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AFRICA | IMF Executive Board Concludes Regional Consultation with West African Economic and Monetary Union

WASHINGTON DC,  March 18, 2019 - The Executive Board of the International Monetary Fund (IMF) has concluded its regional consultation with the West African Economic and Monetary Union –WAEMU.

In its report, the IMF said Economic activity remains strong with subdued inflation. Despite adverse terms-of-trade shocks and security concerns in some member-countries, real GDP growth is estimated to have exceeded 6 percent for the 7th consecutive year in 2018, fueled by strong domestic demand.

The IMF report pointed out that the aggregate fiscal deficit was reduced by ½ percentage point of GDP and external reserves increased, mainly supported by Eurobond issuances. However, this dynamic has come with persistent vulnerabilities. Public debt and its servicing costs increased in 2018, partly because of below-the-line budgetary operations.

Preliminary data point to an increase in total debt to 52.5 percent of GDP in 2018 from 50.1 percent in 2017, and in total debt service to 33 percent of government revenue in 2018 from 26.4 percent in 2017.

The external current account deficit is estimated to have increased to 6.8 percent in 2018 from 6.6 percent of GDP in 2017. This increase was underpinned by strong public capital spending but also by worsening terms-of-trade on the back of higher world oil prices.

Notwithstanding a firmer monetary policy stance since early 2017, liquidity pressures in the regional financial system were temporarily eased in 2018. The BCEAO significantly reduced its refinancing volume to banks between early 2017 and end-2018.

However, liquidity in the financial system gradually improved in the wake of sizeable Eurobond issuances, which also reduced sovereigns’ demands for financing on the regional debt market.

Important banking sector reforms were implemented in 2018, including the move to Basel II/III prudential standards (with a 5 year-phasing period), new bank accounting rules, banking supervision based on a risk-sensitive consolidation approach to groups, and steps to operationalize the new resolution framework of the Banking Commission.

The medium-term outlook remains positive but hinges critically on the implementation of planned reforms. Growth is projected to stay above 6 percent, assuming fiscal consolidation to meet the regional fiscal deficit convergence criterion of 3 percent of GDP and eliminate below-the-line budgetary operations from this year onwards, and structural reforms implementation.

Risks are tilted to the downside and stem from potential slippages in fiscal consolidation, slow progress in implementing structural reforms and improving inclusiveness, larger imports or lower capital inflows relative to projections, persistent security concerns, as well as weaker-than-expected global recovery and tighter international financial conditions.

The Executive Directors welcomed the region’s continued strong growth despite the ongoing challenges and commended the authorities for the progress made in implementing banking sector reforms.

The IMF Directors noted, however, that the medium-term outlook is subject to downside risks, including those from rising public debt burdens and higher external current account deficit. They emphasized that continued fiscal consolidation, more effective monetary policy transmission, and further financial and structural reforms are needed to support private sector-led growth and reduce vulnerabilities

They highlighted the importance of increasing banks’ capital and reducing concentration risks and non-performing loans to foster confidence in the banking sector. Directors also encouraged the authorities to promptly resolve ailing banks, operationalize the new resolution framework, improve banking groups’ supervision, and identify criteria for defining systemic institutions.

  • Countries: Africa

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