Aftermath of the CFA

JEAN A. P.\eiEME$>T/

Finance & Development, June 1994.) A new to consolidate the progress achieved so far, IINCE the devaluation of strategy had to be found, and the January especially by strengthening the implementa- 1994 devaluation of their common tion of fiscal and structural policies. \ their common currency was the central element of that new strategy. in early 1994, the mem- The devaluation—50 percent in foreign- Expected outcome S currency terms for the CFA franc and 33 per- The new strategy was designed to help ber countries of the CFA cent for the Comorian franc (see chart)—was zone members regain competitiveness by franc zone have made great backed up by tight macroeconomic policies shifting resources from low-growth sectors, and far-reaching structural measures that which were often artificially protected, to sec- strides toward economic were designed to improve the countries' tors where countries enjoyed a comparative recovery. But much remains to growth prospects and restore confidence in advantage. The agricultural sector, which be done to consolidate the initial the zone. employs most of the population, was expected The IMF had been active in providing to be the first to benefit, through higher gains in order to achieve advice to the countries concerned in the period domestic prices for export crops and a shift in sustainable growth with fiscal leading up to the devaluation. Once the deci- sion to devalue had been taken, the IMF The CFA franc zone comprises the seven mem- and external viability over the moved quickly to assist each member country ber countries of the West African Economic and medium term. of the zone in formulating a comprehensive Monetary Union (WAEMU), namely , adjustment program and in mobilizing the , Cote d'lvoire, , , financial resources needed to make the new , and ; the six members of the strategy work (see box on page 25). Central African Economic and Monetary By the early 1990s, it had become clear that The new strategy's objectives for economic Community (CAEMC), namely , the , , the Congo, the repeated attempts at internal adjust- growth, inflation, and the balance of payments , and ; and the ment by the member countries of the CFA in 1994 have been largely met. Progress on the . On January 12, 1994, the exchange fiscal and structural elements of the new strat- franc zone (see box on this page) had not rate of the CFA franc, which had been fixed since been sufficient to cope with the rapidly wors- egy, however, has been uneven, with signifi- 1948, was devalued by 50 percent in foreign- ening economic and financial situations that cant differences between the West African and currency terms, and the Comorian franc (CF) they faced. (See "Striving for Stability: CFA Central African members of the zone. The was devalued by 33 percent at the same time. Franc Realignment," by Jean A.P. Clement, in main challenge now facing all the countries is

Jean A. P. Clement, a French national, is Assistant to the Director of the IMF's African Department.

24 Finance & Development / June 1995

©International Monetary Fund. Not for Redistribution domestic consumption toward local products. age points, and the ratio of investment to GDP The same was expected for the nontraditional by 6 percentage points, during 1994-96. CFA countries Real effective exchange rates and terms Savings would rise mainly owing to the export and import-substitution sectors. With of trade, 1980-94 stronger adjustment in the public sector, improved profitability in these sectors, exist- (weighted by 1994 GDP, 1985=100) ing capacities would be utilized, growth and which would include repayments of arrears. employment would be revived, and private This effort and capital inflows were expected investment would be encouraged. This, to provide scope for increased private sector together with effectively targeted public investment. investment, would lay the basis for further As the balance of payments improved and productivity growth over the medium term. external financial assistance flowed in, net The new strategy thus aimed to revive out- international reserves were programmed to put throughout the zone—after falling during strengthen considerably. The larger coun- 1990-93, real GDP was expected to rise by 1 tries—Cameroon and Cote d'lvoire, which percent on average in 1994, and by 4 to 6 per- account for more than 40 percent of the CFA cent during 1995-96—but cross-country vari- franc zone's GDP—were expected to have a ations were likely to be significant in the short dominant impact on the overall performance term because of differences in the severity of of the zone. the initial economic imbalances. These cross- country variations were expected to diminish How countries fared as a result of increasing economic integration. Overall, the objectives for economic growth, Consumer price inflation in the zone was inflation, and the external position in 1994 expected to rise from 0.5 percent on average have been largely met (see table). Progress during 1990-93 to 31 percent in 1994, and with fiscal and structural policies, however, has been uneven, with particularly significant then to drop to less than 7 percent in 1995, and Sources: IMF, Information Notice System; and World to fall below 5 percent in 1996. The inflation differences between the member countries of Economic Outlook. 1 An upward movement of the real effective rates indicates spike in 1994 reflected the projected direct the West African Economic and Monetary an appreciation. effects of the devaluation on the domestic Union (WAEMU) and those of the Central 2 A downward movement of the terms of trade indicates a loss. prices of imported goods, as well as correc- African Economic and Monetary Community tions in administered prices and wages imple- (CAEMC). In several countries, the problems mented in the devaluation's aftermath. Again, that have emerged stemmed partly from public utilities were lifted, inflation in several cross-country variations were expected on unsettled political situations. However, all countries picked up again somewhat later in account of differences in the degree of open- countries generally benefited from a stronger 1994, but progress in reducing the underlying ness, the terms of trade, and the pace of price world recovery; better terms of trade resulting inflation rate has continued. reforms. Over the medium term, given the from higher commodity prices; and, in several The average annual inflation rate in 1994 is anchor, variations in the infla- cases, favorable weather conditions. estimated at about 33 percent for the zone as a tion rates were projected to decline as a result Inflation. Throughout the CFA franc zone, whole (2 percentage points more than tar- of trade liberalization measures and progress governments kept firm control over nominal geted); 30 percent for the West African coun- toward regional integration. wages in the public sector, and this approach tries (2 percentage points less than targeted); Domestic savings were expected to rise was largely followed by the private sector as and 38 percent for the Central African coun- from their low level and external and internal well. As a result, inflation was quickly tries (5 percentage points more than targeted). imbalances were to be reduced substantially. brought under control after the initial surge in Competitiveness improved, as measured by The ratio of domestic savings to GDP was prices following the devaluation. As tempo- the real effective exchange rate—that is, the programmed to increase by about 9 percent- rary price freezes on a few essential goods and inflation-adjusted exchange rate vis-a-vis the

IMF Supports New Strategy IMF borrowing arrangements were approved for 11 of the 14 member draw under the KbAK (The Congo and Gabon are not eligible because their countries of the CFA franc zone by end-March 1994, and for the remaining per capita incomes exceed the level that defines low-income countries.) 3 by end-September 1994. To put IMF assistance in place as rapidly as Among the five ESAF-eligible countries that had launched their adjust- possible, programs for a number of countries (Cameroon, the Central ment efforts under IMF stand-by arrangements, only Senegal has begun to African Republic, Chad, the Congo, Gabon, Niger, and Senegal) were first implement an ESAF-supported program. During 1994, SDR 357 million supported by stand-by arrangements, with the expectation that these ($508 million) was disbursed out of a total commitment to all CFA franc- would be replaced by annual arrangements under the enhanced structural zone countries of SDR 1.3 billion ($1.9 billion) for 1994-96. adjustment facility (the ESAF is a low-interest-rate borrowing facility for The IMF has also played a critical role in catalyzing financial support for low-income countries) or the extended Fund facility (the Congo and the programs from other sources: about $10 billion of exceptional financial Gabon), provided the programs continued to be implemented satisfactorily. assistance was disbursed in 1994, of which about $7 billion was for debt In other countries where the design of far-reaching reforms was already relief. Shortly after the programs were approved by the IMF's Executive at an advanced stage (Benin, Burkina Faso, Cote d'lvoire, Equatorial Board, the countries benefited from rescheduling arrangements with pri- Guinea, Mali, and Togo), the programs were initially supported by vate and bilateral creditors, the latter worked out under the aegis of the ESAF resources and (for the Comoros) by structural adjustment facility Paris Club. The World Bank has collaborated closely in the design of the (SAF) resources. programs and disbursed about $1 billion of nonproject assistance to CFA At present, 12 of the 14 countries of the CFA franc zone arc eligible to franc-zone countries in 1994.

Finance & Development /June 1995 25

©International Monetary Fund. Not for Redistribution How the CFA franc zone fared in 1993-94 1

WAEMU 2 CAEMC * CFA Franc Zone 1993 1994 1993 1994 1993 1994 Actual Projected Estimated Actual Projected Estimated Actual Projected Estimated

(annual percentage changes)

National income and prices Real GDP -1.3 2.6 3.1 -1.4 -1.1 -0.4 -1.3 1.1 1.5 Consumer prices 0.6 31.7 29.5 6.2 33.0 37.8 3.1 31.2 33.1 External sector Nominal effective exchange rates 3 6.3 ... -43.1 6.7 ... -44.2 6.5 ... -43.6 Real effective exchange rates3 -2.1 ... -35,2 -6,4 ... -32.2 -3.9 ... -33.7 Terms of trade -4.1 -1.4 2.1 1.9 -3.2 0.8 -1.4 -2.2 1.5 Exports—volume -4.0 3.7 1.6 4.3 -0.4 -0.7 -0.3 2.0 0.6 —value (in CFA ) -4.4 115.2 103.6 2.7 93.2 101.7 -1.3 106.0 102.8 Imports—volume -7.9 -0.5 -8.9 0.1 -10.0 -10.4 -4.4 -4.5 -9.5 —value (in CFA francs) -6.1 106.1 81.9 -4.3 69.4 70.7 -5.3 90.6 77.0 Central government finance Revenue" -10.5 49.4 43.6 -15.1 48.9 28.5 -12.6 49.2 36.8 Wagebill 1.5 10.8 11.6 -2.8 -7.5 -7.8 -0.5 2.4 2.7

(percent of GDP) National accounts Total investment 13.1 17.6 15.4 13.4 18.9 19.9 13.2 18.2 17.3 Domestic savings 8.9 13.3 13.0 16.4 24.6 27.6 12.2 18.1 19.3 National savings 3.7 7.8 8.8 8.3 11.1 16.8 6.7 9.2 12.3 Resource balance -4.2 -4.3 -2.5 3.0 5.7 7.7 -1.0 -0.1 2.0 Central government finance Revenue" 15.8 16.4 15.9 20.4 17.2 14.7 17.8 16.7 15.4 Expenditure 5 25.8 15.6 15.6 30.9 14.4 13.6 28.1 15.2 14.7 Balance 5 -10.0 0.8 0.3 -10.5 2.8 1.1 -10.2 1.5 0.7

Sources: Data provided by the respective national authorities and IMF estimates. 1 Excluding the Comoros. 2 Based on a weighted average using 1994 GDP of the respective countries, where applicable. WAEMU stands for West African Economic and Monetary Union; CAEMC stands for Central African Economic and Monetary Community. 3 For the period extending from the end of December 1993 to the end of September 1994. (A minus sign indicates a depreciation.) 4 Grants excluded. 5 Excluding interest payments. ...: Indicates no data available.

zone's main trading partners. During the first enterprises that had been restructured or pri- domestic demand and the sharp increase in nine months of 1994, the CFA franc depreci- vatized, and, therefore, were well placed to saving, especially in the private sector, the bal- ated by about 33 percent in real effective benefit from the devaluation. Producer incen- ance between total investment and domestic terms, broadly as targeted. Wage costs in US tives have been restored by the considerable savings in 1994 is estimated to have been bet- dollar terms—another indicator of competi- increases in producer prices for export crops. ter than expected in all countries except the tiveness—declined by about 40 percent in Meanwhile, tourism has picked up, notably in Congo and Equatorial Guinea. the zone. Senegal. Trade within the zone seems to have Financial resources. Many of the coun- Growth. Real GDP for the zone rose on increased rapidly, albeit from a very low base. tries have benefited from higher-than-pro- average by 1.5 percent in 1994, marginally Most of the other sectors are still undergoing jected commodity prices, which have partly above the original target but indicative of a structural changes, searching for new markets, compensated for shortfalls in the growth of significant turnaround compared with the financing, and suppliers. Activity in the non- export volumes. Reflecting these develop- average annual decline of about 1.0 percent traded goods sector, especially construction ments and the strong increase in national sav- during 1990-93. All but the three largest and domestic services, has tended to remain ings, the foreign reserves of both the Central members of the CAEMC saw positive GDP depressed, except in Benin and Cote d'lvoire. Bank of West African States (BCEAO) and growth rates. The response of output in the In the non-agricultural private sector, entre- the of Central African States tradable goods sectors to the shift in relative preneurs have adopted a "wait and see" atti- (BEAC) rose sharply ($1.9 billion) during 1994. prices has been more rapid than anticipated in tude with regard to private investment, This also mirrored a much more rapid than most countries, and the structure of consump- preferring to use slack capacity first. The projected reconstitution of money balances tion has clearly begun to shift in favor of sluggishness in the private sector may reflect in CFA francs, financed partly by a repatria- locally produced goods, such as food crops, several factors, including the significant con- tion of flight capital. Along with shortfalls vegetables, livestock, and, in some cases, light traction in total domestic demand, the slow in domestic credit, reflecting lower-than- manufactures. pace of repayment of governments' domestic expected demand for credit throughout the There are also indications that production in arrears, the low rate of public investment, and zone, there has been a substantial improve- the export-oriented agro-industrial and textile the slow implementation of structural ment in the liquidity of banks. This has posed sectors has performed well, particularly in reforms. With the contraction in overall a new challenge for .

26 Finance & Development /June 1995

©International Monetary Fund. Not for Redistribution External debt. All countries have ernments' control. There have also been tinued prudent wage policy and on efforts to reached, or are in the process of reaching, com- larger-than-expected shifts in the structure of streamline the civil service. prehensive agreements with the Paris Club to consumption and in the composition of Another important challenge is to intensify secure debt relief, largely on concessional imports, including those involved in intra- structural reforms. A strengthening of the terms. The countries have also benefited from zone trade, toward lower-taxed goods. More administrative capacity of the public sector, substantial debt cancellations from bilateral generally, however, governments have had dif- particularly in tax and treasury administra- creditors, in particular France, as well as ficulty with tax administration, notably cus- tion, should facilitate better management of exceptional assistance from regional and mul- toms tax collections, and tax exemptions the limited resources available and the tilateral institutions. The recent agreement of continue to be widespread. achievement of governments' objectives in the Paris Club creditors to increase the degree The slow pace of implementation of struc- social spending and capital outlays. To of debt reduction granted to the poorest coun- tural reforms, partly owing to administrative respond to this challenge, in collaboration tries to two thirds of the stock of debt to offi- weaknesses, is the second area where perfor- with the World Bank, priorities for cial creditors should also help in further mance has fallen short of expectations in sev- action—encompassing comprehensive public alleviating the latter's debt-service burden. eral countries. These shortcomings resulted expenditure reviews, civil service reform, the Debt to private creditors is important in a few in the late adoption of revised government design of appropriate public investment pro- countries. The governments of these countries budgets, which, in turn, led to delays in imple- grams, the strengthening of the health and are negotiating with private banks and other menting public investment programs and education sectors, and public enterprise creditors to conclude debt operations on terms in meeting the higher targets for social reform—have been identified in all countries. that are compatible with their external pay- expenditure. The development of a strong private sector ments capacity. The total amount of debt relief capable of becoming the engine of economic is estimated at about $7 billion for 1994. Future challenges recovery and growth is also key to the success Regional integration. Important prog- The main challenges for the CFA franc of the strategy. This will require simplification ress has been made in enhancing economic countries in the period ahead are to consoli- of administrative procedures; acceleration of and financial integration. With the signing of date the progress achieved thus far, especially privatization; liberalization of the remaining a new treaty on January 10,1994, and its rati- by ensuring that the gains in competitiveness controls on prices, labor markets, and external fication in June 1994, West African Monetary are not eroded, and to strengthen policy imple- and domestic commercial activity; and com- Union members established the West African mentation in areas where difficulties have pletion of the restructuring of the financial Economic and Monetary Union (WAEMU). been encountered. In the area of government sector. Also, reform of the instruments of The WAEMU's Economic Commission and revenue, measures will be needed to enhance monetary policy, within the framework of the High Court of Justice were inaugurated in late performance. As far-reaching changes in the two regional central banks, is essential to pro- January 1995 in Ouagadougou, Burkina Faso. tax structure cannot be achieved in the short mote the development of more liberalized, effi- Similarly, the Central African Economic and term, tax administration has to be made more cient, and truly regional financial markets. In Monetary Community (CAEMC) was estab- efficient in order to raise revenue. At the same this regard, decisive steps will have to be lished on March 16,1994, and negotiations on time, to achieve a revenue structure that is less taken to develop the regional money and inter- conventions that give content to the CAEMC vulnerable to external shocks and allow a bank markets, as well as a broad-based mar- are nearing completion. To avoid unsustain- reduction of the tax burden on the modern sec- ket for government securities and long-term able fiscal deficits and, more generally, exces- tors of the economy, as well as on exports, instruments for investment financing. A plan sively high government debt that could governments need to implement in a timely of action will have to be defined rapidly to jeopardize the functioning of the zone, the two fashion measures to broaden the tax base and enable the two central banks to move toward a subregions hope to strengthen regional reduce the scope of exemptions. market determination of interest rates, surveillance, particularly with the help of con- The IMF has provided technical assistance develop the tools of indirect monetary control, vergence indicators for the fiscal position and in several countries to help implement tax and respond effectively to surges in bank li- external debt. Other initiatives launched reforms that are already in progress or to quidity. The pursuit of these structural recently include plans for developing financial identify plans of action in the revenue area. In reforms should be supported by the adoption markets, codes for business and insurance addition, IMF and World Bank staff are work- of an enabling and stable legal framework for activities, and social security, and for the ing closely with CFA franc zone governments economic activity, buttressed in several cases development and monitoring of a regional eco- to help strengthen the implementation of by measures to revamp the judiciary. nomic data base. regional customs and tax reforms. The two subregions would benefit from Fiscal performance and structural Governments also need to ensure that the strengthening their efforts to improve regional reforms. Progress has been slower than orig- targeted outlays for the social safety nets and integration and economic cooperation, so as to inally anticipated in mobilizing government basic social services are achieved, and that avoid inconsistent policies among countries revenue and implementing structural reforms. more attention is given to the programming and to facilitate implementation of the com- Total government revenue in the zone, exclud- and implementation of public investment. mon regional elements of tax and budgetary ing grants, increased by only 37 percent in Sound budgetary policy depends on stronger policy, as well as financial sector reform and 1994, compared with the 49 percent originally control of public expenditure and avoidance of the expansion of regional markets and trade. projected. The difference is largely due to extrabudgetary spending. At the same time, Finally, the current efforts to achieve both shortfalls in government revenue in the expenditure policies have to remain flexible macroeconomic adjustment and structural Central African members of the zone (see and adapt to the evolution of revenues, to reforms need to be pursued in a sustained and table). A number of factors have been at avoid any deterioration in the budget balance. determined manner, to avoid slippages and the root of the shortfalls. In some cases, these The success of the strategy in achieving the consolidate the credibility of the bold adjust- factors—such as strikes, civil unrest, and desired restructuring and flexibility in public ment efforts that the CFA franc countries have disruption of trade routes—were outside gov- expenditure will also hinge critically on a con- so far undertaken with success. IB

Finance & Development /June 1995 27

©International Monetary Fund. Not for Redistribution