Public Information Notice

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On March 10, 2003, the Executive Board of the International Monetary Fund (IMF) concluded its discussion of the staff report on the recent economic developments and regional policy issues with West African Economic and Monetary Union (WAEMU) as a supplement to the Article IV consultation with the eight member countries (Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo).¹ The background section in this Public Information Notice reflects information available at the time of the Executive Board meeting and the views of Executive Directors are those expressed at that meeting.

Background

The exchange rate realignment of 1994 brought a significant turnaround in the economic performance of the CFA countries, and in the WAEMU in particular, with output, exports, and investment increasing more rapidly than in other sub-Saharan countries during 1994-98. Inflation returned to single-digit levels; fiscal and external imbalances were reduced; and progress was made in fostering structural reforms in most of the countries.

The strong economic expansion in the aftermath of the 1994 devaluation of the CFA franc has tapered off. Since 1999, real GDP in WAEMU countries has grown on average by only 2½ percent annually compared with an average annual rate of 5¼ percent during 1994-98. Real GDP grew moderately by about 3½ percent in 2001, despite an improvement in the region's terms of trade. Average consumer price inflation rose to 4.3 percent from 1.4 percent in 2000, owing to food supply shortages in several countries. Developments in 2002 were marked by a pronounced slowdown of the economies of several member countries during the last quarter of the year. Before the recent crisis in Côte d'Ivoire, robust aggregate output growth was expected, thanks to a strengthening of manufacturing activity, particularly in Niger, Benin and Côte d'Ivoire. However, the reverberating effects of the ongoing crisis in Côte d'Ivoire, coupled with adverse developments in international commodities markets, have slowed economic growth in the region; real GDP growth in the WAEMU is estimated to have been around 3 percent in 2002, well below the 4½ percent initially projected, in spite of good climate conditions. Inflation had drifted upward, primarily owing to the impact of several largely transitory factors, but it has since came down to 3 percent. The external current account deficit, excluding official transfers, however, is estimated to have narrowed to 7.2 percent of GDP mainly because of a sharp decline in imports resulting from weakened economic activity. The real effective exchange rate appreciated by 5.6 percent during 2001-November 2002, reaching 73 percent of the pre-1994 devaluation level.

Progress towards convergence of the WAEMU countries during the period 2001 and 2002 has been below expectations, despite the adoption of medium-term convergence programs in early 2001, which were designed to ensure compliance with the convergence criteria by the end of 2002. At end-2001, only two members (Benin and Cote d'Ivoire) out of eight met the key target on the basic fiscal balance, while only one country (Senegal) was in compliance with the inflation criterion down from six in 2000. Some progress was achieved in 2001 pertaining to the reduction of domestic arrears. Performance at end-2002 is estimated to have remained weak. Preliminary information indicates that no country was in compliance with all nine convergence criteria at end-December 2002, as required by the convergence pact.

To reinforce convergence, several initiatives have been undertaken to harmonize taxation, budget laws and government accounts. Progress has been made on the harmonization of indirect and excise taxes. In the area of trade, the common external tariff adopted in 2000 is being implemented in all countries and the preferential trade arrangements within the WAEMU have been in place since 2000. However, intraregional trade continues to face numerous nontariff barriers, such as national standards and numerous roadblocks. Efforts are underway to set up common sectoral policies so as to tackle the underlying structural rigidities of the WAEMU economies.

The outlook for 2003 of the region will depend on international commodity price developments, the conduct of economic policies, and the extent and duration of the crisis in Côte d'Ivoire. The impact of the crisis in Côte d'Ivoire, if it persists, is likely to be very serious in 2003 and beyond. Assuming that the crisis would be resolved in the first half of 2003, growth in WAEMU would be less than 2 percent in 2003, with average inflation hovering around 3 percent. However, if the crisis persists, real GDP growth would likely stagnate further or even contract.

Executive Board Assessment

Executive Directors observed that the strong economic expansion in the WAEMU region in the aftermath of the 1994 devaluation of the CFA franc has slowed. The continued uncertainties posed by the unsettled political and economic situation in Côte d'Ivoire—the largest economy in the WAEMU—the delayed global economic recovery, and the possibility of continued high oil prices in case of war in the Middle East, along with persistent structural and institutional rigidities across the WAEMU membership, are weighing on the region's growth prospects. Directors recognized that an early economic recovery and reestablishment of political stability in Côte d'Ivoire will be essential for regional GDP growth to resume at a pace consistent with poverty reduction in the region. Against that challenging background, Directors considered that the WAEMU is at a crossroads: member governments need to match their political commitment to WAEMU with strong actions to deepen the regional integration process in the face of the serious uncertainties about the economic outlook.

Directors commended the authorities of the WAEMU for the progress achieved in regional integration since 1994, including the establishment of a customs union and an economic union. However, some important regional reforms remain to be implemented. Directors therefore concurred with the decision to extend the timetable for economic convergence of the member states to 2005. They stressed that determined further fiscal consolidation by all the WAEMU members over the next years will be necessary to meet the ambitious timetable. The strengthening of regional institutions and greater political commitment on the part of member countries will also facilitate the removal of the remaining obstacles to intra-regional trade and the creation of a full-fledged customs union and a single market.

Directors noted that the prudent monetary policy of the Central Bank of West African States (BCEAO) has kept inflation low and the coverage of base money by foreign reserves adequate, despite the weakening of economic performance of the WAEMU member countries. They considered that further steps are required to streamline monetary policy instruments and to improve the functioning of the regional interbank market. They urged the authorities to pursue a more flexible interest rate policy, and to lay the basis for replacing the current differentiation of reserve requirements with a uniform reserve requirement ratio for all members at the appropriate time. Directors welcomed the shift in government budget financing from central bank direct advances to the issuing of securities on the regional capital market, but noted that for the market to work optimally, close coordination of monetary and fiscal policies across the WAEMU members, as well as strict observance of the fiscal convergence criterion, will be called for. Directors considered that development of a deep and effective regional capital market would greatly enhance the efficacy of monetary policy.

Directors noted the recent moderate improvement in the financial position of the WAEMU banking system, and emphasized the importance of further improvement. Measures to ensure the observance of prudential ratios by banks, and to strengthen loan recovery mechanisms and the judicial environment, would help to raise the standard of banks' portfolios. Reinforcement of the authority of the Regional Banking Commission will be essential to ensure the effectiveness of bank supervision and the adherence by financial institutions to prudential norms.

Directors supported the adoption by the WAEMU Council of Ministers of an anti-money laundering directive and a draft community regulation on the freezing of funds linked to terrorist activities. They urged member states to enforce strictly the relevant laws and regulations.

Directors welcomed the initiatives undertaken in recent years to harmonize taxation, budget laws, and government accounts. These initiatives and the steadfast implementation of the remaining reform agenda will be crucial if the full benefits of economic integration are to be reaped. Directors encouraged the authorities to pursue the harmonization of exemptions and the adoption of a common investment code, which would help level the playing field and remove residual distortions. They welcomed the establishment of structural funds, which should help reduce regional disparities. They encouraged the establishment of a regional solidarity bank, which should complement rather than compete against the lending activities of microfinance institutions in the context of poverty reduction efforts.

Directors agreed with the staff assessment that the external competitiveness of the WAEMU economies is adequate, but called attention to their vulnerability to fluctuations in the terms of trade. To maintain the region's external competitiveness and its share in export markets, policies aimed at broadening the productive base and diversifying the economies, improving factor productivity, and reducing high nonlabor domestic costs will be important, along with continued sound macroeconomic policies. The authorities were also urged to pursue regional sectoral policies aimed at addressing the underlying structural rigidities of the WAEMU economies.

Directors welcomed the steps taken toward the implementation of a common trade policy by WAEMU members and the encouragement of intraregional trade. A common external tariff (CET) is being set in place in all members. Directors welcomed the increase in volume in intraregional trade resulting from the internal trade liberalization undertaken so far. At the same time, Directors saw considerable scope for further liberalization, and encouraged the authorities to eliminate nontariff barriers to intraregional trade, as well as the exceptions to the CET.

Directors recalled the decision by the Heads of State of the Economic Community of West African States (ECOWAS) to create a large single regional market, and ultimately to establish a common monetary framework. They noted that achievement of this objective will require a high degree of macroeconomic convergence among the member countries, which is at present lacking. Directors acknowledged the strong political support underpinning the integration process within ECOWAS, and considered that the goal of achieving a single monetary union in West Africa can serve as a useful anchor for economic policy, even though convergence will remain an ambitious objective and will take time. Against this background, Directors encouraged member countries of the WAEMU and the ECOWAS to intensify their cooperation in the areas of macroeconomic and sectoral policies and trade to set a firm foundation for monetary and economic union at the appropriate juncture.

WAEMU: Selected Economic and Financial Indicators, 1997-2002
						Prel.
	1997	1998	1999	2000	2001	2002
	(Annual percentage change)
National income and prices
GDP at constant prices	5.2	4.9	3.6	1.5	3.4	3.0
Consumer prices (period average)	3.7	3.8	-0.1	1.7	4.1	3.0
Terms of trade	-2.5	5.4	-7.9	-12.0	5.4	2.6
Nominal effective exchange rate 1/	-3.5	3.6	-1.7	-5.3	1.1	2.1
Real effective exchange rate 1/	-1.8	5.0	-3.0	-5.6	2.9	2.7
	(Annual changes in percent of beginning-of-
	period broad money)
Money and credit 2/
Net foreign assets	6.2	-1.7	1.3	12.4	14.5	7.0
Net domestic assets	1.0	5.2	3.7	-5.2	-2.8	-3.2
Broad money	7.3	3.5	5.0	7.2	11.8	3.8
	(In percent of GDP, unless otherwise indicated)
National accounts
Gross domestic savings	12.2	11.8	11.9	9.6	10.4	11.9
Gross domestic investment	17.4	17.4	17.4	16.5	16.7	17.0
Government financial operations
Total revenue, excluding grants	15.8	15.7	15.5	15.8	15.5	15.6
Total expenditure	20.9	20.9	21.4	20.6	20.5	20.3
Overall balance, excluding grants	-5.1	-5.2	-5.8	-5.2	-5.0	-4.5
Overall balance, including grants	-1.8	-2.1	-2.7	-2.3	-2.1	-2.5
External sector
Exports of goods and services	28.0	28.1	27.9	27.9	27.7	28.1
Imports of goods and services	-33.2	-33.7	-31.9	-35.2	-34.6	-34.1
Current account, including grants	-5.9	-6.0	-6.4	-7.3	-6.8	-6.0
Current account, excluding grants	-8.4	-8.3	-7.8	-9.1	-8.4	-7.2
External public debt	103.2	86.9	87.0	86.4	82.7	77.9
Foreign exchange cover ratio 3/	102.4	98.3	104.5	117.7	116.7	103.6
Memorandum items:
Nominal GDP (in billions of CFA francs)	15,517	16,900	17,570	17,866	18,958	20,231
CFA francs per U.S. dollar, average 1/	583.7	590.0	615.7	712.0	733.0	701.8
CFA francs per euro, average 1/	661.9	660.2	655.9	655.9	655.9	655.9
Sources: IMF, World Economic Outlook database; and IMF staff estimates and projections.
1/ First eleven months of 2002
2/ First nine months of 2002.
3/ Gross official reserves divided by base money.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. The main features of the Board's discussion of the staff report on the recent developments and regional policy issues in the WAEMU are described in this PIN. In this case, the Fund staff held discussions in Dakar, and Ouagadougou with the WAEMU regional institutions, including the Central bank of West African States (BCEAO), the WAEMU Commission and the regional Banking Commission, and in Accra with the West African Monetary Institute and the Executive Secretariat of the ECOWAS.