West African Economic and Monetary Union: Selected Issues

The WAEMU has seen strong growth and rising living standards over the past decade. Economic growth averaged 5.4 percent in 2013-2019 and 5.8 percent in 2021-2023. Policy efforts from regional and national authorities have cushioned the impact of several external and internal shocks, prompting a solid economic recovery since the COVID-19 pandemic, despite increasing security issues. Meanwhile, the Human Development Index has increased from 0.44 in 2013 to 0.48 in 2021.

The BCEAO has conducted a comprehensive reform during the past five years. The regulatory and prudential framework were aligned with international standards and the conditions for supervision have been strengthened, although the efforts must be continued (liquidity ratio/net stable funding ratio and tools for monitoring liquidity, transfers of ownership, acquisitions of holdings, guidelines on nonperforming claims, and anti-money laundering and combating the financing of terrorism—AML-CFT). The transition to Basel III has made it possible to incorporate additional capital requirements, while the rules applicable to credit institutions were upgraded with the 2017 publication of four circulars on governance, risk management, internal supervision, and compliance.

Following a serious deterioration of the competitive position of the WAEMU region in the 1980s and the eary 1990s, the countries took steps that have led to a significant turnaround in economic activity, a drop in inflation, and increases in output, exports and investment. This study describes policy issues that the region continues to face and suggests how the WAEMU countries can address them.

In 2010, average inflation has remained low in all West African Economic and Monetary Union (WAEMU) countries, but has edged up in the second half of the year. After a moderate fiscal easing by about 11⁄2 percentage points of GDP in 2009, mostly the result of higher capital spending, the area-wide average deficit is estimated to have declined slightly to 3.1 percent of GDP in 2010. A compression of imports in 2009, the region’s external current account deficit is estimated to have returned to about 51⁄2 percent of GDP in 2010.

Selected Issues

The seventh edition of 'Economics of Monetary Union' provides a concise analysis of the theories and policies relating to monetary union. De Grauwe analyses the costs and benefits associated with having one currency as well as the practical workings and current issues involved with the Euro. In the first part of the book the author considers the implications of joining a monetary union through discussion based on an economic cost-benefit analysis. The second part of the book looks at the reality of monetary unions by analysing Europe's experiences, such as how the European Central Bank was designed to conduct a single monetary policy. The seventh edition has been revised to include more discussion of monetary unions outside Europe and, to reflect this fast-moving area, updated coverage of new member states in transition and an updated discussion of the stability pact. Online Resource Centre An online resource centre, featuring supplements for lecturers including PowerPoint slides and an instructor manual, has been updated for this edition.

The staff report on discussions with regional institutions of the West African Economic and Monetary Union is presented. The region faced a number of challenges in 2011, with the intensification of the political crisis in Côte d’Ivoire and a large increase in global food and fuel prices. A materialization of downside risks could require a monetary policy relaxation for the union and differentiated fiscal responses across member countries. The drought in the Sahel may also require a more active fiscal policy in the affected countries.

This Selected Issues paper focuses on the need of improving liquidity management and the operational framework of monetary policy in Central African Economic and Monetary Community (CEMAC). Disconnected policy and lending rates reflect the ineffective interest rate channel of monetary policy transmission while the shallow domestic banking system and the underdeveloped financial markets induce weaknesses of both the credit and asset price channels. In the absence of an efficient interest rate channel, liquidity plays an important role in the conduct of monetary policy. The CEMAC economy is vulnerable to external shocks and its banking system potentially exposed to liquidity shocks. Successful monetary policy implementation requires a set of appropriate instruments to cope with various liquidity shocks. The origins of the surplus liquidity should be well known upfront and addressed with a suitable combination of measures, including foreign exchange, fiscal and financial system development policies. The paper recommends that the Bank of Central African States should investigate all the means to centralize and analyze relevant information for autonomous factors forecasts, including daily operations of Treasuries and foreign exchange operations from its accounting system, as well as banknotes in circulation.

West African Economic and Monetary Union (WAEMU) countries face a well-known dilemma between the need to provide shock-smoothing mechanisms and the lack of adequate mechanisms to do so. WAEMU countries are subject to frequent and, to a large extent, asymmetric shocks. They have remained poorly diversified and vulnerable to external shocks, such as changing weather conditions. In addition to limited shock-smoothing mechanisms at the regional level, WAEMU members’ ability to respond to shocks through national policies is also constrained by limited fiscal space and the need to preserve external stability—not only at the national level but also at the union level. In this context, developing a well-defined fiscal rule framework at the national level would help to build the necessary fiscal space for shock-smoothing. In addition, the development of specific shock-smoothing mechanisms—including a more developed and integrated financial sector—would also be critical. In addition, promoting financial development is also a challenge, which needs to be addressed in tandem with an adequate surveillance system. Some of these challenges have been faced by other monetary unions, such as the euro area.