West African Economic and Monetary Union: Selected Issues

April2024 IMFCountryReportNo.24/91 WESTAFRICANECONOMICANDMONETARYUNION SELECTEDISSUES ThisSelectedIssuespaperontheWestAfricanEconomicandMonetaryUnionregionalmembercountrieswaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicdiscussionswiththemembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonMarch1,2024. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2024InternationalMonetaryFund March1,2024 WESTAFRICANECONOMICANDMONETARYUNION SELECTEDISSUES PreparedByPreparedbyKnarikAyvazyan,LjubicaDordevic,AlainFeler,FionaHesse-Triballi,OliviaIbrahim,LawrenceNorton,FranciscoRoldan,andCanSever. ApprovedBy AfricanDepartment CONTENTS SECURINGFISCALDISCIPLINEANDCREDIBILITYINWAEMU4 A.Overview4 B.PolicyRecommendationsonStrengtheningFiscalDiscipline5 C.Conclusions14 FIGURES 1.DebtDynamics8 2.FiscalTargetsinContext10References16 RECENTCHALLENGESTOTHECONDUCTOFMONETARYPOLICYINTHEWAEMU17 A.Introduction17 B.TheWAEMU’sMonetaryPolicyFramework18 C.TheShiftofRefinancingAllotmentMethodfromFRFAtoFQVR19 D.SecondaryMarketSovereignDebtPurchasesbytheBCEAO23 E.AddressingtheNeedtoRestoreExternalReserveAdequacy28 TABLE 1.AuctionedSovereignSecurities-BCEAOPurchasesandConcomitantPrimaryIssuances 27 WESTAFRICANECONOMICANDMONETARYUNION ANNEX I.PotentialOperationalizationofaBaselinePathforNet31 KEYBANKINGSYSTEMRISKSINTHEWAEMU33 A.Introduction33 B.CreditRisks35 C.ConcentrationRisks38 D.LiquidityRisks40 E.InterestRateRisks42 F.SovereignBankNexusRisks43 G.ConclusionsandPolicyImplications50 FIGURES 1.SystemicVulnerabilityHeatmap,2010–2235 2.Credit-to-GDPGapEstimates36 3.Banks’SolvencyRatios37 4.WAEMUandSelectedSub-SaharanAfricanCountries:38 5.ConcentrationofBankAssetsandLiabilities39 6.Banks’LiquidityBuffers41 7.Banks'ExposuretoThePublic43 8.EvolutionofBalanceSheetExposures44 9.KeyChannelsoftheSovereign-BankAdverseFeedbackLoopintheWAEMU44 11.Banks’SovereignExposuresandAssociatedRisks46 12.NumberofBanksWithInsufficientCapitalBufferstoCoverSovereignDefault47 13.LossesandAdditionalCapitalRequirements48 14.AssessmentofTheRiskstoDebtSustainabilityofWAEMUCountries4915:AnnualChangeinPublicandPrivate49 ANNEXES I.MacroprudentialMeasuresintheWAEMU52 II.TheRegulatoryTreatmentofBanks’Sovereign55References58 CLIMATECHANGEINTHEWAEMU:TRENDS,MACRO-CRITICALITYANDOPTIONS GOINGFORWARD59 A.ClimateTrendsintheWAEMU59 B.Macro-CriticalityofClimateChangeintheWAEMU61 C.ClimateAdaptionandFinancing64 2INTERNATIONALMONETARYFUND WESTAFRICANECONOMICANDMONETARYUNION FIGURES 1.TemperaturesintheWAEMU60 2.Climate-RelatedEventsintheWAEMU60 3.AgriculturalProductionandFoodInsecurityintheWAEMU62 4.PovertyandGenderInequalityintheWAEMU64 5.ClimateRisksandAdaptationintheWAEMU65 6.ClimateFinanceintheWAEMU67 TABLE 1.MainAgriculturalProducts,Exports,andImportsintheWAEMUCountries63References69 GENDERINEQUALITYINTHEWAEMU:CURRENTSITUATIONAND OPPORTUNITIES71 A.MacroeconomicRelevanceofGenderEquality71 B.GenderInequalitiesintheWAEMU72 C.EconomicGainsfromMovingTowardsGenderEqualityintheWAEMU80 D.ConclusionandPolicies81 FIGURES 1.GenderInequality,EconomicGrowthandIncomeInequality72 2.GenderInequalityinOutcomes73 3.HealthandReproductiveOutcomes744:PrimaryEducation755:SecondaryEducation756:TertiaryEducation767:YearsofSchooling768:LaborForceParticipation77 9.BusinesseswithFemaleOwners78 10.GenderWageGap78 11.FinancialInclusion79 12.GenderEqualityundertheLaw79 13.CumulativeIncomeGainsfromMovingTowardsGenderEqualityintheWAEMU81 14.ClimatedisasterandthesecuritysituationintheWAEMU85 TABLE 1.CorrelationbetweenEconomicGrowthandGenderInequality80References86 INTERNATIONALMONETARYFUND3 SECURINGFISCALDISCIPLINEANDCREDIBILITYINWAEMU1 FiscalconsolidationandthereintroductionoftheWAEMUfiscalframework—ideallyrevampingthefiscalruleunderanewConvergencePact—iscrucialformaintainingdebtsustainability,externalviability,andfinancialstability,whilepromotingaccesstolower-costfinancingandrebuildingfiscalbuffers.The3percentGDPdeficitceilingandthe70percentofGDPdebtceilingenvisagedbytheexpiredruleremainappropriate,whilebetterunderstandingandaddressingthestock-flowadjustments(SFAs)willhelpavoidtheswellingofpublicdebtandrebuildfiscalbuffers.Increasingthedeficitanddebtceilings(forexample,to4percentGDPand80percentGDP,respectively)wouldsignificantlyraisedebtservicingcosts,thusfullyoffsettingthefiscalspacetheyaremeanttocreate.Convergencetoafiscaldeficitof3percentofGDPshouldbeensuredby2025—barringexceptionalcircumstances—asenvisagedbytheauthoritiesinthecontextofseveralIMFprograms.Members’adjustmentplansshouldemphasizedomesticrevenuemobilization,whilecontrollingexpenditure,notablythewagebill.Itisalsoessentialtoimplementaconsistentdefinitionoffiscalindicatorsacrosstheregion,avoidingcarve-outsforparticularspendingitems.Tosecurefiscaldisciplineandcredib