ECONOMIC HEALTH CHECK
Growth Set to Rebound in West African Economic and Monetary Union
IMF Survey online
March 22, 2012
- Economic outlook positive for 2012 in union's eight member countries
- Regional remains vulnerable to events in Europe
- Further economic integration needed to strengthen stability
After falling below 1 percent in 2011, growth in the West African Economic and Monetary Union (WAEMU) is set to rebound to 7 per cent this year, the IMF estimates.
The WAEMU is one of the oldest monetary unions in the world and perhaps one of the most resilient. In the past year alone, the WAEMU—which comprises Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo—has struggled with a long-standing political crisis in Cote d'Ivoire as well as a severe drought in the Sahel. Despite this, the International Monetary Fund, in its regular review of the grouping, expects growth in the WAEMU to rebound significantly this year.
In an interview with IMF Survey online, Herve Joly, mission chief for the WAEMU, says the union is on a fast track to recovery.
IMF Survey online: What is the Western African Economic and Monetary Union?
Joly: As the name indicates, it is a monetary union. This means that the countries in the region share the same currency, which is the CFA franc. This currency is actually pegged to the euro, and the WAEMU itself is part of what is called the franc zone.
Moreover, the WAEMU is an economic union, which means there is a single market with a common external tariff and a zone where countries share a number of common policies beyond monetary policy. In this regard, they have harmonized a number of policies such as in the taxation area or in public financial management.
IMF Survey online: The WAEMU has had to face big challenges in recent years—the political crisis in Côte d'Ivoire and the drought in the Sahel. How has the union handled these challenges and has it recovered from them yet?
Joly: Indeed, these shocks have been major shocks. They have already had an impact on growth in 2011, which has dropped to about 1 percent. This is very low for the region.
The good thing is that we expect a strong rebound in 2012, mostly as a result of these exceptional factors disappearing. For instance, there will be a very strong recovery in Côte d'Ivoire post-crisis. We also hope for a return of agricultural production to normal levels.
In some countries, there will also be a number of domestic factors explaining growth such as, for instance, large infrastructure investments to address energy issues. For example, Niger is going to start oil production.
All of that is going to go in the same direction and will allow to more than offset the fact that the external environment is not as good as it could have been. All in all, we do expect growth to rebound to around 7 percent for the region as a whole.
IMF Survey online: Economically, the WAEMU is heavily exposed to Europe. How would the union be affected if a recovery in Europe did not take place?
Joly: This is a good question because the region, for historical reasons in particular, remains very heavily exposed to Europe and in particular to the euro area.
There are a number of channels of linkages between Europe and the region, such as trade, workers' remittances, and foreign direct investment. Therefore, if activity in Europe were to be revised downward, the region would be affected through these channels and, unfortunately, would probably also be affected through other channels such as aid.
However, we do not see the financial sector itself as a possible channel of transmission from Europe. The absence of this channel of transmission is due to the fact that the financial sector in the WAEMU is funded mostly locally and not through international lines of credit.
At the end of 2011, there were rumors that devaluation was needed or prepared in the region, but our analysis does not support at all the need for devaluation. This is something that we want to stress.
I also want to stress that what we have seen last year is continued accumulation of foreign exchange reserves. These reserves are managed very prudently and we think that these reserves are at adequate levels. From that perspective, we think that the external stability situation is robust.
IMF Survey online: Côte d'Ivoire, the economic motor of the WAEMU, is recovering well from a year of political upheaval. What can be done to improve its growth prospects? What can other members of the union do to capitalize on this growth?
Joly: If you go to Abidjan, the capital of Côte d'Ivoire, you can see that when you talk to people, there is a lot of optimism which is really unusual in the world these days. It is particularly unusual when you go to this region coming from Europe, for instance, where there is obviously more gloom about the situation. I really got the sense from all the people I was talking to that the exit from the crisis in Côte d'Ivoire was a game changer for the region.
However what we have discussed extensively with the authorities, and I think we were in broad agreement on this issue, is that for the region to make the most of this Côte d'Ivoire recovery, regional integration will need to increase and accelerate. Although the region is a single market in principle, in practice there are still a number of nontariff barriers to trade. As a result, trade is not as fluid as it could be and as it should be.
Other impediments to integration include regional infrastructure, transport, and energy, for instance. We think that the new situation in Côte d'Ivoire is very promising for the whole region. But, to make the most of it the authorities need to rekindle the regional integration agenda.
IMF Survey online: What lessons can the WAEMU draw from the turmoil in the euro area in order to maintain its stability and further deepen integration as a monetary union?
Joly: One thing that should be said is that the WAEMU is much older than the euro area. The monetary union in West Africa—the franc zone—was created decades ago and has survived a number of shocks including the debt crisis in most of the countries. So it is well established and it is resilient. The lessons are that countries need to see how they can make the union even more resilient and stable.
However, there are some forms of integration which are more difficult to manage. It is certainly the case for financial integration and, indeed, this is something which has created problems in the euro area.
We had long and very interesting discussions with the authorities on this topic: how could they deepen the financial sector; how could they improve and develop their regional bond market in a way which would not create stability concerns down the road?
When you turn to economic integration, I do not think anyone is disputing that economic integration is desirable, and by that I mean trade but also labor. That is something that the authorities need to improve and to deepen. Down the road, this is going to contribute to higher sustainable growth.