## 1. Calculation of the Internal Real Exchange Rage

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### Overview
- On January 13, 1994, after the CFA franc was devalued by 50 percent in foreign currency terms, Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo signed a treaty creating the West African Economic and Monetary Union (WAEMU).
- Guinea-Bissau joined in May 1997; Guinea-Bissau is omitted from the study’s quantitative analysis because it joined only in May 1997.
- WAEMU builds on WAMU, with the CFA franc pegged to the French franc and, since 1999, to the euro.
- Post-1994 devaluation reforms aimed to reinforce the monetary union with a customs union and common economic market: free movement of persons, goods, services, and capital; common industrial and sectoral policies; common external tariffs and trade policies; harmonized frameworks for fiscal policy, public finance and business accounting, commercial law, and investment promotion.
- A system of multilateral surveillance of macroeconomic policy was established to ensure convergence of key fiscal aggregates and maintain the currency peg.

### Rationale for Convergence and Achievements
- Primary goals: enhance macroeconomic stability, improve economic performance and growth, and reduce poverty by promoting fiscal discipline, openness to international trade, and competition in the regional market.
- Complementary structural reforms needed: transportation, energy, telecommunications to reduce transaction costs and foster differentiated production structures and intraregional trade.
- Heterogeneity:
  - Côte d’Ivoire accounts for about 40 percent of WAEMU’s output; Senegal about 20 percent; remaining six countries represent less than 10 percent each.
  - Per capita income example for 2001: Côte d’Ivoire US$710 vs. Guinea-Bissau US$160.
- Historical note: WAMU functional early post-independence but began to unravel in the mid-1980s, prompting the 1994 devaluation.

### Measuring Disparity
- Constructed measure: “average disparity” = weighted variance of deviations for all WAEMU countries for each year.
- Definitions and formulas:
  - Xit = observed value of variable X for country i in year t.
  - Pit = weight of country i in year t for variable X; Pit are nominal GDP shares so ∑i=1^7 Pit = 1.
  - tX = weighted average: tX = ∑i=1^7 Pit Xit.
  - AverageDisparityt = sqrt(∑i=1^7 Pit (Xit − tX)^2).
- Interpretation: low (high) disparity indicates convergence (divergence).
- For WAEMU inflation, geometric weighted average used: ∏i=1^7 Xit^Pit.

### Real Sector Developments (1990–2003)
- Periodization:
  - 1990-93: adverse terms of trade, significantly overvalued exchange rate, fiscal imbalances, insufficient internal adjustment, rapid external debt accumulation.
  - 1994-98: post-devaluation stabilization and structural adjustment, strong economic expansion, more balanced macro performance, structural transformation.
  - 1999-2003: momentum dissipated, weaker output growth, fiscal and external deficits reversed in several countries, political crises (notably Côte d’Ivoire) weakened political commitment to integration.
- Growth and disparity outcomes:
  - Difference between best and worst performer reached 19.9 percentage points in 1993; disparity indicator peaked at 2.9 in 1993.
  - Post-1994, dispersion in growth rates narrowed to 4 percentage points in 1997; disparity index declined to an average of 0.6 in 1994-98.
  - Since 1999, dispersion increased; disparity indicator averaged 2.7 in 1999-03.
- Savings and investment:
  - Gross domestic savings low in 1990-93, rose markedly in 1994-98 with country contrasts.
  - Divergence indicator for savings increased from 2.6 in the first subperiod to 7.3 in the second.
  - Investment: rebounded from average 12.5 percent of GDP in 1990-93 to 16.4 percent of GDP in 1994-98, then trailed off in 1999-2003 with marked country variation.
- Conclusion on convergence:
  - Neither sources of GDP growth nor uses indicate progress toward convergence; lower-income countries did not increase relative incomes.
  - Country-specific developments and policies were main explanatory variables; regional spillovers were low.

### Labor Mobility and Migratory Flows
- Free movement historically important for convergence via labor mobility, especially migration to Côte d’Ivoire.
- Drivers: rapid population growth, un- or underemployment, wide nominal wage divergences between coastal and landlocked countries, shared language, similar education systems.
- Migration outcomes:
  - During 1960-90, estimated 11 percent of West Africa’s population (excluding Nigeria) resided in a country other than birth.
  - Côte d’Ivoire non-Ivorian residents estimated around 30 percent of population in 1988 and 1996 censuses; 83 percent of these from other WAEMU countries, ~50 percent from Burkina Faso and 22 percent from Mali.
  - Net annual immigration into Côte d’Ivoire in the 1990s estimated at 0.4 percent of resident population.
  - Senegal’s 1988 census registered foreign nationals at 3.1 percent of total population; true percentage estimated higher.
  - Mid-1990s study estimated 40 percent of Burkinabé population is expatriate.
- Since early 2000, Côte d’Ivoire’s political crisis and rising nationalism slowed immigration and prompted returns, reducing labor mobility’s convergence role.
- Legal basis: free movement and right of settlement in Articles 91 and 92 of the WAEMU treaty.

### Fiscal Developments
- Fiscal convergence central given fixed exchange rate and endogenous money; requires prudent fiscal policies, harmonized rules, and national flexibility to offset shocks.
- Regional Pact: Convergence, Stability, Growth, and Solidarity Pact adopted December 1999 to strengthen convergence via peer review and defined criteria (text ends before listing criteria).
- Institutional/policy actions (2002 onward):
  - Full customs union and common external tariff (CET) reduced WAEMU unweighted average tariff from 19 percent in 1997 to about 12 percent in 2000.
  - VAT, excise taxes, petroleum taxation, and withholding taxes harmonized; five directives for fiscal policy harmonization and harmonized commercial/accounting legislation adopted.
- Primary fiscal convergence and heterogeneity:
  - Overall deficit-to-GDP improved from 9.7 percent on average in 1990-93 to 4.6 percent on average in 1994-2003.
  - Improvement in 1994-98 partially reversed in 1999-2003; disparity indicators widened.
  - Primary fiscal deficits improved on average but heterogeneity increased.
- Tax revenue:
  - Structure: indirect taxes ~40 percent of total tax revenue; custom duties ~one-third; direct taxes ~one-fourth.
  - Tax revenue improved from about 13.3 percent of GDP on average in 1990-93 to just above 14 percent of GDP in 1999-2003.
  - Homogeneity improved: average disparity indicators declined from 3.5 in 1990-93, to 2.9 in 1994-98, and to 2.3 in 1999-2003.
- Expenditure and wage bill:
  - Overall expenditure fell from close to 26 percent of GDP in 1990-93 to average about 20 percent of GDP in 1994-2003.
  - Expenditure compression larger among highest spenders (notably Côte d’Ivoire); disparity indicator for total expenditure fell from 6.8 in 1990-03 to 1.7 in 1999-2003.
  - Government wage bill declined as a percentage of current outlays and GDP; average civil service wages in Côte d’Ivoire about three times those in Niger in 1990-2003.
  - WAEMU civil service wage-bill: 1994-98 average 5.6 percent vs. SSA 7.9 percent; 1999-03 WAEMU 5.3 percent vs. SSA 8.2 percent.
- Limits to fiscal convergence:
  - Divergent evolution in investment outlays and debt service costs limited overall convergence.
  - Divergent debt-relief schedules under enhanced HIPC Initiative contributed to heterogeneity.
  - Harmonization lacked mechanism to ensure coordination of regional fiscal policies.

### Monetary Aspects and Financial Integration
- Monetary policy conducted regionally by BCEAO, which holds pooled international reserves.
- BCEAO objectives: preserve exchange rate credibility, achieve target foreign assets, restrain inflation, and maintain monetary stability.
- Regional bank supervision by the Banking Commission (established 1990).
- Policy instruments: discount rate, repurchase agreement facility (pension window), minimum reserve requirements, issuance of central bank bills.
  - BCEAO mainly relies on reserve requirements and standing facilities; does not typically use discretionary instruments (central bank bills).
  - Since 2002, deficit financing shifted from central bank advances to issuance of securities on the regional capital market; low volume of securities has not mopped up excess bank liquidity but promoted capital market development.
- Banking system deficiencies and reforms:
  - Problems: significant monetary overhang, lack of competition regionally, absence of active interbank market.
  - Improvements: single zonewide licensing for banks; overhaul of payments system including cross-border real-time gross settlement; interbank trading increased but concentrated among subsidiaries of regionwide groups.
- Financial deepening initiatives implemented: OHADA business law, Parmec Law for microfinance, regional credit risk agency, Regional Solidarity Bank.
- Remaining needs: diversified regional financial institutions and instruments — cooperative credit associations, collective savings institutions (mutual funds), mortgage and housing finance, leasing, venture capital.

### Intraregional Trade and Competitiveness
- Openness and trade shares:
  - External trade to GDP averaged 61 percent during 1990-2003 and rose steadily since 1994.
  - WAEMU global trade share small: exports and imports averaged 0.12 and 0.15 percent, respectively, of world exports and imports during 1990 and 2003.
- Export concentration and vulnerability:
  - Share of two main commodities in total exports averaged 47.5 percent for WAEMU (high close to 83 percent for Benin; low about 41 percent for Senegal).
  - Concentration ratio declined to about 43 percent in 1999-2003.
  - Correlation between openness and concentration: -0.88 for whole sample; -0.90 for 1999-2003.
- Intrazone trade patterns:
  - Côte d’Ivoire and Senegal directed 11 percent and 6.5 percent of overall exports to WAEMU during 1990–2003.
  - Côte d’Ivoire and Senegal account for about 74 and 14 percent, respectively, of intrazone exports.
  - Landlocked countries export primary commodities to other members; Benin and Togo rely on transit trade; Côte d’Ivoire and Senegal export manufactured goods intra-WAEMU.
  - Intraregional imports: Burkina Faso and Mali combined represent about 63 percent of intraregional imports.
- Magnitude and evolution:
  - Recorded intraregional exports and imports averaged 8.3 and 6.9 percent, respectively, of total exports and imports during 1990-2003.
  - Intraregional trade declined in 2000 due to Côte d’Ivoire’s trade retrenchment but grew from 2001 onward after elimination of tariffs on intraregional trade in 2000.
  - Limits: low regional consumption of primary commodities, product similarity, transportation and marketing bottlenecks raising export costs.
- Competitiveness and REER developments:
  - 1994 devaluation corrected overvaluation and strengthened competitiveness; structural policies to raise labor productivity and lower production costs stalled.
  - CPI-based REER evolution:
    - REER appreciated cumulatively by about 12 percent through 2001 and by a further 8 percent during 2002-03 on a yearly basis; latest appreciation attributable to euro strengthening.
    - By end-2003, regional REER about 76 percent of its predevaluation level.
  - Phases after 1994:
    - Jan 1994–Dec 1998: rapid REER appreciation due to surge in domestic wages and prices after devaluation.
    - Jan 1999–Dec 2000: short REER depreciation driven by terms-of-trade decline and world slowdown.
    - Jan 2001 onward: appreciating REER reflecting euro strengthening.
  - WAEMU average annual and cumulative changes (periods: Jan 1994–Dec 1998; Jan 1999–Dec 2000; Jan 2001–Dec 2003):
    - Annual percentage change (Real effective exchange rate): 38.2, -8.7, 8.6
    - Annual percentage change (Nominal effective exchange rate): 13.2, -8.1, 9.0
    - Annual percentage change (Relative price index): 27.8, -0.2, -1.3
    - Cumulative changes (Real effective exchange rate): 33.0, -8.7, 10.5
    - Cumulative changes (Nominal effective exchange rate): 12.7, -8.2, 10.3
    - Cumulative changes (Relative Price Index): 24.9, 0.8, -1.7

### Evolution of Other REER Measures
- Additional REER measures:
  - Internal real effective exchange rate (IRER) = ratio of nontradables to tradable goods.
  - Cost-based REER = CPI-based REER × real wage index (nominal wage index deflated by CPI).
- IRER measurement issues: lack of straightforward tradable/nontradable definition; two alternative IRER approaches used for robustness.
- Empirical observations (1990–2003):
  - IRER fluctuations followed CPI-based REER with wider amplitude.
  - Steady real appreciation of REER from 1994 through 1999 due to larger increases in prices of nontraded vs. tradable goods, reducing tradable-sector profits and hampering export diversification.
  - Labor-cost-based REER remained below CPI-based REER and IRER.
  - Labor-cost-based REER depreciated more than CPI-based REER after 1994 and has since remained lower.
  - Interpretation: competitiveness appears better using cost-based REERs than CPI-based REERs, and worse when using IRER.

### Market Shares and Profitability
- Export market shares since 2000:
  - WAEMU export market shares to the world and EU appear to be increasing.
  - Export shares to Africa and the United States appear to be decreasing.
  - Intraregional exports expanding.
  - Overall since 1994 devaluation, WAEMU shares have fallen to all groups except Africa.
- Profitability measures constructed:
  - Ratio of export price index to tertiary GDP deflator.
  - Export price index to wages deflator.
- Empirical profitability findings:
  - Both profitability indices show a net decline since 2001-02.
  - Both show a small overall increase since the 1994 devaluation.

### Structural Rigidities and Policy Implications
- Identified rigidities and vulnerabilities:
  - Rigidities in factor markets raising factor costs.
  - Domestic price level vulnerability to agricultural fluctuations.
  - Low diversification of production and exports.
  - Lack of implementation of regional integration programs, notably infrastructure and telecommunications.
- Policy recommendations:
  - Pursue structural reforms to boost labor productivity, reduce excessive factor costs, and diversify production and exports.
  - Reduce factor costs by improving access to technologies and implementing integration programs in road infrastructure, telecommunications, and energy; facilitate interregional trade.
  - Create conditions to increase domestic and foreign private investment in all sectors (especially non-oil), including deepening judicial, legal, and institutional frameworks.
  - Dismantle remaining trade barriers and state trading monopolies; improve transportation and intraregional communication networks; harmonize public procurement.
  - Improve economic governance and transparency to increase FDI.
  - Abolish formal or informal administrative restrictions for WAEMU nationals; facilitate cross-border transfers of pension rights and social security benefits.

### Prospects for Further Integration
- Assessment:
  - Fixed currency peg contributed to price stability.
  - Progress in economic integration disappointing despite commonalities (historical ties, common language, legal/administrative similarities, common currency).
  - Diverging trends linked to income level, resource endowments, population size, and lack of complementarities not sufficiently alleviated.
- Political dimension:
  - Stronger political will required to further integration and to complement monetary union with an economic union.

### Conclusions
- After more than 10 years since WAEMU establishment:
  - The eight WAEMU countries and their citizens are not yet fully integrated.
  - Growth driven primarily by country-specific developments with few regional spillovers.
  - Labor mobility has slowed.
  - Fiscal convergence has been disappointing.
  - Intraregional trade expansion modest.
  - Competitiveness has eroded.
- To complete a full-fledged economic union, the eight countries need significantly stronger political drive to overcome narrow economies and reduce structural rigidities.

### Appendix I — Calculation of the Internal Real Exchange Rate (IRER)
- IRER conceptual definition: "The internal real exchange rate (IRER) is calculated as the ratio of the domestic prices of nontradables to that of tradable goods."
- Two proxy methodologies:

  - First proxy: IRER1
    - IRER = PNT / PT.          (1)
    - CPI = (PT)^z (PNT)^(1- z).          (2)
    - IRER1 = (CPI / PT)^(1/(1- z)).        (3)
    - Implementation: import prices used as proxy for PT; share of imported consumption goods in total private consumption used as proxy for z.

  - Second proxy: IRER2 (Devarajan, Lewis, Robinson (1993) three-good model)
    - py Y = pd D + px X.         (4)
    - py – px Sx = pd D / Y = pd (Y – X) / Y.      (5)
    - pd = (Py – Sx Px) / (1 – Sx).       (6)
    - IRER2 = [(Py – Sx Px) / (1 – Sx)] / PT.      (7)
- Import prices used as proxy for PT in both approaches.

### Appendix II — WAEMU Indicators (selected series and average disparities)
- Real GDP growth (WAEMU series and Average disparity): WAEMU3.4 2.4 -0.4 -0.1 3.2 5.5 7.0 5.4 5.7 2.6 0.2 4.0 1.5 1.7 3.0 1.3 5.4 2.0; Average disparity5.7 3.7 2.7 4.2 2.3 1.7 1.6 1.0 2.7 1.6 3.4 4.3 2.8 4.4 1.7 2.9 0.6 2.7
- Share of Gross Domestic Savings in GDP (WAEMU series and Average disparity): WAEMU8.9 7.8 7.3 8.8 15.7 14.7 13.1 14.1 13.2 12.9 10.8 12.2 15.3 14.3 12.1 8.2 14.2 13.1; Average disparity2.9 2.5 2.2 4.3 8.3 7.5 7.1 8.3 6.2 7.9 6.4 6.7 10.1 8.6 6.0 2.6 7.3 7.8
- Share of Gross Investment in GDP (WAEMU series and Average disparity): WAEMU12.9 12.3 11.8 13.2 16.9 17.6 15.3 16.4 16.0 15.1 15.0 15.8 15.1 15.8 14.9 12.5 16.4 15.4; Average disparity6.0 5.3 5.9 5.2 5.5 5.7 4.0 3.9 3.5 2.7 4.4 5.2 4.2 5.0 4.3 5.2 4.2 4.1
- Overall Fiscal Deficit (percent of GDP) WAEMU series and Average disparity:
  - WAEMU -11.2 -8.8 -9.2 -9.8 -5.7 -5.7 -4.4 -4.1 -4.3 -5.0 -4.1 -3.6 -3.8 -4.8 -6.0 -9.7 -4.9 -4.3
  - Average disparity7.0 4.8 3.5 3.8 4.6 2.3 1.9 2.4 2.4 3.0 3.2 3.9 3.1 2.7 1.9 4.6 2.5 3.1
- Primary Fiscal Balance (percent of GDP) WAEMU series and Average disparity:
  - WAEMU -6.1 -3.4 -4.0 -5.3 -1.2 -2.0 -1.2 -1.3 -2.0 -2.7 -1.7 -1.7 -2.0 -3.1 -2.7 -4.7 -1.5 -2.2
  - Average disparity4.0 3.2 2.5 2.4 6.8 4.0 3.6 3.6 3.3 4.0 4.3 4.9 3.8 3.4 3.2 2.4 4.2 4.0
- Tax Revenue (percent of GDP) WAEMU14.1 13.8 13.3 11.9 12.2 13.5 14.1 14.1 13.8 13.9 13.6 13.8 14.5 14.5 13.6 13.3 13.5 14.1; Average disparity3.9 3.9 3.8 2.8 3.2 3.4 3.1 2.8 2.3 2.2 2.5 2.4 2.5 2.3 2.8 3.5 2.9 2.3
- Total Expenditure (percent of GDP) WAEMU28.6 25.2 25.4 24.0 20.1 21.4 20.4 20.4 20.2 20.1 19.2 18.9 19.8 20.7 21.7 25.8 20.4 19.7; Average disparity9.8 6.5 6.2 5.1 1.5 3.1 2.5 2.1 1.5 1.7 1.6 2.3 1.9 2.3 2.3 6.8 1.7 1.7
- Current Expenditure (percent of GDP) WAEMU18.4 14.4 14.5 14.5 9.9 11.2 11.2 11.2 11.0 11.6 11.1 11.5 11.6 12.2 13.9 12.6 15.4 10.8 12.1; Average disparity7.6 3.9 3.9 3.6 2.3 1.9 1.9 1.4 1.5 0.9 1.1 1.5 1.3 1.6 1.9 4.6 1.2 1.0
- Investment Expenditure (percent of GDP) WAEMU5.1 5.5 5.7 5.0 5.6 6.4 6.0 6.3 7.1 6.8 5.2 5.3 5.9 5.1 5.8 5.3 6.3 5.7; Average disparity2.6 1.7 2.1 2.0 2.1 2.1 2.4 2.3 2.1 3.3 2.3 3.3 2.9 3.6 2.2 1.8 2.1 3.2
- Civil Service Wage expenditures (share of current expenditure) WAEMU49.1 56.5 56.8 55.5 65.6 50.8 51.2 48.9 46.8 46.8 46.2 47.9 45.0 44.5 42.1 50.5 54.5 52.7 45.1; Average disparity8.6 9.9 9.9 5.8 20.4 6.4 5.5 5.8 4.1 4.5 4.9 8.2 6.6 5.8 5.2 6.7 6.0 5.3
- Civil Service Wage Expenditures (percent of GDP) WAEMU8.9 8.7 8.7 8.4 6.3 5.8 5.6 5.4 5.0 5.1 5.3 5.2 5.4 5.5 6.4 8.7 5.6 5.3; Average disparity2.7 2.4 2.3 2.2 1.2 1.1 2.0 0.9 0.9 0.7 0.8 0.9 1.0 1.2 1.3 2.4 1.0 0.9
- External Trade (goods and services) to GDP WAEMU53.0 51.0 52.9 47.8 56.9 61.3 68.6 68.6 80.6 60.5 66.0 66.3 63.4 65.7 73.2 61.0 51.2 63.1 66.9
- Share of Two Main Commodities in Total Exports WAEMU48.1 52.0 47.9 51.9 51.3 51.9 50.3 48.8 50.1 44.8 40.4 43.9 39.9 39.4 45.2 43.5 47.5 50.0 54.2 42.7
- Ratio of Intrazone Exports to Total Exports WAEMU8.9 7.6 7.8 6.9 6.9 6.8 7.8 7.8 8.6 8.5 9.2 10.0 9.1 8.5 8.6 8.3 7.8 7.9 7.2 9.2
- Ratio of Intrazone Imports to Total Imports WAEMU7.1 6.2 6.0 5.4 5.8 5.2 6.1 6.2 7.2 8.8 7.8 8.1 8.4 8.1 6.9 6.1 6.1 6.1 8.2
- Growth of Intrazone Exports WAEMU -19.7 12.4 -23.1 0.4 30.4 18.8 6.1 6.2 7.0 -8.2 4.3 10.0 21.9 5.1 -10.1 12.4 7.0
- Growth of Intrazone Imports WAEMU -16.1 5.6 -21.0 -6.4 25.3 18.2 -0.4 25.5 19.0 -18.4 8.6 12.5 19.3 5.5 -10.5 12.5 8.2

*Source: _wp05145 - IMF staff calculations and WAEMU country authorities.*

### 1. Calculation of the Internal Real Exchange Rage ............................................................23

### 1. Calculation of the Internal Real Exchange Rage ............................................................23

### Overview
- On January 13, 1994, after the CFA franc was devalued by 50 percent in foreign currency terms, the governments of Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo signed a treaty creating the West African Economic and Monetary Union (WAEMU).
- Guinea-Bissau joined the union in May 1997; Guinea-Bissau is omitted from the study’s quantitative analysis because it joined only in May 1997.
- The WAEMU builds on an earlier West African Monetary Union (WAMU) arrangement linking member countries via the CFA franc, which was pegged to the French franc and, since 1999, to the euro.
- The 1994 devaluation prompted moves to reinforce the monetary union with a customs union and common economic market: free movement of persons, goods, services, and capital; common industrial and sectoral policies; common external tariffs and trade policies; and harmonized frameworks for fiscal policy, public finance and business accounting, commercial law, and investment promotion.
- A system of multilateral surveillance of macroeconomic policy was established to ensure convergence of key fiscal aggregates and to maintain the integrity of the currency peg.

### Rationale for Convergence and Achievements
- Primary goals of the economic union: enhance macroeconomic stability, improve economic performance and growth, and reduce poverty by promoting fiscal discipline, openness to international trade, and competition in the regional market.
- Structural reforms and complementary policies (transportation, energy, telecommunications) are needed to reduce transaction costs and generate efficiency gains to foster differentiated production structures and expand intraregional trade.
- Significant heterogeneity among members:
  - Côte d’Ivoire accounts for about 40 percent of WAEMU’s output; Senegal about 20 percent; the remaining six countries represent less than 10 percent each.
  - Per capita income disparity example for 2001: Côte d’Ivoire US$710 vs. Guinea-Bissau US$160.
- Historical context:
  - WAMU functioned well in the two decades post-independence but began to unravel in the mid-1980s due to structural declines in commodity prices and the nominal appreciation of the French franc against the U.S. dollar, leading to the 1994 devaluation.

### Measuring Disparity
- The paper constructs an “average disparity” measure: a weighted variance of deviations for all WAEMU countries for each year.
- Definitions and formulas (as provided):
  - Xit = observed value of variable X for country i in year t.
  - Pit = weight of country i in year t for variable X; weights are each country’s nominal GDP share in aggregated WAEMU nominal GDP, so ∑i=1^7 Pit = 1.
  - tX  = weighted average of X in year t: tX = ∑i=1^7 Pit Xit.
  - Average disparity: AverageDisparityt = sqrt(∑i=1^7 Pit (Xit − tX)^2). (Presented in the source as 2 1 7 1 2 )( ⎭⎬⎫⎩⎨⎧ −= ∑ = i t itit XXPparityAverageDis.)
- Interpretation: a low (high) disparity indicates a tendency for convergence (divergence).
- For WAEMU inflation, the geometric weighted average was used: ∏i=1^7 Xit^Pit.

### Real Sector Developments (1990–2003)
- Periodization used in the analysis:
  - 1990-93: adverse terms of trade, significantly overvalued exchange rate, fiscal imbalances, insufficient internal adjustment, rapid external debt accumulation.
  - 1994-98: post-devaluation stabilization and structural adjustment, strong economic expansion, more balanced macro performance, structural transformation.
  - 1999-2003: momentum dissipated, weaker output growth, fiscal and external deficits reversed in several countries, political crises (notably Côte d’Ivoire) weakened political commitment to integration.
- Growth and disparity outcomes:
  - The difference between the best and worst performer reached 19.9 percentage points in 1993; the disparity indicator peaked at 2.9 in 1993.
  - After the 1994 devaluation, dispersion in growth rates narrowed to 4 percentage points in 1997; disparity index declined to an average of 0.6 in 1994-98.
  - Since 1999, dispersion increased and the disparity indicator widened to an average of 2.7 in 1999-03.
- Savings and investment:
  - Gross domestic savings were low in 1990-93, rose markedly in 1994-98, but with significant contrasts across countries.
  - The divergence indicator for savings increased from 2.6 in the first subperiod to 7.3 in the second.
  - Investment rebounded from an average of 12.5 percent of GDP in 1990-93 to 16.4 percent of GDP in 1994-98 and then trailed off in 1999-2003, with marked variations among countries.
- Conclusion on convergence:
  - Neither sources of GDP growth nor uses indicate progress toward convergence; lower-income countries as a group did not experience an increase in their relative incomes, indicating absence of a gravitational pull toward richer members.
  - Country-specific developments and policies were the main explanatory variables for growth; spillover effects from WAEMU were low.

### Labor Mobility and Migratory Flows
- Historically, free movement of persons and significant migration, especially to Côte d’Ivoire, were key in convergence via labor mobility.
- Drivers of migration: rapid population growth, significant un- or underemployment, wide divergences in nominal wages between coastal and landlocked countries, shared language, and similar education systems.
- Migration outcomes:
  - During 1960-90, an estimated 11 percent of West Africa’s population (excluding Nigeria) resided in a country other than birth.
  - Côte d’Ivoire’s non-Ivorian residents were conservatively estimated at around 30 percent of the population in 1988 and 1996 censuses; 83 percent of these originated from other WAEMU countries, with about 50 percent from Burkina Faso and 22 percent from Mali.
  - Net annual immigration into Côte d’Ivoire in the 1990s was estimated at 0.4 percent of the resident population.
  - Senegal’s 1988 census registered foreign nationals at 3.1 percent of the total population; true percentage estimated higher.
  - A mid-1990s study estimated that 40 percent of Burkinabé population is expatriate.
- Since early 2000, Côte d’Ivoire’s political crisis and rising nationalistic movements slowed immigration and prompted returns, reducing the convergence role of labor mobility.
- Legal basis: free movement of people and right of settlement enshrined in Articles 91 and 92 of the WAEMU treaty.

### Fiscal Developments
- Fiscal convergence is central to integration given WAEMU’s fixed exchange rate and endogenous money: prudent fiscal policies, harmonization and coordination of fiscal rules, and some national flexibility to offset exogenous shocks are required.
- A regional Convergence, Stability, Growth, and Solidarity Pact was adopted in December 1999 to strengthen convergence via a peer review process and defines convergence criteria (text ends before listing the criteria or original target date).

*Source: _wp05145 - 1. Calculation of the Internal Real Exchange Rage ............................................................23 (IMF staff content provided in the source PDF).*

### 2002. With the weakening of economic

### _wp05145 - 2002. With the weakening of economic

### Fiscal convergence and harmonization
- Institutional and policy actions:
  - WAEMU introduced a full-fledged customs union and a common external tariff (CET), which reduced the WAEMU unweighted average tariff from 19 percent in 1997 to about 12 percent in 2000.
  - VAT, excise taxes, taxation of petroleum products, and withholding taxes were harmonized.
  - Five directives were adopted to harmonize fiscal policy; harmonized legislation pertaining to commercial activity, accounting, and disclosure was adopted.
- Primary fiscal convergence outcomes and heterogeneity:
  - The overall deficit-to-GDP ratio improved from 9.7 percent, on average, in 1990-93 to 4.6 percent, on average, in 1994-2003.
  - The improvement in 1994-98 was partially reversed in 1999-2003, with widening disparity indicators.
  - Primary fiscal deficits improved on average, but heterogeneity increased, worsening disparity indicators.
- Tax revenue:
  - Structure: indirect taxes represent, on average, about 40 percent of total tax revenue; custom duties about one-third; direct taxes about one-fourth.
  - Tax revenue improved from about 13.3 percent of GDP on average in 1990-93 to just above 14 percent of GDP in 1999-2003.
  - Homogeneity improved: average disparity indicators declined from 3.5 in 1990-93, to 2.9 in 1994-98, and to 2.3 in 1999-2003.
- Expenditure and wage bill adjustment:
  - Overall expenditure fell from close to 26 percent of GDP in 1990-93 to an average of about 20 percent of GDP in 1994-2003.
  - Expenditure compression was proportionally larger among highest spenders (in particular Côte d’Ivoire); disparity indicator for total expenditure fell from 6.8 in 1990-03 to 1.7 in 1999-2003.
  - Government wage bill declined as a percentage of current outlays and of GDP; average civil service wages in Côte d’Ivoire were about three times those in Niger in 1990-2003.
  - WAEMU wage-bill comparison with sub-Saharan Africa (SSA):
    - For 1994-98, the average for WAEMU is 5.6 percent compared with 7.9 percent for SSA.
    - For 1999-03, the average for WAEMU is 5.3 percent compared with 8.2 percent for SSA.
- Limits to fiscal convergence:
  - Overall fiscal convergence limited by highly divergent evolution in investment outlays and in debt service costs.
  - Divergent schedules for achieving debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative contributed to heterogeneity.
  - Harmonization had positive impacts but lacked a mechanism to ensure coordination of regional fiscal policies.

### Monetary aspects and financial integration
- Monetary policy framework and objectives:
  - Monetary policy conducted regionally by the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), which holds the union’s pooled international reserves.
  - BCEAO objectives: preserve the credibility of the exchange rate, achieve its target level of foreign assets, restrain the inflation rate in member countries, and maintain monetary stability.
  - Bank supervision conducted at the regional level by the regional Banking Commission (established in 1990).
- Instruments and operations:
  - Policy instruments: discount rate mechanism, repurchase agreement facility (pension window), minimum reserve requirements, and issuance of central bank bills.
  - BCEAO mainly relies on reserve requirements and central bank standing facilities; does not typically use discretionary instruments (central bank bills).
  - Since 2002, financing of government fiscal deficits shifted from central bank direct advances to issuance of securities on the regional capital market; low volume of government securities issued has not mopped up excess bank liquidity but has promoted capital market development.
- Banking system deficiencies and reforms:
  - Problems: significant monetary overhang, lack of competition at the regional level, and absence of an active interbank market, hindering fund flows from liquid banks to banks with strong credit demand.
  - Improvements: single zonewide licensing agreement for banks; overhaul of regional payments system, including establishment of a cross-border real-time gross settlement system; interbank trading has increased but remains mostly among subsidiaries of regionwide banking groups.
- Financial deepening initiatives and remaining needs:
  - Implemented: OHADA business law, Parmec Law for microfinance institutions, establishment of a regional credit risk agency and a Regional Solidarity Bank.
  - Remaining needs: development of diversified financial institutions and instruments at the regional level — cooperative credit associations for agriculture and SMEs, collective savings institutions (mutual funds), mortgage and housing finance institutions, leasing, and venture capital firms.

### Intraregional trade and competitiveness
- Openness and trade shares:
  - External trade to GDP averaged 61 percent during 1990-2003 and rose steadily since 1994.
  - WAEMU remains a small player in global trade: exports and imports represented on average 0.12 and 0.15 percent, respectively, of world exports and imports during 1990 and 2003.
- Export concentration and vulnerability:
  - Share of the two main commodities in total exports averaged 47.5 percent for WAEMU (high of close to 83 percent for Benin; low of about 41 percent for Senegal).
  - Concentration ratio declined to about 43 percent in the 1999-2003 subperiod.
  - Correlation between openness and concentration: -0.88 for the whole sample; -0.90 for 1999-2003.
- Patterns of intrazone trade:
  - Côte d’Ivoire and Senegal directed relatively large parts of overall exports to the WAEMU area (11 percent and 6.5 percent, respectively, during 1990–2003).
  - Côte d’Ivoire and Senegal account for about 74 and 14 percent, respectively, of intrazone exports.
  - Landlocked countries export primary commodities to other union members; Benin and Togo rely on transit trade; Côte d’Ivoire and Senegal export manufactured goods to other WAEMU countries.
  - Intraregional imports: Burkina Faso and Mali combined represent about 63 percent of intraregional imports.
- Magnitude and evolution of intraregional trade:
  - Recorded intraregional exports and imports averaged 8.3 and 6.9 percent, respectively, of total exports and imports during 1990-2003.
  - Intraregional trade declined in 2000 due to a retrenchment of Côte d’Ivoire’s trade (sociopolitical crisis) but grew from 2001 onward after elimination of tariffs on intraregional trade in 2000.
  - Limits to expansion of intraregional trade: low regional consumption of primary commodities, similarity of products produced across countries, bottlenecks in regional transportation and marketing raising export costs.
- Competitiveness and real exchange rate developments:
  - The 1994 CFA franc devaluation corrected overvaluation and strengthened competitiveness; subsequent structural policies to increase labor productivity and lower production costs have stumbled.
  - Evolution of CPI-based REER:
    - The REER appreciated cumulatively by about 12 percent through 2001 and by a further 8 percent during 2002-03 on a yearly basis; latest appreciation attributable to strengthening of the euro, to which the CFA franc is pegged.
    - By end-2003, the regional REER was about 76 percent of its predevaluation level.
  - Phases of REER evolution after 1994:
    - January 1994 to December 1998: rapid REER appreciation due to surge in domestic wages and prices after the devaluation.
    - January 1999 to December 2000: short REER depreciation driven by terms-of-trade decline (falls in key export commodity prices and increase in oil prices) and world slowdown.
    - January 2001 onward: appreciating REER reflecting mainly euro strengthening.
  - WAEMU average annual changes and cumulative changes (Jan 1994–Dec 1998; Jan 1999–Dec 2000; Jan 2001–Dec 2003):
    - Annual percentage change (Real effective exchange rate): 38.2, -8.7, 8.6
    - Annual percentage change (Nominal effective exchange rate): 13.2, -8.1, 9.0
    - Annual percentage change (Relative price index): 27.8, -0.2, -1.3
    - Cumulative changes (Real effective exchange rate): 33.0, -8.7, 10.5
    - Cumulative changes (Nominal effective exchange rate): 12.7, -8.2, 10.3
    - Cumulative changes (Relative Price Index): 24.9, 0.8, -1.7

*Italicized source attribution as provided in the content unit.*

### 87.8 percent (Benin) of their predevaluation levels.

### _wp05145 - 87.8 percent (Benin) of their predevaluation levels.

### Evolution of other REER measures
- Two additional REER measures estimated:
  - Internal real effective exchange rate (IRER) measured as the ratio of nontradables to tradable goods.
  - Cost-based REER (calculated as the CPI-based REER multiplied by the real wage index—that is, the nominal wage index deflated by the CPI).
- IRER definition and measurement issues:
  - The IRER is measured as the ratio of the prices of nontraded goods (PNT) to those of tradable goods (PT).
  - Difficulty: lack of a straightforward definition of tradable and nontradable goods.
  - For robustness, two alternative IRER approaches from the literature are used (see Appendix II referenced).
- Empirical observations (WAEMU region, 1990–2003):
  - IRER fluctuations followed the CPI-based REER but with wider amplitude.
  - There was a steady real appreciation of the REER from the devaluation in 1994 through 1999, attributable to larger increases in prices of nontraded goods than in prices of tradable goods, which cut into tradable-sector profits and hampered export diversification.
  - Labor-cost-based REER remained below the CPI-based REER and the IRER.
  - The labor-cost-based REER depreciated more than the CPI-based REER after the 1994 devaluation and has since remained at lower levels.
  - Interpretation: competitiveness appears better using cost-based REERs than CPI-based REERs, and worse when using IRER.

### Market shares and profitability
- Export market shares since 2000:
  - WAEMU export market shares to the world and to the European Union (EU) appear to be increasing.
  - Export shares to Africa and the United States appear to be decreasing.
  - Intraregional exports have been expanding.
  - Overall since the 1994 devaluation, WAEMU shares have fallen to all groups except to Africa.
- Profitability measures constructed:
  - Ratio of the export price index to tertiary GDP deflator.
  - Export price index to wages deflator.
- Empirical profitability findings:
  - Both profitability indices show a net decline since 2001-02.
  - Both show a small overall increase since the 1994 devaluation.
- Summary finding on competitiveness:
  - Evidence of erosion of WAEMU countries’ competitiveness:
    - Loss of some competitiveness gains from the 1994 devaluation (per REER measures).
    - Export shares stagnant or falling in some cases.
    - Other indicators point to continued structural rigidities in the region (see list below).

### Structural rigidities and policy implications
- Identified structural rigidities and vulnerabilities:
  - Rigidities in factor markets that raise factor costs.
  - Vulnerability of the domestic price level to agricultural production fluctuations.
  - Low diversification of base production and exports.
  - Lack of implementation of regional integration programs, notably in infrastructure and telecommunications.
- Policy recommendations to strengthen competitiveness:
  - Pursue structural reform policies to boost labor productivity, reduce excessive factor costs, and diversify production and exports.
  - Reduce factor costs by improving access to new technologies and implementing integration programs in road infrastructure, telecommunications, energy, and measures facilitating interregional trade.
  - Create conditions for increased domestic and foreign private investment in all sectors (especially non-oil), including deepening judicial, legal, and institutional frameworks.
  - Dismantle remaining trade barriers and state trading monopolies; improve transportation and intraregional communication networks; harmonize public procurement policies.
  - Improve economic governance and transparency to increase FDI.
  - Abolish formal or informal administrative restrictions for WAEMU nationals to encourage migration; facilitate cross-border transfers of pension rights and social security benefits.

### Prospects for further integration
- Assessment:
  - Fixed currency peg contributed to price stability.
  - Progress in economic integration has been disappointing despite commonalities (historical ties, common official language, similarities in legal/administrative frameworks, common currency).
  - Diverging trends linked to income level, resource endowment, population size, and lack of complementarities have not been sufficiently alleviated.
- Political dimension:
  - Stronger political will is required to further integration and to complement the monetary union with an economic union.

### Conclusions
- After more than 10 years since WAEMU establishment:
  - The eight WAEMU countries and their citizens are not yet fully integrated.
  - Growth has been driven primarily by country-specific developments with few regional spillovers.
  - Labor mobility has slowed.
  - Fiscal convergence has been disappointing.
  - Intraregional trade expansion has remained modest.
  - Competitiveness has eroded.
- To complete a full-fledged economic union, the eight countries will need significantly stronger political drive to overcome narrow economies and reduce structural rigidities.

### Appendix I — Calculation of the Internal Real Exchange Rate (IRER)
- IRER conceptual definition:
  - "The internal real exchange rate (IRER) is calculated as the ratio of the domestic prices of nontradables to that of tradable goods."
- Two proxy methodologies used to categorize tradable and nontradable consumption bundles:

  - First proxy: IRER1
    - Using the definition of IRER,
      - IRER = PNT / PT.          (1)
    - CPI as weighted average with z the share of tradable goods in the CPI basket:
      - CPI = (PT)z (PNT)1- z.          (2)
    - Reorganizing and substituting:
      - IRER1 = (CPI / PT).1/(1- z)        (3)
    - Implementation details:
      - Import prices used as proxy for prices of tradable goods.
      - Share of imported consumption goods in total private consumption used as proxy for z.

  - Second proxy: IRER2 (based on Devarajan, Lewis, and Robinson (1993) three-good model)
    - Aggregate income identity:
      - py Y = pd D + px X,         (4)
        where py, pd, px are the GDP deflator, price of domestically produced good, and price of the export good; Y, D, X are total output, output of domestic good, and output of exported good (real terms).
    - Divide by Y and denote export share as Sx:
      - py – px Sx = pd D / Y = pd (Y – X) / Y      (5)
    - Rearranged:
      - pd = (Py – Sx Px) / (1 – Sx).       (6)
    - IRER2 using standard definition (PNT/PT) and import prices as proxy for PT:
      - IRER2 = [(Py – Sx Px) / (1 – Sx)] / PT.      (7)

*Source: IMF staff calculations and WAEMU country authorities (excerpt from _wp05145).*

### Appendix II. WAEMU Indicators

### Appendix II. WAEMU Indicators

### Table 1: WAEMU: Real GDP Growth
- WAEMU3.42.4-0.4-0.13.25.57.05.45.72.60.24.01.51.73.01.35.42.0
- Average disparity5.73.72.74.22.31.71.61.02.71.63.44.32.84.41.72.90.62.7

### Table 2: WAEMU: Share of Gross Domestic Savings in GDP
- WAEMU8.97.87.38.815.714.713.114.113.212.910.812.215.314.312.18.214.213.1
- Average disparity2.92.52.24.38.37.57.18.36.27.96.46.710.18.66.02.67.37.8

### Table 3: WAEMU: Share of Gross Investment in GDP
- WAEMU12.912.311.813.216.917.615.316.416.015.115.015.815.115.814.912.516.415.4
- Average disparity6.05.35.95.25.55.74.03.93.52.74.45.24.25.04.35.24.24.1

### Table 4: WAEMU: Overall Fiscal Deficit (Commitment basis, in percent of GDP)
- WAEMU-11.2-8.8-9.2-9.8-5.7-5.7-4.4-4.1-4.3-5.0-4.1-3.6-3.8-4.8-6.0-9.7-4.9-4.3
- Average disparity7.04.83.53.84.62.31.92.42.43.03.23.93.12.71.94.62.53.1

### Table 5: WAEMU: Primary Fiscal Balance (In percent of GDP)
- WAEMU-6.1-3.4-4.0-5.3-1.2-2.0-1.2-1.3-2.0-2.7-1.7-1.7-2.0-3.1-2.7-4.7-1.5-2.2
- Average disparity4.03.22.52.46.84.03.63.63.34.04.34.93.83.43.22.44.24.0

### Table 6: WAEMU: Tax Revenue (In percent of GDP)
- WAEMU14.113.813.311.912.213.514.114.113.813.913.613.814.514.513.613.313.514.1
- Average disparity3.93.93.82.83.23.43.12.82.32.22.52.42.52.32.83.52.92.3

### Table 7: WAEMU: Total Expenditure (In percent of GDP)
- WAEMU28.625.225.424.020.121.420.420.220.120.219.218.919.820.721.725.820.419.7
- Average disparity9.86.56.25.11.53.12.52.11.51.71.62.31.92.32.36.81.71.7

### Table 8: WAEMU: Current Expenditure (In percent of GDP)
- WAEMU18.414.414.514.59.911.211.211.110.611.111.511.612.213.912.615.410.812.1
- Average disparity7.63.93.93.62.31.91.91.41.50.91.11.51.31.61.94.61.21.0

### Table 9: WAEMU: Investment Expenditure (In percent of GDP)
- WAEMU5.15.55.75.05.66.46.06.37.16.85.25.35.95.15.85.36.35.7
- Average disparity2.61.72.12.02.12.12.42.32.13.33.23.32.93.62.21.82.13.2

### Table 10: WAEMU: Civil Service Wage expenditures (as a share of current expenditure)
- WAEMU49.156.556.855.565.650.851.248.946.846.247.945.044.542.150.554.552.745.1
- Average disparity8.69.95.95.820.46.45.55.84.14.54.98.26.65.85.26.76.05.3

### Table 11: WAEMU: Civil Service Wage Expenditures (In percent of GDP)
- WAEMU8.98.78.78.46.35.85.65.45.05.15.35.25.45.56.48.75.65.3
- Average disparity2.72.42.32.21.21.11.20.90.90.70.80.91.01.21.32.41.00.9

### Table 12: WAEMU: External Trade (Goods and Services) to GDP
- WAEMU53.051.052.947.856.961.368.668.060.566.066.363.465.773.261.051.263.166.9

### Table 13: WAEMU: Share of the Two Main Commodities in Total Exports
- WAEMU48.152.047.951.951.351.950.348.850.144.839.939.945.243.547.550.050.542.7

### Table 14: WAEMU: Ratio of Intrazone Exports to Total Exports
- WAEMU8.97.67.86.96.96.87.88.68.59.29.89.58.68.98.37.87.79.2

### Table 15: WAEMU: Weight of Each Country in Intrazone Exports of Goods
- WAEMU100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0

### Table 16: WAEMU: Ratio of Intrazone Imports to Total Imports
- WAEMU7.16.26.05.45.85.26.16.27.28.87.88.18.48.16.96.16.18.2

### Table 17: WAEMU: Weight of Each Country in Intrazone Imports of Goods
- WAEMU100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0

### Table 18: WAEMU: Growth of Intrazone Exports
- WAEMU-19.712.4-23.10.430.418.86.16.27.0-8.24.310.021.95.1-10.112.47.0

### Table 19: WAEMU: Growth of Intrazone Imports
- WAEMU-16.15.6-21.0-6.425.318.2-0.425.519.0-18.48.612.519.35.5-10.512.58.2

*Source: _wp05145 - Appendix II. WAEMU Indicators*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp05145.pdf_