## _spn0916 - Executive Summary

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### Executive Summary: key findings
- Most WAEMU countries are likely to see economic growth deteriorate over the next two years as a result of the global economic crisis; some countries will be more severely affected than others, with potential detrimental effects on poverty reduction efforts.
- Deteriorating remittances and commodity export prices are projected to negatively affect the WAEMU countries’ external current account deficit and reserves, although positive terms-of-trade shocks (declining import prices for food and fuel products) should cushion the impact.
- These developments should help lower inflation pressures, bringing WAEMU inflation closer to its historical level of about 2 percent by 2010.
- The analysis indicates some room for fiscal and monetary easing and the need for stepped-up vigilance on financial sector developments.
- All WAEMU countries are now in Fund-supported programs, and program designs are being adjusted to help countries cope with the crisis.

### Policy recommendations (summary)
- A fiscal expansion could be considered for countries at low or moderate risk of debt distress if the resulting higher fiscal deficits can be financed.
- Any fiscal expansion should preferably result from holding expenditures at or close to planned levels in the face of falling revenues to help protect priority social spending and investment outlays; additional support from development partners could be essential.
- Targeted and effective discretionary fiscal stimulus measures are less advisable, as they are difficult to design at short notice and may ultimately be procyclical.
- Exchange rate developments, reserve levels, and the easing of monetary policy in the euro area could allow the BCEAO to inject more liquidity to support banking sector soundness, credit to the private sector, and government tapping of the regional financial market.
- The BCEAO should consider reinforcing its liquidity forecasting and refining its set of monetary policy instruments to give the financial sector faster access to liquidity if necessary.
- Bank balance sheets should be more closely monitored to ensure early detection of rising credit risks or solvency and liquidity problems, and prompt remedial actions.

*Source: IMF staff executive summary for WAEMU country analysis.*

### I. Transmission of the global crisis on WAEMU countries — principal channels and projected impacts
- Transmission channels:
  - Reduced commodity prices and volumes, with changes in terms of trade and pressures on the trade balance.
  - Falling remittances and net capital inflows—possibly net outflows—affecting FDI, portfolio investment, and development assistance.
  - Direct impact on the financial system via investments in toxic assets, losses in deposits in foreign correspondent banks, and capital repatriations by foreign parent banks.
  - Weaker financial intermediation due to higher credit risk and solvency and liquidity problems.
- Growth outlook:
  - Growth projections revised significantly downward for the region; deceleration is projected to be cushioned by a pickup in Côte d’Ivoire, Senegal, and Togo, while other countries slow noticeably in 2009 mainly due to declining export demand.
  - Country-specific drivers: lower cotton prices in Benin, Burkina Faso, Mali, and Niger; lower cashew prices and remittances in Guinea-Bissau; improved political and economic stability aiding Côte d’Ivoire; government bill settlements and ICS phosphate resumption aiding Senegal; stepped-up donor support and rebound in food production aiding Togo.
- Inflation and terms of trade:
  - Average inflation is expected to approach 4 percent in 2009, a drop of 4 percentage points, though food price inflation persists in some countries (e.g., Burkina Faso and Benin).
  - Zone-wide inflation should approach the BCEAO’s long-run target of 2 percent over the medium term.
  - Regional terms of trade projected to improve by nearly 6 percent on average in 2009, with a slight drop of about 1 percent projected for 2010.
- External current account and reserves:
  - A widening of WAEMU’s external current account deficit is projected for 2009–10, driven by losses from export earnings and remittances; exports expected to decline relative to GDP in 2009 in all countries except Burkina Faso and Mali, with some recovery in 2010.
  - In Niger, large imports related to uranium, oil, and dam projects are projected to more than double the current account deficit by 2010.
  - Abstracting from some one-off factors in 2009, WAEMU’s international reserves are projected to decline during 2008–10, though reserve levels are projected to remain above 4 months of imports (zone aggregate).
- Capital flows, remittances, and official financing:
  - Remittances accounted for 0.7 to 8.5 percent of GDP in WAEMU countries in 2006–08.
  - Projections for 2009 suggest remittances will fall on average for the WAEMU region, though remain above the 2003–07 average.
  - Official support (program and project loans and grants) ranges between 2 and 39 percent of GDP across countries; zone-wide official grants and loans projected to increase to nearly 6 percent of GDP in 2010, up from 5 percent in 2008.
  - FDI has been important for financing current account deficits (example: 3½ percent of GDP in Senegal over the last three years) but is projected to diminish over the next few years.
- Exchange rate developments:
  - The CFA franc experienced a real depreciation of about 2½ percent in recent months, offering temporary mitigation of negative growth impacts; the depreciation is moderate and expected to have limited effect on inflation.
- Financial sector vulnerability:
  - Banking systems were vulnerable pre-crisis: in several countries capital adequacy ratios below required norm, pervasive large single exposures, rising nonperforming loans, and volatile liquidity.
  - Direct exposure to toxic international assets appears modest; BCEAO reports WAEMU banks do not hold toxic international assets.
  - However, many WAEMU banks are subsidiaries of foreign banks, which may repatriate capital or be unable/unwilling to inject capital into their WAEMU subsidiaries.

### Boxed illustrative scenario: vulnerability to falling inflows (selected quantitative first-round effects)
- Under an illustrative scenario where aid inflows decline by 10 percent, FDI and remittances by 20 percent, and net portfolio inflows by 20 percent:
  - WAEMU reserves would fall to 1½ months of imports, below the 3-month benchmark level.
  - Correcting for imports adjustment, import coverage of reserves would hover at around 2.9 months of imports (assuming imports fall by a factor of 0.6 for every CFA franc lost in inflows).
  - A modest shortfall in aid would lead to an average increase in the financing gap by 0.6 percent of GDP for WAEMU countries’ fiscal deficits.
  - Assuming remittances go fully into private consumption, private consumption could fall by 0.6 percent of GDP.

### II. Policy options — overview and policy stance
- Assessment:
  - Estimating the output gap is challenging, but economic activity in most WAEMU countries is expected to be below trend over the next two years, with an immediate and broad-based slowdown.
  - Countervailing factors (e.g., strong 2008/09 agricultural campaigns) may cushion or delay adverse effects for some countries.
  - Impact of the global crisis expected to be limited on WAEMU’s terms of trade but more noticeable on external current account deficits and international reserves, with heterogeneity across countries.
- Policy stance:
  - There is scope for a countercyclical fiscal expansion by member governments to shore up economic activity, with the BCEAO complementing efforts by providing more liquidity to support national banking systems and regional financial markets.
  - Such monetary and fiscal accommodation would help governments place additional securities on the regional financial market and support credit to the private sector.

*Source: IMF executive summary for the WAEMU regional study.*

### Box 2. Estimating the Output Gap

### Estimation approach and headline findings
- A simple approximation of the output gap for WAEMU countries was produced using a Hodrick-Prescott filter and a time series of log real GDP for the period since the 1994 CFAF devaluation.
- In the estimation, Lambda is set at 100, consistent with the use of an annual data series.
- Analysis findings:
  - On average the WAEMU region will continue to grow close to potential in 2009.
  - The average output gap in SSA is projected to be 1 percent of potential GDP.
  - Guinea-Bissau and Côte d’Ivoire distort the WAEMU average in the estimations because their economies are expected to grow well above potential in 2009.
  - Alternative estimates by the country team suggest that Côte d’Ivoire actually faces an output gap of 10 percent due to depletion of capital and very little investment for eight years during the civil war.

### Implications for fiscal policy stance and scope for countercyclical action
- General considerations affecting scope for fiscal easing:
  - Structure of the economy:
    - Fiscal expansion is more effective where consumption is a high share of output and where secondary and tertiary sectors are important.
    - In economies with higher investment and a predominant primary sector, automatic stabilizers or limited discretionary stimulus may be less effective because of high import content of investment and sensitivity to exogenous shocks (weather, insect infestations).
    - High tax ratios (broad tax base and strong tax administration) may make a fiscal stimulus easier to afford; heavy reliance on trade taxes increases vulnerability to the external crisis.
  - Availability of domestic and external financing:
    - Regional financial market has limited capacity to absorb additional member-country issuances of securities.
    - Scaled-up donor resources could compensate, but indications are limited.
    - Raising nonconcessional external resources is unlikely given market conditions; Fund programs generally limit such borrowing.
    - Some countries (Senegal, Burkina Faso, Mali) plan to sell government assets which could provide financing room, though prudence suggests saving some proceeds for future deficits.
    - Higher financing needs may arise from settling domestic payments arrears.
  - Debt sustainability:
    - The four WAEMU countries with low to moderate risk of debt distress—Mali, Benin, Senegal, and Niger—should in principle be well-positioned to tolerate a temporary fiscal expansion.
    - More prudence is warranted for the other four countries.

- Country-specific scope for fiscal expansion (analysis):
  - Senegal:
    - Seems to have the most scope for fiscal expansion.
    - Large secondary and tertiary sectors, a low risk of debt distress, and may have available financing, including privatization receipts.
    - Government appears on track to settle payment delays vis-à-vis the private sector.
  - Benin, Mali, and Niger:
    - Could have some margin for a moderate and temporary fiscal expansion.
  - Burkina Faso:
    - Could tolerate a modest temporary increase in the fiscal deficit target in 2009, given projected decline of revenues and the need to preserve anti-poverty spending, provided concessional financing is available.
    - Continued commitment to a prudent medium-term fiscal policy is critical to reduce Burkina Faso’s high risk of debt distress.
  - Togo:
    - Despite significant concern about debt sustainability, urgent needs (repair flood damage and infrastructure) could justify revising the fiscal deficit target upward if the global downturn worsens, conditional on availability of concessional financing.
  - Côte d’Ivoire:
    - Financing and debt sustainability concerns argue against loosening fiscal policy at this point.
    - When financing becomes available, priority should be clearing the large stock of domestic arrears, which would effectively help support economic activity.
  - Guinea-Bissau:
    - A fiscal expansion is impossible: debt situation very fragile, large informal sector, revenues expected to fall in nominal terms, and severe financing constraints.

- Operational guidance for fiscal policy:
  - In most cases, countries could loosen their fiscal stance by keeping spending at or close to planned levels despite falling revenues to protect social programs and investment outlays.
  - Avoiding spending cuts may hinge on development partners stepping up support.
  - Where recurrent spending surged during the run-up to the crisis (e.g., transfers and subsidies), it may be inappropriate to maintain those higher levels.
  - Ensure progress in paying off overdue payments to the private sector as part of fiscal programming.
  - Any discretionary fiscal stimulus should be focused on:
    - Projects that bolster employment,
    - Have low import content,
    - Foster growth (e.g., labor-intensive public works, acceleration of infrastructure projects already in the pipeline).
  - Public wage increases are not cost-effective (poor targeting, hard to reverse).
  - Targeted social safety nets can be accommodated if implemented speedily.
  - Risks: lags in identifying and implementing discretionary measures and weaknesses in public financial management raise the risk that stimulus will come too late and fiscal policy could become procyclical.
  - Timing:
    - For most countries, fiscal expansion—likely from holding expenditures close to planned levels despite falling revenues—should be initiated preemptively in 2009.
    - In some cases, preserving strong fiscal positions and delaying expansion to next year may be advisable if shocks are expected with a lag.
    - A careful reassessment of fiscal situation and outlook should take place in mid-2009 when 2010 budgets are prepared.

### Scope for an accommodating monetary policy and liquidity support
- Factors favoring monetary easing in the WAEMU:
  - Recent REERs have reversed some of the appreciation that raised competitiveness concerns in 2008.
  - Import coverage of reserves is projected to remain above 4 months.
  - ECB interest rate cuts by a total of 200 basis points have been only partially followed by the BCEAO.
  - BCEAO reduced its key policy rate by 50 basis points in mid-June.
  - Decline in the inflation differential vis-à-vis the anchor region and expected further disinflationary impact of lower commodity prices and lower domestic growth strengthen the case for easing.
- Cautionary considerations:
  - Any relaxation should safeguard the exchange rate peg and the level of international reserves.
  - Monetary policy is unlikely to directly stimulate economic activity effectively given stickiness of interest rates in the WAEMU and partial pass-through to the private sector.
- Liquidity support priorities:
  - Enhance liquidity support to shore up banking system soundness, facilitate bank financing of the private sector, and enhance access of governments to the regional financial market.
  - Risk of crowding out private sector credit if government demand for credit rises—necessitates increased liquidity.
  - BCEAO measures already taken or initiated:
    - Increasing liquidity provision under its one-week facility,
    - Recently introduced a new one-month facility,
    - Reduced reserve requirements in mid-June.
  - The stepped-up liquidity support could:
    - Ease a major bottleneck by strengthening financial intermediation and access to credit,
    - Provide impetus to development of the regional financial market, consistent with FSAP recommendations.
  - Operational options for the BCEAO:
    - Closely monitor bank liquidity and be prepared to rapidly step up liquidity injections if necessary.
    - Use open market operations of various maturities and lower reserve requirements.
    - Consider expanding the set of collateral eligible for discount and open market operations, provided assets are of good quality.

### Banking system monitoring, contingency planning, and institutional coordination
- Monitoring priorities to detect risks early:
  - Identify nonperforming loans and ensure adequate provisioning.
  - Avoid excessive risk concentration, including off-balance-sheet risks.
  - Monitor asset-liability mismatches and anticipate spillovers from problems in parent companies abroad (cross-border credit lines).
  - Systematically assess outstanding maturity of bank liabilities at home and abroad to minimize rollover risks.
  - Pay attention to depositor concentration and vulnerability to deposit runs.
  - Monitoring liquidity more closely can support refinement of BCEAO’s liquidity forecasting and management framework (consistent with FSAP recommendations).
- Actions and contingency planning:
  - Authorities should be prepared to act swiftly when vulnerabilities are identified, including intervening in problem banks to protect depositors or avoid systemic repercussions.
  - Prepare preventive contingency plans and a bank restructuring strategy to deal with worst-case scenarios:
    - Identify trigger points where liquidity assistance is too risky or ineffective,
    - Define resolution procedures or public recapitalization programs with appropriate safeguards for public funds,
    - Design decision-making framework for liquidating, merging, selling, or recapitalizing banks and for restructuring and recovering bank assets and operations.
- Regulatory and supervisory considerations:
  - Advisable not to loosen WAEMU’s restrictive exchange rate regulation at this stage; the regulation has provided temporary protection to the banking sector by limiting the ability of banks to hold foreign exchange abroad.
  - Lending in foreign currency to local companies is not permissible in the WAEMU, preventing currency mismatch risk.
  - Monitor evidence of possible growing currency substitution (noted for Benin, related to informal trade with Nigeria).
  - Track trade financing developments to assess whether slowdown in import and export growth is related to drying up of trade credit (e.g., prepaid letters of credit); early detection allows policy response formulation.
- Enhance institutional coordination:
  - Deepen dialogue and coordination between authorities and banks to better anticipate and understand bank liquidity and solvency problems, tightening corporate credit conditions, and financing needs of member governments.
  - Require more predictable and measured recourse of governments to the financial sector, based on well-developed plans to access the regional financial market.
  - Stepped-up coordination and information exchange between WAEMU authorities and home supervisors of foreign-owned banks to minimize contagion risk and clarify responsibilities for lender-of-last-resort actions.
  - Conduct a stocktaking of existing and needed mechanisms of coordination (e.g., Memoranda of Understanding) and consider additional cooperation forms (e.g., interagency councils or committees).

*Source: Box 2. Estimating the Output Gap (extracted content).*

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

### _spn0916 - Executive Summary

### Executive Summary: key findings
- Most WAEMU countries are likely to see economic growth deteriorate over the next two years as a result of the global economic crisis; some countries will be more severely affected than others, with potential detrimental effects on poverty reduction efforts.
- Deteriorating remittances and commodity export prices are projected to negatively affect the WAEMU countries’ external current account deficit and reserves, although positive terms-of-trade shocks (declining import prices for food and fuel products) should cushion the impact.
- These developments should help lower inflation pressures, bringing WAEMU inflation closer to its historical level of about 2 percent by 2010.
- The analysis indicates some room for fiscal and monetary easing and the need for stepped-up vigilance on financial sector developments.
- All WAEMU countries are now in Fund-supported programs, and program designs are being adjusted to help countries cope with the crisis.

### Policy recommendations (summary)
- A fiscal expansion could be considered for countries at low or moderate risk of debt distress if the resulting higher fiscal deficits can be financed.
- Any fiscal expansion should preferably result from holding expenditures at or close to planned levels in the face of falling revenues to help protect priority social spending and investment outlays; additional support from development partners could be essential.
- Targeted and effective discretionary fiscal stimulus measures are less advisable, as they are difficult to design at short notice and may ultimately be procyclical.
- Exchange rate developments, reserve levels, and the easing of monetary policy in the euro area could allow the BCEAO to inject more liquidity to support banking sector soundness, credit to the private sector, and government tapping of the regional financial market.
- The BCEAO should consider reinforcing its liquidity forecasting and refining its set of monetary policy instruments to give the financial sector faster access to liquidity if necessary.
- Bank balance sheets should be more closely monitored to ensure early detection of rising credit risks or solvency and liquidity problems, and prompt remedial actions.

*Source: IMF staff executive summary for WAEMU country analysis.*

### I. Transmission of the global crisis on WAEMU countries — principal channels and projected impacts
- Transmission channels:
  - Reduced commodity prices and volumes, with changes in terms of trade and pressures on the trade balance.
  - Falling remittances and net capital inflows—possibly net outflows—affecting FDI, portfolio investment, and development assistance.
  - Direct impact on the financial system via investments in toxic assets, losses in deposits in foreign correspondent banks, and capital repatriations by foreign parent banks.
  - Weaker financial intermediation due to higher credit risk and solvency and liquidity problems.
- Growth outlook:
  - Growth projections revised significantly downward for the region; deceleration is projected to be cushioned by a pickup in Côte d’Ivoire, Senegal, and Togo, while other countries slow noticeably in 2009 mainly due to declining export demand.
  - Country-specific drivers: lower cotton prices in Benin, Burkina Faso, Mali, and Niger; lower cashew prices and remittances in Guinea-Bissau; improved political and economic stability aiding Côte d’Ivoire; government bill settlements and ICS phosphate resumption aiding Senegal; stepped-up donor support and rebound in food production aiding Togo.
- Inflation and terms of trade:
  - Average inflation is expected to approach 4 percent in 2009, a drop of 4 percentage points, though food price inflation persists in some countries (e.g., Burkina Faso and Benin).
  - Zone-wide inflation should approach the BCEAO’s long-run target of 2 percent over the medium term.
  - Regional terms of trade projected to improve by nearly 6 percent on average in 2009, with a slight drop of about 1 percent projected for 2010.
- External current account and reserves:
  - A widening of WAEMU’s external current account deficit is projected for 2009–10, driven by losses from export earnings and remittances; exports expected to decline relative to GDP in 2009 in all countries except Burkina Faso and Mali, with some recovery in 2010.
  - In Niger, large imports related to uranium, oil, and dam projects are projected to more than double the current account deficit by 2010.
  - Abstracting from some one-off factors in 2009, WAEMU’s international reserves are projected to decline during 2008–10, though reserve levels are projected to remain above 4 months of imports (zone aggregate).
- Capital flows, remittances, and official financing:
  - Remittances accounted for 0.7 to 8.5 percent of GDP in WAEMU countries in 2006–08.
  - Projections for 2009 suggest remittances will fall on average for the WAEMU region, though remain above the 2003–07 average.
  - Official support (program and project loans and grants) ranges between 2 and 39 percent of GDP across countries; zone-wide official grants and loans projected to increase to nearly 6 percent of GDP in 2010, up from 5 percent in 2008.
  - FDI has been important for financing current account deficits (example: 3½ percent of GDP in Senegal over the last three years) but is projected to diminish over the next few years.
- Exchange rate developments:
  - The CFA franc experienced a real depreciation of about 2½ percent in recent months, offering temporary mitigation of negative growth impacts; the depreciation is moderate and expected to have limited effect on inflation.
- Financial sector vulnerability:
  - Banking systems were vulnerable pre-crisis: in several countries capital adequacy ratios below required norm, pervasive large single exposures, rising nonperforming loans, and volatile liquidity.
  - Direct exposure to toxic international assets appears modest; BCEAO reports WAEMU banks do not hold toxic international assets.
  - However, many WAEMU banks are subsidiaries of foreign banks, which may repatriate capital or be unable/unwilling to inject capital into their WAEMU subsidiaries.

### Boxed illustrative scenario: vulnerability to falling inflows (selected quantitative first-round effects)
- Under an illustrative scenario where aid inflows decline by 10 percent, FDI and remittances by 20 percent, and net portfolio inflows by 20 percent:
  - WAEMU reserves would fall to 1½ months of imports, below the 3-month benchmark level.
  - Correcting for imports adjustment, import coverage of reserves would hover at around 2.9 months of imports (assuming imports fall by a factor of 0.6 for every CFA franc lost in inflows).
  - A modest shortfall in aid would lead to an average increase in the financing gap by 0.6 percent of GDP for WAEMU countries’ fiscal deficits.
  - Assuming remittances go fully into private consumption, private consumption could fall by 0.6 percent of GDP.

### II. Policy options — overview and policy stance
- Assessment:
  - Estimating the output gap is challenging, but economic activity in most WAEMU countries is expected to be below trend over the next two years, with an immediate and broad-based slowdown.
  - Countervailing factors (e.g., strong 2008/09 agricultural campaigns) may cushion or delay adverse effects for some countries.
  - Impact of the global crisis expected to be limited on WAEMU’s terms of trade but more noticeable on external current account deficits and international reserves, with heterogeneity across countries.
- Policy stance:
  - There is scope for a countercyclical fiscal expansion by member governments to shore up economic activity, with the BCEAO complementing efforts by providing more liquidity to support national banking systems and regional financial markets.
  - Such monetary and fiscal accommodation would help governments place additional securities on the regional financial market and support credit to the private sector.  

*Source: IMF executive summary for the WAEMU regional study.*

### Box 2. Estimating the Output Gap

### Box 2. Estimating the Output Gap

### Estimation approach and headline findings
- A simple approximation of the output gap for WAEMU countries was produced using a Hodrick-Prescott filter and a time series of log real GDP for the period since the 1994 CFAF devaluation.
- In the estimation, Lambda is set at 100, consistent with the use of an annual data series.
- Analysis findings:
  - On average the WAEMU region will continue to grow close to potential in 2009.
  - The average output gap in SSA is projected to be 1 percent of potential GDP.
  - Guinea-Bissau and Côte d’Ivoire distort the WAEMU average in the estimations because their economies are expected to grow well above potential in 2009.
  - Alternative estimates by the country team suggest that Côte d’Ivoire actually faces an output gap of 10 percent due to depletion of capital and very little investment for eight years during the civil war.

### Implications for fiscal policy stance and scope for countercyclical action
- General considerations affecting scope for fiscal easing:
  - Structure of the economy:
    - Fiscal expansion is more effective where consumption is a high share of output and where secondary and tertiary sectors are important.
    - In economies with higher investment and a predominant primary sector, automatic stabilizers or limited discretionary stimulus may be less effective because of high import content of investment and sensitivity to exogenous shocks (weather, insect infestations).
    - High tax ratios (broad tax base and strong tax administration) may make a fiscal stimulus easier to afford; heavy reliance on trade taxes increases vulnerability to the external crisis.
  - Availability of domestic and external financing:
    - Regional financial market has limited capacity to absorb additional member-country issuances of securities.
    - Scaled-up donor resources could compensate, but indications are limited.
    - Raising nonconcessional external resources is unlikely given market conditions; Fund programs generally limit such borrowing.
    - Some countries (Senegal, Burkina Faso, Mali) plan to sell government assets which could provide financing room, though prudence suggests saving some proceeds for future deficits.
    - Higher financing needs may arise from settling domestic payments arrears.
  - Debt sustainability:
    - The four WAEMU countries with low to moderate risk of debt distress—Mali, Benin, Senegal, and Niger—should in principle be well-positioned to tolerate a temporary fiscal expansion.
    - More prudence is warranted for the other four countries.

- Country-specific scope for fiscal expansion (analysis):
  - Senegal:
    - Seems to have the most scope for fiscal expansion.
    - Large secondary and tertiary sectors, a low risk of debt distress, and may have available financing, including privatization receipts.
    - Government appears on track to settle payment delays vis-à-vis the private sector.
  - Benin, Mali, and Niger:
    - Could have some margin for a moderate and temporary fiscal expansion.
  - Burkina Faso:
    - Could tolerate a modest temporary increase in the fiscal deficit target in 2009, given projected decline of revenues and the need to preserve anti-poverty spending, provided concessional financing is available.
    - Continued commitment to a prudent medium-term fiscal policy is critical to reduce Burkina Faso’s high risk of debt distress.
  - Togo:
    - Despite significant concern about debt sustainability, urgent needs (repair flood damage and infrastructure) could justify revising the fiscal deficit target upward if the global downturn worsens, conditional on availability of concessional financing.
  - Côte d’Ivoire:
    - Financing and debt sustainability concerns argue against loosening fiscal policy at this point.
    - When financing becomes available, priority should be clearing the large stock of domestic arrears, which would effectively help support economic activity.
  - Guinea-Bissau:
    - A fiscal expansion is impossible: debt situation very fragile, large informal sector, revenues expected to fall in nominal terms, and severe financing constraints.

- Operational guidance for fiscal policy:
  - In most cases, countries could loosen their fiscal stance by keeping spending at or close to planned levels despite falling revenues to protect social programs and investment outlays.
  - Avoiding spending cuts may hinge on development partners stepping up support.
  - Where recurrent spending surged during the run-up to the crisis (e.g., transfers and subsidies), it may be inappropriate to maintain those higher levels.
  - Ensure progress in paying off overdue payments to the private sector as part of fiscal programming.
  - Any discretionary fiscal stimulus should be focused on:
    - Projects that bolster employment,
    - Have low import content,
    - Foster growth (e.g., labor-intensive public works, acceleration of infrastructure projects already in the pipeline).
  - Public wage increases are not cost-effective (poor targeting, hard to reverse).
  - Targeted social safety nets can be accommodated if implemented speedily.
  - Risks: lags in identifying and implementing discretionary measures and weaknesses in public financial management raise the risk that stimulus will come too late and fiscal policy could become procyclical.
  - Timing:
    - For most countries, fiscal expansion—likely from holding expenditures close to planned levels despite falling revenues—should be initiated preemptively in 2009.
    - In some cases, preserving strong fiscal positions and delaying expansion to next year may be advisable if shocks are expected with a lag.
    - A careful reassessment of fiscal situation and outlook should take place in mid-2009 when 2010 budgets are prepared.

### Scope for an accommodating monetary policy and liquidity support
- Factors favoring monetary easing in the WAEMU:
  - Recent REERs have reversed some of the appreciation that raised competitiveness concerns in 2008.
  - Import coverage of reserves is projected to remain above 4 months.
  - ECB interest rate cuts by a total of 200 basis points have been only partially followed by the BCEAO.
  - BCEAO reduced its key policy rate by 50 basis points in mid-June.
  - Decline in the inflation differential vis-à-vis the anchor region and expected further disinflationary impact of lower commodity prices and lower domestic growth strengthen the case for easing.
- Cautionary considerations:
  - Any relaxation should safeguard the exchange rate peg and the level of international reserves.
  - Monetary policy is unlikely to directly stimulate economic activity effectively given stickiness of interest rates in the WAEMU and partial pass-through to the private sector.
- Liquidity support priorities:
  - Enhance liquidity support to shore up banking system soundness, facilitate bank financing of the private sector, and enhance access of governments to the regional financial market.
  - Risk of crowding out private sector credit if government demand for credit rises—necessitates increased liquidity.
  - BCEAO measures already taken or initiated:
    - Increasing liquidity provision under its one-week facility,
    - Recently introduced a new one-month facility,
    - Reduced reserve requirements in mid-June.
  - The stepped-up liquidity support could:
    - Ease a major bottleneck by strengthening financial intermediation and access to credit,
    - Provide impetus to development of the regional financial market, consistent with FSAP recommendations.
  - Operational options for the BCEAO:
    - Closely monitor bank liquidity and be prepared to rapidly step up liquidity injections if necessary.
    - Use open market operations of various maturities and lower reserve requirements.
    - Consider expanding the set of collateral eligible for discount and open market operations, provided assets are of good quality.

### Banking system monitoring, contingency planning, and institutional coordination
- Monitoring priorities to detect risks early:
  - Identify nonperforming loans and ensure adequate provisioning.
  - Avoid excessive risk concentration, including off-balance-sheet risks.
  - Monitor asset-liability mismatches and anticipate spillovers from problems in parent companies abroad (cross-border credit lines).
  - Systematically assess outstanding maturity of bank liabilities at home and abroad to minimize rollover risks.
  - Pay attention to depositor concentration and vulnerability to deposit runs.
  - Monitoring liquidity more closely can support refinement of BCEAO’s liquidity forecasting and management framework (consistent with FSAP recommendations).
- Actions and contingency planning:
  - Authorities should be prepared to act swiftly when vulnerabilities are identified, including intervening in problem banks to protect depositors or avoid systemic repercussions.
  - Prepare preventive contingency plans and a bank restructuring strategy to deal with worst-case scenarios:
    - Identify trigger points where liquidity assistance is too risky or ineffective,
    - Define resolution procedures or public recapitalization programs with appropriate safeguards for public funds,
    - Design decision-making framework for liquidating, merging, selling, or recapitalizing banks and for restructuring and recovering bank assets and operations.
- Regulatory and supervisory considerations:
  - Advisable not to loosen WAEMU’s restrictive exchange rate regulation at this stage; the regulation has provided temporary protection to the banking sector by limiting the ability of banks to hold foreign exchange abroad.
  - Lending in foreign currency to local companies is not permissible in the WAEMU, preventing currency mismatch risk.
  - Monitor evidence of possible growing currency substitution (noted for Benin, related to informal trade with Nigeria).
  - Track trade financing developments to assess whether slowdown in import and export growth is related to drying up of trade credit (e.g., prepaid letters of credit); early detection allows policy response formulation.
- Enhance institutional coordination:
  - Deepen dialogue and coordination between authorities and banks to better anticipate and understand bank liquidity and solvency problems, tightening corporate credit conditions, and financing needs of member governments.
  - Require more predictable and measured recourse of governments to the financial sector, based on well-developed plans to access the regional financial market.
  - Stepped-up coordination and information exchange between WAEMU authorities and home supervisors of foreign-owned banks to minimize contagion risk and clarify responsibilities for lender-of-last-resort actions.
  - Conduct a stocktaking of existing and needed mechanisms of coordination (e.g., Memoranda of Understanding) and consider additional cooperation forms (e.g., interagency councils or committees).

*Source: Box 2. Estimating the Output Gap (extracted content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2009/_spn0916.pdf_