On March 18, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the regional consultation1 with WAEMU.
Economic activity remains strong with subdued inflation. Despite adverse terms-of-trade shocks and security concerns in some member-countries, real GDP growth is estimated to have exceeded 6 percent for the 7th consecutive year in 2018, fueled by strong domestic demand. The aggregate fiscal deficit was reduced by 1⁄2 percentage point of GDP and external reserves increased, mainly supported by Eurobond issuances. However, this dynamic has come with persistent vulnerabilities. Public debt and its servicing costs increased in 2018, partly because of below-the-line budgetary operations. Preliminary data point to an increase in total debt to 52.5 percent of GDP in 2018 from 50.1 percent in 2017, and in total debt service to 33 percent of government revenue in 2018 from 26.4 percent in 2017. The external current account deficit is estimated to have increased to 6.8 percent in 2018 from 6.6 percent of GDP in 2017. This increase was underpinned by strong public capital spending but also by worsening terms-of-trade on the back of higher world oil prices.
Notwithstanding a firmer monetary policy stance since early 2017, liquidity pressures in the regional financial system were temporarily eased in 2018. The BCEAO significantly reduced its refinancing volume to banks between early 2017 and end-2018. However, liquidity in the financial system gradually improved in the wake of sizeable Eurobond issuances, which alsoreduced sovereigns’ demands for financing on the regional debt market. Important banking sector reforms were implemented in 2018, including the move to Basel II/III prudential standards (with a 5 year-phasing period), new bank accounting rules, banking supervision based on a risk-sensitive consolidation approach to groups, and steps to operationalize the new resolution framework of the Banking Commission.
The medium-term outlook remains positive but hinges critically on the implementation of planned reforms. Growth is projected to stay above 6 percent, assuming fiscal consolidation to meet the regional fiscal deficit convergence criterion of 3 percent of GDP and eliminate below-the-line budgetary operations from this year onwards, and structural reforms implementation. Risks are tilted to the downside and stem from potential slippages in fiscal consolidation, slow progress in implementing structural reforms and improving inclusiveness, larger imports or lower capital inflows relative to projections, persistent security concerns, as well as weaker-than-expected global recovery and tighter international financial conditions.
Executive Board Assessment2
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the region’scontinued strong growth despite the ongoing challenges and commended the authorities for the progress made in implementing banking sector reforms. Directors noted, however, that the medium-term outlook is subject to downside risks, including those from rising public debt burdens and higher external current account deficit. They emphasized that continued fiscal consolidation, more effective monetary policy transmission, and further financial and structural reforms are needed to support private sector-led growth and reduce vulnerabilities.
Directors underscored that growth-friendly fiscal consolidation is critical to reduce risks of public debt distress and preserve external stability. They urged member-countries to adhere to the regional fiscal deficit convergence criterion of 3 percent of GDP. Directors emphasized that adjustment efforts should focus on domestic revenue mobilization by curbing tax exemptions and enforcing regional tax policy directives, to generate space for development spending. They also urged more effective control of below-the-line budget operations and encouraged a review of the regional surveillance framework to better contain risks to debt sustainability.
Directors concurred that the current monetary policy is broadly appropriate but highlighted that the regional central bank (BCEAO) should stand ready to tighten its stance in case externalreserves deteriorate. They encouraged the BCEAO to address cautiously the banking sector’sstructural liquidity deficit and advised the authorities to take steps to further develop more active and liquid secondary debt and interbank markets for deepening the WAEMU financial markets and enhancing monetary policy transmission.
Directors welcomed the smooth introduction of new Basel II/III prudential regulations and bank accounting standards in 2018. They highlighted the importance of increasing banks’ capital and reducing concentration risks and non-performing loans to foster confidence in the banking sector. Directors also encouraged the authorities to promptly resolve ailing banks, operationalize the new resolution framework, improve banking groups’ supervision, and identify criteria fordefining systemic institutions.
Directors called for further efforts to improve financial inclusion. They highlighted the need for adequate supervision alongside financial innovations to ensure that such development does not create new risks to financial stability. Directors stressed the importance of closely monitoring microfinance institutions and strengthening AML/CFT risk-based supervision.
Directors emphasized the need to intensify the pace of structural reforms and regional initiatives to improve competitiveness and inclusiveness, including through continued efforts to promote cross-border infrastructure projects, and ease custom procedures. Directors also encouraged the authorities to sustain the progress made in improving the quality, coverage, and timeliness of regional data.
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.
Table 1. WAEMU: Selected Economic and Financial Indicators, 2015-2023
1 Staff reports on the annual consultations with regional institutions of currency unions and the ensuing Board discussion are both considered an integral part of the Article IV consultations with individual member countries. 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.
2 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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.