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

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the regional consultation [1] with the West African Economic and Monetary Union on February 8, 2021.

After almost a decade of strong growth, the West African Economic and Monetary Union (WAEMU) region is facing severe challenges from a triple crisis impacting health, the economy and security. In part, because of drastic measures taken early on, the Covid-19 virus seems to have spread at a slower pace and with a lower fatality rate in WAEMU countries than on average in Sub-Saharan Africa. Economic activity decelerated sharply in March-June 2020, particularly in the commerce, construction, transportation and hospitality sectors. But a rebound was observed in the third quarter. Both fiscal and monetary policies were relaxed significantly in 2020 to contain the pandemic and support the economy.

For 2021, growth is projected at 5.4 percent, mostly driven by a rebound in private consumption and private investment, reflecting the relaxation of lockdown constraints and the return of foreign direct investment. A gradual fiscal consolidation is expected to start this year and bring the aggregate fiscal deficit to 3 percent of GDP by 2023. There are however significant downside risks to the outlook, and new virus outbreaks or security shocks could derail the recovery and create additional fiscal pressures.

Executive Board Assessment [2]

Following the Executive Board discussion, Mr. Mitsuhiro Furusawa, Acting Chair and Deputy Managing Director, made the following statement:

Executive Directors agreed with the thrust of the staff appraisal. They noted the triple crises facing the region (health, economic, and security) and commended the authorities for measures taken early on to contain the spread of the COVID-19 virus, as well as for the monetary and fiscal measures to support the region’s economies. Looking ahead, in view of the high uncertainty and constrained fiscal space, being prepared to respond to a deterioration in the economic outlook and further propagation of the virus will be important.

Directors concurred that a gradual return of the region to the aggregate fiscal deficit ceiling of 3 percent of GDP by 2023 would support internal and external stability. Converging toward the fiscal deficit anchor is essential to maintain an adequate level of external reserves, limit the risk of pressures on the regional financial market, and ensure debt sustainability. A number of Directors saw merit in granting some flexibility to countries facing security risks. Directors cautioned that consolidation should not harm inclusive growth by protecting priority social and infrastructure spending and shifting to targeted policies. Enhancing revenue mobilization, public financial management, and fiscal transparency will also be crucial. Against this background, Directors noted that the upcoming reform of the regional fiscal governance framework would provide an opportunity to anchor the consolidation path.

Directors welcomed the measures taken by the BCEAO in response to the pandemic, which have prevented a tightening of financial conditions. Monetary policy could be relaxed further if the economic outlook deteriorates, provided that an adequate buffer of foreign exchange reserves is maintained.

Directors agreed that the loan forbearance framework set up in March 2020 has provided relief to solvent firms and households impacted by the crisis, but stressed that banks should not relax the monitoring of customers in difficulty. Capital shortfalls in the banking system that could emerge from the crisis would call for targeted and proactive actions from the supervisor. Making the bank resolution framework fully operational in 2021, as planned by the authorities, would be essential to ensure that nonviable banks can be promptly intervened and resolved. Directors urged close monitoring of the microfinance sector and strengthening AML/CFT supervision.

Directors supported the authorities’ intention to push ahead with structural reforms and regional infrastructure investment to enhance competitiveness. They also highlighted the need to continue to support the development of regional financial markets.