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OCCASIONAL PAPER

The West African Economic andMonetary Union

Recent Developments and Policy Issues

By a Staff Team led by Ernesto Hernandez-Cata

and comprisingChristian A. Francois, Paul Masson, Pascal Bouvier,

Patrick Peroz, Dominique Desruelle,and Athanasios Vamvakidis

INTERNATIONAL MONETARY FUND

Washington DC

1998

170

©International Monetary Fund. Not for Redistribution

© 1998 International Monetary Fund

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Typesetting: Victor Barcelona

Library of Congress Cataloging-in-Publication Data

The West African Economic and Monetary Union : recent developments andpolicy issues / by a staff team led by Ernesto Hernandez-Cata : and com-prising Christian A. Francois . . . [et al.].

p. cm. — (Occasional paper, ISSN 0251-6365 ; no. 170)Includes bibliographical references (p.).ISBN 1-55775-755-0

1. Union economique et monetaire Ouest africaine. 2. Monetary pol-icy—Africa, French-speaking West. I. Hernandez-Cata, Ernesto.II. Francois, C.A. (Christian A.) III. Series: Occasional paper (Interna-tional Monetary Fund) ; no. 170.HG1371.W47 1998332.4'566 '0966—dc21 98-41360

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Contents

Preface

I Overview

Policy Issues Facing the WAEMUInstitutional Framework of the WAEMU

II Recent Economic Developments

III Main Regional Policy Issues

Monetary PolicyBanking SystemBank SupervisionTrade PolicyCoordination of Macroeconomic Policies

IV Other Regional Issues

V Conclusions

Page

12

66789

10

12

14

Appendices

I Comparison of Regional Integration:The W A E M U and the European Union

11 The Real Exchange Rate of the W A E M UIII Determinants of Investment in the W A E M U

IV Background Tables

BoxesSection

I 1. WAEMU: Institutional FrameworkIII 2. The CFA Franc, the French Franc, and the Euro

3. WAEMU: New Tariff Structure4. WAEMU: Convergence Criteria

AppendixII 5. Weights for Calculating the External Real Exchange Rate

TablesSection

II 1. WAEMU: Selected Economic Indicators2. International Comparisons: Selected Indicators

16172022

27

1011

18

45

Hi

I

3

V


Appendix

III 3. Investment Share, Trade Share, and Index of Economic Freedomin the WAEMU and Other Selected Countries, 1995

IV 4. WAEMU: Output Growth5. WAEMU: Trade Volume Growth6. WAEMU: Real Effective Exchange Rates7. WAEMU: Inflation8. WAEMU: Fiscal Balances9. WAEMU: Government Revenue, Excluding Grants

10. WAEMU: Gross Domestic Investment11. WAEMU: Gross Domestic Saving12. WAEMU: External Current Account Balance, Excluding Grants13. WAEMU: Public External Debt14. WAEMU: Balance of Payments15. WAEMU Governments' Financial Operations16. WAEMU: Monetary Survey17. WAEMU: Summary Accounts of the Central Bank18. WAEMU: Summary Accounts of the Commercial Banks19. WAEMU: Indicators of Banking Sector Soundness20. WAEMU: Convergence Criteria

FiguresSection

II

III

1. CFA Franc: Real Effective Exchange Rates2. CFA Franc: Nominal Exchange Rates3. Money Market Interest Rates

212222232323232424242425262728293031

338

The following symbols have been used throughout this paper:

. . . to indicate that data are not available;

n.a. to indicate not applicable;— to indicate that the figure is zero or less than half the final digit shown, or that the item

does not exist;between years or months (e.g., 1994-95 or January-June) to indicate the years ormonths covered, including the beginning and ending years or months;

/ between years (e.g., 1994/95) to indicate a crop or fiscal (financial) year."Billion" means a thousand million.Minor discrepancies between constituent figures and totals are due to rounding.The term "country," as used in this paper, does not in all cases refer to a territorial entity thatis a state as understood by international law and practice; the term also covers some territorialentities that are not states, but for which statistical data are maintained and provided interna-tionally on a separate and independent basis.

iv

CONTENTS


Preface

An IMF staff team visited Ouagadougou and Dakar during November 11-14, 1997,to hold policy discussions with senior officials of the Central Bank of West AfricanStates (BCEAO), the regional Banking Commission, and the Commission of the WestAfrican Economic and Monetary Union (WAEMU). The WAEMU representativeswere headed by Moussa Toure, president of the commission, and those of theBCEAO by Governor Charles Konan Banny. The discussions focused on a review ofrecent performance and on key regional economic policy issues, including (1) an ex-amination of the framework for monetary policy, (2) an assessment of the bankingsector, (3) the introduction of a common external tariff, and (4) other specific regionalissues.

Given the widening range of economic policies that have been formulated and im-plemented at the regional level since the ratification of the WAEMU treaty in August1994, and in view of the special characteristics of the CFA franc zone, both IMF staffand country authorities believe that these periodic regional discussions, which are es-sential to complement bilateral surveillance and monitoring of IMF-supported pro-grams, should be strengthened. Accordingly, as part of a move to a more formal andcomprehensive dialogue with the regional institutions of the WAEMU, annual reportson these discussions will be presented to the IMF's Executive Board.

The authors are grateful to many colleagues in the IMF for helpful comments onprevious drafts. They would like to thank Ngoc Le for her valuable assistance inpreparing tables and charts and Marie-Jeanette Ng Choy Hing, Francoise Straver-Postic, and Nadine Dubost for providing very dependable secretarial support. ElisaDiehl of the IMF's External Relations Department edited the manuscript and coordi-nated production.

V


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I Overview

In January 1994, seven sub-Saharan African coun-tries—Benin, Burkina Faso, Cote d'Ivoire, Mali,

Niger, Senegal, and Togo—signed a treaty establish-ing the West African Economic and Monetary Union(WAEMU). These countries, with the addition ofGuinea-Bissau in 1997, form part of the CFA franczone along with a second group of six African coun-tries that participate in a similar monetary arrange-ment, the Central African Economic and MonetaryCommunity (CAEMC). The CAEMC countries areCameroon, the Central African Republic, Chad, Re-public of Congo, Equatorial Guinea, and Gabon.Within each subzone, monetary arrangements aremanaged by a separate central bank: the CentralBank of West African States (BCEAO) for theWAEMU and the Bank of Central African States(BEAC) for the CAEMC. The two subzones share acommon currency, the CFA franc, which stands forthe Communaute financiere africaine in the BCEAOarea and for the Cooperation financiere en Afrique inthe BEAC area.

Member countries of each subzone agree to pool aminimum proportion of their gross foreign exchangereserves (currently 65 percent) in an operations ac-count with the French treasury. Through this account,the French treasury provides an unlimited overdraftfacility, thus guaranteeing the convertibility of theCFA franc. Since its introduction in 1948, the CFAfranc has been pegged to the French franc, and, exceptfor a devaluation in 1994, its parity has remained un-changed. Since January 12, 1994, the exchange ratehas been fixed at CFAF 100 = F 1, compared withCFAF 50 = F 1 before the devaluation.

During the second half of the 1980s and in theearly 1990s, a prolonged worsening of the terms oftrade and a steep rise in labor costs, combined with anominal appreciation of the French franc against theU.S. dollar, led to a considerable real effective ap-preciation of the CFA franc and a serious deteriora-tion in the region's competitive position. As part of acomprehensive strategy to address this problem, the14 countries of the CFA franc zone devalued theircommon currency by 50 percent in January 1994and ceased to rely exclusively on measures of inter-nal adjustment.

The exchange rate realignment led to a significantturnaround in economic activity in the CFA franczone, and in the WAEMU in particular, with output,exports, and investment increasing rapidly during1994-97. Inflation, after a brief surge in the after-math of the devaluation, has returned to low levels.On the basis of a number of real exchange rate indi-cators, the competitive position of the WAEMU atthis time appears to be broadly adequate, althoughthe evolution of these indicators will need to be keptunder close review.

Policy Issues Facing the WAEMU

Despite these recent improvements, the WAEMUcountries continue to grapple with a number of pol-icy issues. First, the level of liquidity in the bankingsystem is high, which appears to be related tovarious structural problems, including insufficientcompetition among banks, the limited role of the in-terbank market, administrative obstacles to cross-country banking activities, and the high risks associ-ated with reimbursements of bank loans. Althoughthe governments of the member countries have beenactively involved in the restructuring efforts of anumber of banks, they must now pursue full privati-zation to improve banks' efficiency and strengthentheir financial structure. They should, in addition, re-vise capital adequacy ratios to make them consistentwith international standards.

Second, in the area of trade policy, the WAEMUcountries are planning to implement a common ex-ternal tariff during 1998-2000, which will providean opportunity to eliminate all tariff and nontariffbarriers within the WAEMU, further liberalize ex-ternal trade, and deepen the countries' integrationwith the world economy. Specifically, all tariffs ontrade related to products that meet local content re-quirements will be eliminated among membercountries, and the tariff structure that applies totrade with countries outside the WAEMU will besimplified.

A third major issue for the countries in the regionwill be to create the conditions for an increase in do-

I


mestic and foreign private investment, which, de-spite some improvement in recent years, remain low.Necessary steps include streamlining the regulatoryframework and eliminating the discriminatory prac-tices and distortions associated with exemptionsfrom customs duties and other taxes. The plannedadoption of a regional investment code and the liber-alization of trade that is expected to result from theimplementation of the common external tariff shouldhelp them achieve this objective.

Finally, the WAEMU countries are seeking tofully harmonize business laws among themselves.The vehicle for this strategy is the Treaty on the Har-monization of Business Laws in Africa, adopted inOctober 1993. While it represents a major step in theright direction, the countries will need to follow it upby overhauling the judicial system.

Institutional Framework ofthe WAEMU

The treaty establishing the WAEMU was signedon January 10, 1994 and entered into force on Au-gust 1, 1994 after its ratification by all membercountries (see Box 1).1 The aim of the treaty was tobuild on the achievements of the West African Mon-etary Union (WAMU), created in 1962, whose mainobjective was to provide the macroeconomic stabil-ity and the credibility required to sustain the fixedexchange rate for the common currency. TheWAEMU treaty aims to extend the process of inte-gration already at work in the monetary area to thewhole economic sphere.2 This goal will involve cre-

Box I. WAEMU: InstitutionalFramework

The highest organ of the WAEMU is the Confer-ence of the Heads of States and Governments. Itmeets at least once a year, determines the broad pol-icy orientations of the WAEMU, and has authorityfor introducing new provisions into the treaty.

The Council of Ministers, which meets four timesa year, is responsible for implementing the broaddecisions of the Conference of the Heads of Statesand Governments. It decides on the adoption of theregional Banking Commission's proposals. Thecommission, responsible for bank supervision,makes recommendations on all policy issues rele-vant to the WAEMU other than those within thepurview of the central bank, and implements the de-cisions of the Council of Ministers.

The acts of the Council of Ministers and of theregional Banking Commission are translated intorulings, instructions, or decisions that are manda-tory for all parties concerned. The West African De-velopment Bank, headquartered in Lome, Togo,also plays an active supporting role in the economicintegration effort of the WAEMU. Other regionalinstitutions include The Court of Justice, the Con-sular Chamber of Commerce, and the Interparlia-mentary Committee.

1Appendix I describes some of the main features of theWAEMU as a regional grouping and compares them with featuresof the European Union.

2At present, the WAEMU treaty coexists with the earlierWAMU treaty, but is expected eventually to replace it.

ation of a single domestic market through the estab-lishment of a customs union, harmonization of legalsystems, implementation of common sectoral poli-cies, and convergence of fiscal policies in support ofthe common monetary policy. The treaty provides aframework within which member countries can ad-dress a number of structural weaknesses that havelimited their growth potential; strengthen the credi-bility and effectiveness of their economic policies;and achieve a number of benefits, includingeconomies of scale and efficiency gains.

I OVERVIEW

2


II Recent Economic Developments

During the second half of the 1980s and in theearly 1990s, a prolonged deterioration of the

terms of trade, a steep increase in labor costs, andthe nominal appreciation of the French franc againstthe U.S. dollar resulted in a considerable real effec-tive appreciation of the CFA franc (Figures 1 and 2and Appendix II).3 These developments led to a seri-ous decline in the competitive position of the CFAfranc zone and a substantial weakening of the eco-nomic situation in the region. For the WAEMU as a

3This conclusion is based on the behavior of the internal realexchange rate, a proxy for the ratio of nontradable to tradablegoods prices (Figure 1). For reasons explained in Appendix II,this concept of the real exchange rate is more relevant for smallopen economies than the one based on relative consumer prices.

Figure I. CFA Franc: Real EffectiveExchange Rates(Period average: 1990 = 100)

whole during 1990-93, real GDP growth per capitawas negative, and savings and investment ratioswere very low (see Table 1 and Appendix IV,Tables 4-13). The deterioration in the terms of trade,together with the slow growth of export volume, re-sulted in a widening of the external current accountdeficit to an average of 11 percent of GDP in1990-93. The shrinking of the tax base caused bythe decline in real income as well as the financialdifficulties of most corporate taxpayers were re-flected in a drop in the ratio of government revenueto GDP, a deterioration in the overall fiscal balance,and severe constraints on government investment.Consequently, there was a significant accumulationof both domestic and external payments arrears, alarge increase in the public debt, and a decline in thenet foreign assets of the BCEAO.

The 50 percent devaluation of the CFA franc inJanuary 1994 was part of a comprehensive strategythrough which the countries of the CFA franc zone

Figure 2. CFA Franc: Nominal ExchangeRates

Source: IMF staff estimates.1 Based on relative consumer prices.2Ratio of prices of nontradable to tradable goods. For details

on the definition of this variable see Appendix II. Source: International Financial Statistics (IFS).

3


RECENT ECONOMIC DEVELOPMENTS

Table I. WAEMU: Selected Economic Indicators

Real GDP growthReal per capita GDP growthExport volumeImport volumeTerms of tradeInflation

Overall fiscal balance1

Primary fiscal balance1-2

Government revenue1

External current accountGross domestic savingsGross domestic investmentGross foreign assets, BCEAO3

Public external debt (end of period)

1990-93

0.2-3.0

3.6- I . I-1.9

0.6

-9.1-3.916.4

-11.27.3

12.1I.I85

1994 1995 1996

(Annual percentage change)3.2

-0.28.8

-12.02.0

29.2

5.72.58.6

28.24.3

12.2

6.02.6

13.05.0

-3.13.9

(Percent of GDP)-8.7-3.415.2-7.213.614.82.7132

-6.0-1.217.0-9.113.516.23.7113

-4.3-0.217.4-8.214.616.93.7109

Prel.1997

5.62.38.84.8

-3.93.8

-4.3-0.717.4-7.615.718.13.9103

Note: Excluding Guinea-Bissau.

•Excluding grants.2Overall balance, excluding interest payments.3ln billions of U.S. dollars.

sought to address the problems just mentioned.4 Itwas followed by a significant turnaround in theeconomies of most countries in the CFA franc zoneand in the W A E M U in particular. The improvedcompetitive position of the W A E M U resulted insharp increases in the volume of exports after 1994,reflecting primarily the response of the traditionalexport sector to higher producer prices (Appendix,IV, Table 14). Import volumes fell sharply in 1994,reflecting import substitution in favor of agriculturaland locally manufactured goods, which also con-tributed to a narrowing of the regional current ac-count deficit. However, imports picked up stronglythereafter, owing to the rapid growth of real aggre-gate demand.

Improved profitability in the tradable goods sec-tor, including nontraditional exports and import sub-stitutes, led to stronger growth performance after1994, which, together with an improvement in theaggregate financial position of governments in theregion (see Appendix IV, Table 15), resulted in alarge increase in the domestic saving ratio.5 Invest-

4For a more detailed discussion of the background of the 1994devaluation, see Jean A.P. Clement and others, Aftermath of theCFA Franc Devaluation, IMF Occasional Paper No. 138 (Wash-ington: International Monetary Fund, 1996).

5Historical relationships suggest that changes in governmentsavings in sub-Saharan Africa tend to be offset only in part by op-posite changes in private savings.

ment also rose substantially in relation to GDP,owing mainly to a rise in the private investmentratio. However, both total and private investment ra-tios remain low by the standards of all developingcountries and also in comparison with other sub-Saharan African countries (Table 2).

Following the surge in domestic prices associatedwith the devaluation, inflation declined rapidly to anaverage of just under 4 percent in 1996-97, reflect-ing the prudent fiscal and monetary policies fol-lowed by governments and the BCEAO, respec-tively (Table 1). The return of confidence in pricestability and the improvement in the region's exter-nal current account were reflected in a large buildupin the BCEAO's gross foreign assets, from theequivalent of 19 percent of base money in 1993 to95 percent in 1994 (five months of imports of goodsand nonfactor services). During the same period, thebalance of the operations account maintained withthe French treasury improved from US$0.3 billion toUS$1.7 billion. Finally, the external debt ofWAEMU countries has dropped substantially since1994, even though it remains high in most membercountries.

Data for 1997 confirm the continued favorableeconomic performance of WAEMU member coun-tries. For the region as a whole, growth is estimatedat 5Vi percent and inflation has subsided to less than4 percent, saving and investment ratios have contin-

II

4


Recent Economic Developments

Table 2. International Comparisons: Selected Indicators

1Last year of the period; consumer prices (annual averages).2Excluding grants.

ued to rise, and the overall fiscal position has re-mained stable. In the area of monetary policy, astrong pickup in credit demand was partially offsetby a decline in BCEAO credit to governments, andgross foreign assets increased further, to the equiva-

lent of 130 percent of base money. In spite of a dete-rioration in the terms of trade in 1996-97, the re-gion's external current account deficit declined fur-ther as export volumes—including for nontraditionalexports—continued to expand rapidly.

5

Real GDPReal GDP per capitaInflation1

InvestmentPrivate investmentExternal current account2

WAEMU

1990-93 1994-97

0.2 5.0-3.0 1.8

1.0 3.8

13.0 16.27.7 10.1

-11.2 -8.0

Sub-Saharan Africa

1990-93 1994-97

(Annual percentage change)

1.6 3.7-2.3 0.830.0 34.6

(Percent of GDP)

17.2 17.612.3 12.2-4.5 -4.6

All DevelopingCountries

1990-93 1994-97

5.5 6.33.4 4.3

46.6 9.0

26.5 28.615.8 16.6-2.3 -1.8


Ill Main Regional Policy Issues

Monetary Policy

The BCEAO conducts monetary policy in theWAEMU at the regional level. Its basic near-term ob-jectives are (1) to maintain the fixed exchange rate re-lationship between the CFA franc and the Frenchfranc—which means that the trend rate of inflation inthe area is fundamentally determined by French infla-tion (Box 2); and (2) to achieve a target level of for-eign assets for the BCEAO. The fixed exchange ratesystem implies that the independence of regional mon-etary policy is constrained: money growth within theregion is endogenously determined, and an appropriatedifferential must be maintained between market inter-est rates in the WAEMU and in France (Figure 3).Moreover, there is no scope for national monetarypolicies in the member countries of the WAEMU. Forthis reason, IMF-supported programs in these coun-tries currently do not include targets for either basemoney or the central banks' net domestic assets be-cause these variables cannot be meaningfully definedat the national level. Even if they could be defined,they would be beyond the control of the national au-thorities. Of course, fiscal policy—including publicdebt management—remains within the purview of in-dividual countries in the WAEMU, and IMF-supported programs typically include targets for thefiscal deficit, external borrowing by the government,and net domestic bank credit to the government. Cu-mulative borrowing by national governments from theBCEAO is itself constrained to no more than 20 per-cent of their fiscal revenue in the previous year.

The BCEAO seeks to control domestic credit ex-pansion in the region by using indirect monetarypolicy instruments and enforcing ceilings on centralbank credit to governments. The policy instrumentsavailable to the BCEAO are the discount rate mech-anism, a repurchase agreement facility (pension win-dow), and a system of periodic auctions of centralbank bills, as well as reverse auctions, introduced inJuly 1996.6 Auctions and repurchase agreements are

the most frequently used instruments; the discountrate is used primarily to signal policy intentionsabout future movements in interest rates. Ceilings oncentral bank credit to governments, set at the equiva-lent of 20 percent of tax revenue in the precedingyear and generally observed by member countries,are a powerful tool of credit policy. However, theylack flexibility because the central bank cannotchange them to accommodate its near-term policyobjectives.

The goal of the regional monetary program for1998, adopted by the BCEAO last December, is tostrengthen the gross foreign assets of the centralbank while allowing credit to the economy to ex-pand in line with the projected rate of growth ofnominal GDP. The net foreign assets of the BCEAOare targeted to grow by nearly 10 percent during1998 over the previous year, which should allow forcontinued adequate coverage of the monetary base.In line with the objectives determined in each coun-try of the WAEMU in the context of IMF-supportedprograms, net bank credit to WAEMU governmentsis expected to decline moderately.

A source of concern for both the monetary authori-ties and IMF staff in recent years has been the vast poolof unused liquid resources in the banking system (seeAppendix IV, Tables 16—18). These resources consistof a large stock of unremunerated excess reserves atthe central bank and sizable holdings of long-term gov-ernment bonds consolidated by the WAEMU andshort-term BCEAO bills.7 At the end of 1996, theamount of liquid resources held by banks in these vari-ous forms amounted to almost 20 percent of bank de-posits (Appendix IV, Table 18). This liquidity "over-hang" tended to increase from 1994 to 1996, owing tothe return of flight capital and the rise in export earn-ings that had to be repatriated and surrendered to thecentral bank, while the expansion of bank credit tended

6A system of reserve requirements has been in place since late1993. However, the required reserve ratio is very low (1.5 percentof deposits) and has remained unchanged since 1993.

7The long-term consolidated bonds were issued by the BCEAOin 1994, in counterpart of its claims on member governments re-sulting from the restructuring of the banking system; they are defacto highly liquid because they can be redeemed on demand withthe BCEAO. The short-term BCEAO bills are purchased throughthe periodic auction system introduced in 1996.

6


Banking System

Box 2. The CFA Franc, the French Franc,and the Euro

The parity between the CFA franc and the singleEuropean currency will be based automatically onthe exchange rate between the French franc and theeuro.1 More specifically, the communique issued atthe conclusion of the meeting of finance ministers ofFrance and of the countries of the CFA franc zone,held in Libreville on April 10, 1998, indicates that

• the French franc will become a national de-nomination of the euro on January 1, 1999 at aparity that will be irrevocably fixed on that dayand that it will be replaced by the euro on Janu-ary 1, 2002;

• the cooperation agreements linking France andthe two monetary unions within the CFA franczone will be maintained and that France willcontinue to guarantee the convertibility of theCFA franc;

• the value of the euro in terms of the Frenchfranc will automatically determine the value ofthe CFA franc against the euro beginning Janu-ary 1, 1999; and

• the move to the euro will have no implications forthe denomination of transactions and settlementsoutside the euro zone; claims denominated in thecurrencies participating in the euro can be de-nominated either in those currencies or in eurosbeginning January 1, 1999, and will be denomi-nated in euros beginning January 1, 2002.

1For a discussion of some of the issues involved, seeMichael Hadjimichael and Michel Galy, "The CFA FrancZone and the EMU," IMF Working Paper 97/156 (Washing-ton: International Monetary Fund, 1997).

to lag behind the growth of nominal GDP. Credit ex-pansion picked up strongly during 1997, and the ratioof liquid assets to deposits fell sharply, although it re-mained high at almost 17 percent.

The liquidity overhang seems to be related to anumber of factors: (1) the high risk of bank loans tobanks resulting from legal difficulties in enforcingthe recovery of claims in case of default; (2) signifi-cant inefficiencies in the banking system at the re-gional level, which hinder the channeling of fundsfrom very liquid banks in some member countries tobanks in other countries where the demand for creditis relatively strong;8 (3) a lack of competition amongbanks, particularly at the regional level; and (4) theweakness of credit demand from a number of largeborrowers, in particular in the export-oriented sector,

who experienced substantial improvements in theircash flow and improved access to external creditafter the 1994 devaluation.

The first three factors—high lending risk, lack ofcompetition, and other financial market imperfec-tions—appear to be consistent with the simultaneousoccurrence until recently of excess liquidity and slowcredit expansion and also with the existence of highspreads between deposit and loan rates in the region.The fourth explanation, which features the strongcash-flow position of export-oriented companies,could help to explain weak demand for bank credit inrecent years. While not a cause of immediate concernin view of the sluggishness of credit expansion in thepast several years, the recent surge in bank credit sug-gests that the central bank must stand ready to absorbany excess liquidity in the system if and when theneed arises—for example, if strong demand for creditcoincides with the resolution of some of the structuralproblems noted above. If the use of reserve require-ments or auctions of central bank bills prove insuffi-cient, additional measures—including the issuance ofcentral bank medium-term bonds (not redeemable ondemand) carrying a suitable rate of interest—mightalso be considered. While not ruling out this possibil-ity, the BCEAO feels that the need for such bonds isnot required in present circumstances in view of theprudence of the banks' lending policies.

Banking System

As indicated above, some of the key monetarypolicy issues in the WAEMU are closely related to anumber of structural problems of the region's bank-ing system, which need to be addressed both to in-crease efficiency in financial intermediation and toimprove monetary control. First, competition amongbanks in the WAEMU appears to be insufficient in atleast two ways: (1) lending rates, except for pre-ferred customers, remain high in real terms; and(2) the lack of competition for depositors is evi-denced by low deposit rates and occasional refusalsby banks to accept term deposits by customers. Thelack of competition is illustrated by a large gap be-tween the costs of funds to banks and their lendingrates and, therefore, by a high level of profitabilityof most banks in the region.9

Because they are so profitable at present, thebanks lack incentives to modify their strategy anddevelop more aggressive lending policies. In addi-tion, the unreliability of the judicial system and, insome countries, the apparent bias of legal procedures

8Banks in Senegal and Cote d'Ivoire tend to be less liquid thanthose in other WAEMU countries. However, Senegalese andIvoirien banks are usually refinanced through the central bankrather than through the regional interbank market.

9The average cost of resources in the WAEMU is about 2 per-cent, while lending rates range from 6 percent to 15 percent.

7©International Monetary Fund. Not for Redistribution

Ill MAIN REGIONAL POLICY ISSUES

in favor of debtors represent serious obstacles to therecovery of claims and encourage some borrowers todefault on their loans. Thus, the risk to banks thatwould result from a more aggressive lending policyshould not be underestimated. However, the rapiddevelopment of small mutual savings and lendinginstitutions during the last five years in both urbanand rural areas shows that it is possible for financialinstitutions to lend actively while experiencing onlyvery limited rates of nonperforming credits.

One way to improve the functioning of the re-gion's banking system would be for the BCEAO toencourage the development of an active interbankmarket. Indications about volume, interest spreads,and accessibility suggest that the interbank market isworking imperfectly; only a few of the approxi-mately fifty banks operating in the WAEMU partici-pate actively in the market. Insufficient informationabout the financial strength of participants and theabsence of an efficient payment system also hamperthe functioning of the interbank market. As a firststep toward improving the flow of information, theBCEAO has started to provide market participantswith data on interbank loans, including the volumeof transactions and the weighted average rate. In ad-dition, a reform of the payment system is currentlyunder way and should promote the development ofinterbank transactions. The efficiency and competi-tiveness of the banking system could also be im-proved through the introduction of a single, zone-wide licensing agreement for banks in the WAEMU.Currently, banks are required to have a banking li-cense and a separate capital base in each country in

which they wish to operate, discouraging them fromoperating across borders. While supportive of azone-wide licensing agreement, the BCEAO facesresistance from WAEMU governments, which fearthat an increase in the number of banks operating intheir respective countries could increase their liabil-ity in the event of bank failure.

Bank Supervision

The financial sector of the WAEMU includes 53banks and 26 financial institutions (Appendix IV,Table 19). At most, 10 of the 53 banks are consid-ered large—with assets of more than CFAF 100 bil-lion (US$170 million)—and offer a wide variety ofservices to a broad range of customers throughoutthe region. The financial situation of the bankingsystem has improved significantly in most WAEMUcountries since the early 1990s as a result of restruc-turing operations that have raised banks' equity baseand retained profits. Net profits for 1996 amountedto about CFAF 73 billion (US$140 million), com-pared with CFAF 12 billion (US$22 million) in1994, and were equivalent to 25 percent of capitalfor all banks taken as a group (and to 35 percent ofcapital for the 10 largest banks). The number ofbanks unable to observe the minimum capital re-quirement ratio fell from 17 in 1994 to 13 in 1996;of these 13 banks, all except 1 were small ormedium-sized. The share of nonperforming loansdeclined from 32 percent in 1993 to less than 20 per-cent in 1996.

Responsibility for bank supervision rests primar-ily with the regional Banking Commission, estab-lished in 1990. However, the ministries of finance ofindividual member countries and the BCEAO retainfinal authority, and their agreement is necessary forthe most important decisions involving commercialbanks and other financial institutions, including clo-sure in the interest of depositors. By and large, theBanking Commission has supervised the bankingsystem effectively. With the recent strengthening ofits personnel, it has been able to inspect about half ofthe banks operating in the WAEMU and to carry outmore frequent partial controls over banks on its"close watch" list—about one-fourth of activebanks. The quality of the inspections it performs andof the reports it produces is generally considered tobe high. However, in many cases, the recommenda-tions of the Banking Commission tend to be imple-mented with long delays, especially when the issueis strengthening the capital base of banks consideredto be financially unsound.

Governments have been actively involved in therestructuring efforts of a number of banks in finan-cial difficulty—an involvement that is unavoidable

Figure 3. Money Market Interest Rates

Sources: BCEAO, and Bank of France.

8


when the banks are entirely or partly owned by thestate. The political pressure to ensure full repaymentof deposits when banks fail and depositors losemoney explains, to a large extent, the reluctance ofmost governments to accept the closure of banks as asolution. Governments should seek full privatizationof the banking system, which would diminish thispressure. The need to raise capital ratios to interna-tional standards should also receive prompt atten-tion. The capital adequacy ratio currently in place inthe WAEMU (4 percent) does not accurately reflectthe level of risk faced by banks operating in the re-gion, and a minimum ratio of 8 percent should beconsidered.

Trade Policy

The WAEMU treaty provides for the eliminationof all tariff and nontariff barriers between membercountries as well as for the rationalization and har-monization of trade policies vis-a-vis third countriesthrough the elimination of nontariff barriers and theimplementation of a common external tariff. Despiteefforts to liberalize trade in recent years, and espe-cially since the 1994 devaluation, import duties aregenerally still high in the WAEMU, especially inBurkina Faso, Cote d'Ivoire, and Senegal. Thesehigh tariffs have usually been justified on the basisof the narrowness of the tax base, but they have alsoserved in many instances to protect local industries.The move to a common external tariff thus providesan opportunity for member countries to harmonizeand rationalize their individual tariff structures, fur-ther liberalize external trade, and deepen their inte-gration with the world economy.

In its dialogue with both the national authoritiesand the regional Banking Commission, the IMF staffhas argued that the common external tariff should in-volve a reduction in tariff peaks, a simplification ofthe tariff schedule, and a reduction in the average ex-ternal duty rate to the lowest level consistent with re-ducing fiscal imbalances. In line with the principlesof the World Trade Organization, the staff has alsocautioned against the adoption of a tariff structurethat would raise the tariffs in those member coun-tries with the lowest rates, such as Benin and Togo.In view of the relatively small economic size of theWAEMU and the relatively low level of trade amongits members (see Appendix I), it should be possibleto reduce intraregional levels of protection substan-tially while liberalizing trade with the rest of theworld, resulting in considerable trade creation withvery little trade diversion.

On November 28, 1997, the Council of Ministersadopted a precise calendar for introducing the com-mon external tariff. The ultimate objective is to put

in place by January 1, 2000, a structure that consistsof four rates: 0, 5, 10, and 20 percent (see Box 3). Inthe first phase of the transition (from July 1, 1998 toDecember 31, 1998), all import duties will be sub-ject to an overall ceiling of 30 percent. In the secondphase, starting January 1, 1999, the number of rateswill be limited to four: 0, 5, 10, and a temporarymaximum rate of 25 percent. On top of the tariffrates that will be in place by January 2000, there willbe a statistical tax not to exceed 1 percent that, forsome countries, will represent a sharp reductionfrom existing levels. In addition, a few products—still to be identified—could be subject to import sur-taxes on a transitory basis. Safeguard measures,however, may be applied in specific circumstancesto protect local industries or producers from erraticfluctuations in international prices.

With regard to the liberalization of trade withinthe WAEMU, the 60 percent preference margin rela-tive to the tariff rate applicable to countries outsidethe union in July 1997 will be raised to 80 percent inJanuary 1999 and to 100 percent in January 2000.These steps will eliminate by the latter date all inter-nal tariffs on trade between member countries re-lated to eligible industrial products—that is, thosewith a regional value added equal to at least 40 per-cent of total value added or with a regional contentof at least 60 percent. All duties on agricultural prod-ucts and handicrafts were eliminated in July 1996.

The common tariff structure to be put in placeover the next two years will need to be based on adetailed classification of imports to be adopted byJuly 1, 1998.10 In discussions with WAEMU repre-sentatives and national authorities, the IMF staffnoted that the categorization of products that wasunder consideration was biased toward the protec-tion of local industries in that it allowed productsidentified as "sensitive" to be shifted into categoriesthat afforded the maximum allowable tariff rate. Ac-cordingly, the staff recommended, with support fromthe World Bank, the adoption of a categorization ofgoods similar to the one established by the UnitedNations, which is strictly based on the level of pro-cessing of the goods (that is, primary, capital, andconsumption goods). The staff also argued that theuse of any exceptional surtax should be temporaryand truly exceptional (that is, limited to a very smallnumber of tariff lines).

The lower duties implied by the common externaltariff could substantially reduce fiscal revenue in a

10The broad classification of products envisaged by theWAEMU Commission in November 1997 is as follows: categoryI: essential goods (for example, medical supplies and schoolbooks); category II: raw materials and capital goods; category III:intermediate goods; category IV: final consumption goods. Therevised classification is expected to be finalized by the end ofJune 1998.

9

Trade Policy


Ill MAIN REGIONAL POLICY ISSUES

Box 3. WAEMU: New Tariff Structure

1Levied on all imported goods to assist in meeting the budgetary cost of regional institutions and to finance structuralregional funds and the revenue shortfall resulting from the regional preference margin.

2Rates currently vary from I percent to 6 percent.3Products with a minimum local content of 40 percent.4Over external tariff rate.

number of WAEMU countries where import dutyrates are currently high. Several of the countries thatare most likely to be affected have requested techni-cal assistance from the IMF to quantify the potentialimpact of the common external tariff and help themfind ways to offset the expected losses. A recent IMFtechnical assistance mission to Burkina Faso esti-mated the revenue loss associated with the introduc-tion of the common external tariff at 0.9 percent ofGDP by the year 2000. This estimate assumes theimplementation of certain compensatory fiscal mea-sures, including an increase in excise taxes on petro-leum products. A similar study for Senegal hasshown that the fiscal cost, exclusive of compen-satory measures, would be equivalent to 1 percent ofGDP during 1998-99 and 1.6 percent in 2000. Simu-lations performed by the customs administration inCote d'lvoire indicate that revenue shortfalls wouldbe very limited in that country, provided that exemp-tions are virtually eliminated. In discussions withboth regional and national authorities, the IMF staffhas stressed that countries must offset revenue lossesas much as possible by introducing compensatoryrevenue measures and, in particular, by eliminatingexemptions on import duties and other taxes. At thesame time, the staff has indicated that, if countriesmake such efforts, and if they are implementing anotherwise strong reform program, the IMF wouldtake into consideration any temporary, residual ef-

fect of tariff reduction on fiscal revenue in identify-ing the financing of the program.

In parallel with adopting the common external tar-iff, WAEMU members are working together to har-monize indirect taxation. In this regard, the regionalBanking Commission is developing proposals for avalue-added tax, excises, and a tax on petroleumproducts, for which the IMF is providing technicalassistance. In December 1997, the Council of Minis-ters considered a general framework for harmoniz-ing indirect taxation and will address recommenda-tions to member countries before the end of 1998,with the objective of achieving effective harmoniza-tion by 2000.

Coordination ofMacroeconomic Policies

The WAEMU treaty aims at convergence of eco-nomic policies and performance among membercountries through a mechanism of multilateral sur-veillance. The WAMU treaty had already specified anumber of common rules in the monetary area, inparticular on central bank credit to governments, theminimum level of official foreign assets, and thelegal framework under which commercial banks op-erate. Convergence is expected to be achievedthrough

External tariffCategory 1Category 11Category IIICategory IV

Regional tax1

Statistical tax

Intra-WAEMU tariffLocal agricultural productsApproved industrial

products of origin3

Nonapproved industrialproducts of origin

Other products

FromJuly 1, 1998

Current rateCurrent rateCurrent rate

Maximum 30%

0.5%

Current rate2

or less

0

60% preference4

-5 percentage pointsNo preference

FromJanuary 1, 1999

0Maximum 5%

Maximum 10%Maximum 25%

0.5%

Current rate2

or less

0

80% preference4

-5 percentage pointsNo preference

FromJanuary 1, 2000

05%10%20%

0.5%

Maximum 1%

0

100% preference

10


Coordination of Macroeconomic Policies

Box 4. WAEMU: Convergence Criteria

Article 4b of the WAEMU treaty establishes the principle of a gradual convergence ofeconomic performance of member countries. Accordingly, convergence criteria to facili-tate monitoring of progress in the context of the multilateral surveillance on economicperformance have been developed in the area of public finance. The common objectivesset by these criteria are as follows:

• A level of civil service wage bill not to exceed 50 percent of tax revenue (loweredto 40 percent from January 1998).

• A level of public investment financed by domestic resources equal to atleast 20 percent of tax revenue.

• A primary basic fiscal surplus equivalent to at least 15 percent of tax revenue.• A declining or unchanged level of domestic arrears.• A declining or unchanged level of external arrears.

For 1997, the performance of member countries in terms of these convergence criteriawas estimated as follows by the regional commission:

• basic rules and quantitative criteria related tosome key policy areas, such as fiscal policies, in-comes policies, and external debt management;

• harmonized statistical indicators to monitor theobservance of adopted norms;

• periodic reviews by the regional Banking Com-mission of the performance of individual coun-tries; and

• in cases of serious divergence, a process involv-ing consultation and coordination, and, at somepoint, disciplinary actions against individualcountries failing to implement corrective mea-sures. So far, however, this process remainsuntested.

Five indicators are used to monitor the conver-gence of fiscal policies in the WAEMU area, all ofthem defined in relation to tax revenue (see Box 4and Appendix IV, Table 20). Member countries arealso expected to gradually eliminate all domesticand external payments arrears. Indicators of eco-nomic performance for 1997 suggest that all mem-ber countries except Burkina Faso, Niger, and Togomet the convergence criterion on the basic primary

balance.11 Only Burkina Faso and Cote d'lvoire ob-served the criterion on domestically financed invest-ment, while Mali is within reach of the 20 percentthreshold. All countries have satisfied the criterionon the wage bill except Burkina Faso, Niger, andTogo, which are close to the target. All membercountries except Niger have eliminated external pay-ments arrears, and Benin, Burkina Faso, and Senegalhave eliminated domestic payments arrears. The re-cent adoption by the Council of Ministers of two de-cisions designed to harmonize budget laws and gov-ernment accounts in the WAEMU as a whole by2000 is expected to further strengthen the basis formultilateral surveillance. IMF technical assistance inthe area of fiscal convergence has been requestedand is being considered.

11 Defined as total revenue minus expenditure and net lending,excluding interest payments and externally financed capitalexpenditure.

BeninBurkina FasoCote d'lvoireMaliNigerSenegalTogo

WageBill

38403730574051

InvestmentFinanced

by DomesticResources

(Percent of tax revenue)7

2322187

143

BasicPrimaryBalance

219

2427- 829

6

Change Changein in

Domestic ExternalArrears Arrears

(Billions of CFA francs)-17 —

-6 —-52 —

- 7 —-21 2

— 3-23 -17

11


IV Other Regional Issues

A s a key element in the achievement of sustain-able long-run growth, investment is given top

priority in the development of the WAEMU's eco-nomic policy. On average, rates of investment in theWAEMU are comparatively low.12 A major objec-tive of the regional investment code in preparation,which is intended to replace all existing codes inmember countries, is to promote investment throughsimpler and more transparent rules. It also seeks tocorrect discriminatory practices that are based on thetype of economic activity, the nationality of the ben-eficiaries, and the size of the relevant enterprises.Another objective is to avoid the distortions associ-ated with exemptions from customs duties and otherindirect taxes. In the view of the IMF staff, however,the project as it now stands does not go far enough inthe direction of eliminating exemptions, notablythose on customs duties on equipment and invest-ment goods as well as those on the value-added taxon imports and local goods and services.

To promote the development of the private sector,WAEMU countries have decided to create a pri-vately owned regional securities exchange, which isexpected to become operational in mid-1998. Givenits wide regional base, the securities exchangeshould increase the number of companies currentlylisted on the national stock exchange operating inAbidjan. It should also facilitate the implementationof WAEMU countries' privatization programs andhelp raise small investors' participation in the fi-nancing of enterprises. The necessary supervision offinancial markets will be ensured by the RegionalSecurities and Exchange Council, created in 1996 bythe WAEMU Council of Ministers. Its mandate in-cludes not only supervising all activities of the ex-change, but also regulating and authorizing all finan-cial instruments issued by borrowers on the market.

The bias in favor of tax exemptions that still existsin the draft common investment code—which theIMF staff has urged the authorities to correct

12The results reported in Appendix III suggest that low invest-ment ratios in the region reflect insufficient competition amongbusinesses in domestic markets, excessive regulation, and a lackof openness to international trade and capital movements.

promptly—appears to represent a vicious circle in-herent in the preferential regimes put in place over anumber of years in all WAEMU countries. The nar-rowing of the tax base resulting from such preferen-tial regimes leads to excessively high nominal ratesof taxation—reducing people's incentives to pro-duce and invest—and these high tax rates, in turn,provide a strong incentive for firms to seek tax ex-emptions. Thus, the staff has impressed on theWAEMU's regional and national authorities theneed to move forcefully and simultaneously to cutexemptions and reduce import duties in the contextof the common external tariff as complementarysteps to improve incentives and raise the efficiencyand the fairness of the tax system.

An important element of the strategy adopted byWAEMU member countries is to fully harmonizebusiness laws through the Treaty on the Harmoniza-tion of Business Laws in Africa (OHADA), adoptedin October 1993 by 15 African countries (all theCFA franc countries and Comoros). It is designed tounify business laws, promote arbitration proceduresto resolve contractual conflicts, and improve the pro-fessional training of magistrates and their auxil-iaries. It calls for a framework of rules to apply to allcorporate and individual businesses, a set of rules forthe use of guarantees and other forms of collateral insupport of business transactions, procedures govern-ing the resolution of bankruptcy proceedings andloan recovery, and accounting laws applicable to en-terprises. WAEMU members have made progress to-ward achieving these objectives, notably with the es-tablishment of a regional court of justice andarbitration in 1997 and the recent entry into force ofthree Uniform Acts, adopted in 1997 by the OHADACouncil of Ministers. These acts, which do not re-quire further approval and are directly enforceable inall member countries, go a long way in the directionof full harmonization of business laws in theWAEMU. They will soon be complemented by twoadditional acts, which were adopted by the Councilof Ministers in April 1998. These acts establish sim-plified procedures for loan recovery and a frame-work for settling liabilities in cases of bankruptcy;they are expected to come into force on July 10,

12


Other Regional Issues

1998 and January 1, 1999, respectively. The recentlycreated regional court of justice and arbitration canhear all cases related to the implementation of theUniform Acts, and its decisions are enforceable in allthe countries that have ratified the OHADA Treaty.

In parallel to the efforts made to harmonize busi-ness laws, the WAEMU authorities decided, in Sep-tember 1996, to launch a regional project aimed atcreating a common accounting framework for allnonfinancial businesses and corporations. The Sys-teme comptable ouest africain, which is expected tobecome fully operational by January 1, 1999, willensure that all accounting systems used in the regiongenerate information that is both reliable and capa-ble of meeting the requirements and needs of allusers.

Efforts to create a set of comparable economic in-dicators for countries in the WAEMU have alreadyproduced a harmonized index of consumer pricesbased on a common methodology. Other projects in-volve the harmonization of fiscal data, external anddomestic debt, national accounts, and balance ofpayments. A uniform analytical framework for thepublic finances has been put in place, and progress isbeing made in compiling balance of payments andmonetary statistics with technical assistance fromthe IMF. These are important steps that should nowbe followed by efforts to improve and harmonize na-

tional accounts data. To assist in the preparation ofother key economic aggregates, WAEMU members,together with other member countries of the CFAfranc zone, created a regional statistical office,which became operational in 1996. Its role is to ad-vise and provide technical support to national statis-tical agencies in the preparation of aggregate dataand to assist in conducting surveys and studies inkey areas, such as the informal sector. With assis-tance from external donors, the office is currentlylending support to member countries in institutionbuilding; harmonization of statistical nomenclatures;national accounting compilation methods; and stud-ies on competitiveness, economic trends, and thecontribution of informal businesses to overall eco-nomic activity.

The WAEMU treaty specifies a number of areasof common interest to its member countries. Specificsectoral policies need to be put in place in theseareas to facilitate the achievement of the countries'macroeconomic policy objectives: human resourcedevelopment, transport and telecommunications, en-vironment, agriculture, energy, industry, and mining.Work on some of these areas (especially transportand communications) has recently begun in coordi-nation with donors, notably the World Bank and theEuropean Union, but it will take some time beforeconcrete results can be achieved.

13


V Conclusions

E conomic performance in the WAEMU has im-proved considerably since the devaluation of the

CFA franc in 1994. The growth of output has in-creased rapidly and now exceeds population growthby a substantial margin, exports and investment haverecovered strongly, and budgetary and external im-balances have narrowed. Moreover, after a briefsurge in the aftermath of the devaluation, inflationhas returned to low levels. However, while the ratioof investment to GDP has risen since 1994, it re-mains low by the standards of other developingcountries and even in comparison with other coun-tries of sub-Saharan Africa, thus raising some ques-tions about the sustainability of strong growth.

The fixed exchange rate regime adopted byWAEMU countries has been operating without inter-ruption since 1948, except for the single change inthe exchange rate peg in January 1994. This degreeof stability testifies to the prudence of the BCEAO'smonetary policy during this period and to the abilityof governments to pursue supportive fiscal policies.At the same time, the subordination of monetary pol-icy to the objective of defending the fixed exchangerate and the level of international reserves has notbeen costless in terms of growth and employment.The overdue exchange rate realignment of 1994 hasdemonstrated the capacity of WAEMU countries toimplement in a coordinated fashion a comprehensiveset of measures geared toward reestablishing com-petitiveness and restoring confidence in theireconomies. At present, the IMF staff, on the basis ofan examination of a number of exchange rate indica-tors and the behavior of the external current account,considers the competitive position of the WAEMUto be broadly adequate. In the future, the evolutionof these indicators will need to be kept under closereview.

The monetary policy pursued by the BCEAO hasmade an important contribution to macroeconomicstability in the region. A number of steps would helpthese countries improve efficiency in the financialsector in the future. The central bank should improvethe functioning of the regional interbank market toallow banks to channel their excess reserves to lessliquid banks elsewhere in the WAEMU, thus con-

tributing to the elimination of distortions and ineffi-ciencies. The monetary authorities should also en-hance competition between financial institutions.Lack of competition at present, particularly in viewof the limited number of banks operating in the frag-mented domestic markets, unduly raises lendingrates and lowers the remuneration of deposits. Theauthorities should allow banks to open branchesthroughout the WAEMU and encourage them tocompete for deposits and loans, which would im-prove the efficiency of the banking system and raiseboth private saving and investment. However, evenif competition is improved, the supply of bank creditis likely to remain unduly constrained as long as theproblems associated with loan recovery are not seri-ously addressed. Therefore, the IMF staff welcomesthe efforts of the national authorities to improve thelegal and judiciary environment. The entry into ef-fect of the first Uniform Acts of OHADA will alsocontribute to this objective.

Another major preoccupation of the authorities isthe need to further improve the soundness of thebanking system. While they have made progress inthe last few years, doubts remain about the financialsituation of a number of institutions in need of re-structuring. In particular, the rehabilitation plans forsuch banks should aim at a complete restoration oftheir equity base. In that context, the authoritiesshould move to raise capital adequacy ratios to inter-national standards.

The IMF staff believes that the success ofWAEMU's common trade policy hinges on its abil-ity to liberalize the region's trade regime. The com-mon external tariff, to be phased in by January 1,2000, represents an opportunity to achieve this goal.It should help raise productivity and incomes andimprove the region's integration into the world econ-omy by simplifying the present structure of importduties, lowering average tariff rates, and eliminatingtariff peaks. However, it will be important for theWAEMU countries to avoid protectionist considera-tions in the final determination of the product classi-fication scheme that they work out. Moreover, theapplication of any surtax should be severely limitedin terms of level, coverage, and duration, and "statis-

14


tical taxes" should be lowered in all countries asquickly as possible to the target level of 1 percent.

In the long run, the economic benefits resultingfrom the reallocation of resources and the improve-ment in competition made possible by the commonexternal tariff should more than compensate for thelosses that will unavoidably affect some producersin the region. In the near term, the reduction in aver-age duties will have an adverse effect on govern-ment revenue in some countries. Although the de-cline in revenue should be compensated for throughthe reduction or elimination of exemptions on im-port duties and through other taxes, a transitional netrevenue loss may well remain in a few countries.The resulting decline in government saving, if in-vestment is to be protected, could lead to a transitorybalance of payments gap. In those cases, and in thecontext of a strong program that includes strengthen-ing the tax and customs administration, the possibil-ity of additional, temporary financial support fromthe IMF and the World Bank will have to beconsidered.

A major challenge for the WAEMU will be to in-crease private investment, both domestic and for-eign. The adoption of a common investment code

should provide an opportunity to reduce or eliminatethe tax incentives granted to domestic and foreigninvestors under existing regimes. In particular, thestreamlining and harmonization of tax regimesunder way in the WAEMU should allow govern-ments to eliminate existing fiscal exemptions andpreferences, which introduce serious distortions anddeprive national treasuries of potentially largesources of revenue. A specific feature of the invest-ment codes of WAEMU member countries is thatthey grant incentives in terms of value-added tax andtariff reductions, as well as corporate income tax in-centives. The reduction or elimination in exemp-tions—under the value-added tax, in particular—would in many instances go a long way towardoffsetting the revenue shortfalls resulting from lowertariffs. This reduction should go hand in hand withambitious efforts to streamline the regulatory envi-ronment in which most enterprises function. In thisrespect, the harmonization of business laws repre-sents a major achievement. The countries shouldtake the next step of overhauling the functioning ofthe judicial system, which in many instances is animportant source of significant delays and unreliablerulings.

15

Conclusions


Appendix I Comparison of RegionalIntegration: The WAEMU andthe European Union

The two regions present an interesting contrast.Forty years after the Treaty of Rome, the Euro-

pean Union (EU) has created a customs union andachieved extensive regional economic and politicalintegration, but is only now moving to a single cur-rency. By contrast, the West African Economic andMonetary Union has had a single currency for 50years, but a common external tariff is still in theplanning stages, and other aspects of regional inte-gration are far less developed than in Europe. Theextent of reported intraregional trade (as a propor-tion of total trade of member countries) gives a strik-ing, though somewhat exaggerated,13 measure of thedifference in trade integration between the two re-gions. Despite sharing a common currency, thecountries of WAEMU trade little among themselves;most of their exports and imports are with industrialcountries. In relation to total international trade, re-ported internal trade in the WAEMU is even signifi-cantly below that of the rest of Africa.

Intraregional Exports(Percent of total exports)

European Union

WAEMU

Other Africa

1993

61.5

8.4

13.1

1996

61.2

9.1

10.5

Source: IMF, Direction ofTrade Statistics (Washington), various years.

The WAEMU and the EU differ considerably intheir regional institutional and legal structures. InEurope, security as well as political considerationshave reinforced the economic rationale for integra-tion and have given rise to intergovernmental bodieswith clear supranational authority in particular areas.The European Commission has executive responsi-bility in such areas as trade negotiations and compe-tition policy, the European Court of Justice has its

13Informal trade is probably more significant for WAEMUcountries, and other current account transactions, in particularworkers' remittances, are substantial.

own areas of jurisdiction, and the European Parlia-ment is directly elected. In addition, the EuropeanCouncil can make decisions through qualified ma-jority voting, helping to avoid paralysis of decisionmaking in areas for which the European institutionsdo not have supranational authority. In the WAEMU,supranationality to date has effectively been limitedto the central bank for the region (the BCEAO) andto the regional Banking Commission.

Since the creation of the WAEMU in 1994, whichbroadened the scope of the existing WAMU, a moreambitious form of regional integration is being putin place that will include surveillance over membercountry policies through the monitoring of conver-gence criteria. The criteria (discussed in the body ofthe text) resemble the fiscal criteria of the EU (bud-get deficits and debt), but are focused more closelyon the composition of government expenditures:wage bill, elimination of arrears, and primary sur-plus. Sanctions may be imposed on countries that donot observe the criteria, although details have notbeen worked out. In contrast, the countries proceed-ing to Economic and Monetary Union in the EU willbe subject to the Stability and Growth Pact, whichcontains detailed procedures and considerable finesfor those countries running excessive fiscal deficits.In the WAEMU, the danger of excessive deficits isreduced by the existence of ceilings on each membergovernment's reliance on central bank financing. Ineffect, the fixed exchange rate link between the CFAfranc and the French franc provides a tight constrainton money growth and budgetary profligacy.

In the European Union, the Treaty of Romekicked off the integration process with a schedulefor eliminating internal tariffs and quotas and mov-ing to a common external tariff. These measureswere accompanied by the management of agricul-tural production and important transfers to farmersin the context of the Common Agricultural Policy.By contrast, the WAEMU region has been slow toachieve a customs union. Tariffs were eliminated in1996 on agricultural products, and preferential ratesare applied on internally produced industrial goods.A common external tariff is scheduled to be phasedin during 1998-2000.

16


Appendix II The Real Exchange Rateof the WAEMU

This appendix calculates several indices of thereal exchange rate for the WAEMU as a whole

during 1970-97. The WAEMU economies maintaina fixed nominal exchange rate vis-a-vis the Frenchfranc, which remained unchanged from 1948 to Jan-uary 1994, when the parity was devalued by 50 per-cent. The following questions are examined: To whatextent had the real exchange rate appreciated beforethe devaluation of 1994? Was the nominal devalua-tion effective in improving competitiveness, and, ifso, did the improvement last in the years followingthe devaluation?

There are two main definitions of the real ex-change rate: the external real exchange rate and theinternal real exchange rate. The external real ex-change rate is the ratio of a domestic price or costindex to a weighted average of the correspondingindex in foreign countries. The real exchange rate asmeasured by relative prices may not be appropriatefor measuring competitiveness in small openeconomies because the price of tradable goods is de-termined in world markets. Domestic price changestherefore do not necessarily reflect changes in pro-duction costs. Moreover, trade barriers drive awedge between foreign and domestic prices of trad-able goods, so that changes in trade policy willchange the external real exchange rate even thoughproduction costs do not change. It is thereforepreferable to calculate the external real exchangerate as a ratio of production costs. The ratio of do-mestic to foreign wages or unit labor costs is oftenchosen because labor costs represent the largest pro-portion of total production costs.

The terms of trade have also been used as a mea-sure of the external real exchange rate. This ap-proach is based on the assumptions that the exportprice proxies the domestic deflator and that the im-port price proxies the foreign deflator. However, thefirst assumption is not expected to hold for smalleconomies with undiversified exports, as is the casefor the economies in the WAEMU that export pri-mary products. In this case, the export price index isnot representative of domestic prices because it mea-sures the prices of only a few commodities. Further-more, both the export and import price components

of the terms of trade are determined in world mar-kets, and changes of the nominal exchange ratetherefore have no impact on them.

The internal real exchange rate is the ratio of theprice of nontradable goods to the price of tradablegoods. This measure relies only on domestic priceindices and may therefore be more appropriate forsmall economies with relatively high trade barriers.The price of nontradables is influenced by their costof production and may thus be more relevant as ameasure of competitiveness.14

This appendix provides estimates of the externaland internal real exchange rates for the WAEMU.The external real exchange rate is measured here asthe ratio of domestic to foreign consumer price in-dices (CPI). Unfortunately, owing to unavailabilityof cost data for these economies, it was not possibleto estimate a measure of relative costs. The internalreal exchange rate, which has some of the advan-tages of a measure of relative costs, is calculated asthe price ratio of nontradables to imports (the latterbeing a proxy for tradable goods).15

Both measures show that the real exchange ratedepreciated sharply in 1994 and that it appreciated inthe following three years, although a substantialmargin of improvement remains relative to 1994.These results suggest that the devaluation of 1994,together with the accompanying policies, improvedthe competitive position of the region and that thecompetitiveness gains have been broadly main-tained. The evolution of domestic costs and priceswill nonetheless need to be carefully monitored toavoid a recurrence of the overvaluation of the early1990s.

14For an extensive comparison of the external and the internalreal exchange rate, see Lawrence E. Hinkle and FabienNsengiyumva, "The Relationship Between and Interpretation ofExternal and Internal Real Exchange Rates: Competitiveness,Productivity, and the Terms of Trade," in Estimating EquilibriumExchange Rates in Developing Countries, ed. by Lawrence E.Hinkle and Peter J. Montiel (unpublished; Washington: WorldBank, 1997).

15Other measures were also calculated, but for various reasonsthe indices chosen seemed to be the most satisfactory.

17


The results are more mixed before 1994. On aver-age, the external real exchange rate shows no appreci- Box 5. Weights for Calculating theation of the real exchange rate before the devaluation External Real Exchange Rateof the nominal exchange rate in 1994. In contrast, theinternal real exchange rate shows a significant appre- France 28.23 Netherlands 5.82ciation before 1994, tending to confirm the theoretical United States 10.09 United Kingdom 5.50

Germany 9.95 Belgium 5.23

presumption that the internal real exchange rate is a Japan 7.24 Spain 3 23superior measure for these economies. Italy 7.04 Canada 2.53

Source: IMF, International Financial Statistics (IFS) (Washington),various issues.

Measuring the Real Exchange Rate Note: GDP-weighted averages for the W A E M U , calculated on thebasis of trade shares during 1988-91.

The external real exchange rate (RERX) is calcu-lated here as the ratio of consumer price indices:

RERX = CPId /(CPI/E), The price of nontradables (Pn) is calculated on thewhere CPId and CPIf are the domestic and foreign basis of the domestic CPI, which is actually a weightedconsumer price indices, respectively, and E is the average of prices of tradable and nontradable goods. Ifnominal exchange rate expressed in CFA francs per these weights are known, it is easy to calculate the in-unit of foreign currency. An increase of the ratio im- ternal real exchange rate from the ratio of the CPI toplies an appreciation of the real exchange rate. Both the import price index (both expressed in terms of theCPIf and E are weighted averages for major trading domestic currency). Alternatively, it can be assumedpartners, with bilateral trade shares used as the that the weight of tradable goods in the CPI is equal toweights. RERX index is calculated for each of the the average share of imports over total consumption-seven economies of the WAEMU, and the national in- in line with the assumption that the import price is thedices are then used to calculate a GDP-weighted aver- price of tradable goods. The ratio of the CPI to the im-age RERX for the WAEMU region (which is the one port price index can then be writtenreported here). Box 5 shows the weights (GDP- CPI/Pm = (Py

lP^y)/(Pm) = (Pn/Pm)l-y=(RERN)^-y,weighted averages for the WAEMU) for the foreignprice index in the calculations of the RERX. where y is the weight of tradable goods in the CPI.

The internal real exchange rate (RERN) is the ratio Therefore,of nontradable to tradable goods prices. When the RERN= (CPI/P )1/l~y

price of nontradable goods increases in relation to theprice of tradable goods, factors of production move to Figure 1 shows the GDP-weighted average exter-the nontradables sector. To avoid such a reallocation nal real exchange rate (ratio of domestic to foreignof resources, a devaluation of the nominal exchange CPIs) for the WAEMU economies. The real ex-rate or a tightening of aggregate demand may be nee- change rate appreciated during most of the 1970s be-essary. This is often the case when economic agents fore depreciating between 1979 and 1984. It then ap-perceive as permanent a temporary resource "boom" preciated between 1984 and 1986 without, however,in an economy that exports primary products. reaching its 1979 level. It depreciated gradually dur-

The difficulty in measuring the internal real ex- ing 1986-93 and sharply in 1994, but appreciated inchange rate is that there is no operationally straight- the following years, partially offsetting the effect offorward definition of tradable and nontradable the nominal exchange rate devaluation in 1994.goods. As a result, the literature uses a variety of ap- The internal real exchange rate in Figure 1 showsproximations.16 In the measure calculated here, the a substantial appreciation between 1985 and 1994,price of imports (Pm) is used for the price of tradable reversing the depreciation that occurred betweengoods. An alternative would be to use the price of 1980 and 1985. It reached its highest level in 1993,exports, but for economies with undiversified ex- just before the devaluation. Finally, the devaluationports, the import price index is more representative of 1994 caused the internal real exchange rate to de-of tradable goods prices.17 preciate substantially in that year, although this ef-

fect was offset to some extent in the following years.In addition to the effect of the devaluation of the

16See Lawrence E. Hinkle, and Fabien Nsengiyumva, "Internal CFA franc against the French franc in 1994, theReal Exchange Rates: Concepts and Measurement," in Hinkle real exchange rate of the WAEMU may also be in-

fluenced by the movement of the U.S. dollar againstgoods is defined as the average of the indices of export and im- the French franc (Figure 2). The nominal exchangeport prices. rate of the WAEMU in terms of the U.S. dollar

18

APPENDIX II


(which reflects both factors) appreciated from 1985to 1994. The two measures of the real exchange ratefor the WAEMU show similar movements, althoughthe internal real exchange rate exhibits fluctuationsthat are amplified by domestic price movements.

Conclusions

This appendix constructed two measures of the realexchange rate in the WAEMU for the period 1970-97.

The external real exchange rate shows on average noappreciation of the real exchange rate before the de-valuation of the nominal exchange rate in 1994, whilethe internal real exchange rate—which is thought toprovide a better measure of competitiveness—showsa significant appreciation of the real exchange rate be-fore 1994, as does the nominal exchange rate vis-a-visthe U.S. dollar. Both measures of the real exchangerate depreciated sharply in 1994 and appreciatedsomewhat thereafter, although the competitivenessgains achieved in 1994 have been largely preserved.

Appendix II

19


Appendix III Determinants of Investmentin the WAEMU

Capital investment, by increasing productive ca-pacity and serving as a vehicle for new tech-

nologies, is an important engine of growth. It is thusencouraging that the share of investment in GDP hasrisen in every country of the WAEMU in recentyears. However, the fact that the average investmentratio remains low in the WAEMU, compared notonly with the developing countries of Asia, but alsowith the rest of sub-Saharan Africa, remains a sourceof concern (Table 3). Investment ratios vary widelywithin the WAEMU, from relatively high ratios inBurkina Faso and Mali to very low ones in Coted'Ivoire, Togo, and, especially, Niger (Appendix IV,Table 10). The empirical tests presented in this ap-pendix seek to explain these differences by usingpanel regressions to examine the determinants of an-nual investment (private plus public) in the period1970-95 for the seven WAEMU countries for whichdata were available.

Several factors have been suggested as explaininginvestment behavior.18 The traditional acceleratormodel suggests that changes in income should be pos-itively associated with short-run fluctuations in in-vestment. Other explanations of a more structural na-ture include demographic trends, the competitivenessand profitability of exports, and the attractiveness ofthe business environment. While difficult to measure,attractiveness of the business environment probablyincludes freedom from bureaucratic meddling and ex-cessive regulation, as well as openness to the outsideworld through access to foreign goods and capital. In-deed, one of the advantages suggested for regional(and global) integration is that it may increase invest-ment and hence growth. A related factor is the interna-tional competitiveness of domestic producers. TheWAEMU countries experienced an appreciation ofthe real exchange rate in the late 1980s and early1990s, which was associated with low investment, butinvestment rebounded after the devaluation of 1994.Finally, the price and profitability of the region's ex-ports—which consist largely of primary commodi-

ties—could be expected to influence domestic invest-ment. This relationship might be captured through theprice ratio of primary commodities to manufactures.

The results of the panel regressions, using the av-erage investment share of the WAEMU (INV) as thedependent variable during 1970-95, tend to confirmmost of the hypotheses mentioned above. Thegrowth variable (GROW) is not statistically signifi-cant (despite being biased upward, since positive in-vestment probably also increases contemporaneousgrowth to some extent). However, the dependencyratio (DEP)—the ratio of the young and the elderlyto those of working age; a measure of openness(OPEN)—exports plus imports divided by GDP; andtwo indices of "economic freedom" are significant.The economic freedom variables are subjective indi-cators19 that measure the freedom of businesses tocompete domestically (COMPETE) and the freedomof international capital transactions (CAPITAL). Asimple average of the two variables for 1995 is re-ported in Table 3. In addition, the real effective ex-change rate (RER), which is based on relative GDPdeflators, has a significant negative effect on invest-ment.20 The regression did not include country dum-mies, and thus differences between countries that arenot captured by the explanatory variables show up inthe random error terms:

INV = 0.104 OPEN+ 0.101 GROWTH(3.15) (1.36)

- 46.9 DEP + 5.49 COMPETE(3.64) (3.31)

+ 3.98 CAPITAL- 0.172 RER(4.64) (4.82)

Number of observations =152R2 = 0.37t-statistics are reported in parentheses below thecoefficients.

18Some factors, like the cost of capital, could not be included inthe analysis because no information is available for the WAEMUcountries.

19 Calculated by J. Gwartney, R. Lawson, and W. Block, Eco-nomic Freedom of the World (Vancouver, British Columbia,Canada: Fraser Institute, 1996).

20The price ratio of commodities to manufactures was not sta-tistically significant, perhaps because it was correlated with othervariables.

20


Table 3. Investment Share,Trade Share,and Index of Economic Freedom inthe WAEMU and Other SelectedCountries, 1995(Percent)

WAEMU countries2

Benin

Burkina Faso

Cote d'lvoire

MaliNiger

SenegalTogo

Other African

countries

Selected other

countries

Brazil

France

IndiaKorea

United States

Investment/GDP

15.8

19.3

24.0

12.8

26.07.2

15.6

13.5

20.9

21.9

17.7

24.5

36.6

16.5

Imports +

Exports/GDP

64.044.775.9

38.2

30.1

68.565.2

15.543.4

111

67224.4

Index of

EconomicFreedom1

2.5

2.03.52.52.52.5

2.53

3.87.83.56.3

10.0

Sources: IMF, World Economic Outlook database;World Bank,

Wor ld Development Indicators database; and J. Gwartney, R.

Lawson, and W. Block, Economic Freedom of the World (1996).

'Unweighted average of freedom of capital transactions and

freedom of business to compete, for most recent year. A value of

0 is the least free, one of 10 is the most.2Excluding Guinea-Bissau.3Central African Republic, Chad, and Nigeria.

Additional explanatory variables were tried andsome of those mentioned above were dropped, butgenerally the variables included remained statisti-cally significant.21 A Granger causality test was run,which confirmed that openness influenced invest-ment rather than the reverse. The measure of open-ness is imperfect because larger countries tend tohave lower ratios of trade to GDP than smaller onesfor a given level of trade restrictiveness; inclusion ofcountry size (as measured by GDP) in the regressionstill yielded a significant coefficient for the opennessvariable. Thus, there seems to be firm evidence thatmore freedom to compete and to access foreigngoods and capital markets has favorable effects onthe scale of investment in W A E M U countries,adding to evidence for other regions.22

2 1An exception was competitiveness, which, when measuredby the relative CPI variable, changed the sign of the coefficienton the variable COMPETE.

22See for instance Ross Levine and David Renelt, "A Sensitiv-ity Analysis of Cross-Country Growth Regressions," AmericanEconomic Review, Vol. 82 (September 1992), pp. 942-63; andJeffrey Sachs and Andrew Warner, "Economic Reform and theProcess of Global Integration," Brookings Papers on EconomicActivity:!, Brookings Institution, 1995, pp. 1-118.

Appendix III

21


Appendix IV Background Tables

WAEMU: Output Growth(Annual percentage changes)

Table 5. WAEMU: Trade Volume Growt(Annual percentage changes)


WAEMU1


WAEMU1

Average1990-93

2.82.6

-0.41.4

-1.00.9

-5.9

0.2

-0.3-0.3-A3-1.6-3.7-1.9-8.4

-3.0

1994

4.41.22.12.34.02.9

16.8

3.2

1995

(Real GDP)4.63.87.16.42.64.86.8

5.7

1996

5.66.26.84.03.35.78.2

6.0

(Per capita GDP)1.5

-1.6-1.9-0.7

0.70.1

13.2

-0.2

2.90.93.23.3

-0.72.13.5

2.5

1.53.43.10.90.03.05.0

2.6

Prel.1997

5.35.56.06.73.55.24.8

5.6

2.12.52.33.60.22.51.7

2.3

Sources: IMF staff estimates, and Wor ld Economic Out look

database, January 1998.

'Excluding Guinea-Bissau.

-


WAEMU1


WAEMU1

Sources: IMF

Average1990-93

6.710.04.48.7

-2.91.8

-10.8

3.6

1.77.1

-2.03.2

-9.20.2

-13.7

-I.I

1994 1995 1996

(Export volume)

45.59.74.91.42.09.16.0

8.8

2.85.46.0

19.66.87.3

30.4

8.6

27.32.5

21.72.6

11.92.11.2

13.0

(Import volume)-32.3-29.9-9.5-2.7-9.5-AA

-16.1

-12.0

39.024.440.714.48.65.0

56.6

28.2

-0.912.86.62.1

-3.74.28.0

5.0

Prel.1997

4.118.33.9

31.718.3

1.73.5

8.8

3.05.86.32.89.72.9

-2.1

4.8

staff estimates, and World Economic Outlookdatabase, January 1998.

•Excluding Guinea-Bissau.

Table 4.

22


Appendix IV

Table 6. WAEMU: Real Effective ExchangeRates(Annual percentage changes)

Table 7. WAEMU: Inflation(Annual percentage changes)

Source: IMF staff estimates.

Note: In terms of relative consumer price indices.1Excluding Guinea-Bissau.

Sources: IMF staff estimates, and Wor ld Economic Outlook

database, January 1998.1Excluding Guinea-Bissau.

Table 8. WAEMU: Fiscal Balances(Percent of GDP)

Table 9. WAEMU: Government Revenue,Excluding Grants(Percent of GDP)



Sources: IMF staff estimates, and Wor ld Economic Outlook


23


WAEMU1

Average1990-93

1.0-1.5

0.2-2.4-4.9-2.0-0.8

-1.1

1994

-35.8-38.8-34.5-38.1-33.5-35.1-33.5

-35.4

1995

14.57.78.3

12.610.98.5

16.0

9.8

1996

1.03.0

-1.03.63.3

-2.42.6

0.3

Prel.1997

0.6-2.9

2.2-6.9-3.0-3.7

2.8

-0.8


WAEMU1

Average1990-93

2.40.21.8

-0.9-1.5-0.6-0.1

0.6

1994

38.624.726.024.835.632.135.3

29.2

1995

14.97.8

14.112.410.98.5

15.9

12.2

1996

4.76.12.76.45.32.84.6

3.9

Prel.1997

3.82.35.6

2.91.88.2

3.8


WAEMU1


WAEMU1

Average1990-93

-4.5-7.4-2.6-8.4-7.8-0.3-5.7

-3.9

(Ov

-7.5-8.8

-12.5-10.3-9.7-2.6-9.1

-9.1

1994 1995 1996

(Primary balance)

-3.8 -4.5 -1.9-9.6 -7.8 -8.1

1.4 3.2 3.8-11.4 -9.1 -6.9-10.2 -5.5 -3.7

-2.4 0.2 1.3-5.9 -2.1 -1.4

-3.4 -1.2 -0.2

erall balance, excluding g-7.0 -7.3 -4.3

-11.0 -9.2 -9.0-7.2 -4.4 -2.8

-13.7 -10.5 -7.9-12.5 -7.8 -5.4

-6.1 -3.5 -2.2-13.1 -7.8 -6.3

-8.7 -6.0 -4.3

Prel.1997

-2.5-9.0

3.0-7.8-5.3

1.90.8

-0.7

rants)-4.2-9.8-2.7-8.8-6.8-1.5-3.6

-4.3


WAEMU1

Average1990-93

11.712.519.615.28.6

18.016.8

16.4

1994

12.811.019.912.26.1

14.912.1

15.2

1995

14.911.822.113.17.2

16.314.7

17.0

1996

15.212.322.514.47.8

16.014.8

17.4

Prel.1997

14.613.022.214.48.4

16.315.2

17.4


Table 10. WAEMU: Gross DomesticInvestment(Percent of GDP)


WAEMU1

Average1990-93

14.520.6

6.922.3

7.113.315.9

12.1

1994

15.819.3II.126.010.416.215.1

14.8

1995

19.622.512.926.0

7.516.916.1

16.2

1996

17.124.813.926.5

9.717.416.3

16.9

Prel.1997

17.826.216.025.89.7

18.715.2

18.1




Table 11. WAEMU: Gross Domestic Saving(Percent of GDP)

Average Prel.1990-93 1994 1995 1996 1997


WAEMU1

5.26.5

10.15.92.26.16.6

7.3

9.56.1

22.47.11.79.6

11.4

13.6

10.27.1

20.39.50.4

11.311.9

13.5

8.77.5

22.310.83.1

11.911.4

14.6

9.99.2

23.114.22.1

13.211.2

15.7

Sources: IMF staff estimates, and World Economic Outlook



Table 12. WAEMU: External CurrentAccount Balance, Excluding Grants(Percent of GDP)

Average Prel.1990-93 1994 1995 1996 1997

Benin -6.9Burkina Faso -10.3Cote d'lvoire -12.8Mali -14.5Niger -8.7Senegal -9.9Togo -10.5

WAEMU1 -11.2

-5.2 -8.2 -6.8 -6.5-8.7 -11.3 -13.4 -13.3-2.2 -7.2 -6.0 -5.6

-16.9 -15.3 -14.7 -10.8-13.6 - I I.I -9.2 -10.0-9.9 -9.2 -7.7 -7.5-8.1 -6.7 -6.2 -5.3-7.2 -9.1 -8.2 -7.6




Table 13. WAEMU: Public External Debt(Percent of GDP)


WAEMU1

Average1990-93

65.518.4

124.9100.555.056.181.1

85.0

1994

102.374.3

183.9141.084.880.9

131.7

132.2

1995

78.552.3

157.9115.474.576.6

108.3

113.1

1996

70.250.7

154.7108.468.577.399.4

109.3

Prel.1997

63.156.4

140.3113.973.773.093.8

103.3

Sources: IMF staff estimates, and World Economic Outlook



APPENDIX IV

24


Appendix IV

Table 14. WAEMU: Balance of Payments(Billions of CFA francs)

Source: BCEAO.Note: Data are provided by the BCEAO and may show differences with data from the World Economic Outlook

database.1 Excluding official transfers.

Exports (f.o.b.)

Imports (f.o.b.)

Trade balance

Services

TransfersPrivateOfficial

Current balance1

Capital accountPrivatePublic

Errors and omissions

Overall balance

FinancingChange in arrearsDebt relief

Other (including change in foreign assets)

Exports + imports/GDP

Trade balance/GDP

Current account balance/GDP

GDP

1994

2,878.7

-2,485.8

392.9

-1,108.7

1,017.6-56.4

1,074.0

-772.2

435.8179.5256.3

-31.6

706.0

-706.0-666.6

843.6

-883.0

51.14064

3.745579

-7.36151

10,489.7

1995

3,298.4

-3,118.2

180.2

-1,296.5

810.9-71.4882.3

-1,187.7

183.9108.775.2

-26.3

-147.8

147.8-155.7

313.6

-10.1

52.80631

1.482981

-9.77434

12,151.2

1996

3,654.1

-3,166.2

487.9

-1,258.6

572.1-87.2659.3

-857.9

19.1-93.5112.6

-22.0

-201.5

201.5-29.0355.6

-125.1

50.68368

3.62573

-6.37531

13,456.6

Prel.1997

3,960.1

-3,473.1

487.0

-1,317.7

535.4-111.0

646.4

-941.7

497.3167.3330.0

202.0

-202.0-207.0

101.2

-96.2

50.44656

3.305101

-6.39099

14,734.8

25


Table I5.WAEMU Governments' Financial Operations(Billions of CFA francs)

Total revenue and grants

Total revenue

Tax revenueDirect taxesIndirect taxes

Taxes on goods and servicesTaxes on foreign trade

Other taxesNontax revenue

Grants

Total expenditureCurrent expenditureWages and salariesInterest due

Domestic interestForeign interest

Other current expenditure

Capital expenditureDomestically financedExternally financed

Net lendingPrimary balance1

Overall balance, excluding grantsOverall balance

FinancingDomestic financing

ArrearsBanking systemNonbank borrowing

External financingDrawingsAmortization dueDebt reliefArrears

Budgetary revenueTotal expenditureCurrent expenditureCapital expenditurePrimary balanceOverall balance excluding grants

Memorandum itemsWages/tax revenueDomestically financed

investment/tax revenuePrimary balance/tax revenue

1994

2,025.6

1,625.9

1,352.3304.3

1,019.8266.5753.3

28.2273.6

399.7

2,559.31,926.8

721.6534.7

70.5464.2670.5

639.6153.5486.1

-7.180.3

-933.4-533.7

533.7-155.8

-67.2-15.8-72.8689.5866.7

-615.9973.9

-535.2

15.524.418.46.10.8

-8.9

53.4

11.45.9

1995

2,491.9

2,093.8

1,756.1441.7

1,290.6335.7954.9

23.8337.7

398.1

2,833.52,026.6

769.3514.3

64.2450.1743.0

812.5254.4558.1

-5.6327.1

-739.7-341.6

341.6-119.7-106.9

21.4-34.2461.3692.9

-610.0457.1-78.7

1996

2,805.1

2,378.0

2,048.0524.8

1,495.2405.3

1,089.928.0

330.0

427.1

2,972.32,091.7

818.2476.0

56.4419.6797.5

881.4265.1616.3

-0.8497.2

-594.3-167.2

167.2-237.3-188.8-100.3

51.8404.5600.7

-530.9349.7-15.0

(Percent of GDP)

17.223.316.76.72.7

-6.1

17.722.115.66.53.7

-4.4

(Percent of tax revenue)43.8

14.518.6

40.0

12.924.3

Prel.1997

3,058.1

2,648.3

2,254.9603.8

1,615.3446.1

1,169.235.8

393.4

409.8

3,245.12,189.7

854.1471.9

69.4402.5863.7

1,044.0355.0689.0

11.4575.5

-596.8-187.0

187.0-215.5-112.7

-50.5-52.3272.3591.3

^51.5226.8-94.3

18.022.014.97.13.9

-AA

37.9

15.725.5

Source: BCEAO.Note: Data are provided by the BCEAO and may show differences with data from the World Economic Out-

look database.'Total revenue less total expenditure excluding interest due, externally financed investment, and net lending.

APPENDIX IV

26


Appendix IV

Table 16. WAEMU: Monetary Survey(Billions of CFA francs)

Source: BCEAO.1Includes data for liquidated banks.

27

Net foreign assetsGross foreign assetsLiabilities

Net domestic assetsNet credit to governmentCredit to economy

Crop creditsOther credits

Other items (net)

Money supplyCurrency in circulationPostal depositsSavings banksBank deposits

Public enterprisesSight depositsTerm deposits

Private sectorSight deposits

Term deposits

1993Dec.1

-225306531

2,217430

1,76497

1,66723

1,992593

1011

1,37818811969

1,191512578

1994Dec.1

4301,4441,013

2,345897

1,607190

1,416-159

2,776894

1413

1,85525417480

1,601816784

1995Dec.1

6931,8161,123

2,473986

1,861248

1,613-373

3,1661,018

1415

2,118331215117

1,787908879

1995Dec.

7331,8131,080

2,3221,0531,746

2481,498-477

3,0551,018

1415

2,008309198111

1,699864835

1996Sept.

7111,8281,117

2,4261,0081,844

1241,720-427

3,137908

1917

2,192313209104

1,880881999

1996Dec.

8702,0031,133

2,532946

2,044196

1,847-458

3,4011,060

1718

2,307343226117

1,963977986

1997Mar.

1,2482,3761,128

2,4011,0162,087

2951,791-702

3,6491,163

1818

2,450381252129

2,0691,0401.099

1997Jun.

1,1332,3021,168

2,3631,1342,012

2221,790-783

3,4961,072

1619

2,389359248I I I

2,030985

1,044

1997Sept.

1,0712,3531,282

2,3921,1172,007

1611,847-732

3,4641,007

1619

2,422382231150

2,040982

1,058

Prel.1997Dec.

1,0882,2781,190

2,5661,0112,251

2871,964-696

3,6541,217

1819

2,400368221147

2,0321,0201,011

(Twelve-month rate of increase; percent)

Memorandum items

Net foreign assetsNet domestic assets

Net credit to governmentCredit to economy

Money supplyCurrency in circulationBank deposits

2916

109-9395135

615

1016141414

199

-1017114

15

51-1119

101110

2517

107

154


Table 17. WAEMU: Summary Accounts of the Central Bank(Billions ofCFA francs)

1993Dec.1

1994Dec.1

1995Dec1

1995Dec.

1996Sept.

1996Dec.

1997Mar.

1997 1997Jun. Sept.

Prel.Dec.1997

Assets

Net foreign assetsGross foreign assetsLiabilities2

Net domestic assetsNet credit to government

Guaranteed bondsSecuritized debtOther (including IMF)Government deposits

Net claims on banks andfinancial institutions

Money market paperRepurchase agreements (pensions)Collateralized loansOther

Other items (net)

Liabilities

Base moneyCurrency in circulationBank depositsOther deposits

Memorandum itemGross foreign assets/base money

(in percent)

-134190325

1,135535360—

23360

809192

19148450

-209

1,00159334067

19

3721,138

767

826792317209399136

15729—

1217

-123

1,19789422084

95

6091,417

809

698782270117550158

1645310

100—

-248

1,3061,018

19395

108

6091,417

809

697782272117517158

164————

-249

1,3061,018

19395

109

6171,455

837

551756328

1608180

76————

-281

1,16990816893

124

7551,612

857

580745296

38642231

162————

-327

1,3351,060

18096

121

1,0611,938

877

351769299

7776314

80————

^ 9 8

1,4121,163

148101

137

9701,894

925

452855334

7764249

83————

^ 8 5

1,4221,072

25397

133

9411,9651,024

420831312

7791279

54————

^ 6 5

1,3611,007

250104

144

9621,889

927

525797326

19777325

174————

^ 4 6

1,4871,217

168102

127

Source: BCEAO.1 Includes data for liquidated banks.includes liabilities to IMF.

APPENDIX IV

28


Appendix IV

Table 18. WAEMU: Summary Accounts of the Commercial Banks(Billions of CFA francs)

Source: BCEAO.1Includes data for liquidated banks.2Excluding all intra-WAEMU claims and liabilities, including securitized debt of governments3Including deposits with central bank, currency in vaults, and BCEAO short-term bonds.

Assets

Net foreign assets2

Gross foreign assetsLiabilities

Net domestic assetsNet credit to governmentClaims

Of which, securitized debtDeposits

Credit to economyShort-term credits

Crop creditsOrdinary creditsMedium-term creditsLong-term credits

Other items net

Reserves3

Liabilities

Private sector and publicenterprise depositsPublic enterprisesPrivate sector

Central bank loans

Memorandum itemsBank reservesSecuritized debtLiquid assetsLoans/depositsReserves + securitized debt/deposits

1993Dec.1

-91115206

1,849-102

283

3851,726

86897

771568290225

344

1,311139

1,172

791

20

209620

1994Dec.1

59305247

1,662112623201511

1,566944190754459163-16

200

1,771193

1,578

150

99

186518

1995Dec.1

85399314

1,923200724289524

1,8211,118

248870549154-98

177

2,023263

1,761

162

7II186818

1995Dec.

124396272

1,773267701289434

1,7071,048

248801516142

-201

177

1,913240

1,673

162

(8

12207220

1996Sept.

94373279

1,910240847367607

1,8051,077

124953580148

-135

157

2,099249

1,850

62

Percent of6

14196219

1996Dec.

115391276

2,066196827331631

1,9981,247

1971,051

605146

-128

178

2,211278

1,933

148

deposits)6

12186618

1997Mar.

187438251

2,087234800341566

2,0481,320

2951,024

589139

-195

146

2,349310

2,039

70

512176717

1997Jun.

164407244

2,021264824341559

1,9771,224

2221,002

614139

-220

192

2,314293

2,021

63

712196619

1997Sept.

130388257

2,012273848320575

1,9711,222

1611,062

612137

-232

211

2,318310

2,007

36

7II186618

Prel.1997Dec.

126389263

2,142208807320599

2,2041,426

2871,139

641137

-270

188

2,297295

2,003

159

6II181118

29


AP

PE

ND

IX IV

30

Table 19. WAEMU: Indicators of Banking Sector Soundness

BeninIncluding provisions2

Burkina FasoIncluding provisions2

Cote d'lvoireIncluding provisions2

MaliIncluding provisions2

NigerIncluding provisions2

SenegalIncluding provisions2

TogoIncluding provisions2

TotalIncluding provisions2

1993

5

8

14

7

6

9

7

56

Number ofActive Banks

1994

5

8

14

7

6

9

7

56

1995

5

5

15

7

5

8

7

52

1996

5

5

15

7

5

9

7

53

1993

0

5

3

3

2

5

0

18

Number of Banks Not Meeting Prudential Ratios

Solvency

1994

1

4

6

3

1

3

4

22

1995

2

0

3

3

2

3

4

17

1996

1

2

0

4

1

2

3

13

1993

0

1

3

1

1

6

0

12

Liquidity

1994

0

1

4

0

1

2

4

12

1995

0

0

1

0

2

3

3

9

1996

2

1

5

1

2

4

3

18

Share of Non-performing Assets1

1993

9.316.0

15.234.3

16.232.8

28.145.9

28.655.0

9.922.5

17.233.4

15.832.2

1994

7.416.4

8.429.9

9.931.2

32.052.5

7.543.0

II.124.8

18.135.4

12.031.6

1995

6.915.4

5.619.8

4.621.2

18.334.7

4.039.5

11.824.2

15.829.1

7.923.7

1996

3.610.0

2.911.0

5.819.7

10.724.8

5.029.8

7.519.6

5.319.4

6.219.6

Number of Bankswith Government Share

Exceeding 20 Percent

Dec. 1995 Dec. 1996

0

4

4

4

2

4

4

22

0

5

3

4

2

4

6

24

Source: WAEMU, Annual Report of the Banking Commission (1996).

'In percent of credit to the economy, unless otherwise indicated.2Total amount of bad loans (that is, including provisions) over total credit.


Prel.1993 1994 1995 1996 1997 1997

(Percentage of tax revenue)

Wage bill/tax revenue (<50 percent)

Benin 57 50 44 41 43 43Burkina Faso 11 56 48 43 39 39Cote d'lvoire 72 48 39 37 37 37Mali 49 43 37 29 31 30Niger 97 102 80 50 57Senegal 60 56 48 44 41 41Togo 125 95 64 57 51 51

WAEMU 69 54 44 40

Public investment paid from domesticrevenue/tax revenue (>20 percent)

Benin 5 5 II 6 II IIBurkina Faso 12 9 8 10 17 17Cote d'lvoire 10 14 18 16 19 19Mali II 13 14 14 14 14Niger 3 6 4 4 7 . . .Senegal 13 10 II II 12 12Togo 19 5 8 5 4 4

WAEMU II II 14 13

Primary fiscal balance/tax revenue (> 15 percent)

Benin 20 19 19 27 20 20Burkina Faso -34 — 9 14 17 17Cote d'lvoire -22 19 27 30 27 27Mali -72 17 32 40 33 33Niger -118 -98 -29 5 - 4Senegal -13 II 24 26 31 31Togo -123 -53 - 1 3 - 1 1 6 6

WAEMU -30 8 21 26

(Billions of CFA francs)

Change in external arrears (<0)

Benin 2 -3 — — — —Burkina Faso 3 -15 -4 — . . . —Cote d'lvoire 269 -353 7 2 — —Mali 5 - 2 0 — — — —Niger 19 -67 34 -26 2Senegal 37 -129 -46 — -9 - 9Togo 20 16 1 - 3 - 4 7 -41

WAEMU 355 -570 - 7 -27 -53 -55

Change in domestic arrears (<0)

Benin -10 -II -17 -26 -13 -13Burkina Faso — - 7 -16 -19 — —Cote d'lvoire -27 -98 -79 -84 -78 -78Mali 4 -10 -14 -19 - 4 -4Niger 6 6 -12 -20 -21Senegal 12 -32 -15 — -9 —Togo 29 - 6 - 6 2 -25 -24

WAEMU 14 -157 -159 -165 -150 -119

Sources: IMF staff estimates; and WAEMU regional Banking Commission.

Appendix IV

Table 20. WAEMU:Convergence Criteria

31

Wage bill/tax revenue (<50 percent)


WAEMU

Public investment paid from domesticrevenue/tax revenue (>20 percent)


WAEMU

Primary fiscal balance/tax revenue (> 15 percent)


WAEMU

Change in external arrears (<0)


WAEMU

Change in domestic arrears (<0)


WAEMU

1993 1994 1995 1996 1997Prel.1997

(Percentage of tax revenue)

577272499760

12569

51210113

131911

20-34-22-72

-118-13

-123-30

50564843

102569554

59

14136

105

II

19

1917

-98II

-538

4448393780486444

II8

18144

II8

14

199

2732

-2924

-1321

4143372950445740

61016144

II5

13

271430405

26-11

26

43393731574151

II1719147

124

20172733-4316

43393730

4151

II171914

124

20172733

316

(Billions ofCFA francs)

23

2695

193720

355

-10

-2746

122914

-3-15

-353-20-67

-12916

-570

-11-7

-98-10

6-32-6

-157

-47

34-46

1-7

-17-16-79-14-12-15-6

-159

2

-26

-3-27

-26-19-84-19-20

2-165

2-9

-47-53

-13

-78- 4

-21-9

-25-150

-9-41-55

-13

-78-4

-24-119

Sources: IMF staff estimates; and WAEMU regional Banking Commission.


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