West African Economic and Monetary Union: Staff Report on Common Policies of Member Countries�Regional Consultation on Economic Issues and Policies�Staff Report, Public Information Notice Informational Annex, Staff Statement, Executive Director�s Statement

Abstract

Recent economic developments:The WAEMU has weathered the global financial crisis relatively well. A recovery has been supported by broadly appropriate monetary and fiscal policies, a revival in the region's main trading partners, and a pick-up in growth in Guinea-Bissau and Togo. Economic outlook and risks:The economic recovery is expected to continue in the baseline scenario, under the assumption that the crisis in Côte d'Ivoire comes soon to a peaceful end. But risks are considerable. In particular, the crisis in Côte d'Ivoire, if not resolved soon, risks having significant negative spillover effects, reducing growth prospects and increasing human tragedy. A more sluggish global economy could also slow the recovery by dampening exports, remittances, and capital inflows. Globally rising food and fuel prices, exacerbated by regional trade disruptions stemming from the crisis in Côte d'Ivoire, pose upside inflationary risks. Key policy priorities:Staff and the authorities agreed that achieving higher growth and reducing vulnerabilities requires a stable political and macroeconomic environment and a faster pace of reforms to address key structural constraints, including infrastructure bottlenecks. Macroeconomic policies:Over the medium term fiscal policy must balance aggregate demand effects, investment needs to overcome severe infrastructure deficiencies, and debt sustainability considerations. The central bank should stand ready to tighten monetary policy, if rising food and fuel prices were to spill over into core inflation and inflation expectations. Laudable progress in implementing a new monetary policy framework needs to be supported by additional analytical underpinnings and a clear and transparent communication strategy.Competitiveness: Fostering competitiveness is critical, in particular non-price competitiveness, including better infrastructure, quality of institutions, and trade integration. The past year's weakness of the euro-to which the CFA franc is pegged-has helped to counteract some of the previous erosion of price competitiveness.Financial sector: Notwithstanding progress made to date, the pace of reform needs to be accelerated. The 2009 slowdown of economic activity has further weakened asset quality. To strengthen supervision, more timely collection of financial soundness indicators and stepped-up financial stability analysis will be important. The sector's contribution to financing growth should be strengthened through further institutional reforms, including those that facilitate the use of collateral, information sharing, and maturity transformation.