20220301-IMF-West_African_Economic_and_Monetary_Union_Staff_Report_On_Common_Policies_for_Member_Countries-Press_Release_Staff_Report_and_Statement_by_the_Executive_for_the_WAEMU_68页_2mb

Summary of the IMF Staff Report on WAEMU Common Policies

Core Content

The IMF Staff Report on the West African Economic and Monetary Union (WAEMU) outlines the region's economic performance and policy responses in the aftermath of the COVID-19 pandemic, as well as the outlook for 2022 and beyond. The report highlights the region's resilience to the crisis, the progress made in recovery, and the ongoing challenges related to fiscal sustainability, inflation, and external risks.

Main Views and Key Information

Economic Performance

• Resilience to the Pandemic: The WAEMU region showed strong resilience to the initial impact of the pandemic, with a recovery that gained momentum in 2021.
• Growth: GDP growth in 2021 was estimated at 5.7 percent, driven by a rebound in private domestic demand and net exports.
• Inflation: Regional inflation has exceeded the BCEAO's target band (1-3 percent) since April 2021, mainly due to rising domestic and imported food prices. It is expected to return to the target band by the end of 2022.
• External Reserves: External reserves have increased to comfortable levels, reaching USD 23.7 billion by end-November 2021, with an import cover of 5.8 months.
• Financial System: The financial system remains broadly sound, with improved bank capital adequacy and reduced non-performing loans (NPLs) in 2021.

Fiscal Policy

• Fiscal Deficit: The overall fiscal deficit reached 5.9 percent of GDP in 2021, with a gradual consolidation expected to bring it back to 3 percent of GDP by 2024.
• Adjustment Strategy: The fiscal adjustment is expected to be more focused on expenditure containment than revenue mobilization, with a significant portion of retrenchment on the current spending side.
• Vaccination and Social Spending: The IMF recommends accelerating vaccination efforts and protecting priority social and infrastructure expenditures to support an inclusive recovery.
• Debt Management: Debt levels are estimated at 56 percent of GDP in 2021, with the need to ensure debt sustainability through fiscal consolidation and prudent borrowing.

Monetary Policy

• Monetary Stance: An accommodative monetary policy has been appropriate to support recovery, but the BCEAO should be prepared to tighten policy if inflationary pressures persist or external conditions weaken.
• Interest Rates: The policy rate has remained at 2 percent since June 2020, and the average interbank rate has declined to near the policy rate.
• Sovereign Yields: Sovereign yields have declined, and the average maturity of bonds has increased due to the issuance of 7 and 10-year bonds by several WAEMU countries.

Financial Sector

• Banking Sector: The WAEMU banking system has remained resilient, with an increase in average bank capital adequacy ratios.
• Microfinance Institutions (MFIs): MFIs have faced significant structural fragilities, with NPLs rising sharply in 2020 before decreasing slightly in 2021.
• Refinancing Reliance: Some commercial banks have high reliance on BCEAO refinancing, which poses a vulnerability. The IMF encourages reducing this dependence.

Structural Reforms

• Regional Integration: Enhancing regional integration through trade, competition, and cross-border infrastructure development is critical to mitigating the scarring effects of the pandemic.
• Convergence Pact: Reinstating the WAEMU's Convergence Pact is seen as essential for enhancing the credibility of the medium-term fiscal adjustment path.
• Financial Inclusion: Strengthening financial market development and inclusion remains a priority for the region.

Risks and Challenges

• Downside Risks: The economic outlook faces significant downside risks, including slow vaccination progress, worsening security conditions, and political uncertainty.
• Global Financial Conditions: Tightening global financial conditions could pose a challenge to the region's economic stability.
• Security Situation: The security situation in the Sahel region has deteriorated, with increased incidents of violence and fatalities, affecting countries like Burkina Faso, Mali, and Niger.

Conclusion

The IMF Executive Board concluded that the WAEMU region has shown resilience to the pandemic and is on track for a recovery, but continued attention is needed to address fiscal sustainability, inflation, and external risks. The report recommends a gradual fiscal consolidation, maintaining an accommodative monetary stance, and fostering financial market development and regional integration to ensure long-term economic stability and growth.