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Olivier Basdevant, Patrick A. Imam, Mr. Tidiane Kinda, and Ms. Aleksandra Zdzienicka
West African Economic and Monetary Union (WAEMU) countries face a well-known dilemma between the need to provide shock-smoothing mechanisms and the lack of adequate mechanisms to do so. WAEMU countries are subject to frequent and, to a large extent, asymmetric shocks. They have remained poorly diversified and vulnerable to external shocks, such as changing weather conditions. In addition to limited shock-smoothing mechanisms at the regional level, WAEMU members’ ability to respond to shocks through national policies is also constrained by limited fiscal space and the need to preserve external stability—not only at the national level but also at the union level. In this context, developing a well-defined fiscal rule framework at the national level would help to build the necessary fiscal space for shock-smoothing. In addition, the development of specific shock-smoothing mechanisms—including a more developed and integrated financial sector—would also be critical. In addition, promoting financial development is also a challenge, which needs to be addressed in tandem with an adequate surveillance system. Some of these challenges have been faced by other monetary unions, such as the euro area.
International Monetary Fund. Finance Dept.

Plan Disbursements relative to commitments related with the Regional Economic Plan Doing Business Indicators Share of (intraregional) cross-border bank-to-bank transactions (both in value and volume) Detailed targets, guidelines, and/or rules for member countries have not yet been determined and the WAEMU’s correcting mechanism for failures of first-order criteria has never been enforced. Sources: WAEMU authorities; and IMF staff. 1 Total fiscal revenues, excluding grants, minus total expenditures excluding foreign-financed investment expenditure. From

Patrick A. Imam, Ms. Christina Kolerus, Raymond Bernard, and Mr. Alexei P Kireyev

better reporting. Their track record suggests that problems have been permitted to persist longer than desirable. Many banks in the WAEMU have indeed been insolvent for long periods without being resolved. These “zombie banks” have incentives to gamble for resurrection and can have an adverse impact on other banks. More forceful action would therefore be desirable in the future, including with a view to reducing intervention costs. Absent a robust and effective resolution regime, the WAEMU authorities have little choice but to bail out such banks at great public

Patrick A. Imam and Ms. Christina Kolerus
The financial system in the WAEMU remains largely bank-based. The banking sector comprises 106 banks and 13 financial institutions, which together hold more than 90 percent of the financial system’s assets (about 54 percent of GDP at end-2011). Five banks account for 50 percent of banking assets. The ownership structure of the sector is changing fast, with the rapid rise of foreign-owned (pan-African) banks. This contributes to higher competition but also rising heterogeneity in the banking system, with large and profitable cross-country groups competing with often weaker country-based (and sometime government-owned) banks. Nonbank financial institutions are developing quickly, notably insurance companies, but remain overall small. This paper presents a detailed analysis of the banking system.
International Monetary Fund. African Dept.

1. Our WAEMU authorities thank staff for their engagement with the regional institutions and the candid interactions on a broad range of issues facing the Union. Our authorities are in general in broad agreement with staff’s analysis and policy recommendations, especially as regards the financial sector and structural transformation. They also very much appreciate the quality of the Selected Issues paper which will provide them with important inputs in the design of economic strategies. However, they view staff’s assessment on medium term risks and