West African (Economic and) Monetary Union

West African (Economic and) Monetary Union is a currency union whose exchange rate has been fixed to the French franc, with a major devaluation in 1994, and then, from 1999, to the euro. The scope for monetary policy is limited, but its operation has evolved slowly from direct towards indirect monetary instruments, and the union is becoming more integrated on financial and other dimensions.

YearsTargets and attainmentClassification
1974-2017under arrangements inherited (with some modifications in agreements of late 1973) from the colonial period, the West African Monetary Union (Union Monétaire Ouest-Africaine), then from 1994 West African Economic and Monetary Union (WAEMU, or Union Economique et Monétaire Ouest-Africaine, UEMOA) covers Bénin, Burkina Faso, Côte d’Ivoire, Niger, Sénégal and Togo, plus from 1984 Mali and from 1997 Guinea-Bissau; central bank, Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), originally operated from France but from 1978 located in Dakar with African governor; CFA (Communauté financière d’Afrique) franc is fixed to French franc until 1998, then from 1999 to euro; peg is supported by operations account with French Treasury, in which 65% (from 2005 50%) of central bank’s forex reserves must be held (sub-accounts are held for each country): French Treasury pays interest on those balances, guarantees the convertibility of CFA francs into SDRs through unlimited overdraft facility, and retains minority representation on board of BCEAO; commitment to exchange rate peg plus high capital mobility between union and France mean little scope for independent monetary policy; 1975 interbank call money market with interest rates set by central bank facilitates flows between member countries; lending to governments is limited to 20% of fiscal receipts of previous year; central bank sets overall and national credit and refinancing targets, split between credit to government and rest of economy, and national credit committees decide allocation within each country; if ratio of gross foreign assets to sight liabilities falls below 20% for three consecutive months or if operations account goes negative, BCEAO is required to tighten policy, which could involve increasing discount rate and reducing rediscount ceilings, but interest rates infrequently adjusted; reforms from 1989 aimed at moving from quantitative credit controls to indirect monetary instruments; region-wide banking supervision from 1990; late 1993 interest rates liberalised, money market auctions with BCEAO intervention introduced, interbank market with freely negotiated rates set up, reserve requirements (from 2002 differentiated between countries) introduced; January 1994, after long-term decline in terms of trade and despite sustained but ultimately unsuccessful efforts at internal adjustment, devaluation of 50% (in foreign currency terms), followed by stabilisation programmes in each country and increased focus on regional integration; mid-1994 credit controls abandoned; by late 1990s main instruments are central bank bill auctions and repo operations; policy tightened in response to speculation about new devaluation before start of EMU; 1999 peg switched to euro with no change to arrangements with French Treasury; 1999 set of convergence criteria agreed; from 1999 fluctuating political tensions in Côte d’Ivoire, largest economy in WAEMU, with periodic armed conflict; persistence of excess liquidity in banks; 2003 monetary (central bank) financing of governments to be replaced by issuance of securities on regional financial market; 2004 new real time gross settlement system; from 2002 interbank market becomes more shallow and limited to intra-group transactions, but treasury bill market grows; relatively little effect from GFC, because of relative lack of integration into world financial system, but monetary policy accommodating; 2010 central bank institutional framework reforms including monetary policy committee with clear inflation objective, more transparency and more independence; late 2010 reserve requirements made uniform across countries; convergence criteria agreed in 1999, especially first-order fiscal criteria, still not all fulfilled; 2012 disruption from military coups Guinea-Bissau and Mali, jihadi activity northern Mali; monetary transmission across union still weak; 2016-17 efforts to activate interbank market in context of bank segmentation, with limited success; some gaps still in statistical databaseaugmented exchange rate fix AERF

Selected IMF references: Côte d’Ivoire – RED 1974 pp68-70; Côte d’Ivoire – RED 1976 pp38-40; Senegal – RED 1985 pp50-3; Senegal – RED 1989 pp48-50; A Review of the CFA Franc Arrangements, 1990, especially pp3-12, 18-21, 37, 44-51; Common Policy Issues of the CFA Franc Countries, 1994, pp4-17, 22-5, 69-70; CFA Franc Countries – Recent Adjustment Experience and Policy Issues, 1995, pp2-4, 15-16, 27-8, 132-6, 137-9; REDRPI 1998 pp11-14; REDRPI 2000 pp8, 17, 19-22; REDRPI 2001 pp17-20, 23; REDRPI 2003 pp14-17; REDRPI 2004 pp16-18, 20; SI 2006 pp67-9; REDRPI 2006 pp9-10, 13-14; SI 2007 pp49-50, 52-3; SR 2011 pp8-9, 14-17; SR 2013 pp13, 19, 52; SR 2014 pp46-53; SR 2017 pp5-6, 8, 14-16, 45-9; Program Design in Currency Unions – Policy Frameworks of the West African and Central African Monetary Unions, 2018, pp4-7; SR 2018 pp13-15, 40-1.

Other references: Boughton (1991); Masson and Pattillo (2005, pp15-16, 21-4, 46-8); Wolf et al. (2008, p46).

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