IMF Concludes Regional Consultation with West African Economic and Monetary Union

Washington, DC : On February 11, the Executive Board of the International Monetary Fund (IMF) concluded the regional consultation[1]with the West African Economic and Monetary Union (WAEMU) on February 11, 2022.

The WAEMU has so far demonstrated strong resilience to the Covid crisis. Nonetheless, the region has been hard hit by the Omicron variant and security risks continue to increase in some countries. Despite these headwinds, the economic rebound that started in the second half of 2020 firmed up in 2021, while fiscal and monetary policies remained supportive. External reserves have risen to comfortable levels and the financial system appears to be broadly sound. Inflation has exceeded the 3 percent ceiling of the BCEAO's target band since April 2021, mainly on account of higher domestic and imported food prices.

Growth is expected to further accelerate to about 6 percent in 2022, primarily driven by a rebound in net exports and inflation is projected to return to the BCEAO's target band by the end of the year. A gradual fiscal consolidation is expected to start this year and bring the aggregate fiscal deficit to 3 percent of GDP by 2024. There are however significant downside risks to the outlook, particularly given slow and uneven progress with vaccination, the possibility of further deterioration of security risks and political uncertainty, and the likely tightening of global financial conditions.

Executive Board Assessment[2]

Executive Directors welcomed the region's strong resilience to the COVID crisis and that the recovery has firmed up in 2021. Directors noted important downside risks to the outlook, particularly from the evolution of the pandemic, a tightening in global financial conditions, deterioration in security conditions, and political instability. They underscored that efforts to ensure macroeconomic sustainability, while limiting scarring and supporting the recovery are crucial.

Directors agreed that a return to the aggregate fiscal deficit ceiling of 3 percent of GDP by 2024 is essential to maintain an adequate level of external reserves, limit the risk of regional financial market pressures, and ensure debt sustainability. The credibility of the medium-term adjustment path would be enhanced by re-establishing the WAEMU's Convergence Pact. Directors emphasized that the fiscal adjustment should promote an inclusive recovery. They recommended implementing revenue-enhancing measures, protecting priority social and infrastructure expenditure, and prioritizing vaccine rollout. Directors highlighted the importance of using the SDR allocation in a way that preserves fiscal sustainability and external stability.

Directors concurred that the accommodative monetary policy stance remains appropriate. They urged the BCEAO to stand ready to tighten monetary policy if the external position weakens or persistent inflationary pressures emerge. Directors welcomed the BCEAO's continuing efforts to modernize its policy and governance frameworks. They noted that reserves are adequate.

Directors welcomed the progress on finalizing the bank resolution framework and encouraged its full operationalization. They stressed the need to reduce the high reliance of some banks on BCEAO refinancing and to address structural fragilities in the microfinance institutions sector. Directors concurred that enhancing the depth and liquidity of the sovereign security market remained a priority.

Directors agreed that countering the possible scarring effects of the crisis would require strong actions at the regional and national levels to boost productivity growth and stimulate private investment. They noted that regional-level priorities were to foster trade integration, enhance regional competitiveness, and accelerate the implementation of regional infrastructure projects.

The views expressed by Executive Directors today will form part of the Article IV consultations with individual member-countries that take place until the next Board discussion of WAEMU common policies.