U.S. dollars, 2010): WAEMU total 71.2; country examples: Benin 6.9; Burkina Faso 9.0; Côte d'Ivoire 23.0; Mali 13.5 - GNP per capita (current U.S. dollars, 2010): WAEMU examples: Benin 780; Burkina Faso 550; Côte d'Ivoire 1,160; Mali 590 - Intraregional trade (exports as percent of total, 2010): WAEMU aggregate 14.6; country examples: Benin 15.9; Burkina Faso 9.0; Côte d'Ivoire 10.5; Senegal 33.7 *2012 REPORT WAEMU — INTERNATIONAL MONETARY FUND.* ### APPENDIX I: Exploring Risks to the WAEMU from a Weaker Global Environment ### APPENDIX I: Exploring Risks to the WAEMU from a Weaker Global Environment ### Overview and key scenario - The baseline scenario for 2012 assumes a slowdown of the world economy; the main risk is a further weakening of the external environment, particularly in the euro area. - The adverse scenario is the January 2012 WEO downside scenario: - Global real GDP growth is about 2 percentage points lower than in the baseline. - Euro zone output is reduced by 4 percentage points. - Oil prices and non-oil commodity prices are 10-20 percent below their baseline levels. - The euro is expected to depreciate during the first year of the crisis. - Consumption, particularly of households without access to credit, drops significantly while inflation decreases. ### Likely channels of transmission to the WAEMU - Trade - The euro zone remains the largest trade partner of the WAEMU region, particularly on the export side. - With a decline in demand from the euro area (and to a lesser extent the rest of the world), WAEMU exports are likely to be significantly affected. - In 2011, half of the region’s exports were commodities, such as fuel products, gold, cotton, and cocoa. - Commodity prices - The composition of exports (large share of commodities) leaves the region exposed to world market price volatility and asymmetric shocks across member countries. - The commodity share is expected to continue increasing owing to new mines and oil production facilities in certain WAEMU countries. - Remittances, aid and FDI - Remittances are estimated to average 4 percent of WAEMU GDP. - A substantial decline in euro area demand for labor is likely to lead to worker layoffs and reduced wage payments, affecting remittances negatively (though short-term transfers could increase if migrant workers return). - Aid could be affected by further fiscal consolidation in donor countries. - FDI could fall with lower growth in advanced and emerging economies. - Financial sector and other flows - Financial integration of the WAEMU with the rest of the world is limited; exposure to European banks is low despite the large presence of French bank subsidiaries. - Banks in the region fund themselves domestically and liquidity is abundant. - Indirect effects: lower WAEMU real GDP growth could increase nonperforming loans and reduce bank profitability, raising borrowing costs for the local corporate sector. - Large exchange rate fluctuations owing to the euro‑CFAF peg could be a source of instability, but so far they have not materialized. ### Lessons from the 2008 global financial crisis - Overall impact on the WAEMU was relatively moderate compared to other regions. - Trade and tourism were substantially affected: - Exports stagnated. - Imports declined by 10 percent. - Import prices declined by about 10 percent, in line with world food prices. - With imports much larger than exports, the current account improved markedly. - Remittances declined substantially after the 2008 crisis. - FDI held up relatively well, possibly reflecting increasing investment from emerging economies. - Fiscal deterioration was less pronounced than elsewhere, reflecting a lesser growth slowdown, smaller automatic stabilizers and limited discretionary stimulus spending. ### Model, calibration and simulation approach - The Global Integrated Monetary and Fiscal (GIMF) model (a multi-regional DSGE) is used, covering three regions: the euro zone, the WAEMU and the rest of the world. - Key model features: - Bilateral trade flows, relative prices, exchange rates and interest rates are explicitly modeled. - The model includes remittances and foreign aid flows. - Households: two types — OLG households with financial market access and liquidity-constrained households; share of households without access to credit is estimated at 70 percent. - Financial sector: limited set of financial assets; most domestic assets are non-tradable across borders; exogenous spillover shock to borrowing costs is used to capture cross-border borrowing cost effects. - Monetary policy: WAEMU follows the maintenance of the peg to the euro; euro area and rest of world follow Taylor rules. - Fiscal policy: variety of fiscal instruments; non-Ricardian features; in the current version all three regions target a balanced budget. - Calibration: - Share of households without access to credit: 70 percent. - Exports and imports between WAEMU and euro zone/rest of world taken from DOS databases. - Remittances and official development aid from World Bank sources. - Fiscal data from IMF country desks. - Several WAEMU parameters derived from applying the model to Asia to capture developing economy patterns. ### Simulation results and quantitative impacts - WAEMU aggregate impacts in the adverse scenario (relative to baseline): - WAEMU real GDP is about 1.5 percentage points below its baseline level in the first two years. - Exports decline by about 3 percent. - Domestic consumption is moderately lower (about 0.5 percent), with liquidity-constrained households more severely affected partly owing to lower remittances. - Real investment is lower by about 4 percent. - The current account deficit widens by about 0.3 percentage points of GDP. - Inflation would be lower, and the exchange rate would initially depreciate like the euro. - The fiscal balance deteriorates by 2/3 percentage point of GDP. - Government debt accumulates to a 2.5 percentage point higher level. - Distributional and cross-country considerations: - Impacts would differ substantially across individual WAEMU countries owing to heterogeneity in exposure to a euro zone recession and export destinations. - Some commodity exporters (e.g., Burkina Faso, Guinea-Bissau, and Mali) have shifted exports away from Europe and would be less affected. - Countries more exposed to Europe, such as Senegal and Côte d’Ivoire, would be more affected. *Prepared by Christina Kolerus with support from Dirk Muir (RES) and Doug Shapiro (AFR).* ### Appendix II: Lessons From the Euro Area Crisis for the WAEMU ### Appendix II: Lessons From the Euro Area Crisis for the WAEMU ### Summary and purpose - Prepared by Hervé Joly; draws on existing publications. - Reviews factors that led to the euro-area crisis and extracts lessons relevant to the WAEMU. - Key takeaway for the WAEMU: market flexibility and regional integration facilitate adjustment to asymmetric shocks; fiscal discipline is essential; attention to competitiveness and external imbalances is desirable; a crisis management system should be established; regional surveillance (including over the financial system) should be strengthened. ### A. What went wrong in the euro area? - Low interest–rate environment in the 2000s and lax financial sector regulation increased vulnerabilities, especially in periphery countries. - Common developments (one or several in each periphery country): - Excessive borrowing financing consumption or investment in real estate, often from other euro area countries aided by financial integration. - Excessive leverage in the financial sector: rapid growth in banks’ balance sheets, emergence of systemically important financial institutions, heavy reliance on volatile wholesale funding. - Procyclical fiscal policy in certain countries (e.g., Greece, and to a lesser extent Ireland and Portugal); insufficient countercyclical policies in others, failing to build buffers. - Loss of competitiveness from debt-financed demand and asymmetric efforts to contain production costs within the euro area; compounded by weaknesses in product and labor markets (limited competition in services; wage bargaining that often ignored employment/competitiveness; wage indexation increasing inflation persistence). - Failures of existing safeguards: - Fiscal integration remained incomplete; the Stability and Growth Pact (SGP) was not adequately monitored and enforced. - Generalized risk mispricing persisted until mid-2007, driven by lax financial regulation, a search-for-yield in a low-interest environment, belief that current account imbalances mattered less in a monetary union, and confidence in the SGP. - Lack of a European-wide crisis management framework; conflicting mandates for financial stability between EU and national authorities. - Insufficient coordination of regulatory and supervisory policies as cross-border capital flows and financial interconnectedness increased. - Insufficient capital buffers with Basel II implementation: reliance on internal risk models that undercounted negative interdependence and spillovers. ### B. General lessons for the stability of currency unions - OCA (optimal currency area) theory remains a useful framework: - Price and wage flexibility and labor mobility are critical for adjustment to asymmetric shocks. - Fiscal transfers can facilitate adjustment where available. - Strong fiscal discipline is critical: - Fiscal policy is the main macro tool for national authorities to address asymmetric shocks; countercyclical policies in good times are essential. - Imprecise fiscal policies in one member can generate negative spillovers and increase borrowing costs across the union. - Move toward greater fiscal integration: - Some form of fiscal risk-sharing is needed to provide common support before localized dislocation becomes a systemic fiscal/financial crisis. - Effective and comprehensive crisis-fighting tools must be available ex ante; designing tools mid-crisis is particularly challenging. - Strong regional supervision and crisis management: - Banks in an integrated currency area are not purely national; regional supervision is needed to detect excessive exposure and expansion. - Currency area–wide crisis management and resolution frameworks are required. - External imbalances and competitiveness matter: - Large current account deficits and external debt burdens can lead to external payment crises even when debt is held largely within the currency union. - Maintaining competitiveness and preventing excessive external debt accumulation requires product and labor market reforms for flexibility. - Need for strong regional surveillance: - Focus on fiscal developments, other sources of imbalances, members’ ability to address asymmetric shocks, and promotion of data availability, timeliness, and integrity. - External defined on a residency basis (includes debt owed to residents of other countries of the currency area). ### C. Applicability to the WAEMU OCA issues - Medium-term goal: improve OCA characteristics of the WAEMU to reap greater benefits from the common currency. - Trade and integration context: - The euro area remains the WAEMU’s main trading partner; its share decreased over 15 years from more than half to about a third. - Intra-WAEMU trade represents about 10 percent of total trade by WAEMU countries. - Ways to strengthen integration and convergence: - Remove obstacles to free trade inside the region; address identified nontariff barriers. - Develop regional infrastructure, particularly transport, to facilitate movement of goods and people. - Consider some form of fiscal integration in the medium term. - Promote price and wage flexibility and labor mobility; address statistical gaps on labor markets and informal sector size. Fiscal discipline - Need for fiscal discipline increases with regional integration: - Historical context: all WAEMU countries accumulated unsustainable debts and experienced debt crises in past decades. - Three factors that prevented past crises from destabilizing the union: convertibility guarantee by the French treasury; limited economic and financial integration within the region; limited financial integration with the rest of the world. - Increasing financial integration (e.g., rise in cross-country holding of sovereign paper) strengthens the case for fiscal discipline. - Current regional fiscal surveillance and criteria: - Two convergence criteria: (i) basic fiscal balance (excludes external debt-financed investment) should be positive; (ii) debt-to-GDP ratio should be below 70 percent. - Following HIPC and MDRI debt relief, debt-to-GDP ratios are well below the WAEMU ceiling in all countries except Côte d’Ivoire. - Many countries do not meet the fiscal balance criterion. - A review of the debt criterion was initiated in 2011. - Toward a comprehensive approach: - The 70 percent of GDP benchmark is probably on the high side for a sustainability threshold. - Fund staff empirical estimates in the context of revisiting the DSF suggest thresholds of 49 percent for countries with weak policies and institutions (CPIA < 3.25), 62 percent for medium policies and institutions (CPIA between 3.25 and 3.75), and 75 percent for strong policies and institutions (CPIA > 3.75) for total public debt in nominal terms. - These thresholds are ceilings beyond which probability of debt distress becomes significant, not optimal target levels. - Lowering the debt threshold alone is insufficient; emphasis should fall on the fiscal balance criterion, whose current indicator excludes significant sources of debt accumulation. - Consider moving to a more comprehensive definition of fiscal balance and disentangling cyclical from structural factors when assessing fiscal stance. - Question of sanctions: - Currently only a breach of the fiscal balance criterion in the “stability phase” can trigger a sanction. - Breaching fiscal criteria in the “convergence phase” has limited consequences, reducing incentives to meet targets. Monitoring external imbalances and competitiveness - Regional surveillance expansion (monitored from 2012) includes: - (i) standard of living (changes in per capita GDP relative to average in the zone); - (ii) trade integration (change in intra-regional trade as a share of the total); - (iii) labor mobility within the WAEMU (visa and/or passport requirements); - (iv) implementation of the Regional Economic Plan (number of projects underway and completed relative to plan and disbursements relative to commitments); - (v) changes in the business climate (based on Doing Business survey data); - (vi) financial integration (share of cross-border bank-to-bank transactions, in value and volume). - Responsibilities: WAEMU Commission mainly responsible for monitoring country progress, BCEAO responsible for the financial integration indicator, and trade integration relies on BCEAO information to the WAEMU Commission. - Additional indicators recommended: - Monitor REER (real effective exchange rate) developments to improve early detection of diverging competitiveness trends. - Monitor total external indebtedness by residency to capture private-sector external debt accumulation, especially relevant if financial integration increases. Supervision of, and crisis management framework for, the financial system - WAEMU advantages vs euro area pre-crisis: - Financial integration inside WAEMU and with the rest of the world is much more limited than in the euro area. - Regional regulation exists for main parts of the financial system (banking) and a regional banking supervision and crisis resolution framework centered on the Banking Commission. - Areas for strengthening: - Regulatory framework tightening to detect problems earlier, particularly assessment of risks borne by banks (credit risk, including private and sovereign risk). - Current practice assigns a zero weight to paper issued by WAEMU sovereigns when calculating capital requirements—this is inadequate given recent crises. - Consider adoption of certain Basel II provisions and CEMAC experience (government risk rating based on compliance with CEMAC convergence criteria). - Tighten rules on risk division, asset write down, and internal controls. - Strengthen banking supervision of regional and international groups; many groups are not supervised on a consolidated basis. - Deepen collaboration with supervisors outside the region and move toward consolidated supervision. - Increase Banking Commission resources; shift to risk-based supervision and further develop macroprudential supervision via the Financial Stability Committee. - Crisis management improvements: - New banking law requires banks to participate in a deposit insurance scheme—this should be implemented. - BCEAO and Banking Commission roles strengthened in processes leading to liquidation and granting priority to net claims of depositors, but liquidation remains judicial and no explicit unwinding framework exists. - Authorities could develop understandings on roles and coordination in bank resolution. - Consider whether the BCEAO should be given formal authority to be the lender of last resort (LOLR); currently it does not have formal authority and its LOLR capacity is limited in practice. Instruments to address sovereign debt problems - So far limited need for regional instruments: - Only Côte d’Ivoire had unsustainable public debt; expected substantial relief upon reaching the HIPC completion point in 2012. - Case for a regional facility to lend to solvent but illiquid sovereigns has been limited because concessional external resources are relatively accessible and the share of debt held by private creditors has been limited (lower rollover risks). - Medium-term considerations: - A regional financing facility could become more relevant as private creditor share increases. - Consider introducing collective action clauses (CACs) in longer-term regional paper to facilitate future public debt restructuring if necessary. Improving provision and quality of information - Good and timely information is critical for surveillance, supervision, and early detection of problems. - Statistical gaps and weaknesses led to late recognition of problems in the euro area (e.g., inaccurate Greek fiscal data). - Priorities for WAEMU: - Address statistical gaps and strengthen statistical agencies. - Improve timeliness and integrity of financial data to allow regular stress-testing of the banking sector. *Appendix II: Lessons From the Euro Area Crisis for the WAEMU — IMF staff note prepared by Hervé Joly.* ### APPENDIX III: What is the impact of a recovery in Côte d’Ivoire on the WAEMU region? ### APPENDIX III: What is the impact of a recovery in Côte d’Ivoire on the WAEMU region? ### A. Côte d’Ivoire: A Strong Outlook After a Crisis - Background and recent history - Côte d’Ivoire experienced political instability in the past 15 years, including a brief civil war in 2002-3 and a second armed conflict after the November 2010 presidential election; the crisis ended in April 2011. - Despite a subsequent rapid recovery, GDP is expected to have decreased by about 6 percent in 2011. - The crisis disrupted intraregional trade and regional transportation networks, increasing transportation costs for landlocked WAEMU countries. - Medium-term macroeconomic outlook (Table 1: Côte d'Ivoire: Medium-term projections; Annual percentage changes / Percent of GDP / Nominal values) - Real GDP at constant prices: 2010 Act. 2.4; 2011 Est. -5.8; 2012 Proj. 8.5; 2013 Proj. 6.0; 2014 Proj. 6.0; 2015 Proj. 5.5; 2016 Proj. 5.2; 2017 Proj. 5.2 - Consumer price index (average): 2010 Act. 1.4; 2011 Est. 5.1; 2012 Proj. 2.8; 2013 Proj. 2.5; 2014 Proj. 2.5; 2015 Proj. 2.5; 2016 Proj. 2.5; 2017 Proj. 2.5 - Overall fiscal balance (percent of GDP): 2010 Act. -2.3; 2011 Est. -8.1; 2012 Proj. -4.4; 2013 Proj. -3.5; 2014 Proj. -2.9; 2015 Proj. -2.7; 2016 Proj. -2.6; 2017 Proj. -2.6 - Primary basic balance (percent of GDP): 2010 Act. -0.2; 2011 Est. -4.8; 2012 Proj. -2.0; 2013 Proj. -0.5; 2014 Proj. 0.2; 2015 Proj. 0.5; 2016 Proj. 0.7; 2017 Proj. 0.7 - Central government investment (percent of GDP): 2010 Act. 3.1; 2011 Est. 2.9; 2012 Proj. 5.0; 2013 Proj. 5.6; 2014 Proj. 6.0; 2015 Proj. 6.2; 2016 Proj. 6.4; 2017 Proj. 6.4 - Nongovernment sector investment (percent of GDP): 2010 Act. 5.9; 2011 Est. 5.2; 2012 Proj. 6.6; 2013 Proj. 8.5; 2014 Proj. 10.0; 2015 Proj. 10.9; 2016 Proj. 11.5; 2017 Proj. 11.5 - Current account balance (percent of GDP): 2010 Act. 1.1; 2011 Est. 1.1; 2012 Proj. -1.7; 2013 Proj. -4.3; 2014 Proj. -4.8; 2015 Proj. -5.3; 2016 Proj. -5.5; 2017 Proj. -5.5 - Overall balance (percent of GDP): 2010 Act. -0.9; 2011 Est. -0.2; 2012 Proj. -3.1; 2013 Proj. -3.3; 2014 Proj. -2.7; 2015 Proj. -3.4; 2016 Proj. -3.4; 2017 Proj. -3.4 - Nominal GDP (CFAF billions): 2010 Act. 11,352; 2011 Est. 11,150; 2012 Proj. 12,400; 2013 Proj. 13,400; 2014 Proj. 14,500; 2015 Proj. 15,959; 2016 Proj. 16,782; 2017 Proj. 17,456 - Nominal GDP per capita (US$): 2010 Act. 1,043; 2011 Est. 1,044; 2012 Proj. 1,083; 2013 Proj. 1,128; 2014 Proj. 1,175; 2015 Proj. 1,227; 2016 Proj. 1,282; 2017 Proj. 1282 - Real GDP per capita growth (percent): 2010 Act. -0.6; 2011 Est. -8.8; 2012 Proj. 5.5; 2013 Proj. 3.0; 2014 Proj. 3.0; 2015 Proj. 2.5; 2016 Proj. 2.2; 2017 Proj. 2.2 - Additional projections and assumptions - Real growth expected to reach 8–9 percent in 2012 and to remain at about 5–6 percent in the medium term. - Postconflict recovery program assumes an increase in public and private investment from some 9 percent of GDP during 2009–11 to 14 percent of GDP in 2012–14. - Current account deficit projected to gradually increase to 6 percent of GDP by 2016 and be financed by foreign direct investment and new borrowing. - Overall fiscal deficit expected to gradually decrease to 2.5 percent of GDP; basic primary balance to recover to a small surplus in the medium term. - After a crisis-induced spike, inflation is expected to moderate to 3 percent in the medium term. ### B. Short-Term Impact on the WAEMU Region - Aggregate regional effects from Côte d’Ivoire recovery (accounting exercise) - A 1 percentage point higher real growth in Côte d’Ivoire, everything else equal, raises regional growth by 0.3 percentage point. - A decline of inflation in Côte d’Ivoire by 1 percentage point lowers regional inflation by 0.4 percentage point. - An improvement in the Ivorian fiscal deficit by 1 percentage point improves the area-wide fiscal deficit by about 0.3 percentage point. - A similar improvement in its current account improves the WAEMU’s current account by 0.2 percentage point. - Growth correlations with WAEMU countries (Table 2: Côte d'Ivoire: growth correlations with WAEMU countries) - Correlation coefficients by country and period: - Benin: 1980-2010 0.27; 1980-1993 0.38; 1995-2001 -0.15; 2002-2010 -0.36 - Burkina Faso: 1980-2010 0.38; 1980-1993 0.37; 1995-2001 0.79; 2002-2010 -0.38 - Côte d'Ivoire: 1.00 across all periods - Guinea-Bissau: 1980-2010 -0.04; 1980-1993 0.10; 1995-2001 -0.20; 2002-2010 0.67 - Mali: 1980-2010 0.21; 1980-1993 0.18; 1995-2001 0.40; 2002-2010 -0.39 - Niger: 1980-2010 0.23; 1980-1993 0.43; 1995-2001 0.14; 2002-2010 -0.36 - Senegal: 1980-2010 0.05; 1980-1993 0.08; 1995-2001 -0.11; 2002-2010 -0.09 - Togo: 1980-2010 -0.23; 1980-1993 -0.52; 1995-2001 0.70; 2002-2010 -0.04 - Real economy channels and short-term benefits - Resumption of transit trade through Côte d’Ivoire will improve supply of imported construction materials and industrial inputs for hinterland countries, restoring more efficient resource allocation. - Restoration of oil product exports from Abidjan’s refinery and electricity to Burkina Faso and Mali will help reduce production costs. - Growth in regional trade—exports of cattle, poultry, onions and other agricultural products to Côte d’Ivoire and imports of construction materials, processed foods, cooking oils, and soap from Côte d’Ivoire—will reinvigorate residential construction and help dampen food price inflation. - Border-sharing countries can expect increases in border trade. - Higher remittances from Côte d’Ivoire—notably significant for Burkina Faso—could stimulate consumption and private investment. - In 2011, estimated inward private transfers to Burkina Faso through formal channels amounted to 2.7 percent of GDP, including private remittances of 1.1 percent of GDP, two thirds of them from Côte d’Ivoire. - Inflation and price risks - Risks of inflationary pressures from Côte d’Ivoire are limited because high growth largely reflects a rebound amid large spare capacity, but price developments should be monitored closely. - Financial channels and risks - Key interest rates (WAEMU averages, Table 3) - T-bills (percent, averages): Q4 2010 5.385; Q1 2011 5.535; Q2 2011 5.785; Q3 2011 5.545; Q4 (Nov) 2011 5.25 - Lending rate (percent, averages): 2010 8.39; 2011 8.44; 2011 quarterly values 8.31, 8.68, 8.11 - Deposit rate (percent, averages): 2010 5.40; 2011 5.14; 2011 quarterly values 5.12, 5.14, 5.12 - Although lending to the private sector in the region increased in 2011, the average lending rate remained broadly unchanged; high demand for credit from Côte d’Ivoire could in future lead to higher interest rates there with potential spillovers to other WAEMU countries, though low financial integration is likely to limit this phenomenon. - Temporary closure of banks in Côte d’Ivoire in 2011 had a limited impact on the rest of the WAEMU financial system. - Côte d’Ivoire domestic debt management and market operations - Total domestic debt at end-June 2011 estimated at about 14.5 percent of GDP. - Creditor composition at that time: regional securities market investors 60 percent (mostly banks in Senegal, Benin, Burkina Faso, and to a lesser extent Mali); BCEAO 25 percent. - With the onset of the December 2010 crisis, regular auctions of Treasury securities were discontinued and holders of T-bills were not paid at maturity; authorities rolled over maturing T-bills until November/December 2011. - In late 2011 Côte d’Ivoire restructured CFAF 600 billion of short-term paper (interest rates ranging from 5.1 to 6.4 percent) into 2-year T-bills, and 3- and 5-year bonds at 4.75–5.25 percent interest rates and paid the accrued interest in cash; participation in the restructuring exceeded 90 percent at end-2011. - Projected regional borrowing and market implications (Table 4: Projected net issuances of government securities, CFAF billions, 2011-13) - Projected net issuances by country (2011 Est., 2012 Proj., 2013 Proj.): - Benin: 47, -3, -9 - Burkina Faso: 35, -21, -31 - Côte d'Ivoire: 230, 450, 360 - Guinea-Bissau: 0, 0, 0 - Mali: 350, ... - Niger: 5, -3, ... - Senegal: 170, 178, 141 - Togo: -2, 314, ... - Total: 468, 664, 462 - Côte d’Ivoire’s net borrowing needs in the domestic and regional markets in 2012 were estimated at CFAF 450 billion in the 2012 budget (3.5 percent of Côte d’Ivoire GDP and 1.1 percent of regional GDP). - With Senegal planning net borrowing of CFAF 178 billion, total regional borrowing from the market is expected to increase by almost 40 percent. - Challenges from large borrowing: - Potential tighter financing conditions for all sovereigns if issuance bunching occurs. - Banks may continue to find government securities attractive given excess liquidity, but governments should adopt clear medium-term issuance strategies and stick to announced schedules. - Desirable to expand the investor base to nonbanks to help the BCEAO control money supply; credit to governments contributed almost 40 percent to broad money increase in the region in the past two years. ### C. Medium-Term Impact and Regional Integration Opportunities - Medium-term benefits if Côte d’Ivoire grows near historical rates - If Côte d’Ivoire were to grow annually at about 6 percent in the next 10 years, the size of its economy would almost double. - Positive externalities (trade, remittances) could increase; investment in energy and transportation infrastructure, improved business climate, and postconflict reconstruction may attract foreign investors and create outsourcing opportunities for neighboring countries. - Opportunities to accelerate regional integration - Strengthening the common regional market - Accelerate efforts to remove barriers to trade (including those erected because of the crisis in Côte d’Ivoire) and improve the dispute resolution system for intrazone trade problems. - A more coherent common external trade policy - Reduce country-specific exemptions to the common external tariff (CET), in particular in Côte d’Ivoire as the main importer of goods and services into the region. - Lessons could be drawn from Côte d’Ivoire’s interim Economic Partnership Agreement (EPA) with the European union for negotiating the EPA for the West Africa region. - Accelerated implementation of the regional economic program - Active Côte d’Ivoire participation could help accelerate projects aimed at improving governance, economic infrastructure, and human resource development to remove bottlenecks to growth in the region. *Prepared by Alexei Kireyev.* ### APPENDIX IV: Financial Development in the West African Economic and Monetary ### APPENDIX IV: Financial Development in the West African Economic and Monetary Union ### A. The Role of the Financial Sector in Economic Development - A well-functioning financial system pools resources from savers, transforms maturity from short-term deposits to medium- and long-term financing, screens investment projects, allocates resources to projects with the highest (risk-adjusted) expected rates of return, and monitors performance. - Financial systems also provide payment and transaction services, and insurance and risk management services. - An efficient financial system (as measured, for example, by the level of the net interest margin) leads to higher growth by increasing both savings and investment: - Higher interest rates paid on deposits attract more savings. - Lower interest rates charged on loans encourage higher investment. - Empirical evidence (cross-section of countries) shows positive and statistically significant relationships between: - Growth of GDP and financial deepening (typically measured by the ratio of private credit to GDP). - Financial development and poverty reduction. - Causality cannot be inferred definitively because higher GDP growth and lower incidence of poverty may also lead to higher financial deepening; nevertheless, the relationships are suggestive of the financial system’s importance for economic development. - Mechanisms through which financial development can accelerate poverty reduction: - Direct channels: increased provision of credit enabling more socially profitable projects. - Indirect channels: improved allocation of risk sharing, reduction in vulnerability to shocks, greater ability to smooth consumption. - Expanded access enables skilled individuals to become entrepreneurs rather than wage earners; this reallocation can employ subsistence workers and improve the allocation of talent versus outcomes determined solely by initial wealth. ### B. Evolution of Financial Deepening in WAEMU Between 2006 and 2010 - Context: - The period 2006–2010 included the global financial crisis of 2008–2009 and the resulting Great Recession, which had only a limited impact on the WAEMU financial system. - At the onset of the crisis, financial systems in most countries in SSA, including WAEMU, were on average well capitalized and highly liquid, with little or no exposure to toxic assets such as sub-prime mortgages, asset-backed securities, and collateralized debt obligations. - As a result, SSA financial systems largely avoided contagion and repeated banking crises of the 1980s and 1990s. - Broad money to GDP: - The ratio of broad money to GDP in WAEMU member countries increased from an average of 24.4 percent in 2006 to 31.2 percent in 2010. - Despite this increase, WAEMU started from a relatively low level even compared with other countries in SSA. - All WAEMU member countries except Mali experienced an increase in broad money to GDP between 2006 and 2010. - Country growth in broad money (annual average fastest to slowest): Guinea-Bissau (about 10 percent), followed by Cote d’Ivoire, Togo, Benin, Burkina Faso, Niger, and Senegal. - Note: WAEMU broad money to GDP is higher than among six other members of the franc zone (CEMAC). - Domestic credit to the private sector to GDP: - This indicator provides a broadly similar picture to broad money, but the ratio increased at a lower rate than the SSA average and started from a lower level. - Country-level domestic credit to private sector (% of GDP) for 2006 and 2010 (preserved ordering as displayed): - Mali: 2006 = 8.4; 2010 = 18.4 - Burkina Faso: 2006 = 17.9; 2010 = 17.6 - Senegal: 2006 = 22.7; 2010 = 25.9 - Cote d’Ivoire: 2006 = 14.2; 2010 = 18.1 - Togo: 2006 = 17.1; 2010 = 23.0 - Benin: 2006 = 16.8; 2010 = 23.1 - Niger: 2006 = 2.1; 2010 = 12.6 - Guinea-Bissau: 2006 = 6.2; 2010 = 6.2 - Regional comparisons and markets: - WAEMU domestic credit to private sector (% of GDP) comparison (2006–2010 averages plotted alongside CEMAC, WAEMU, SSA ex WAEMU and South Africa) shows WAEMU lagging SSA averages. - Regional stock market: - Registered modest growth in 2006–2010. - Remains a small market with limited liquidity. - Market capitalization as a share of GDP increased, but the number of listed firms declined from 40 to 38. - The value of stocks traded as a share of GDP remained very low compared to other SSA exchanges and decreased marginally. - Example country comparisons (selected numbers preserved as shown): - Number of domestic companies listed in the stock market in 2006 and 2010 (selected): Cote d’Ivoire: 2006 = 41; 2010 = 53 (other countries listed for context in source). - Total value of stocks traded (% of GDP) in 2006 and 2010 for selected countries: Cote d’Ivoire: 2006 = 2.4; 2010 = 3.7 (other countries listed for context in source). - Government securities market: - Very dynamic segment during recent years. - Amount of annual securities issuances increased almost 60 times in nominal value since establishment in 2001, and 30 times as a share of WAEMU GDP and government revenue. - By end-2011 annual issuances of government securities represented almost 10 percent of GDP and 70 percent of tax revenue. - Fastest growth observed in 2009–11, when issuances increased six-fold, both in nominal terms and as a share of GDP and tax revenue. - Despite growth, government borrowing in the regional market is mainly short-term: - Two main types of government securities: short-term T-bills and medium-term bonds. - Short-term T-bills represent about 90 percent of all government paper issued in the regional market in 2000–11, and their share has been gradually growing. - Medium-term bonds, which represented almost half of all issuances until the mid-2000s, have become less important in relative terms. - The Côte d’Ivoire restructuring recently bucked this trend. ### C. Conclusions and Policy Implications - Despite improvements in 2006–2011, the financial system in WAEMU member countries continues to be characterized by low levels of financial intermediation. - Financial deepening should be pursued resolutely and will require accelerating reform implementation, starting with: - Developing the interbank market. - Strengthening the public debt market. - Assessing progress in financial deepening is hindered by the near absence of indicators on access. - Participation in international surveys like Financial Access or FinScope could be considered by the authorities. *Prepared by Rodrigo Garcia-Verdu, with input from Alexei Kireyev.* ### Appendix V: FSAP Follow-up ### Appendix V: FSAP Follow-up ### Supervision and Operational Framework of the Banking Sector - Recommendation: Gradually align prudential norms to international best practice: i.e., CAR, credit exposure, delinquent loan classification threshold. - Status: Institutional reform provided basis for aligning prudential norms. Current norms will first be rationalized. At a second stage, the regulatory framework will be aligned with Basel II principles. - Recommendation: Enforce the minimum statutory capital requirement to encourage bank mergers and end BCEAO and government participation in the capital structure of banks. - Status: WAEMU banks compliant with the higher minimum capital requirement at end-December 2010 accounted for 87 percent total assets of the banking system. - Status details: 10 out of 36 non-compliant banks are from Côte d’Ivoire and are being treated separately in view of the crisis. The remaining 26 have demonstrated readiness to comply shortly. Supervisory authorities are monitoring progress closely. - Recommendation: Limit states’ participation in financial institutions to 25 percent of equity. - Status: Majority of member states comply; some do not yet observe this norm. Article 27 of the BCEAO’s new statutes allows for its participation in financial institutions, but the BCEAO has divested from 7 institutions since late 2008. - Recommendation: Strengthen the WAEMU Banking Commission (BC) and make it accountable for enforcing regulations more strictly; put in place early warning procedures; establish crisis resolution procedures for systemic cases. - Status: Institutional reform strengthened BC’s autonomy in enforcing regulations and resolving crises. BC now has the power to propose administrators and can be overruled only by the WAEMU Council of Ministers upon a member state’s appeal. - Status: An early warning procedure has not yet been put in place. - Status: The resources of the Banking Commission are expected to be increased substantially in 2012. ### Open Market Operations and Public Securities Markets - Recommendation: Enhance operational framework for monetary policy: collectivize open market operations with prime quality assets; provide daily forecasts through a bank liquidity monitoring committee; establish active national cash committees. - Status: In progress. BCEAO is enhancing the operational framework; continues to internally assess asset quality and does not currently use external ratings. BCEAO is putting in place active national treasury cash flow committees, but national authorities’ compliance is presently very weak. Providing daily forecasts of liquidity is yet to materialize. - Recommendation: Produce reliable annual schedules of securities issuance. - Status: In progress. - Recommendation: Issue all public debt securities by auction. - Status: Implemented. The BCEAO has clearly favored issuance by auction. - Recommendation: Put in place a network of primary dealers. - Status: In progress. Regulations are being prepared by the BCEAO. - Recommendation: Establish a regional legal framework for repurchase operations. - Status: In progress. Implementation expected in 2012. - Recommendation: Set up a government bond issues coordination committee under the authority of the Council of Ministers. - Status: Adopted in 2010, but not yet operational because of national authorities’ difficulty complying. ### Securities and Exchange Market and Accounting and Audit Framework - Recommendation: Complete study of restructuring the market addressing: (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; (v) incentives to attract foreign investment. - Status: Some progress. Principle of creating incentives for venture capital adopted. Regulator has undertaken actions to attract more participants. - Recommendation: Gradually align bank accounting and auditing with international standards (IFRS and ISA) while maintaining financial reporting in accordance with prudential rules. - Status: In progress. Accounting framework under review to be aligned with IFRS and IAS standards. - Recommendation: Ease accounting requirements for companies wishing to list by reducing number of audited fiscal years from five to three. - Status: Not implemented—but under review. A window for SMEs is being established to facilitate listing. - Recommendation: Determine under what conditions the guarantee system could be replaced with ratings. - Status: Implemented since 2010—private entities with good ratings do not need external guarantees before issuing securities. Private entities with no ratings or bad ratings still required to use guarantee funds/institutions. Only a few businesses are rated in the region. - Recommendation: Harmonize securities taxation in the WAEMU; review pricing of services to significantly lower transaction costs. - Status: Implemented—adopted in 2010, review of pricing in progress. *This appendix was prepared by Prosper Youm.* ### Public Information Notice (PIN) — Executive Board Assessment (March 22, 2012) - Context and 2011 developments: - Côte d’Ivoire experienced a political crisis and armed conflict after the November 2010 presidential election; crisis ended in April 2011 when President Ouattara took control. - Regional growth in 2011: 0.9 percent (area-wide), affected by Ivorian crisis and drought in Sahel. - Côte d’Ivoire annual GDP decline in 2011: 5.8 percent. - Drought-related cereal production declines in Burkina Faso, Mali, Niger, and Senegal: estimated declines ranging from 15 to 27 percent. - Consumer price inflation: estimated at 3.6 percent in 2011 (annual average); year-on-year inflation below 3 percent at year-end 2011 after a peak in spring 2011. - Area-wide overall fiscal deficit (excluding grants): increased from 5.5 percent of GDP in 2010 to 7.9 percent of GDP in 2011. - Average public debt: estimated to have remained at about 42 percent of GDP in 2011. - Current account deficit: rose to about 6 percent of GDP in 2011 (from about 5 percent of GDP in 2010). - Foreign exchange reserves: about six months’ imports (excluding intra-WAEMU trade) at end-2011. - Progress on convergence criteria: mixed—many countries met inflation criterion in 2010 but fewer did so in 2011; most did not meet fiscal deficit criterion in 2011; indebtedness criterion improved due to debt relief to Togo and Guinea-Bissau under HIPC Initiative and MDRI. - Executive Directors’ views and recommendations: - Commended sound macroeconomic management that contained inflation and maintained financial stability in 2011 despite shocks. - Noted mixed progress on convergence and downside risks from Europe and Sahel drought; macroeconomic policies should respond if risks materialize. - Urged reduction of area-wide fiscal deficit over the medium term while attending infrastructure needs. - Welcomed ongoing review of convergence criterion on debt and suggested a broader approach to fiscal sustainability. - Urged prompt implementation of directives on public financial management, containment of wages and salaries, broad-based tax reforms, and replacement of petroleum price subsidies with well-targeted social safety nets. - Considered monetary stance broadly appropriate but called to strengthen liquidity management and forecasting framework and expedite inter-bank market reforms. - Found foreign exchange reserves adequate and area-wide real exchange rate broadly aligned with fundamentals. - Encouraged continuation of FSAP recommendations implementation: strengthen prudential regulation and supervision, introduce a more formal crisis management framework, and develop the financial sector to support growth. - Urged acceleration of regional integration: remove barriers to intra-regional trade and factor mobility, improve business environment, and develop regional infrastructure. - Recommended continued progress on transparency and timely publication of financial soundness indicators. ### Table 1 — Selected Economic and Financial Indicators, 2008—2016 (key series and exact values) - GDP at constant prices: - 2008: 4.2 - 2009: 2.9 - 2010: 4.6 - 2011: 0.8 - 2012 (Proj.): 7.0 - 2013 (Proj.): 5.6 - 2014 (Proj.): 5.8 - 2015 (Proj.): 5.7 - 2016 (Proj.): 5.7 - GDP at constant prices excluding Côte d'Ivoire: - 2008: 4.9 - 2009: 2.6 - 2010: 5.5 - 2011: 3.2 - 2012 (Proj.): 6.5 - 2013 (Proj.): 5.5 - 2014 (Proj.): 5.8 - 2015 (Proj.): 5.8 - 2016 (Proj.): 5.9 - GDP per capita at constant prices: - 2008: 1.4 - 2009: 0.2 - 2010: 1.8 - 2011: -1.9 - 2012 (Proj.): 4.1 - 2013 (Proj.): 2.8 - 2014 (Proj.): 3.0 - 2015 (Proj.): 2.9 - 2016 (Proj.): 2.9 - Consumer prices (average): - 2008: 7.4 - 2009: 0.4 - 2010: 1.4 - 2011: 3.8 - 2012 (Proj.): 3.6 - 2013 (Proj.): 2.5 - 2014 (Proj.): 2.5 - 2015 (Proj.): 2.4 - 2016 (Proj.): 2.4 - Gross domestic savings (percent of GDP): - 2008: 12.8 - 2009: 15.5 - 2010: 13.5 - 2011: 13.5 - 2012 (Proj.): 13.5 - 2013 (Proj.): 13.8 - 2014 (Proj.): 14.6 - 2015 (Proj.): 15.3 - 2016 (Proj.): 15.9 - Gross domestic investment (percent of GDP): - 2008: 19.8 - 2009: 18.6 - 2010: 19.1 - 2011: 19.3 - 2012 (Proj.): 20.9 - 2013 (Proj.): 21.6 - 2014 (Proj.): 21.7 - 2015 (Proj.): 22.2 - 2016 (Proj.): 22.5 - Public investment (percent of GDP): - 2008: 5.9 - 2009: 7.1 - 2010: 6.6 - 2011: 7.0 - 2012 (Proj.): 8.2 - 2013 (Proj.): 8.5 - 2014 (Proj.): 8.6 - 2015 (Proj.): 8.6 - 2016 (Proj.): 8.7 - Overall fiscal balance, excl. grants (percent of GDP): - 2008: -4.8 - 2009: -6.5 - 2010: -5.5 - 2011: -7.9 - 2012 (Proj.): -7.0 - 2013 (Proj.): -6.6 - 2014 (Proj.): -6.3 - 2015 (Proj.): -6.0 - 2016 (Proj.): -5.7 - Overall fiscal balance, incl. grants (percent of GDP): - 2008: -1.9 - 2009: -3.5 - 2010: -3.2 - 2011: -4.8 - 2012 (Proj.): -3.9 - 2013 (Proj.): -3.5 - 2014 (Proj.): -3.1 - 2015 (Proj.): -2.8 - 2016 (Proj.): -2.7 - Basic fiscal balance, incl. grants & HIPC (percent of GDP): - 2008: -1.8 - 2009: -1.3 - 2010: -0.8 - 2011: -2.5 - 2012 (Proj.): -1.9 - 2013 (Proj.): -1.3 - 2014 (Proj.): -0.9 - 2015 (Proj.): -0.7 - 2016 (Proj.): -0.5 - Current account, excl. grants (percent of GDP): - 2008: -8.7 - 2009: -5.7 - 2010: -6.8 - 2011: -7.7 - 2012 (Proj.): -9.2 - 2013 (Proj.): -9.2 - 2014 (Proj.): -8.5 - 2015 (Proj.): -8.3 - 2016 (Proj.): -7.9 - Current account, incl. grants (percent of GDP): - 2008: -7.1 - 2009: -3.6 - 2010: -4.9 - 2011: -5.7 - 2012 (Proj.): -7.4 - 2013 (Proj.): -7.7 - 2014 (Proj.): -7.1 - 2015 (Proj.): -6.9 - 2016 (Proj.): -6.6 - External public debt (percent of GDP): - 2008: 33.8 - 2009: 35.6 - 2010: 32.3 - 2011: 32.2 - 2012 (Proj.): 32.6 - 2013 (Proj.): 32.8 - 2014 (Proj.): 33.3 - 2015 (Proj.): 33.0 - 2016 (Proj.): 32.4 - Broad money (percent of GDP): - 2008: 29.5 - 2009: 32.3 - 2010: 35.2 - 2011: 37.5 - Nominal GDP (in billions of CFA francs): - 2008: 31,205 - 2009: 32,551 - 2010: 34,660 - 2011: 35,977 - 2012 (Proj.): 39,800 - 2013 (Proj.): 42,988 - 2014 (Proj.): 46,490 - 2015 (Proj.): 50,162 - 2016 (Proj.): 54,169.7 - Nominal GDP per capita (in US dollars): - 2008: 750 - 2009: 722 - 2010: 713 - 2011: 757 - 2012 (Proj.): 754 - 2013 (Proj.): 791 - 2014 (Proj.): 828 - 2015 (Proj.): 865 - 2016 (Proj.): 905 - Reserves in months of imports (excl. intra-WAEMU imports): - 2008: 5.7 - 2009: 6.2 - 2010: 6.3 - 2011: 6.2 - 2012 (Proj.): 6.0 - 2013 (Proj.): 6.1 - 2014 (Proj.): 6.1 - 2015 (Proj.): 6.0 - 2016 (Proj.): 8.0 *Public Information Notice (PIN) No. 12/29 — March 22, 2012. Staff report and annexes underpinning this summary were presented to the IMF Executive Board on March 14, 2012.* ### Statement by Assimaidou Kossi (Executive Director for WAEMU, March 14, 2012) - Key remarks: - WAEMU authorities thanked IMF staff for discussions in January 2012. - 2011 regional growth affected by postelection crisis in Côte d’Ivoire and drought in Sahel; Côte d’Ivoire GDP decline in 2011: 5.8 percent; regional growth in 2011: 0.8 percent. - Inflation remained in line with targets after first-half surge. - Authorities rolled over maturing Ivorian government paper to help safeguard banking system. - Convergence agenda suffered; most countries missed fiscal deficit criterion in 2011; debt figures improved due to HIPC/MDRI. - Outlook for 2012: regional growth expected at 7 percent; inflation expected around 3.5 percent. - Authorities committed to sound macroeconomic policies, reforms on infrastructures, energy, industry, and trade; fiscal deficits set to narrow as subsidy-related measures end and energy shortages improve. - Financial sector: authorities addressed systemic risks from Ivorian bank closures and nonpayment of Ivorian debt; coordination between BCEAO and Ivorian authorities insulated other countries. - Authorities will enhance compliance with prudential regulation and deepen the banking sector to address underfinancing of private sector, especially SMEs. - Regional initiatives: linking capital cities by modern roads, extending railway, regional energy fund hosted by BOAD to finance short-term national energy initiatives. - Authorities intend to revamp institutional setting of the Union to strengthen crisis prevention and resolution mechanisms drawing lessons from euro zone crisis and Ivorian debt crisis. *This content unit is derived from the IMF staff report and Public Information Notice (PIN) on the WAEMU — Appendix V: FSAP Follow-up.* ### Conclusion ### Conclusion ### Growth prospects and drivers - Growth prospects are highly favorable for the WAEMU region for 2012 and the medium term, partly owing the post-crisis recovery in Cote d’Ivoire. - The buoyant public investments programmed in the region’s leading economy support the favorable outlook. - The reaching of the HIPC completion point this year should help improve further the outlook for the whole region. - The WAEMU authorities are committed to implement a wide array of reforms to fully benefit from these favorable developments and entrench growth momentum. ### Institutional challenges and policy commitments - The new challenges posed by recent crises, both within the region and on the international scene have underscored the need to continuously improve the monetary union’s institutions. - My authorities will work hand in hand with partners such as the Fund in this endeavor. *Source: _cr1259 - Conclusion* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1259.pdf_