© 2024 International Monetary Fund IMF Country Report No. 24/91 WEST AFRICAN ECONOMIC AND MONETARY UNION SELECTED ISSUES This Selected Issues paper on the West African Economic and Monetary Union regional member countries was prepared by a staff team of the International Monetary Fund as background documentation for the periodic discussions with the member countries. It is based on the information available at the time it was completed on March 1, 2024. Copies of this report are available to the public from International Monetary Fund • Publication Services PO Box 92780 • Washington, D.C. 20090 Telephone: (202) 623-7430 • Fax: (202) 623-7201 E-mail: publications@imf.org Web: http://www.imf.org Price: $18.00 per printed copy International Monetary Fund Washington, D.C. April 2024 WEST AFRICAN ECONOMIC AND MONETARY UNION SELECTED ISSUES Approved ByAfrican Department Prepared By Prepared by Knarik Ayvazyan, Ljubica Dordevic, Alain Feler, Fiona Hesse-Triballi, Olivia Ibrahim, Lawrence Norton, Francisco Roldan, and Can Sever. SECURING FISCAL DISCIPLINE AND CREDIBILITY IN WAEMU _______________________ 4 A. Overview ________________________________________________________________________________ 4B. Policy Recommendations on Strengthening Fiscal Discipline ___________________________ 5C. Conclusions ___________________________________________________________________________ 14FIGURES 1. Debt Dynamics __________________________________________________________________________ 82. Fiscal Targets in Context _______________________________________________________________ 10References _______________________________________________________________________________ 16 RECENT CHALLENGES TO THE CONDUCT OF MONETARY POLICY IN THE WAEMU 17 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 _________________________ 28TABLE 1. Auctioned Sovereign Securities- BCEAO Purchases and Concomitant Primary Issuances ___________________________________________________________________________________________ 27CONTENTS March 1, 2024 WEST AFRICAN ECONOMIC AND MONETARY UNION 2 INTERNATIONAL MONETARY FUND ANNEX I. Potential Operationalization of a Baseline Path for Net _____________________________________ 31 KEY BANKING SYSTEM RISKS IN THE WAEMU ___________________________________________ 33 A. Introduction ________________________________________________________________________________ 33 B. Credit Risks _________________________________________________________________________________ 35 C. Concentration Risks ________________________________________________________________________ 38 D. Liquidity Risks ______________________________________________________________________________ 40 E. Interest Rate Risks __________________________________________________________________________ 42 F. Sovereign Bank Nexus Risks ________________________________________________________________ 43 G. Conclusions and Policy Implications ________________________________________________________ 50 FIGURES 1. Systemic Vulnerability Heatmap, 2010–22 __________________________________________________ 35 2. Credit-to-GDP Gap Estimates _______________________________________________________________ 36 3. Banks’ Solvency Ratios ______________________________________________________________________ 37 4. WAEMU and Selected Sub-Saharan African Countries: _____________________________________ 38 5. Concentration of Bank Assets and Liabilities _______________________________________________ 39 6. Banks’ Liquidity Buffers _____________________________________________________________________ 41 7. Banks' Exposure to The Public ______________________________________________________________ 43 8. Evolution of Balance Sheet Exposures ______________________________________________________ 44 9. Key Channels of the Sovereign-Bank Adverse Feedback Loop in the WAEMU _____________ 44 11. Banks’ Sovereign Exposures and Associated Risks ________________________________________ 46 12. Number of Banks With Insufficient Capital Buffers to Cover Sovereign Default ___________ 47 13. Losses and Additional Capital Requirements ______________________________________________ 48 14. Assessment of The Risks to Debt Sustainability of WAEMU Countries ____________________ 49 15: Annual Change in Public and Private ______________________________________________________ 49 ANNEXES I. Macroprudential Measures in the WAEMU __________________________________________________ 52 II. The Regulatory Treatment of Banks’ Sovereign_____________________________________________ 55 References ___________________________________________