West African Economic and Monetary Union: Selected Issues

SELECTED ISSUES ThisSelected IssuespaperontheWest African Economicand Monetary Unionregionalmember countries was prepared by a staff team of the International Monetary Fund asbackground documentation for the periodicdiscussionswith the member countries. It isbased on the information available at the time it was completed onMarch 1,2024. Copies of this report are available to the public from International Monetary Fund•Publication ServicesPO Box 92780•Washington, D.C. 20090Telephone: (202) 623-7430•Fax: (202) 623-7201E-mail:publications@imf.org Web:http://www.imf.orgPrice: $18.00per printed copy International Monetary FundWashington, D.C. WEST AFRICAN ECONOMICAND MONETARY UNION SELECTED ISSUES ApprovedByAfrican Department Prepared ByPrepared by Knarik Ayvazyan, Ljubica Dordevic,Alain Feler, Fiona Hesse-Triballi, Olivia Ibrahim, LawrenceNorton, Francisco Roldan, and Can Sever. CONTENTS SECURING FISCAL DISCIPLINE AND CREDIBILITY IN WAEMU_______________________4 A. Overview ________________________________________________________________________________4B. Policy Recommendations on Strengthening Fiscal Discipline ___________________________5C. Conclusions ___________________________________________________________________________14 FIGURES 1. Debt Dynamics __________________________________________________________________________82. Fiscal Targets in Context_______________________________________________________________10 References _______________________________________________________________________________16 RECENT CHALLENGES TO THE CONDUCT OF MONETARY POLICY IN THE WAEMU17 A. Introduction ___________________________________________________________________________17B. The WAEMU’s Monetary Policy Framework ___________________________________________18C. The Shift of Refinancing Allotment Method from FRFA to FQVR______________________19D. Secondary Market Sovereign Debt Purchases by the BCEAO _________________________23E. Addressing the Need to Restore External Reserve Adequacy _________________________28 TABLE 1. Auctioned Sovereign Securities- BCEAO Purchases and Concomitant Primary Issuances___________________________________________________________________________________________27 ANNEX I. Potential Operationalization of a Baseline Path for Net _____________________________________31 A.Introduction ________________________________________________________________________________33B.Credit Risks _________________________________________________________________________________35C.Concentration Risks ________________________________________________________________________38D.Liquidity Risks ______________________________________________________________________________40E.Interest Rate Risks __________________________________________________________________________42F.Sovereign Bank Nexus Risks ________________________________________________________________43G.Conclusions and Policy Implications________________________________________________________50 FIGURES 1. Systemic Vulnerability Heatmap, 2010–22 __________________________________________________352. Credit-to-GDP Gap Estimates_______________________________________________________________363. Banks’ Solvency Ratios______________________________________________________________________374. WAEMU and Selected Sub-Saharan African Countries: _____________________________________385. Concentration of Bank Assets and Liabilities _______________________________________________396. Banks’ Liquidity Buffers _____________________________________________________________________417. Banks' Exposure to The Public ______________________________________________________________438. Evolution of Balance Sheet Exposures ______________________________________________________449. Key Channels of the Sovereign-Bank Adverse Feedback Loop in the WAEMU _____________4411. Banks’ Sovereign Exposures and Associated Risks ________________________________________4612. Number of Banks With Insufficient Capital Buffers to Cover Sovereign Default ___________4713. Losses and Additional Capital Requirements ______________________________________________4814. Assessment of The Risks to Debt Sustainability of WAEMU Countries ____________________4915: Annual Change in Public and Private ______________________________________________________49 ANNEXES I. Macroprudential Measures in the WAEMU__________________________________________________52II. The Regulatory Treatment of Banks’ Sovereign_____________________________________________55 References ____________________________________________________________________________________58 CLIMATE CHANGE IN THE WAEMU: TRENDS, MACRO-CRITICALITY AND OPTIONSGOING FORWARD__________________________________________________________________________59 A.Climate Trends in the WAEMU _____________________________________________________________59B.Macro-Criticality of Climate Change in the WAEMU____________________________________