Public Information Notice

Public Information Notice (PIN) No. 08/63
May 30, 2008

On May 23, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the discussions on Common Policies of Member Countries of the West African Economic and Monetary Union (WAEMU).¹

Background

Economic performance in the WAEMU region improved in 2007, but growth remained modest. Regional growth increased to 3.2 percent, led by the two largest economies in the union: economic growth resumed in Cote d'Ivoire as the security situation stabilized and accelerated in Senegal as a result of resurgent services and construction sectors. In most other countries of the union, however, growth slowed due to adverse weather and energy shortages. WAEMU's growth performance continues to lag behind other countries in sub-Saharan Africa (SSA), and per-capita growth of less than 1 percent is insufficient to significantly reduce poverty.

Regional inflation declined to 2.3 percent in 2007, helped by continued exchange rate appreciation and the favorable 2006/07 agricultural season. However, food and fuel price inflation accelerated in late 2007.

Despite rising expenditures, the overall regional fiscal deficit, excluding grants, remained unchanged at about 6 percent of GDP. The scaling up of expenditures in pursuit of the Millennium Development Goals (MDGs) continued, with an average increase of more than 1 percent of GDP in 2007 financed by increased domestic revenues. Overall progress on macroeconomic convergence continued to stagnate, and all but one country missed the fiscal convergence criterion.

The current account deficit, including grants, increased slightly to 6 percent of GDP, as increased grants and a slight reduction in import values offset rising fuel prices and a marked drop in export values. Reflecting the continued strength of the euro, the real effective exchange rate (REER) of the CFA franc is estimated to have appreciated by 1.6 percentage points on average in 2007. This appreciation brought the REER at end-2007 to approximately 78 percent of its level prior to the 1994 devaluation.

The WAEMU region continues to suffer from a poor business environment, including from weak economic infrastructure and financial institutions, and trade distortions, although some countries have made progress recently. WAEMU countries were ranked on average 161^st out of 178 countries in the World Bank's 2007 "Doing Business Indicators." However, Burkina Faso was among the top 5 reformers in sub-Saharan Africa (SSA), introducing judicial reforms, reducing registration costs, and cutting the time needed to start a business. Mali and Niger also made progress, through reforms to facilitate property registration and business start-ups.

Implementation of a Regional Economic Plan (REP) picked up in 2007. The program is focused on transportation, telecommunications and energy, and aims to promote regional integration and governance.

A Financial System Stability Assessment for the WAEMU region found that the financial sector remains fragile and underdeveloped. Financial markets are shallow, and banks are vulnerable to macroeconomic and sectoral shocks. Compliance with prudential norms is weak. One country suffers from a systemic banking crisis, and there are a number of problem banks in other countries.

Progress has been made in negotiations on a Common External Tariff (CET) for a free trade area comprising all of the Economic Community of West African States (ECOWAS), but the deadline for conclusion was extended by half a year to end-June 2008. Discussions on an Economic Partnership Agreement (EPA) with the European Union (EU), which are coordinated at the ECOWAS level, are ongoing. However, to avoid being subjected to large tariff increases, Cote d'Ivoire has initialed an interim agreement with the EU.

Finally, the authorities have approved and sent to their parliaments a treaty on institutional reforms. The reforms would enhance the independence of the central bank, modernize its monetary policy and instrument frameworks, and enhance the authority of the regional banking commission. Two states have already ratified the reform.

Executive Board Assessment

Executive Directors welcomed the positive role that regional monetary and economic cooperation under the WAEMU has played in maintaining a stable macroeconomic environment in sub-Saharan Africa. Directors noted that economic performance in the region—albeit with substantial variation among member countries—continues to improve. But growth remains below that of other sub-Saharan oil importing countries, and falls well short of what is needed to substantially reduce poverty. Directors accordingly called for renewed vigorous efforts in the region to pursue reforms aimed at strengthening economic performance and reducing poverty.

Directors expressed concern that the recent surge in food and fuel prices is eroding real incomes and hurting the poor. A main challenge for the authorities in 2008 will be to deal with the adverse social and economic impact of these price increases while keeping inflation under control. Fiscal policies will have a key role to play in this regard. Measures should be regionally coordinated and targeted, and be consistent with fiscal sustainability and available financing. Directors encouraged the WAEMU Commission to play a more proactive role in coordinating these efforts as well as any further fiscal response to the weakening global environment. Monetary policy should allow the first-round impact of the price increases, but should resist pressures to accommodate second-round effects. In addition, structural reforms will also be needed to foster an appropriate supply-side response over the medium-term.

Directors noted that the exchange regime of the CFA franc has served the WAEMU zone well, contributing to the favorable inflation outturns. They noted the staff's assessment that the exchange rate remains broadly in line with fundamentals, and consistent with external stability. At the same time, most Directors considered that several years of real appreciation have weakened competitiveness and contributed to lackluster economic growth and export performance. Directors encouraged the authorities to monitor real exchange rate developments closely, and to better coordinate fiscal and monetary policies in order to support the fixed exchange rate regime and reduce pressure on the real exchange rate.

Directors observed that structural obstacles—including infrastructure gaps, an underdeveloped financial sector, a poor business environment, and incomplete regional integration—have continued to drag down the region's growth performance, along with exogenous shocks and developments in the largest economy in the region, Côte d'Ivoire. Directors were encouraged by the start of implementation of the Regional Economic Plan, which is focused in large part on improving transport and other economic infrastructure in the region, and by the recent progress in improving the business environment in some union countries. However, they emphasized that it will be important to accelerate structural reforms to improve regional growth prospects and make progress toward the Millennium Development Goals. In this context, Directors underscored that productivity-enhancing structural reforms will be crucial for improving the region's competitiveness. Several Directors also attached importance to progress being made in the negotiations with the EU on an Economic Partnership Agreement. Directors were hopeful that the improved economic prospects in Cote d'Ivoire would boost growth prospects for the region.

Directors expressed concern about the persistent weaknesses in the region's financial sector. They noted that the recent regional Fiscal Sector Assessment Program (FSAP) found the banking system to be increasingly vulnerable to macroeconomic and sectoral shocks, weak compliance with prudential requirements, and low capitalization. Directors welcomed the recent increase in the minimum statutory capital of banks, but noted that national governments will need to fully support strict enforcement by banking supervisors to ensure that banks comply.

Directors encouraged the authorities to vigorously pursue the FSAP recommendations that are addressed to both the regional and national authorities. In particular, they stressed the need to enhance banking sector stability and promote regional financial integration, including by strengthening the framework for managing regional liquidity, and to devolve public ownership in commercial banks. Directors welcomed the recent approval of important institutional reforms, which should contribute to improving financial supervision and strengthening monetary policy—including steps to bolster the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO)'s independence and to modernize its monetary policy framework. They encouraged national parliaments to adopt the related legislation quickly.

Directors encouraged stronger progress in regional integration—both within the WAEMU and the wider ECOWAS region. Several Directors underscored the importance of political commitment for effective convergence and better alignment of policies in the member states. They also encouraged the WAEMU countries to intensify their policy dialogue and take advantage of intra-regional learning opportunities. Directors welcomed the recent decision to remove barriers to intra-WAEMU trade and called on the authorities to move quickly in this effort. They also expressed the hope that the WAEMU common external tariff will soon be extended to all of ECOWAS, and cautioned against the introduction of new protectionist tariffs in the process.

While supporting progressive regional economic integration, Directors considered premature the announced goal of establishing a monetary union at the ECOWAS level by end-2009. They called on the authorities to ensure that the minimum conditions for a successful and beneficial monetary union are met to build a solid foundation for a common currency before it is created. A few Directors expressed skepticism about the technical feasibility of an ECOWAS monetary union.

WAEMU: Selected Economic and Financial Indicators, 2003-08
	2003	2004	2005	2006	2007	2008
					Est.	Proj.
	Annual percentage change
National income and prices
GDP at constant prices	4.1	2.9	4.3	2.8	3.2	4.1
GDP per capita at constant prices	1.7	0.5	1.9	0.6	0.9	1.8
Broad money to GDP	3.0	2.1	-0.9	5.3	8.3	1.8
Consumer prices (average)	0.8	0.2	4.9	3.0	2.3	4.3
Terms of trade	0.1	-7.2	-7.0	5.8	1.6	1.5
Nominal effective exchange rates	6.5	2.9	-0.7	0.0	1.8	...
Real effective exchange rates	4.4	0.3	1.7	-0.4	1.6	...
	In percent of GDP
National accounts
Gross domestic savings	11.9	11.5	11.7	12.0	11.8	11.8
Gross domestic investment	17.3	18.0	18.7	18.0	19.0	20.1
Of which: public investment	5.6	5.9	6.0	6.1	7.0	7.2
Resource gap	-5.5	-6.5	-7.0	-6.0	-7.1	-8.3
	Annual changes in percent of beginning-of-period broad money
Money and credit
Net foreign assets	2.7	1.7	2.1	9.1	10.1	...
Net domestic assets	0.3	3.5	6.2	1.6	8.9	...
Broad money	3.0	5.2	8.3	10.7	19.0	...
	Annual percentage change
Money and credit
Net foreign assets	5.0	3.1	3.9	17.3	18.2	...
Net domestic assets	0.6	8.0	13.6	3.3	20.0	...
Broad money	3.0	5.2	8.3	10.7	19.0	...
	In percent of GDP, unless otherwise indicated
Government financial operations
Government total revenue, excl. grants	15.6	16.2	16.3	17.1	18.0	17.6
Government expenditure	20.3	21.5	21.9	23.0	24.1	24.1
Overall fiscal balance, excl. grants	-4.7	-5.2	-5.7	-6.0	-6.0	-6.5
Official grants	2.7	2.8	2.8	13.6	3.4	3.6
Overall fiscal balance, incl. grants	-2.0	-2.4	-2.9	7.7	-2.6	-2.9
External sector
Exports of goods and services	28.2	29.2	29.9	30.5	28.6	29.4
Imports of goods and services	33.7	35.7	36.9	36.6	36.1	38.0
Current account, excl. grants	-6.4	-6.6	-7.3	-6.1	-7.3	-8.4
Current account, incl. grants	-4.3	-4.9	-5.7	-4.7	-5.0	-6.3
External public debt	65.5	57.5	51.9	36.1	36.6	32.4
Foreign exchange cover ratio 1/	118.9	116.3	118.4	116.8	113.8	...
Reserves in months of imports	5.8	5.5	4.8	4.6	4.8	...
Memorandum items:
Nominal GDP (in CFA francs billions)	21,738	22,556	24,319	25,957	27,549	29,655
CFA franc per US dollars, average	581.2	528.3	527.5	522.9	479.3	...
1/ Gross official reserves divided by short term domestic liabilities of the central bank

---

¹ The IMF holds annual regional discussions with the WAEMU region. A staff team visits the region, 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 region's authorities.