## _cr15101

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---

### External Sector Developments
- Current account and trade:
  - The current account deficit declined to 7.3 percent of GDP in 2014, down from 8.1 percent in 2013.
  - The trade deficit expanded by 4 percent of GDP to 11.6 percent of GDP in 2013 and is projected to stay above 10 percent of GDP in 2014.
  - Drivers of the widened trade balance include increased capital imports for infrastructure investments (Côte d’Ivoire) and investments into the extractive industry (Niger and Benin).
- Financing and reserves:
  - Capital and financial inflows increased, with FDI and concessional loans remaining stable.
  - Two WAEMU countries tapped international capital markets in 2014.
  - Gross international reserve coverage increased slightly from 4.5 to 4.6 months of extra-regional imports.
  - Part of the current account deficit was financed through a decline in commercial banks’ net foreign assets.
- Medium-term baseline outlook (conditional on government consolidation plans and favorable oil price outlook):
  - The current account deficit is expected to gradually decline and be matched by sufficient financial inflows in the medium term.
  - Investment is expected to remain high but increasingly financed by domestic savings in line with governments’ consolidation plans.
  - The contribution of WAEMU’s exports to SSA and world exports would increase gradually.
  - Financial and capital accounts are projected to finance the current account deficit, generating BOP surpluses, building up GIR and stabilizing reserve coverage in the medium term.
- Downside risks:
  - Slow containment or spread of Ebola impacting trade and tourism.
  - A decline in non-oil commodity demand and prices (in particular gold) driven by an emerging markets slowdown.
  - Tighter external financing conditions associated with normalization of advanced economies’ monetary policy.
- Policy imperatives:
  - Fiscal consolidation and a break from the WAEMU’s historical average growth are needed to preserve external sustainability.
  - High investment efficiency and improvements to the business climate are essential to boost exports and attract private inflows.

### Box 1 — Growth and Fiscal Consolidation Scenario
- External sustainability would weaken in the absence of fiscal consolidation or if growth reverted to its historical average.
- No fiscal adjustment scenario:
  - Assumption: The overall fiscal deficit stays at its projected 2014 level in percent of GDP.
  - Results:
    - The current account deteriorates compared to the baseline due to higher imports induced by the more expansionary fiscal stance.
    - GIR would fall to 2 months of next year’s imports, below standard optimal levels (5-12 months of imports).
    - The REER would be more overvalued by 14.2 percent according to the external sustainability approach.
- Historical growth scenario:
  - Assumption: Medium-term growth for 2015-19 is set at its historical average (4.4 percent, 2004-13, excluding Côte d’Ivoire).
  - Results:
    - The fiscal deficit deteriorates compared to the baseline as expenditures are kept constant in nominal terms while tax revenue decreases owing to lower growth.
    - The current account deteriorates as only private sector imports react to lower growth.
    - GIR would fall to about 3½ months of extra-regional imports.
    - The REER would be slightly more overvalued by 10.7 percent according to the external sustainability approach.

### Exchange Rate Assessment
- Overall finding: Based on four methodologies, the REER appears to be broadly in line with fundamentals.
- EBA-lite approach (re-estimated to include WAEMU aggregates):
  - Regression estimates are very similar to the original approach by Chen (2014).
  - Fitted values capture current account dynamics well but consistently underestimate its size.
  - Decomposition for 2013:
    - The WAEMU’s policy gap is positive, driven mainly by its relative fiscal stance, decreasing the current account norm to -5.1 percent of GDP.
    - A further adjustment downward of 0.6 percent of GDP relates to one-off investments in Benin.
    - The current account gap of -2.4 percent of GDP implies an overvaluation of the REER by 5.7 percent.
- CEGR-based assessment:
  - The three CEGR methodologies suggest real exchange rate misalignment ranging between an overvaluation of 1 to 9.8 percent.
  - CEGR macro-balance approach (medium-term perspective) suggests a smaller current account gap than the EBA-lite (short-term fundamentals).
  - The current account to GDP ratio that stabilizes NFA at roughly the median for lower-middle income countries lies at -3.9 percent of GDP, implying a misalignment of the REER of about 9.8 percent.
  - The equilibrium real exchange rate approach implies an overvaluation of the REER of 8.9 percent, driven almost entirely by productivity differences.
- Policy implication: Implementing efficiency-enhancing reforms will be an important driver of external stability.

### Gross international reserve coverage in the WAEMU
- Current levels and trends:
  - GIR coverage declined substantially since 2010 when it stood at 6.6 months of imports.
  - GIR increased slightly in 2014 compared to 2013: 4.6 month of imports in 2014, up from 4.5 in 2013.
  - GIR cover about 40 percent of broad money.
  - GIR cover approximately 80 percent of short-term liabilities.
  - GIR coverage of narrow money is on a downward trend but remains significantly higher than the floor: 84 percent compared to the floor of 20 percent of narrow money.
  - Banks’ net foreign assets (NFA) have decreased and turned negative.
- Reserve adequacy assessment and projections:
  - Using Dabla-Norris et al. (2011) approach, the “optimal” level of reserves for the region is estimated at about 5 to 12 months of imports.
  - Implication: the region’s reserve coverage is currently below these “optimal” levels.
  - Caveat: this metric does not fully apply for the WAEMU given the commitment of France to back the convertibility of the CFA franc.
  - Given current macroeconomic projections, and assuming no significant change in the CPIA rating, projected reserve coverage could stay below these optimal levels even in the medium term.
- Key quantitative indicators (preserved exactly):
  - 6.6 months of imports (GIR in 2010)
  - 4.6 month of imports (GIR in 2014)
  - 4.5 (GIR in 2013)
  - 40 percent (GIR as percent of broad money)
  - 80 percent (GIR as percent of short-term liabilities)
  - 84 percent (GIR of narrow money)
  - 20 percent (floor of narrow money under zone’s arrangement with France)
  - Optimal reserve range: 5 to 12 months of imports
  - CPIA referenced as a conditional factor
- Policy-relevant implications:
  - Reserve coverage below estimated “optimal” levels suggests a need to build buffers against typical external shocks.
  - WAEMU’s special monetary arrangement (convertibility backed by France) limits direct applicability of standard reserve adequacy metrics; policy judgment must account for this commitment.
  - Declining commercial banks’ NFA and negative NFA positions increase vulnerabilities, reducing private-sector foreign exchange buffers and potentially raising reliance on official reserves.

### Monetary policy stance and transmission
- Risks and transmission:
  - Elevated levels of central bank lending to commercial banks can hinder the development of the interbank market and weaken the transmission of monetary policy.
  - If risks to fiscal and financial stability are material, "the cost of tightening monetary policy will be higher when faced with increasing inflationary pressure."
  - Underdevelopment of the interbank market in the WAEMU means the channel from central banks’ direct counterparties to the wider financial system is not fully active.
- Policy options to reduce central bank liquidity dependence:
  - Fiscal consolidation is identified as the most effective way to reduce elevated central bank liquidity provision to commercial banks:
    - Staff projections: fiscal deficit would fall to 2.8 percent of GDP and the current account deficit (including grants) to 5.5 percent of GDP by 2019, conditional on planned consolidation.
    - In the absence of planned consolidation, monetary policy would need to be tightened to reduce private sector demand to preserve external stability.
  - Authorities should monitor central bank liquidity provision closely and consider pre-emptive policy responses, including monetary, prudential and debt management measures.
- Targeted monetary measures:
  - Increase in the policy rate is judged "inappropriate at this juncture" given the current benign inflation outlook.
  - Targeted tightening options:
    - Reduce the refinancing ratio from its current level of 35 percent to discourage carry trade activity by commercial banks.
    - Tighten liquidity only for banks that have high levels of borrowing from the central bank.
- Prudential and debt management measures:
  - Raise the capital requirement applied to banks’ holdings of government securities from its current level of zero.
  - Remove the tax exemption relating to interest received on holdings of government securities.
  - Relax regulatory barriers to entry for financial institutions other than domestic banks.
  - Issue a greater share of public debt externally, consistent with external debt sustainability.

### Financial inclusion: empirical findings and drivers
- Access and usage:
  - Only about 13 percent of the population has deposits at a commercial bank.
  - Less than one third of firms access credit.
  - Bank teller is the dominant way to make deposits; checks and electronic payments are much less developed.
  - Less than one percent of the population has access to a credit card.
- Vulnerable groups:
  - Young adults and the bottom 40 percent of income distribution have account ownership less than 5 percent of the respective group.
  - Rural populations, those with less education, and women are less likely to have accounts.
- Firms and shock mitigation:
  - Most firms have bank accounts but less than 30 percent access a loan or line of credit in most WAEMU countries.
  - Majority of loans require collateral; the value of collateral on average exceeds the value of the loan.
  - Internal funds are the main source of firms’ investment financing; bank financing contributes only a small fraction.
- Drivers of private sector credit gaps (regression results):
  - Factors positively associated with higher private sector credit-to-GDP (coefficients preserved exactly where reported):
    - FDI/GDP: coefficient 0.002***.
    - Trade Openness: coefficients 0.209*** and 0.217***.
    - Capital Controls: coefficients 0.076*** and 0.115***.
    - Health Spending/GDP: coefficients 1.575*** and 1.202***.
    - Institutions (ICRG): coefficients 0.295*** and 0.234***.
    - Telephone Lines: coefficient 0.000***.
    - Internet Use: coefficients 0.001** and 0.001*.
  - Factors negatively associated with private sector credit-to-GDP:
    - Growth: coefficient -0.004***.
    - Fiscal Balance (cyclically adjusted)/GDP: coefficients -0.185** and -0.247**.
    - Inflation: coefficients -0.004*** and -0.003***.
  - Other estimates and model fit:
    - Constant terms across specifications: 0.019*, -0.119***, -0.033, -0.183***, -0.308***.
    - Number of observations: 1055.
    - R-squared values across specifications: 0.01, 0.04, 0.04, 0.09, 0.18.
- Policy levers (effects of a one WAEMU standard deviation increase, reported in Percent of GDP):
  - Positive effects: FDI (0.8), Trade Openness (1.9), Health Spending (1.7), Institutions (1.1), Internet Use (0.3), Telephone Lines (1.7).
  - Negative effects: Growth (-1.0), Fiscal Balance (-1.7), Inflation (-1.1).
- Implication: Policies to raise FDI, trade openness, health spending, institutional quality, and ICT access can expand private sector credit; macro stability and fiscal consolidation also matter.

### Micro-founded general equilibrium model: constraints to financial inclusion
- Model purpose and frictions:
  - Calibrated to Dabla-Norris et al. (2015) to quantify binding constraints to financial inclusion and impacts on GDP, productivity, and income distribution.
  - Three financial frictions: participation costs, intermediation costs, and imperfect enforceability of contracts (collateral requirements).
- Calibration targets (preserved exactly):
  - Savings (in Percent of GDP): 14.5
  - Collateral (in Percent of Loan Value): 170
  - Firms with Credit (in Percent of Firms): 20
  - Non-Performing Loans (in Percent of Loans): 17
  - Interest Rate spread: 7.4
- Main quantitative findings:
  - Participation costs and high collateral requirements are identified as the main borrowing constraints on average in the WAEMU.
- Simulation insights and trade-offs:
  - Lowering participation costs:
    - Substantially increases fraction of firms with credit.
    - Raises GDP and reduces income inequality (Gini), but may lower average productivity (TFP) as less talented entrants enter.
  - Lowering intermediation costs:
    - Reduces interest rate spreads, yields modest positive impacts on GDP, TFP and access.
  - Lowering collateral constraints:
    - Allows firms to borrow more, yields large GDP and productivity gains.
    - Benefits more talented entrepreneurs disproportionately and may increase income inequality (Gini rises).
- Policy-relevant interpretation:
  - Two distinct channels to expand inclusion with different trade-offs: participation-cost reduction (broad access, lower inequality, possible TFP decline) versus collateral-relaxing measures (higher GDP and TFP, higher inequality).
  - Complementary measures are needed to balance inclusion, efficiency, and distributional outcomes.

### Mobile payments in the WAEMU: uptake, impediments, and oversight
- Market size and trends:
  - Number of existing mobile-money accounts increased by 35 percent to 17 million between December 2013 and September 2014.
  - Number of transactions increased by more than 40 percent to almost 179 million in the same period.
  - Transaction value was 2,445 billion FCFA (about 5 percent of 2014 GDP).
  - Mobile phone penetration has increased rapidly; in some WAEMU countries it exceeds penetration in Kenya and Tanzania.
- Usage gaps and distribution:
  - Mobile payments remain lower than benchmarks (Kenya, Tanzania) and are less accessed by vulnerable groups (bottom 40 percent, rural populations, females).
- Impediments:
  - Cost: High cost of electronic payment services, especially for small transactions (up to 10 USD); in-network transfer costs are particularly high relative to transaction amount for small transactions.
  - Intermediation model: Regulatory framework requires bank intermediation, potentially limiting innovation, competition and raising costs through bank fees.
  - Services and interoperability: Providers mainly offer basic transfers and bill payments; international remittances, links to banking products, mobile micro-insurance and loan disbursements are less developed. Interoperability is weak due to national licensing.
- Oversight and risks:
  - Mobile payments increase the importance of mitigants against provider failure and misconduct, AML/CFT risks, settlement risk, liquidity and credit risks, and operational risk.
  - Recommended oversight pillars:
    - Minimum market entry requirements (e.g., minimum capital for non-bank providers).
    - Financial integrity controls: AML/CFT risk-based supervision by the WAEMU Banking Commission; reporting of suspicious transactions.
    - Fund safeguarding: guarantee or insurance for funds (insurance coverage or inclusion in deposit insurance schemes).
    - Operational resiliency: tested business continuity plans.
    - Payment system stability: robust clearance and settlement systems leveraging bank transaction systems.
- Policy directions:
  - Promote mobile financial services subject to a strong oversight framework.
  - Target policies to reduce cost for small transactions and expand interoperability across networks and borders.

### Structural transformation, diversification, and demographics
- Potential gains from transformation:
  - A 1 percentage point reallocation of labor from agriculture to manufacturing (keeping productivity constant) could raise output by 1.1 percent.
  - A 1 percent increase in agricultural productivity (keeping resource allocation constant) could raise aggregate output by 0.3 percent.
  - Increasing output diversification to benchmark levels could increase average growth by 0.6 to 0.9 percent.
  - A 1 standard deviation increase in LIC’s export diversification raises the growth rate by about 0.8 percentage points, translating into potential ½ percentage point growth gains if raised to Asian or SSA benchmark levels.
- Heterogeneity and policy priorities:
  - Magnitudes vary across member economies depending on starting structures and productivity.
  - Policies to foster transformation should focus on infrastructure, human capital, finance, trade networks, regulatory and institutional environment, and ideas creation/management.
  - Agricultural sector priorities: productivity and quality improvements given agriculture’s large employment share.
- Role of agriculture:
  - Agriculture employs around 60 percent of the workforce in the WAEMU and may remain the largest employer in the medium term.
  - Applying Fox and Thomas (2014) methodology, agricultural employment could double over two decades, with share in total employment declining from around 60 percent to 50 percent.
  - Agricultural productivity is relatively low (e.g., cereal yields below benchmarks); scope exists to increase quantity and quality of agricultural exports.
- Demographics and employment:
  - Fertility and population: fertility rates remain high; in 2010 almost half the population was below age 15.
  - Population could double over the next two decades, from around 100 to 200 million, with a net annual increase in the labor force of around 1.3 million new workers.
  - Demographic dividend potential:
    - If fertility declines from current level of 5.7 children per woman to 3.8, share of working age population would increase from 52 percent to 58 percent by 2035.
    - Drummond et al. (2014) estimate that a 1 percentage point increase in the working age population increases real GDP growth per capita by 0.5 percentage points.
  - Risks if fertility remains high or labor markets fail to absorb entrants: pressure on public services and infrastructure, possible excess labor in informal low-productivity agriculture or unemployment.
- Policy implications:
  - Promote fertility decline (e.g., increased contraceptive use) and education/skills to absorb new entrants into higher value-added employment.

### ECOWAS Common External Tariff (CET) adoption and implications for WAEMU
- Adoption and objective:
  - ECOWAS CET adopted at Heads of State Summit in October 2013 in Dakar and became effective in January 2015.
  - Purpose: stock-taking of WAEMU tariff structure, trade flows, estimate import demand elasticities, and partial equilibrium assessment of tariff change effects.
- Stylized facts:
  - WAEMU tariffs prior to ECOWAS CET: range 0 to 20 percent on goods from non-WAEMU countries.
  - Simple average import tariff prior to ECOWAS CET: about 12 percent.
  - Import duties constituted at least 8 percent of total government revenue in any WAEMU country over 2000-2013; in 2013 import duties represented at least 13 percent of total government revenue in all WAEMU countries, with Benin at 34 percent.
- ECOWAS CET structure vs WAEMU:
  - Five bands; first four taken from WAEMU CET; ECOWAS adds a fifth band at 35 percent for specific goods for economic development.
  - Table of duty rates (preserved exactly):
    - Category 0: Essential social Goods — WAEMU Duty Rate: 0; ECOWAS Duty Rate: 0
    - Category 1: Goods of primary necessity, raw materials and specific inputs — WAEMU Duty Rate: 5; ECOWAS Duty Rate: 5
    - Category 2: Inputs and Intermediate goods — WAEMU Duty Rate: 10; ECOWAS Duty Rate: 10
    - Category 3: Final Consumption goods — WAEMU Duty Rate: 20; ECOWAS Duty Rate: 20
    - Category 4: Specific goods for economic development — WAEMU Duty Rate: - ; ECOWAS Duty Rate: 35
    - Average duty rates reported: WAEMU Average 11.93; ECOWAS Average 12.27
- Partial equilibrium framework and import demand elasticities:
  - Supply blocks: WAEMU, other ECOWAS (non-WAEMU), and Rest of the World (ROW); supply assumed perfectly elastic.
  - Import price elasticities (selected country coefficients preserved exactly):
    - Benin: Import Price-CPI ratio coefficient -2.43***
    - Cote d’Ivoire: Import Price-CPI ratio coefficient -0.22*
    - Mali: Import Price-CPI ratio coefficient -0.87**
    - Togo: Import Price-CPI ratio coefficient -0.63***
  - Panel WAEMU estimate: Import Price-CPI ratio coefficient -0.39***; Real GDP coefficient 0.73***; Import duties coefficient 0.46***.
  - Interpretation: Percent decrease in import demand from a 1 percent increase in import price varies from about 0.2 (Côte d’Ivoire) to 2.4 (Benin), average about 0.4 for WAEMU.
- Trade effects of ECOWAS CET:
  - Expect increase in WAEMU imports from other ECOWAS countries and decrease from ROW due to higher tariffs on non-ECOWAS members.
  - In most WAEMU countries (except Togo), trade creation estimated larger than trade diversion.
  - In other WAEMU countries, tariff change implies an increase in imports from non-WAEMU ECOWAS countries by approximately 6 percent on average.
  - Highest estimated increase in imports from non-WAEMU ECOWAS: 52 percent in Benin.
  - Increase in average tariff for non-ECOWAS countries estimated to reduce WAEMU imports from ROW by less than 0.2 percent for most WAEMU countries; highest expected decrease ¾ percent in Benin.
  - Estimates are likely upper bounds due to remaining non-tariff barriers and lack of substitutes.
- Revenue implications:
  - Net effects vary by country:
    - Revenues in Benin, Burkina Faso, Côte d’Ivoire, Niger, and Senegal could decrease by ½ to approximately 2½ percent from their 2013 level.
    - Revenues could increase by ½ to 3 percent in Guinea-Bissau, Mali, and Togo.
  - Overall a slight decrease in revenues would be expected in the WAEMU.
  - Informal trade exclusion may understate revenue losses in countries with substantial informal re-exports (notably Benin).
- Benin-specific box (preserved facts):
  - About 50 percent of imports going through the Port of Cotonou are destined for Nigeria.
  - At least 20 percent of Benin’s GDP is generated through informal trade.
  - Tax revenue gain from re-export activity could be about 2 percent of GDP or 14 percent of total tax revenue.
  - A full trade liberalization scenario in Nigeria is estimated to result in a revenue loss of at least 2 percent of GDP for Benin.

*Prepared by William Gbohoui, Karim Barhoumi, Larry Cui and Monique Newiak (IMF staff analysis extracted from the provided PDF).*

### References _________________________________________________________________________________ 14

### _cr15101 - References _________________________________________________________________________________ 14

### External Sector Developments
- The current account deficit declined to 7.3 percent of GDP in 2014, down from 8.1 percent in 2013.
- The trade deficit expanded by 4 percent of GDP to 11.6 percent of GDP in 2013 and is projected to stay above 10 percent of GDP in 2014.
- Drivers of the widened trade balance:
  - Increased capital imports for infrastructure investments (Côte d’Ivoire).
  - Investments into the extractive industry (Niger and Benin).
- Financing and reserves:
  - Capital and financial inflows increased, with FDI and concessional loans remaining stable.
  - Two WAEMU countries tapped international capital markets in 2014.
  - Gross international reserve coverage increased slightly from 4.5 to 4.6 months of extra-regional imports.
  - Part of the current account deficit was financed through a decline in commercial banks’ net foreign assets.
- Medium-term outlook (baseline, conditional on implementation of government consolidation plans and favorable oil price outlook):
  - The current account deficit is expected to gradually decline and be matched by sufficient financial inflows in the medium term.
  - Investment is expected to remain high but increasingly financed by domestic savings in line with governments’ consolidation plans.
  - The contribution of WAEMU’s exports to SSA and world exports would increase gradually.
  - Financial and capital accounts are projected to finance the current account deficit, generating BOP surpluses, building up GIR and stabilizing reserve coverage in the medium term.
- Downside risks to the outlook:
  - Slow containment or spread of Ebola impacting trade and tourism.
  - A decline in non-oil commodity demand and prices (in particular gold) driven by an emerging markets slowdown.
  - Tighter external financing conditions associated with normalization of advanced economies’ monetary policy.
- Policy imperatives:
  - Fiscal consolidation and a break from the WAEMU’s historical average growth are needed to preserve external sustainability.
  - High investment efficiency and improvements to the business climate are essential to boost exports and attract private inflows.

### Box 1 — Growth and Fiscal Consolidation Scenario
- External sustainability would weaken in the absence of fiscal consolidation or if growth reverted to its historical average.
- No fiscal adjustment scenario:
  - Assumptions: The overall fiscal deficit stays at its projected 2014 level in percent of GDP.
  - Results:
    - The current account deteriorates compared to the baseline due to higher imports induced by the more expansionary fiscal stance.
    - GIR would fall to 2 months of next year’s imports, below standard optimal levels (5-12 months of imports, Figure 6).
    - The REER would be more overvalued by 14.2 percent according to the external sustainability approach (Figure 3).
- Historical growth scenario:
  - Assumptions: Medium-term growth for 2015-19 is set at its historical average (4.4 percent, 2004-13, excluding Côte d’Ivoire).
  - Results:
    - The fiscal deficit deteriorates compared to the baseline as expenditures are kept constant in nominal terms while tax revenue decreases owing to lower growth.
    - The current account deteriorates as only private sector imports react to lower growth.
    - GIR would fall to about 3½ months of extra-regional imports.
    - The REER would be slightly more overvalued by 10.7 percent according to the external sustainability approach (Figure 3).

### Exchange Rate Assessment
- Overall finding: Based on four methodologies, the REER appears to be broadly in line with fundamentals (Figure 3).
- EBA-lite approach (re-estimated to include WAEMU aggregates):
  - The regression estimates are very similar to the original approach by Chen (2014).
  - Fitted values capture current account dynamics well but consistently underestimate its size.
  - Decomposition for 2013:
    - The WAEMU’s policy gap is positive, driven mainly by its relative fiscal stance, decreasing the current account norm to -5.1 percent of GDP.
    - A further adjustment downward of 0.6 percent of GDP relates to one-off investments in Benin.
    - The current account gap of -2.4 percent of GDP implies an overvaluation of the REER by 5.7 percent.
- CEGR-based assessment:
  - The three CEGR methodologies suggest real exchange rate misalignment ranging between an overvaluation of 1 to 9.8 percent, broadly confirming the EBA-lite result.
  - CEGR macro-balance approach (medium-term perspective) suggests a smaller current account gap than the EBA-lite (short-term fundamentals).
  - The current account to GDP ratio that stabilizes NFA at roughly the median for lower-middle income countries lies at -3.9 percent of GDP, implying a misalignment of the REER of about 9.8 percent.
  - The equilibrium real exchange rate approach implies an overvaluation of the REER of 8.9 percent, driven almost entirely by productivity differences.
- Policy implication: Implementing efficiency-enhancing reforms will be an important driver of external stability.

*Prepared by Monique Newiak. (Content extracted from the provided IMF document pages.)*

### 7.      Gross international reserve coverage in

### _cr15101 - 7.      Gross international reserve coverage in

### Reserve coverage: current levels and recent trends
- Gross international reserves (GIR) coverage declined substantially since 2010 when it stood at 6.6 months of imports.
- GIR increased slightly in 2014 compared to 2013: 4.6 month of imports in 2014, up from 4.5 in 2013.
- GIR cover about 40 percent of broad money.
- GIR cover approximately 80 percent of short-term liabilities.
- GIR coverage of narrow money is on a downward trend but remains significantly higher than the floor: 84 percent compared to the floor of 20 percent of narrow money (the floor that acts as a warning signal under the zone’s monetary arrangement with France).
- Banks’ net foreign assets (NFA) have decreased and turned negative.

### Reserve adequacy assessment and projections
- Using the Dabla-Norris et al. (2011) approach (maximize net benefits from reserves given crisis costs, fundamentals, exposures, and opportunity cost), the “optimal” level of reserves for the region is estimated at about 5 to 12 months of imports, depending on the opportunity cost of reserves.
- Implication: the region’s reserve coverage is currently below these “optimal” levels.
- Caveat: this metric does not fully apply for the WAEMU given the commitment of France to back the convertibility of the CFA franc.
- Given current macroeconomic projections, and assuming no significant change in the CPIA rating, projected reserve coverage could stay below these optimal levels even in the medium term.

### Key quantitative indicators (preserved exactly)
- 6.6 months of imports (GIR in 2010)
- 4.6 month of imports (GIR in 2014)
- 4.5 (GIR in 2013)
- 40 percent (GIR as percent of broad money)
- 80 percent (GIR as percent of short-term liabilities)
- 84 percent (GIR of narrow money)
- 20 percent (floor of narrow money under zone’s arrangement with France)
- Optimal reserve range: 5 to 12 months of imports
- CPIA (Country Policy and Institutional Assessment) referenced as a conditional factor

### Policy-relevant analysis and implications
- Reserve coverage below estimated “optimal” levels suggests a need to build buffers against typical external shocks.
- The WAEMU’s special monetary arrangement (convertibility backed by France) limits direct applicability of standard reserve adequacy metrics; policy judgment must account for this commitment.
- Without improvements in fundamentals or a decline in the opportunity cost of reserves, projected reserve coverage may remain below the estimated optimal range in the medium term.
- Declining commercial banks’ NFA and negative NFA positions increase vulnerabilities, reducing private-sector foreign exchange buffers and potentially raising reliance on official reserves.

*Source: _cr15101 - 7.      Gross international reserve coverage in (IMF staff report).*

### 14.      Monetary policy may not be optimally set and the transmission mechanism may be

### _cr15101 - 14.      Monetary policy may not be optimally set and the transmission mechanism may be weakened.

### Monetary policy risks and transmission
- Elevated levels of central bank lending to commercial banks can hinder the development of the interbank market and weaken the transmission of monetary policy.
- If risks to fiscal and financial stability are material, "the cost of tightening monetary policy will be higher when faced with increasing inflationary pressure."
- Underdevelopment of the interbank market in the WAEMU means the channel from central banks’ direct counterparties to the wider financial system is not fully active.

### Policy options to reduce central bank liquidity dependence
- Fiscal consolidation is identified as the most effective way to reduce elevated central bank liquidity provision to commercial banks:
  - Staff projections: fiscal deficit would fall to 2.8 percent of GDP and the current account deficit (including grants) to 5.5 percent of GDP by 2019, conditional on planned consolidation.
  - In the absence of planned consolidation, monetary policy would need to be tightened to reduce private sector demand to preserve external stability.
- Authorities should monitor central bank liquidity provision closely and consider pre-emptive policy responses, including monetary, prudential and debt management measures.

### Monetary policy measures (targeted)
- Increase in the policy rate is judged "inappropriate at this juncture" given the current benign inflation outlook.
- Targeted tightening options:
  - Reduce the refinancing ratio (the maximum permitted stock of outstanding BCEAO refinancing relative to total assets, applied on an individual bank basis) from its current level of 35 percent to discourage carry trade activity by commercial banks.
  - Tighten liquidity only for banks that have high levels of borrowing from the central bank.

### Prudential policy measures
- Mitigate market distortions that incentivize banks to invest in government securities:
  - Raise the capital requirement applied to banks’ holdings of government securities from its current level of zero.
  - Remove the tax exemption relating to interest received on holdings of government securities.
- Relax regulatory barriers to entry for financial institutions other than domestic banks to increase the market presence of non-bank financial institutions (domestic and foreign) and relieve pressure on domestic banks to finance government borrowing.

### Debt management policy
- Issue a greater share of public debt externally to ease the burden on the domestic banking system and lessen sovereign-bank feedback loops.
- Any increase in external debt must be consistent with external debt sustainability.

### Financial inclusion: summary of findings
- WAEMU countries lag benchmark countries in several dimensions of financial inclusion:
  - Low access to basic financial infrastructure (density of ATMs, number of bank branches).
  - Relative amounts of deposits and loans at commercial banks broadly in line with African benchmark groups but significantly lower than Asian benchmark countries.
  - Number of people with deposits at commercial banks is relatively low.
  - More than half of enterprise survey respondents identify access to finance as a major constraint.
- Financial access is lowest for the most vulnerable groups:
  - Young adults and the bottom 40 percent of income distribution have account ownership less than 5 percent of the respective group.
  - Rural populations, those with less education, and women are less likely to have accounts.
- Main modes of deposit and payment:
  - Bank teller is the dominant way to make deposits.
  - Checks and electronic payments are much less developed than in comparator groups.
  - Less than one percent of the population has access to a credit card; debit card access is higher but still well below peers.
- The financial sector contributes modestly to shock mitigation and firms’ investment:
  - Share of population with loans for health or emergencies is comparatively high; loans for education are comparable to benchmarks.
  - Coverage by health insurance is low; agricultural insurance is less prevalent on average than in benchmark countries.
  - Most firms have bank accounts but less than 30 percent access a loan or line of credit in most WAEMU countries.
  - Majority of loans require collateral; the value of collateral on average exceeds the value of the loan.
  - Internal funds are the main source of firms’ investment financing; bank financing contributes only a small fraction.

### Drivers of private sector credit gaps and policy implications
- Private sector credit-to-GDP ratios are broadly in line with WAEMU fundamentals on average, with cross-country variation:
  - In 2013 actual credit-to-GDP was lower than the benchmark in Benin, Burkina Faso, Côte d’Ivoire, and Guinea-Bissau; higher in Mali, Niger, and Togo; broadly consistent in Senegal.
- Regression analysis (financial gap = actual private sector credit-to-GDP minus benchmark) identifies factors positively associated with higher private sector credit-to-GDP:
  - FDI/GDP: coefficient 0.002***.
  - Trade Openness: coefficients 0.209*** and 0.217*** (in alternative specifications).
  - Capital Controls: coefficients 0.076*** and 0.115***.
  - Health Spending/GDP: coefficients 1.575*** and 1.202***.
  - Institutions (ICRG): coefficients 0.295*** and 0.234***.
  - Telephone Lines: coefficient 0.000***.
  - Internet Use: coefficients 0.001** and 0.001*.
- Factors negatively associated with private sector credit-to-GDP:
  - Growth: coefficient -0.004*** (in two specifications).
  - Fiscal Balance (cyclically adjusted)/GDP: coefficients -0.185** and -0.247**.
  - Inflation: coefficients -0.004*** and -0.003***.
- Other reported estimates and model fit:
  - Constant terms reported across specifications: 0.019*, -0.119***, -0.033, -0.183***, -0.308***.
  - Number of observations across specifications: 1055.
  - R-squared values across specifications: 0.01, 0.04, 0.04, 0.09, 0.18.
- Policy levers to increase private sector credit relative to benchmark (shown as effects of a one WAEMU standard deviation increase):
  - Positive effects: FDI (0.8), Trade Openness (1.9), Health Spending (1.7), Institutions (1.1), Internet Use (0.3), Telephone Lines (1.7).
  - Negative effects: Growth (-1.0), Fiscal Balance (-1.7), Inflation (-1.1), Capital Controls (0.0 effect listed in figure sequence; see table for positive coefficients).
  - The figure reports effects in "Percent of GDP" for each one WAEMU standard deviation increase in the respective variable.

*Source: IMF staff analysis in the WAEMU country note contained in the provided PDF content.*

### 8.       A micro-founded general equilibrium model helps identifying the most binding

### 8.       A micro-founded general equilibrium model helps identifying the most binding constraints to financial inclusion from firms’ perspective.

### Model design and calibration
- Purpose: Calibrate the micro-founded general equilibrium model by Dabla-Norris et al. (2015) to quantify the most binding constraints to financial inclusion and resulting impacts on growth, productivity, and income distribution.
- Key agent heterogeneity: Agents differ in wealth and talent; they choose to become entrepreneurs or supply labor for wages.
- Three financial frictions modeled:
  - Participation costs — limit access to credit, particularly for smaller and poorer entrepreneurs.
  - Intermediation costs — asymmetric information between banks and borrowers resulting in deposit-lending spreads.
  - Imperfect enforceability of contracts — results in collateral requirements and smaller collateral leverage ratios.
- Calibration inputs: A range of macroeconomic and financial indicators are fed into the model (see Table 2: WAEMU target moments).

### Calibration targets (Table 2. WAEMU: Target Moments)
- Savings (in Percent of GDP): 14.5
- Collateral (in Percent of Loan Value): 170
- Firms with Credit (in Percent of Firms): 20
- Non-Performing Loans (in Percent of Loans): 17
- Interest Rate spread: 7.4

### Main quantitative findings from calibration and experiments
- Preliminary result: Participation costs and high collateral requirements are identified as the main borrowing constraints on average in the WAEMU.
- Simulation outputs: Figures 7–10 (calibration-based) depict effects of relaxing individually each of the three constraints on:
  - Number of firms accessing credit
  - GDP
  - Productivity (TFP)
  - Income inequality (Gini coefficient)
  - Interest rate spreads
  - Non-performing loan (NPL) ratio

### Effects of lowering participation costs (Figure 8)
- Mechanism:
  - Lowering participation costs (transaction costs, institutional impediments, bureaucratic hurdles) increases the fraction of firms with credit substantially.
  - More access to credit → higher investments → GDP increases significantly.
- Distributional and productivity effects:
  - Income inequality (Gini coefficient) could decrease because previously constrained (less wealthy) entrepreneurs disproportionately benefit when they enter the market.
  - Overall productivity (TFP) may decline because newly entering, less talented entrepreneurs lower average productivity.

### Effects of lowering intermediation costs (Figure 9)
- Simulated outcomes include changes in GDP, TFP, interest rate spread, Gini coefficient, percent of firms with credit, and NPL ratio as intermediation cost parameter is varied.
- (Figures show modest positive impacts on GDP and other indicators as intermediation costs fall; detailed numeric series are depicted in the figures.)

### Effects of lowering collateral constraints (Figure 10)
- Mechanism:
  - Policies that reduce collateral requirements (for example, introducing collateral registries) allow firms to borrow more and can yield large GDP gains.
  - Productivity increases through gains in efficiency because more talented entrepreneurs scale up more.
- Distributional effects:
  - Relaxing collateral constraints tends to over-proportionately benefit more talented entrepreneurs; less talented firms reach their maximum business scale sooner and do not scale as much.
  - As a consequence, lowering collateral constraints may lead to an increase in income inequality (Gini coefficient rises).

### Policy-relevant interpretation (from model results)
- Two distinct channels to expand financial inclusion with different trade-offs:
  - Reducing participation costs expands access broadly, reduces inequality (Gini), raises GDP, but may lower average productivity.
  - Reducing collateral constraints increases GDP and productivity and disproportionately benefits more talented entrepreneurs, but may increase inequality.
- Intermediation-cost reductions improve financial efficiency and lower spreads, with intermediate impacts on access, GDP, and inequality.

---

### Mobile payments in the WAEMU (summary of subsequent note)

### Market overview and recent trends
- Financial access context:
  - Only about 13 percent of the population has deposits at a commercial bank.
  - Less than one third of firms access credit.
- Mobile penetration and mobile finance uptake:
  - Mobile phone penetration has increased rapidly in the WAEMU over the last decade; in some WAEMU countries it exceeds penetration in Kenya and Tanzania.
  - Between December 2013 and September 2014:
    - Number of existing mobile-money accounts increased by 35 percent to 17 million.
    - Number of transactions increased by more than 40 percent to almost 179 million.
    - Transaction value was 2,445 billion FCFA (about 5 percent of 2014 GDP).
- Usage gaps: Mobile payments remain lower than benchmark countries (Kenya, Tanzania) and are less accessed by vulnerable groups (bottom 40 percent of income, rural populations, females).

### Market size signals
- Cross-border payment market is large (remittances data indicate substantial flows).
- Number of mobile payment operators more than doubled since 2010; most providers operate in Côte d’Ivoire and Senegal.

### Possible impediments to mobile payments (Section B)
- Cost:
  - Relatively high cost of using electronic payment services, especially for smaller transactions (up to 10 USD), makes mobile payments unattractive for lower-income users.
  - Evidence: cost of in-network transfers is particularly high relative to transaction amount for small transactions.
- Intermediation model:
  - Regulatory framework requires some form of intermediation by banks, potentially limiting innovation and competition and raising costs through bank fees.
  - Contrast: Kenya and other rapid-adoption countries used nonbank-led models and partnered with a larger group of banks and remittance partners.
- Number of services and interoperability:
  - Most WAEMU providers offer basic transfers and bill payments; services like international remittances, links to banking products, mobile micro-insurance, and loan disbursements are less developed than in benchmark countries.
  - Interoperability is weak, partly due to licensing on a national basis, making cross-border expansion across WAEMU countries difficult.
  - Mobile loan disbursement and micro-insurance are not yet developed in the WAEMU.

### Evidence on provider networks and services
- Number of bank and remittance partners per country (2014) shows variation across WAEMU countries and fewer partners than in Kenya/Tanzania.
- Transaction cost schedules (Figures 5) show cost (in Percent of Transaction Amount) is high for small-value transactions across multiple providers and countries.
- Service breadth comparison (Figure 6) indicates fewer advanced services (international remittance, loan disbursement, mobile microinsurance, links to banking products) in WAEMU relative to Kenya and Tanzania.

### Policy and oversight considerations (Section C preview)
- The note highlights key oversight pillars necessary to safeguard stability in mobile payments:
  - Minimum market entry requirements
  - Financial integrity controls
  - Funds safeguards
  - Payment stability

*WEST AFRICAN ECONOMIC AND MONETARY UNION, INTERNATIONAL MONETARY FUND*

### 7.      Mobile payment services promote financial inclusion, but they carry a number of risks

### 7.      Mobile payment services promote financial inclusion, but they carry a number of risks

### Risks and Rationale for Oversight
- Mobile payment services expand financial inclusion but target mostly the most vulnerable parts of the population, increasing the importance of mitigants against provider failure and misconduct.
- Mobile payments may increase the complexity of payments and give rise to money laundering and financing of terrorism risks.
- High transaction volumes associated with mobile payments can create settlement risk, which may translate into liquidity and credit risks potentially affecting financial stability.
- Mobile payment services may run substantial operational risk, particularly when functioning under poor or limited infrastructure.

### Oversight framework components (as described in the source)
- Minimum entry requirement into the sector.
  - Entry requirements, such as minimum capital requirements for non-bank mobile service providers, will help reduce the risk of failure because operators will have to demonstrate that they have the financial capacity to supply mobile payment services.
  - Such protection is particularly important given that mobile payment services are mostly addressed to the most vulnerable parts of the population.
- Financial integrity controls.
  - Mobile payments should be subject to adequate anti-money laundering/combating terrorism financing (AML/CFT) risk-based supervision by the WAEMU Banking Commission.
  - Providers should effectively implement AML/CFT preventive measures and report suspicious transactions to financial intelligence units.
- Fund safeguarding.
  - Mobile payment services should include some form of guarantee or insurance to cover funds in case of failure of the mobile financial service provider.
  - Such guarantee can be in the form of coverage by insurance companies or the inclusion of these services within the scope of deposit insurance schemes applicable in some countries.
- Operational resiliency.
  - Mobile payment providers’ business continuity plans should be regularly tested for viability and effectiveness.
- Payment system stability.
  - Mobile payment services, particularly those performed by non-banks, should be subject to a very robust clearance and settlement system leveraging on the system used for bank transactions.

### Main Conclusions and Policy Directions
- Subject to a strong oversight framework, the development of mobile financial services in the WAEMU should be promoted further.
- Mobile payment services have been picking up in WAEMU, but there is potential for a further expansion.
- Policies should be targeted at reducing cost, in particular for small transaction amounts.
- Policies which favor the expansion of interoperability between networks could further open the market for cross-border payments.
- To safeguard stability, such development of mobile payment services should go hand in hand with measures to strengthen the oversight framework.

*Source: _cr15101 - 7.      Mobile payment services promote financial inclusion, but they carry a number of risks*

### 7.      Structural transformation and diversification of output has the potential to boost

### 7.      Structural transformation and diversification of output has the potential to boost

### Potential gains from structural transformation and diversification
- Between-sector structural transformation (reallocating resources from low productivity sectors such as agriculture to higher productivity sectors such as manufacturing) and within-sector transformation (quality improvements, focusing on higher value-added activities, diversifying into new high value-added products) can boost overall productivity and reduce growth volatility.
- Quantified impacts:
  - A 1 percentage point reallocation of labor from agriculture to manufacturing (keeping sectoral productivity levels constant) could raise output by 1.1 percent.
  - A 1 percent increase in agricultural productivity (keeping resource allocation constant) could raise aggregate output by 0.3 percent.
  - Increasing output diversification to the level of benchmark countries could increase average growth by 0.6 to 0.9 percent.
  - A 1 standard deviation increase in LIC’s export diversification raises the growth rate by about 0.8 percentage points, which translates into potential ½ percentage point growth gains if export diversification was raised to levels observed in Asian or SSA benchmark countries.
- Output growth volatility could be significantly reduced by similar magnitudes through diversification.

### Cross-country and sectoral heterogeneity
- The magnitude of potential growth gains will vary across member economies depending on starting structures, productivity levels and extent of diversification.
- The potential growth effects from increased diversification vary across WAEMU countries (Figure 6 evidence cited).
- Further growth gains could be realized from upgrading manufacturing quality to benchmark levels.

### Policy priorities to foster structural transformation and diversification
- Policies should address weaknesses that hinder entry into new lines of economic activity, focusing on:
  - Provision of infrastructure.
  - Accumulation of human capital.
  - Provision of finance.
  - Establishment of trade networks and functioning of factor markets.
  - Regulatory and institutional environment.
  - Creation and management of ideas.
- Cross-country evidence and case studies suggest policies targeting the above areas can be successful; evidence is more mixed for industry-focused and narrowly targeted measures.
- Agricultural sector warrants special attention in the WAEMU given its large scope for productivity and quality improvements and its high share of employment.

### Reforms that foster structural transformation (Box 2 summary)
- Macroeconomic stability: successful diversification in Vietnam, Rwanda, Malaysia and Tanzania coincided with stronger macroeconomic policies and greater stability.
- Market entry: reducing entry barriers encouraged entrepreneurship (examples: Vietnam, Rwanda, Tanzania); electricity market liberalization associated with higher structural transformation.
- Education: increases in education associated with higher diversification and export quality (e.g., years of education in Vietnam increased by about 50 percent in two decades; Rwanda expanded education through ninth grade).
- Institutions and business environment: a one standard deviation increase in institutional quality is associated with a 0.3 increase in quality upgrading; removal of red tape in Bangladesh associated with large investments in export processing zones.
- Industrial policies: mixed results—successful targeting in Malaysia and Bangladesh but may decrease export diversification if targeted sectors become dominant; targeting may help diversification in resource-dominated economies.

### The role of agriculture in structural transformation (Box 3 summary)
- Agriculture accounts for a significant share of output, employment and external trade in the WAEMU and will likely remain important in the medium term even with manufacturing expansion.
- Agriculture currently employs around 60 percent of the workforce in the WAEMU and is likely to remain the largest employer in the medium term.
- Applying the Fox and Thomas (2014) methodology, the number of workers in agriculture could double over the next two decades, with the share in total employment declining only from around 60 percent to 50 percent.
- Given expected continued buoyant supply of agricultural labor, large-scale between-sector structural change may be unlikely in the medium term; policies targeting productivity improvements within agriculture may have greater traction.
- Data indicate agricultural productivity is relatively low in the WAEMU (e.g., cereal yields remain below benchmark countries; relative quality of agricultural exports has been on a declining trend).
- External competitiveness of agriculture: the agricultural trade balance is negative in some member countries and several countries import the same agricultural products that they export. Policy scope:
  - Encourage countries to increase exports of agricultural products in which they produce domestically and have comparative advantage.
  - Reduce imports of these domestically producible products.
- WAEMU has scope to increase quantity of agricultural exports due to abundant agricultural labor, relatively high share of uncultivated arable land, and neighboring countries as large importers of agricultural products.

### Demographic trends and employment implications
- Fertility and population dynamics:
  - Fertility rates in the WAEMU remain among the highest in the world despite rapid declines in child mortality.
  - In 2010 almost half the population was below the age of 15.
  - Over the next two decades, the population could double, from around 100 to 200 million, with a net annual increase in the labor force of around 1.3 million new workers.
- Demographic dividend potential:
  - If fertility rates decline from current level of 5.7 children per woman to 3.8 (UN’s most optimistic scenario), the share of working age population will increase from 52 percent to 58 percent by 2035.
  - Drummond et al. (2014) estimate that a 1 percentage point increase in the working age population increases real GDP growth per capita by 0.5 percentage points.
- Risks if fertility remains high or labor markets fail to absorb entrants:
  - If fertility rates do not decline, the working age population share will stay constant and the demographic transition and associated growth dividend will remain elusive.
  - Rapid population increase would impose enormous pressure on public services and infrastructure which are already inadequate at current levels.
  - Even with declining fertility, manufacturing and service sectors may face speed limits absorbing new workers; excess labor may be forced into informal low-productivity agriculture or unemployment, undermining productivity growth, poverty reduction and social cohesion.
- Policy implications related to demographics:
  - Policies to ensure the demographic transition (e.g., promoting increased use of contraception) and to harness the growth benefits by providing necessary education so new entrants have skills for high value-added employment are essential.
  - Contraceptive prevalence and unmet need figures are noted as policy-relevant indicators in Figure 7.

*Italic: Extracted and summarized from IMF staff analysis in the WAEMU chapter provided.*

### 1.      The Common External Tariff (CET) for ECOWAS was adopted at a Heads of State

### _cr15101 - 1.      The Common External Tariff (CET) for ECOWAS was adopted at a Heads of State

### Overview and Objective
- The ECOWAS CET was adopted at a Heads of State Summit in October 2013 in Dakar and became effective in January 2015.
- Purpose of the note:
  - Provide a stock-taking of the current tariff structure in the WAEMU, current intra and extra-ECOWAS trade flows, and describe the implied changes to the tariff structure with the ECOWAS CET.
  - Estimate the elasticity of import demand for individual WAEMU members.
  - Use a partial equilibrium framework to assess potential trade and revenue effects of the tariff change.

### Caveats and Scope
- Focuses on aggregate effects under simplified assumptions on supply and consumption responses.
- Excludes effects from informal activity in the empirical analysis due to data limitations.
- Does not quantify effects from ECOWAS countries moving closer to a single market.
- Notes that additional research (e.g., simulations using product categories and accounting for the informal economy) could provide a more differentiated picture.

### Stylized Facts on Trade and Tariffs within WAEMU and ECOWAS
- Current tariff practice in WAEMU:
  - WAEMU countries currently impose tariffs within the range of 0 to 20 percent on goods from all non-WAEMU countries, including ECOWAS countries.
  - Simple average import tariff prior to ECOWAS CET: about 12 percent.
- Intra-ECOWAS trade observations:
  - Trade between WAEMU countries and the rest of ECOWAS is rather low.
  - Burkina Faso, Guinea-Bissau and Mali: intra-WAEMU imports constitute more than one fifth of total import value.
  - Côte d’Ivoire, Niger and Senegal: import close to or more than 10 percent from non-WAEMU ECOWAS countries.
  - Only Guinea-Bissau shows a trade surplus with the rest of ECOWAS of almost 7 percent of its GDP.
- Fiscal reliance on import duties:
  - Import duties constitute at least 8 percent of total government revenue in any WAEMU country over the period 2000-2013.
  - In 2013, import duties represented at least 13 percent of total government revenue in all WAEMU countries, with the highest share of 34 percent in Benin.
  - With the exception of Côte d’Ivoire, more than half of imports to any WAEMU country face a tariff rate of 10 or 20 percent.

### Structure of the ECOWAS CET (as compared to WAEMU CET)
- ECOWAS CET organized in five bands; first four bands taken from WAEMU CET; ECOWAS adds a fifth band at 35 percent for specific goods for economic development.
- Table of duty rates (as presented):
  - Category 0: Essential social Goods — WAEMU Duty Rate: 0; ECOWAS Duty Rate: 0
  - Category 1: Goods of primary necessity, raw materials and specific inputs — WAEMU Duty Rate: 5; ECOWAS Duty Rate: 5
  - Category 2: Inputs and Intermediate goods — WAEMU Duty Rate: 10; ECOWAS Duty Rate: 10
  - Category 3: Final Consumption goods — WAEMU Duty Rate: 20; ECOWAS Duty Rate: 20
  - Category 4: Specific goods for economic development — WAEMU Duty Rate: - ; ECOWAS Duty Rate: 35
  - Average duty rates reported: WAEMU Average 11.93; ECOWAS Average 12.27

### Partial Equilibrium Framework and Assumptions (Box 1 summary)
- World divided into three supply blocks for WAEMU imports: WAEMU, other ECOWAS (non-WAEMU), and Rest of the World (ROW).
- Supply to WAEMU assumed to have perfect supply elasticity (infinite at a given price).
- Consumers substitute imperfectly across sources; products from three sources are assumed equally substitutable.
- Elimination of tariffs within ECOWAS assumed to have negligible competition effects between intra-WAEMU exporters.
- Definitions:
  - Trade creation: substitution of domestic production by imports from rest of ECOWAS due to tariff elimination.
  - Trade diversion: substitution of imports from ROW by imports from rest of ECOWAS due to tariff elimination.
  - Other trade effect (OTE): change in WAEMU demand for imports from ROW resulting from higher ECOWAS CET vs WAEMU CET.

### Import Demand Elasticities (Estimation and Results)
- Import function estimated with explanatory variables: ratio of import price index to CPI, real GDP, export volume index, and import duties.
- Individual country price elasticity (selected reported estimates):
  - Benin: Import Price-CPI ratio coefficient -2.43***
  - Cote d’Ivoire: Import Price-CPI ratio coefficient -0.22*
  - Mali: Import Price-CPI ratio coefficient -0.87**
  - Togo: Import Price-CPI ratio coefficient -0.63***
- Panel WAEMU estimate:
  - Import Price-CPI ratio coefficient -0.39***
  - Real GDP coefficient 0.73***
  - Import duties coefficient 0.46***
- Interpretation:
  - Percent decrease in import demand from a 1 percent increase in import price varies from about 0.2 (Côte d’Ivoire) to 2.4 (Benin), with an average of about 0.4 for the WAEMU region as a whole.
  - High elasticity in Benin possibly explained by informal re-exports to Nigeria (estimated to represent 50 percent of imports going through the Port of Cotonou).

### Trade Effects of ECOWAS CET (estimates)
- General expectation:
  - Increase in WAEMU imports from other ECOWAS countries due to tariff elimination.
  - Decrease in WAEMU imports from the rest of the world due to higher tariffs imposed on non-ECOWAS members.
- Quantitative estimates:
  - In most WAEMU countries (except Togo), trade creation estimated to be larger than trade diversion.
  - In other WAEMU countries, tariff change implies an increase in imports from non-WAEMU ECOWAS countries by approximately 6 percent on average.
  - Highest estimated increase in imports from non-WAEMU ECOWAS: 52 percent in Benin (Figure 3, chart 1).
  - Increase in average tariff for non-ECOWAS countries estimated to reduce WAEMU imports from ROW by less than 0.2 percent for most WAEMU countries; highest expected decrease ¾ percent in Benin (Figure 3, chart 3).
- Caveat:
  - These estimated trade effects should be considered upper bounds because remaining non-tariff barriers and lack of substitutes for some goods could reduce trade creation and trade diversion.

### Revenue Implications of Tariff Changes
- Revenue change components:
  - Combined effect of changes in tariff income from imports from non-ECOWAS countries (higher tariff vs. lower import value) and tariff income from non-WAEMU ECOWAS countries (lower tariff vs. higher import value).
- Net effects (country-level outcomes reported):
  - Revenues in Benin, Burkina Faso, Côte d’Ivoire, Niger, and Senegal could decrease by ½ to approximately 2½ percent from their 2013 level (phrase in text: "could decrease by ½ 51.5 4.8 2.8 5.5 11.8 4.9 5.6 20.5 5.9" appears in image context; the narrative states "could decrease by ½ to approximately 2½ percent from their 2013 level").
  - Revenues could increase by ½ to 3 percent in Guinea-Bissau, Mali, and Togo due to current trade profiles with low shares of imports from non-WAEMU ECOWAS countries.
- Aggregate projection:
  - Overall a slight decrease in revenues would be expected in the WAEMU (visual summary in Figure 2).
- Data and estimation limitations:
  - Informal trade exclusion may understate revenue losses in countries with substantial informal re-exports (notably Benin).
  - Example: Benin’s informal re-exports to Nigeria estimated to contribute 2 percent of GDP to fiscal revenue (Box 2).

### Box: Revenue Impact in Benin (summary)
- Benin’s trade pattern: dominated by informal re-exports to Nigeria due to trade restrictions in Nigeria on products like frozen poultry, rice, used cars, and textiles.
- Estimated facts:
  - About 50 percent of imports going through the Port of Cotonou are destined for Nigeria.
  - At least 20 percent of Benin’s GDP is generated through informal trade (World Bank, 2014).
  - Tax revenue gain from re-export activity could be about 2 percent of GDP or 14 percent of total tax revenue (Geourjeon et al., 2008).
  - A full trade liberalization scenario in Nigeria is estimated to result in a revenue loss of at least 2 percent of GDP for Benin (based on customs data 2009–2012; Sola et al., 2013).
- Implication:
  - Implementation of ECOWAS CET (or Nigerian liberalization) may cause substantial revenue losses in Benin due to reduced scope for informal re-exports and associated VAT and customs revenue.

*Prepared by William Gbohoui (University of Montreal), Karim Barhoumi, Larry Cui and Monique Newiak (all AFR).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15101.pdf_