Growth in the West African Economic and Monetary Union (WAEMU) was moderate in 2004 and 2005 as the region grappled with the real appreciation of the CFA franc and falling prices for its core commodity exports. Per capita income growth was positive but below the sub-Saharan African average, according to the IMF’s recent economic review. WAEMU countries also contended with domestic problems, including food shortages in some, weak fiscal performance, sociopolitical crises, and financial sector difficulties. In this environment, the WAEMU had difficulty implementing regional policies and made slow progress in complying with the convergence criteria for the monetary union.
Inflation was less than 1 percent in 2004, largely because of successful agricultural production in most countries and the strong CFA franc. But inflation rose in 2005, partly because of oil price increases, food shortages, and a pickup in domestic demand. With excess liquidity, banks in some member countries were able to significantly increase lending, contributing to higher domestic credit in some countries, which also contributed to higher inflation.
WAEMU members’ fiscal positions continued to weaken, but much of the increase in deficits was due to poverty-related spending. Although the share of capital expenditures has increased, fiscal flexibility is still limited by the high share of current expenditures, particularly wages. Efforts to raise revenues have been hampered by problems in tax administration.
External sector developments in 2004-05 were mixed. At least some of the exchange rate-based competitiveness gains from the 50 percent 1994 devaluation persist: the regionwide real effective exchange rate currently stands at 76 percent of its predevaluation level. With exports dominated by limited primary commodities, the WAEMU is vulnerable to changes in the terms of trade, which deteriorated by more than 20 percent during 2000-05. However, the terms of trade impact of the 2004-05 oil price increase was softened by Côte d’Ivoire’s oil exports, representing about half of the WAEMU’s oil imports.
|(annual percent change)|
|Consumer prices (average)||3.0||0.8||0.2||4.5||1.9|
|(percent of GDP)|
|Overall fiscal balance (including grants)||-2.3||-2.1||-2.4||-2.6||-2.9|
|Exports of goods and services||30.3||28.2||28.7||28.0||31.4|
Macroeconomic prospects are good but subject to risks. Price projections for the region’s main export commodities are stable or set to increase, which should help improve fiscal and external current accounts. Debt relief for some countries and related flows, as well as any increased aid under the Multilateral Debt Relief Initiative, will also spur growth. Given Côte d’Ivoire’s economic importance, a faster regional expansion will hinge on improved socioeconomic conditions in this country. Other risks include possible further exchange rate- and oil price-induced shocks and domestic financial sector weaknesses.
The IMF Executive Board noted that prospects for strengthened economic performance would depend on developments in the external environment, the strength of macroeconomic and structural policy implementation, and the resolution of Côte d’Ivoire’s conflict. The Directors called on the member authorities to make progress on already agreed-upon regional policies, particularly on trade.
Stressing that future exchange rate and terms of trade developments should be monitored carefully, the Directors called for more domestic price and wage flexibility to alleviate past losses in price competitiveness. They also underscored the importance of prudent fiscal policies, including the containment of wage increases, in underpinning the exchange rate regime.
The Directors welcomed the regional central bank’s ability to maintain sufficient international reserves. The rapid credit and monetary expansion, however, is a source of concern. In light of increasing inflationary pressures, they called on the Central Bank of West African States to reactivate its market-based instruments to manage liquidity at the regional level.
The Directors regretted the region’s failure to date to reach macroeconomic convergence and welcomed ongoing efforts to redefine the convergence criteria. Members need to renew their commitment to common macroeconomic targets and to promote more integrated regional markets. In this context, the Directors noted that the emergence of a regional treasury bill market—while a positive step—reinforces the importance of improved regional fiscal policy coordination. They encouraged the authorities to promote the use of existing regional guidelines on public accounting, statistics, and budgetary processes.
The Directors urged the authorities to improve the soundness of the financial sector and enforce prudential regulations. They underscored the importance of preserving confidence in the regional banking system. The Directors welcomed the dynamic development of the microfinance sector in the region but called for a consistent regulatory framework and effective oversight.