Financial Integration In The West African Economic And Monetary Union

This study assesses the degree of financial integration in the West African Economic and Monetary Union (WAEMU). The structure of the financial sector and its institutional arrangements indicate that financial integration is well advanced in some aspects. Common and foreign ownership of banks is very high and cross-border transactions are frequent in the government securities markets. Common institutions help achieve a high degree of similarity of rules. There is nonetheless scope for further financial integration as indicated by persistent deviations from the law of one price, limited cross-border bank transactions, and differences in treatment. Policy measures could therefore help achieve greater financial convergence.

Monetary and Financial Integration in West Africa details the progress, challenges faced, and potential of the project intended to create a West African Monetary Zone (WAMZ) between Gambia, Ghana, Guinea, Nigeria and Sierra Leone. Given the trend towards regionalization of economic ties across the world, especially after the successful launch of the euro, a detailed analysis of the WAMZ is needed. As this is the first book on monetary and financial integration in Gambia, Ghana, Guinea, Nigeria and Sierra Leone, it is an essential read for anyone interested in economic development in West Africa, and indeed in Africa as a whole. This book is extremely well-researched, with detail on virtually all aspects of economic integration in the region; with issues ranging from the institutional details of integration, trade and financial market integration, to progress on convergence of macroeconomic fundamentals to the required payments system infrastructure. The book deploys solid empirical facts and sophisticated analyses to thoroughly defend its assertions. This collection is a valuable contribution and an excellent companion book for monetary economics or international economics classes as well as African development literature. It will provide students and researchers with an exciting chance to apply concepts of, for example, optimum currency areas, central bank structure or monetary policy approaches, to a real-world case of potential monetary union. Dr. Temitope W. Oshikoya and his collaborators have written the authoritative book on the subject of monetary union in the West African Monetary Zone. As is evident in the level of detail of the book, Dr. Oshikoya brings rich field experience from his role as Director General and CEO of the West African Monetary Institute. This book will be of interest to postgraduates and researchers in development economics; as well as policymakers, monetary authorities and development practitioners.

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.

The staff report on discussions with regional institutions of the West African Economic and Monetary Union is presented. The region faced a number of challenges in 2011, with the intensification of the political crisis in Côte d’Ivoire and a large increase in global food and fuel prices. A materialization of downside risks could require a monetary policy relaxation for the union and differentiated fiscal responses across member countries. The drought in the Sahel may also require a more active fiscal policy in the affected countries.

KEY ISSUES Context. The region continued to experience strong growth in 2014, led by the continued economic expansion in Cote d’Ivoire. The outlook is for further strong growth, subject to a range of downward risks, in particular political instability ahead of upcoming elections in several countries, and security issues in Mali and Niger. With an elevated fiscal deficit exerting pressure on the balance of payments and the regional financial market, delays in fiscal consolidation or structural reforms pose the main medium-term risks. Policy recommendations: • Fiscal consolidation. Safeguarding external stability in the region will require governments to adhere to their budget deficit reduction plans while maintaining public investment efforts, which will require increasing tax revenue and controlling current expenditure. • Monetary policy. Macroeconomic conditions do not warrant a tightening of monetary policy at this juncture. However, if fiscal deficits do not decline as envisaged, the BCEAO should consider increasing its policy rates. In the mean time, the BCEAO should very closely follow the evolution of the macro-prudential risks flowing from its sharp increase in commercial bank refinancing. • Financial stability. The WAEMU authorities should enforce existing prudential rules and raise standards to international best practice. Ongoing reforms go in the right direction but need to be accelerated. • Structural transformation and regional integration. Policies to promote structural transformation should focus on addressing weaknesses, such as the lack of education and training, finance, and supportive regulatory environments. Countries should refrain from using the possibility to deviate from the common external tariff of the Economic Community of West African States (ECOWAS) in force since January 1, 2015, in order to protect the gains from regional integration in WAEMU.

Capital markets in the East African Community (EAC) face common challenges of low capitalization and liquidity, but to different degrees. EAC member countries have made noticeable progress in developing domestic capital markets through a regional approach, removing constraints on capital transactions and harmonizing market infrastructure. Nevertheless, empirical analysis suggests capital market integration has not deepened during the past few years in the EAC, although convergence of investment returns is taking place to some extent. Learning from the experience of the West African Economic and Monetary Union and the Association of Southeast Asian Nations, EAC countries would benefit from four actions to accelerate financial market integration: (i) further harmonize market infrastructure; (ii) strengthen regional surveillance mechanisms; (iii) encourage local currency bond issuance by multilateral financial institutions; and (iv) build the capacity of the existing regional institutions.

KEY ISSUES Context. The region continued to experience strong growth in 2014, led by the continued economic expansion in Cote d’Ivoire. The outlook is for further strong growth, subject to a range of downward risks, in particular political instability ahead of upcoming elections in several countries, and security issues in Mali and Niger. With an elevated fiscal deficit exerting pressure on the balance of payments and the regional financial market, delays in fiscal consolidation or structural reforms pose the main medium-term risks. Policy recommendations: • Fiscal consolidation. Safeguarding external stability in the region will require governments to adhere to their budget deficit reduction plans while maintaining public investment efforts, which will require increasing tax revenue and controlling current expenditure. • Monetary policy. Macroeconomic conditions do not warrant a tightening of monetary policy at this juncture. However, if fiscal deficits do not decline as envisaged, the BCEAO should consider increasing its policy rates. In the mean time, the BCEAO should very closely follow the evolution of the macro-prudential risks flowing from its sharp increase in commercial bank refinancing. • Financial stability. The WAEMU authorities should enforce existing prudential rules and raise standards to international best practice. Ongoing reforms go in the right direction but need to be accelerated. • Structural transformation and regional integration. Policies to promote structural transformation should focus on addressing weaknesses, such as the lack of education and training, finance, and supportive regulatory environments. Countries should refrain from using the possibility to deviate from the common external tariff of the Economic Community of West African States (ECOWAS) in force since January 1, 2015, in order to protect the gains from regional integration in WAEMU.

The inspiration to write on the ECOWAS Treaty and the role of financial institutions derived from the apparent and unabated efforts of the various governments in the West African subregion to find solutions to the inexplicable sufferings and underdevelopment of the region and its people in the face of abundant but untapped human and natural resources. The strategy of integration has been employed by other jurisdictions, some of them more developed, as an option in addressing the forgoing challenges. So many years after the establishment of ECOWAS, the dream is far from being attained. Given the critical financial engagements inherent in the ECOWAS integration strategy, it is considered desirable that the treaty is rationalized to accommodate a wider role for financial institutions within the control of a supra national framework.