The International Monetary Fund (IMF), has called for a return to the aggregate fiscal deficit ceiling of 3% of the gross domestic product (GDP) by 2024.
This, it said, is essential to maintain an adequate level of external reserves, limit the risk of regional financial market pressures, and ensure debt sustainability.
This is part of the agreements reached at the end of the IMF Executive Board regional consultation with the West African Economic and Monetary Union (WAEMU) on February 11, according to a statement yesterday.
They underscored efforts to ensure macroeconomic sustainability, while limiting scarring and supporting the recovery are crucial.
Directors noted important downside risks to the outlook, particularly from the evolution of the COVID-19 pandemic, a tightening in global financial conditions, deterioration in security conditions, and political instability.
The Directors noted that despite the COVID crisis, West Africa’s economy is recovering on the back of supportive fiscal and monetary policies.
Growth is expected to further accelerate to about 6% in 2022, primarily driven by a rebound in net exports and inflation is projected to return to the BCEAO’s target band by the end of the year.
Highlights of projections:
• The WAEMU region has so far demonstrated strong resilience to the Covid crisis, and the economy is recovering on the back of supportive fiscal and monetary policies.
• Growth is projected to accelerate this year, mostly driven by a rebound in net exports. But there are important downside risks to the economic outlook, including from the possibility of further deterioration of the security situation and political uncertainty.
• A gradual fiscal consolidation is expected to start in 2022, and bring back the regional fiscal deficit towards 3% of regional GDP by 2024.
The Directors noted that despite the resilience, West Africa has been hard hit by the Omicron variant and security risks continue to increase in some countries.
The statement reads: “Despite these headwinds, the economic rebound that started in the second half of 2020 firmed up in 2021, while fiscal and monetary policies remained supportive.
“External reserves have risen to comfortable levels and the financial system appears to be broadly sound.
“Inflation has exceeded the 3% ceiling of the BCEAO’s target band since April 2021, mainly on account of higher domestic and imported food prices.
“Growth is expected to further accelerate to about 6% in 2022, primarily driven by a rebound in net exports and inflation is projected to return to the BCEAO’s target band by the end of the year.
“A gradual fiscal consolidation is expected to start this year and bring the aggregate fiscal deficit to 3% of GDP by 2024.”
The Central Bank of West African States (BCEAO) should be ready to tighten monetary policy if the external position weakens or persistent inflationary pressures emerge.
Notwithstanding these upsides, IMF Directors noted that there are however significant downside risks to the outlook, particularly given slow and uneven progress with vaccination.
They also feared the possibility of further deterioration of security risks and political uncertainty, and the likely tightening of global financial conditions.
The Directors emphasized that the fiscal adjustment should promote an inclusive recovery, adding that credibility of the medium-term adjustment path would be enhanced by re-establishing the WAEMU’s Convergence Pact.
They recommended implementing revenue-enhancing measures, protecting priority social and infrastructure expenditure, and prioritizing vaccine rollout. Directors highlighted the importance of using the SDR allocation in a way that preserves fiscal sustainability and external stability.
Directors concurred that the accommodative monetary policy stance remains appropriate.
They therefore urged the Central Bank of West African States (BCEAO) to be ready to tighten monetary policy if the external position weakens or persistent inflationary pressures emerge.
Welcoming the BCEAO’s continuing efforts to modernize its policy and governance frameworks amid adequate reserves, the Directors stressed the need to reduce the high reliance of some banks on BCEAO refinancing, and to address structural fragilities in the microfinance institutions sector.
Directors concurred that enhancing the depth and liquidity of the sovereign security market remained a priority.
Directors agreed that countering the possible scarring effects of the crisis would require strong actions at the regional and national levels to boost productivity growth and stimulate private investment.
They noted that regional-level priorities were to foster trade integration, enhance regional competitiveness, and accelerate the implementation of regional infrastructure projects.
The Executive Directors informed that the views expressed will form part of the Article IV consultations with individual member-countries that take place until the next Board discussion of WAEMU common policies.