Public Information Notice

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 19, 2000, the International Monetary Fund’s (IMF) Executive Board concluded discussion of the staff report on the recent developments and regional policy issues in the 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, 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 Treaty establishing the WAEMU entered into force in January 1994. Since then, substantial progress has been made toward closer integration and coordination of macroeconomic policies among the member countries. Most recently, a common external tariff with a simple average rate of 12 percent was put in place in all countries, and a regional convergence pact was adopted in December 1999. Member countries have also taken important steps to integrate the WAEMU into the larger regional arrangement of the Economic Community of West African States (ECOWAS) with a view to creating a unified regional market and currency between the 15 member states.

The overall economic and financial situation in the WAEMU improved considerably during the four-year period following the devaluation of the CFA franc in January 1994 with output, exports and investment increasing more rapidly than in other sub-Saharan countries. However, since 1998, the economic performance of the WAEMU as a whole has weakened, mainly because of a slackening of policy resolve and delays in implementing structural reforms in several countries in the context of political uncertainties linked to the elections process in five countries. This situation was compounded by the impact of the adverse terms of trade developments caused by a decline in the prices of key export commodities—namely, cotton, cocoa, and coffee—and the sharp rise in the import prices of oil products.

Real GDP growth was 4 percent in 1999, compared with 5.5 percent in 1997 and 4.7 percent in 1998, but it remained higher than the 2.2 percent in the rest of sub-Saharan Africa. Average CPI inflation remained subdued at less than 1 percent, and the real effective exchange rate of the CFA franc (based on the CPI) remained virtually unchanged in 1999; relative to 1994, the improvement in the competitive position was estimated at 28 percent at end-December 1999. Mirroring the deterioration in the terms of trade, the external current account deficit, including official transfers, widened from 5.4 percent in 1998 to 6.1 percent of GDP. For 2000, the regional GDP growth is projected at about 3½ percent based on the expected recovery of world trade and output, and favorable weather conditions for agricultural production. However, there are downside risks to the overall macroeconomic outlook emanating from a continued deterioration in the region’s terms of trade and a weakening of policy resolve.

Reflecting a weakened fiscal stance in several countries, the zone-wide overall fiscal deficit (excluding grants) increased slightly to 5 percent of GDP in 1999. Including official transfers, the fiscal deficit widened to 2.5 percent of GDP from 1.3 percent in 1998. Total government revenue declined by 1 percentage point of GDP to 16.7 percent, reflecting lower export tax revenue owing to the fall in commodity prices, the fiscal impact of the first round of tariff reductions in the context of the common external tariff, and weakness in tax administration in some countries. Government expenditure fell slightly by 0.3 percentage points to 21.7 percent of GDP mainly because of a reduction in foreign-financed investment.

The conduct of monetary policy was successful during 1998 and 1999 in maintaining a foreign exchange cover ratio in excess of 100 percent. Monetary policy was tightened considerably in mid-1998, in response to speculative capital outflows sparked by public expectation of a new devaluation at the time of the switch of the French franc to the euro as the anchor on January 1, 1999. Monetary conditions remained stable throughout 1999; regional broad money grew by 5½ percent in 1999 while net credit to the government remained broadly stable despite a large recourse to the central bank overdraft facility by one country. Because of a slow pickup in ordinary credit demand and a decline in crop credits near the end of the year, credit to the private sector contracted marginally by the equivalent of ½ of 1 percent of beginning-of-period broad money. There was a further strengthening of the net foreign assets position of the banking system, by the equivalent of 5 percent of beginning-of-period money, to about US$3 billion (104 percent of base money) at end-December 1999. On June 19, the BCEAO raised its key interest rates by 75 basis points, broadly in line with developments in European financial markets.

Executive Board Assessment

Executive Directors noted that, following an impressive performance in the aftermath of the realignment of the CFA franc in 1994, the economic and financial situation in the WAEMU had weakened somewhat since 1998, largely as a result of the sharp decline in the region’s terms of trade, as well as the weakening of policy implementation and political uncertainties in some countries. At the same time, over the past year, the process of economic integration has moved forward. To preserve the gains of economic and monetary union, a strong political commitment and appropriate policy strengthening are essential to reduce financial imbalances, while renewed efforts are necessary to push forward the structural reform agenda.

Directors noted with satisfaction that member countries have taken decisive steps toward closer economic integration and the establishment of a framework for the coordination of macroeconomic policies, which offer a window of opportunity for improving the economic and regulatory environment and accelerating growth and poverty reduction in the region. They welcomed the adoption of a regional convergence pact, which provides a framework for promoting good governance and macroeconomic convergence and strengthening mutual surveillance through periodic reviews and possible sanctions. To be effective, such a system should be accompanied by the introduction of harmonized accounting, reporting, and disclosure standards to enhance transparency and accountability in public finance management; Directors urged national authorities to introduce the necessary legislation in their countries.

Directors observed that most of the elements of a customs union and single market are in place, including a common external tariff with relatively low average rates, setting the stage for the elimination of intraregional barriers for eligible originating products. Directors urged the authorities to push ahead with removing the remaining barriers in order to reap the full benefits of economic integration. They expressed concerns about the transitional measures taken by some countries in availing themselves of the use of common safeguard clauses. Directors stressed that the establishment of a full-fledged customs union and the creation of an effective single market would require the elimination of special import surcharges and other safeguard measures, the reduction of duty exemptions, and the elimination of nontariff impediments to free movements of goods and factors.

Directors noted that, despite a less favorable internal and external environment, the monetary policy of the BCEAO had been broadly appropriate in 1998 and in 1999. They underscored the need for monetary policy to stay on a prudent course, particularly in view of the uncertainty regarding the resumption of adjustment programs in some countries. They welcomed the decisions by the Council of Ministers to eliminate gradually central bank statutory advances to governments by 2002, noting that such action would foster the development of a regional market for government securities and thereby increase the effectiveness of monetary policy in WAEMU.

Directors noted that, despite the progress made over the last ten years in rehabilitating the banking sector and conducting effective supervision of banks, a number of banks in the region still do not comply with the core prudential ratios. They welcomed the introduction of new prudential arrangements along the lines of the core principles recommended by the Basel Committee, the recent efforts to improve compliance with prudential regulations, and plans to complete the privatization of major banks in several countries. However, Directors observed that there was still scope to strengthen management of banks and the supervision of the financial system. While welcoming the introduction of a single, zone-wide licensing agreement for banks in the WAEMU, they added that the quality of financial intermediation in the region would benefit from greater competition among financial institutions and an improvement in the judiciary and law enforcement system that would reduce the problems associated with loan recovery.

Directors commended the authorities for the important steps taken in 1998 to encourage the development of a regional financial market and the creation of a more diversified range of financial institutions and instruments in order to attract available financial saving and provide longer-term credit required to finance business expansion. The newly established regional stock exchange in Abidjan, together with the supporting regulatory framework placed under the supervision of a Regional Securities Commission, offers an excellent vehicle for the mobilization of long-term saving to boost investment and growth in the region. Directors, however, stressed the need to further develop the operational and regulatory framework of the market to make it more efficient.

Directors supported recent steps to harmonize indirect taxation in the WAEMU, formulate a common investment code, and strengthen business laws in the context of the Treaty on the Harmonization of Business Laws in Africa They encouraged the authorities to move forcefully in addressing the remaining agenda in this area, including the harmonization of taxation of petroleum products and the promotion of common tax procedures and methods to control exemptions and improve the taxation of small business.

Directors agreed with the staff assessment that the external competitiveness of the WAEMU economies appears to be broadly adequate on the basis of a number of traditional exchange rate indicators. They suggested that these indicators should be broadened and monitored closely, in view of the demonstrated vulnerability of the external current account to fluctuations in the terms of trade and domestic price rigidities and economic inefficiencies. In addition to sound macroeconomic policies, decisive progress in structural reforms are essential in all member countries to boost labor productivity, reduce excessive domestic costs and maintain the region’s competitiveness in export markets. In this vein, they welcomed efforts to address, at the regional level, the most critical structural impediments to growth in the areas of agriculture, industry, transportation, and territorial development. However, while noting the merit of elaborating common sectoral policies, Directors called for setting priorities in the pursuit of economic integration, in line with the subsidiarity principle. Over the longer term, there will be a need to raise the rate of domestic savings, in order to maintain the recent recovery in the rate of investment.

Directors welcomed and encouraged the renewed efforts to integrate the WAEMU into the larger regional arrangement of the ECOWAS, with a view to creating a large single regional market and establishing a common monetary framework. They emphasized the need to harmonize trade policies by the removal of all internal tariffs and the introduction of a harmonized common external tariff. Directors stressed the importance of establishing an appropriate framework for credible regional surveillance to promote macroeconomic policy convergence in the region. They remarked that the success of these initiatives would depend critically on strong progress in the implementation of sound macroeconomic and structural policies in all ECOWAS countries.

Directors believed that a strategy for regional integration would need to include the production of timely and reliable regional statistics, especially in the areas of national account, domestic debt, trade, and balance of payments, and the adoption of new indices to measure price and factor cost movements.

West African Economic and Monetary Union: Selected Economic Indicators
	1996	1997	1998	1999	2000 1/
Real Economy	Annual percentage change
Real GDP	5.9	5.5	4.7	4.0	3.5
Consumer prices	3.9	3.8	3.8	0.6	2.2
Terms of trade	-9.9	2.4	2.3	-3.3	-11.1
Gross domestic saving (in percent of GDP)	14.2	15.4	15.4	15.3	14.8
Gross domestic investment (in percent of GDP)	16.6	17.9	18.4	18.2	18.5
Public Finances	In percent of GDP
Government revenue (excl. grants)	17.8	17.8	17.8	16.7	17.0
Official grants	3.8	2.8	2.9	2.5	2.4
Government expenditure	22.2	22.0	22.0	21.7	21.1
Overall fiscal balance (incl. grants)	-0.6	-1.4	-1.3	-2.5	-1.7
External public debt	124.6	122.5	87.7	82.6	76.6
Money and Interest Rates	Annual change in percent of beginning-of-period broad money
Net foreign assets	6.5	5.9	-4.9	5.0	...
Net domestic assets	-6.0	8.9	6.1	2.6	...
Broad money	0.5	14.8	3.4	5.6
Discount rate (in percent)	6.5	6.0	6.25	5.75	6.5
Repurchase rate (in percent)	6.0	5.5	5.75	5.25	6.0
Money market rate (in percent)	5.05	4.96	4.95	4.95	...
Balance of Payments	In percent of GDP
Exports of goods and services	32.3	34.1	32.9	31.8	31.6
Imports of goods and services	34.9	37.0	36.1	35.3	35.7
Current account (incl. grants)	-5.8	-5.4	-5.4	-6.1	-6.4
Foreign exchange cover ratio 2/	103.9	104.2	100.1	104.1	...
Exchange Rates	Annual percentage change
Nominal effective exchange rate 3/	0.6	-3.5	3.6	-1.5	---
Real effective exchange rate 3/	1.5	-1.8	5.6	-2.8	---
Source: World Economic Outlook database; and IMF staff estimates and projections.
1/ Staff projections.
2/ Gross official resources divided by base money.
3/ Trade-weighted CPI-based.
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 with the WAEMU regional institutions, including the Central Bank of West African States (BCEAO) in Dakar, and the regional Commission in Ouagadougou.