The Executive Board of the International Monetary Fund (IMF) has concluded the Article IV consultation with the West African Economic and Monetary Union on March 26, 2018.
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.
Economic activity remains strong but vulnerabilities persist. Despite lower terms of trade, social tensions, and security challenges within the region, real GDP growth is estimated to have exceeded 6 percent in 2017, underpinned by strong domestic demand. Inflation remained subdued. However, external and internal imbalances widened. Preliminary data point to an increase in the fiscal deficit to 4.7 percent of GDP in 2017 from 4.5 percent in 2016, and the external current account deficit to 6 percent of GDP in 2017 from 5.6 percent in 2016. International reserve coverage rebounded somewhat to 4.2 months at end-2017, helped by sizable Eurobonds issuances by Côte d’Ivoire, Senegal, and the West African Development Bank.
The tightening of monetary policy since end-2016 stimulated the interbank market, reduced banks’ appetite for government debt, and contributed to Eurobond issuances by the two largest WAEMU sovereigns. However, since September 2017, renewed liquidity pressures have pushed up the interbank market rate and maintained the average refinancing rate at the ceiling of the BCEAO’s policy corridor. An ambitious set of reforms were also undertaken in 2017 to modernize financial sector regulations, including a gradual increase in minimum capital requirements in line with the Basel II/III principles. Other reforms include introducing a new accounting plan, moving to consolidated supervision of bank groups, strengthening the resolution framework, and setting up a deposit guarantee fund.
The outlook remains positive but hinges critically on the planned fiscal consolidation and implementation of structural reforms by member countries. Growth is projected to stay above 6 percent with continued low inflation over the medium term. Risks are tilted to the downside and stem from potential delays in fiscal consolidation, slow progress in the implementation of the structural reforms, persistent security concerns in the region, higher international oil prices, as well as tightening of international financial conditions and a slowdown in world growth.
Executive Board Assessment
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the region’s continued strong economic growth resilience and low inflation. Directors stressed that vulnerabilities had persisted in 2017 with increased fiscal and external account deficits, although risks to debt sustainability remain moderate for seven-member countries and low for one member, based on existing DSAs. Although international reserves had rebounded somewhat, this mainly reflects sizable Eurobond issuances. They took note that the exchange rate remains broadly in line with fundamentals. Directors underscored that the medium-term outlook remains positive but is subject to downside risks, and regional security issues remain a concern. Sustaining the growth momentum and preserving external stability require continued macroeconomic stability and accelerated structural reforms.
Directors underscored the need for determined, growth-friendly fiscal consolidation to meet the WAEMU convergence criterion of 3 percent of GDP by 2019. Adjustment efforts should focus on reforms to enhance revenue mobilization and contain current expenditure while protecting priority capital and social spending. Directors emphasized the need to raise the efficiency of public investment, capture fiscal risks, and strengthen debt coverage and management.
Directors supported maintaining the current monetary policy stance. They called on the BCEAO to remain vigilant and stand ready to further tighten monetary policy if pressures persist on the money market or foreign exchange reserves. Directors encouraged the authorities to take steps to further reduce the banking system’s dependence on refinancing, improve liquidity management, energize the interbank market, deepen financial markets and strengthen monetary policy transmission.
Directors commended the authorities for the important steps undertaken to modernize the financial sector, including the launch of an upgraded prudential regime in line with Basle II/III. They highlighted the importance of operationalizing the financial safety net and using upgraded bank supervision and resolution tools to address vulnerabilities in the banking system.
Directors called for the implementation of the regional strategy to promote financial inclusion and deepening to sustain robust and inclusive growth. They highlighted the importance of lowering the cost of financial services, promoting financial literacy, enhancing consumer credit protection and closely supervising microfinance institutions to ensure prudential safeguards, while strengthening AML/CFT supervision.
Directors stressed that sustaining the growth momentum will require efforts to improve competitiveness and promote diversification. They urged the authorities to intensify the pace of structural reforms to improve the business environment and promote private investment.
Directors supported the authorities’ efforts to strengthen the quality, timeliness, and public availability of economic statistics, notably to address weaknesses in the balance of payment data. They also underlined the need to improve consistency between national and regional data, including by accelerating the transition of WAEMU member-countries to the GFSM 2001 fiscal reporting.
The views expressed by Executive Directors today will form part of the Article IV consultations with individual member countries that take place until the next Board discussion of WAEMU common policies. The next Article IV consultation discussion with the WAEMU regional authorities will be held on the 12-month cycle in accordance with the Executive Board decision on the modalities for surveillance over WAEMU policies.