The Evolving Role of Central Banks

10 Central Bank Operations and Independence in a Monetary Union: BCEAO and BEAC

Patrick Downes, and Reza Vaez-Zadeh
Published Date:
June 1991
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The Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO) and the Banque des Etats de l’Afrique Centrale (BEAC) are the central banks of two regional groupings of countries in Western Africa and Central Africa that have adopted a common currency. The BCEAO is the central bank of the seven member countries of the West African Monetary Union (WAMU), with headquarters in Dakar, Senegal. The WAMU comprises the states of Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo; the common currency is the franc de la Communauté Financière Africaine (CFA). The BEAC is the central bank for the six countries that are members of the Central African Monetary Area (CAMA). The members are Cameroon, the Central African Republic, Chad, the Congo, Equatorial Guinea, and Gabon; their currency is the franc de la Cooperation Financière en Afrique Centrale. Together, these groups form the CFA currency area.

The CFA currency area was established at the end of 1945, at which time it covered a somewhat wider geographic area than at present. With the accession of the francophone countries of Western and Central Africa to independence, monetary agreements were established between France and the member countries of the zone. The West African Monetary Union was formally established in 1962. At the same time, the francophone countries in Central Africa entered into a monetary agreement between themselves, and with France.1 The two central banks were established in 1962, but their statutes were revamped in 1972–73 in order to devolve more responsibilities to the member countries; as part of the new agreements, the headquarters of the two banks were transferred from Paris to Dakar (BCEAO) and Yaoundé (BEAC). Although the institutional arrangements were modified, the main characteristics of the two monetary areas remain unchanged. These can be summarized as (1) a single currency having legal tender throughout the union; (2) monetary integration through the pooling of external reserves in an account with the French Treasury, called the Operations Account, which also functions as an overdraft facility; (3) external convertibility of the currency of the two monetary areas, guaranteed by France, effected through the Operations Account, and observance of restrictions on capital movements with other members of the franc zone; and (4) a fixed exchange rate with the French franc, at CFAF 1 = F 0.02, unchanged since October 1948.

The main motivation of the two monetary unions is a political commitment to financial stability and regional solidarity, rather than strong intraregional trade and factor mobility—the elements generally considered in the literature as a primary justification for currency areas. In the two monetary areas, intraregional trade is limited, as the countries mainly export primary commodities to industrial countries; intraregional labor mobility is not particularly encouraged, and labor markets remain segmented, despite a large inflow of workers to Côte d’Ivoire from some neighboring countries.

The participation of the member countries in the common monetary area rests on the advantage of having a common currency, which is convertible, as a medium of exchange and a store of value, and on the benefits for small open developing economies of maintaining a fixed exchange regime, which provides a nominal anchor for macroeconomic policies. The political will to achieve gradual economic and political integration has also contributed to the solidity of the two monetary unions.

Trade liberalization, in the framework of the trade associations in the two areas,2 and common features of the fiscal system (particularly in the context of the UDEAC) are also elements underlying the design of gradual economic integration of the countries belonging to the two monetary unions. Coordination of fiscal policy has been limited in both, despite strict limits on central bank government financing, as governments have been able to finance deficits by borrowing from multilateral organizations or in the international capital markets. The absence of developed capital markets, which for the developed countries are the vehicle through which inconsistent fiscal policies spill over to other countries, has reduced the need to harmonize fiscal policies.

The convertibility of the CFA franc is an important advantage from which the members of the two unions benefit, unlike many other developing countries. The pegging of the exchange rate provides a useful nominal anchor for macroeconomic policies, if the currency to which the exchange rate is pegged achieves financial stability. In the case of the CFA franc, the peg to the French franc has not been altered since 1948. This pegging imposes strict constraints on the conduct of monetary policy, as net foreign assets positions have to be maintained at a sustainable level and domestic rates of inflation of member countries have to remain aligned with that of France. Accordingly, both the treaties establishing the monetary unions and the statutes of the central banks highlight the need to safeguard the common currency with appropriate policies.

The statutes recognize the need for the central banks to adequately support economic growth and development. To that end, the structures of the central banks include, in addition to centralized organs, national credit committees and national agencies established in each member state, which are responsible for making the credit system responsive to the specific situation of member countries.

Safeguards of Convertibility

The guarantee of convertibility provided by France implies that the Operations Account with the French Treasury, in which a minimum of 65 percent of the foreign reserves must be deposited, can be overdrawn. To protect the reserve position and to avoid requiring the French Treasury to extend support for more than transitory periods, a number of safeguards are built into the rules of operations of the two central banks.

First, their statutes include a limit on the financing of the government, which cannot exceed 20 percent of the ordinary budgetary revenues in the previous year. Second, if the ratio of the foreign assets of each central bank to its sight liabilities falls below 20 percent for a period of three months, the boards of directors must convene to adopt corrective measures. The statute of the BEAC specifies that these measures be a reduction of the refinancing ceilings and an increase in the discount rate. The BCEAO statute provides that in these circumstances the decisions regarding credit have to be taken by a unanimous vote. The statute of the BEAC also prescribes a reduction of the refinancing ceilings by 10 percent if the holdings in the Operations Account pertaining to a country fall below the threshold of 15 percent of the currency in circulation; if the Operations Account shifts into a negative position, the refinancing ceiling is curtailed by 20 percent.3

In addition to tightening monetary policy, should the balance of payments weaken and the position of the Operations Account deteriorate, member countries are encouraged to increase their recourse to foreign financing and, in particular, to enter into arrangements with the International Monetary Fund (IMF) and seek assistance from other multilateral organizations. This is explicitly stated in the convention de compte d’opérations signed with France, which provides that when the assets of each monetary union fall below a certain level, the central banks will replenish the accounts by using their other external assets and by urging their members to convert their SDR holdings into French francs and to utilize the facilities of the IMF.

In practice, the Operations Account of the BCEAO, which had always been in a positive position until 1979, shifted into large negative positions in the period 1980–84; after a return to a positive position, negative positions were again recorded in 1988 and 1989. The ratio of external assets to sight liabilities fell below the 20 percent threshold in 1980, rose to 18.5 percent in 1986, and declined again in the period 1987–89; at the end of 1989, the ratio stood at 8 percent. In the BEAC, the Operations Account recorded negative positions in 1987–89, which prompted immediate tightening of refinancing ceilings and an increase in the discount rate; by mid-1990, the Operations Account returned to a positive position. The external assets-to-sight liabilities ratio was below the threshold in 1986 and 1987 but rose above it again in 1988.

Institutional Arrangements

The present organization and operational arrangements of the WAMU and the BCEAO were institutionalized in 1973 with the revision of the original 1962 treaty establishing the WAMU and of the statutes of the BCEAO, which modified the original 1962 arrangements. The WAMU has two policymaking organs: the Council of Heads of States and the Council of Ministers; the latter has responsibilities in the monetary policy area as specified in the central bank’s statutes. The arrangements with France are embodied in a cooperation agreement between France and the WAMU members and in an Operations Account convention. Similarly, in the Central African area, the BEAC statutes were modified in 1972. The cooperation between the BEAC member countries is specified in a convention of monetary cooperation between the Central African states, and the cooperation convention between France and the member states of the BEAC.

The organs of the BCEAO and the BEAC are somewhat different inasmuch as those of the BCEAO include—in addition to the governor, board of directors, and the national credit committees—a council of ministers, which has responsibilities with regard to the appointment of the governor, changes in the exchange rate parity, the conventions with new members, and the broad orientation of the union’s monetary and credit policy. The two boards of directors are charged with the overall management of monetary and credit policy in the two central banks. The BCEAO board comprises sixteen members, two from each country and two from France; the BEAC board comprises four members of the largest country, Cameroon, two from Gabon, one each from the other four countries, and three from France. The boards of directors specify the terms and conditions of the central banks’ refinancing policies, and the global amount of central bank refinancing available to the government and the deposit money banks and other financial institutions. The governor is the chairman of the board (in the BCEAO but not in the BEAC), is in charge of carrying out the decisions of the council of ministers and of the board of directors, and is in charge of the day-to-day management of the bank. In the BEAC, the governor only attends the board with a consultative voice; the chairman is one of the ministers of finance. An additional BEAC organ is the committee of three comptrollers (one each for Cameroon, Gabon, and France) who attend both the board of directors and the national committees with a consultative vote.

At the country levels, the national committees propose the amount of refinancing that can be granted to banks and financial institutions and the financing that is available to the government; they also establish limits on rediscountable credits to individual enterprises, authorize credits, which are subject to prior approval because of their amount, and adopt measures of credit control, such as credit ceilings. The national committees can delegate their responsibility to the national directors.

Thus, the national committees and the national directors have a significant role in the allocation of refinancing facilities between individual banks, as well as in the determination of the amount of credit extended to individual enterprises. In the BEAC, the national committees exercise substantial initiative in proposing the global refinancing limits for each country, which are then submitted to the board of directors for approval. With the deterioration in the external situation of the CAMA, the BEAC board reduced the rediscount ceilings in each country in early 1988 and kept them unchanged thereafter.

In the BCEAO, the national committees have the important macroeconomic role of proposing monetary and credit targets in the framework of an annual exercise that involves the council of ministers, the headquarters of the bank, and the committees themselves and that aims at establishing the refinancing ceilings for the BCEAO as a whole and for each country. Once country ceilings are established, the allocation of the global amount of refinancing in each country among the banks is left to the national committees and the national central bank agencies. To eliminate the presumption of a right to rediscount, the commercial banks are not informed of the decisions of the national committees. In order to limit the exposure of the central bank, it cannot refinance more than 35 percent of a commercial bank’s portfolio of ordinary credit (i.e., credit other than for crop financing).4 Until 1989, selective credit ratios were established in many WAMU countries, requiring commercial banks to allocate a minimum share of their resources to preferential sectors; however, they were not always respected.

As evidenced by the institutional arrangements and the operational procedures, the commitment of the two central banks to protect the external position and safeguard the common currency does not derive from a status of independence from political authorities, but rather from the institutional responsibility enshrined in the monetary union treaty and in the statutes of the central bank. A certain degree of independence from the national governments comes from the fact that the political authorities control the central bank in a collegial manner.

In practice, as discussed below, the central banks responded with a gradualistic policy with regard to the deterioration in the balance of payments and the Operations Account positions in the early 1980s. Credit to the economy was not squeezed, nor were interest rates brought to levels that could have hampered economic activity; however, in 1989–90, the tight refinancing policy of the BCEAO contributed to a liquidity squeeze in Côte d’Ivoire, in the context of a growing portfolio of nonperforming loans.

Operations and Instruments of Monetary and Credit Policy

The operations of the two central banks concentrate on granting credit to the government and providing rediscounts to the commercial banks.


In the absence of a domestic market for government paper, there are no open market operations. A money market operates in the WAMU countries with intermediation by the BCEAO. Credit to the governments takes the form of overdrafts, advances to banks secured by government securities, purchases from commercial banks of government securities with a remaining maturity of one year or less, and discount or rediscount of public securities with a maturity of ten years or less to finance development projects, including infrastructure. The total of these credits cannot exceed 20 percent of the government’s fiscal receipts in the preceding budgetary year. This limit is adjusted downward by the amount of government debt held by commercial banks availing themselves of central bank refinancing and upward for the treasury deposits at the central bank. Refinancing of commercial bank credit to the nongovernment sector takes the form of rediscounting of short-, medium-, and long-term credit (remaining maturity of less than ten years), classified as eligible for rediscounting. The total amount of refinancing to each country is subject to a ceiling, both in the BCEAO and the BEAC. Until recently, the refinancing of crop credit was maintained outside the ceiling and carried a preferential interest rate; however, abuses led the BCEAO to bring such credit under the global refinancing ceiling in 1989 and to unify the discount rates. The BEAC took a similar decision in October 1990.

Instruments of Monetary Policy

The main instruments of credit policy both in the WAMU and the CAMA are limits on central bank refinancing. The BCEAO also relies on credit ceilings, while in the CAMA national credit ceilings are established in the framework of adjustment programs with the IMF, but are not a normal instrument of control of the central bank. The interest rate is changed infrequently, although more often since 1988.

As indicated above, for each main country, the BCEAO establishes refinancing and credit ceilings in the framework of macroeconomic projections of the main real, monetary, and credit aggregates. The exercise starts each September, with the council of ministers formulating the objective for the external position of each country for the coming year, in line with the overall external situation of the union. Thereafter, the national agencies and committees have the responsibility for preparing the projections of real and nominal GDP for the year ahead and of the money demand associated with these projections. The supply of credit consistent with these projections is allocated between the government and the rest of the economy, by estimating the change in the government’s net credit position toward the banking system and obtaining credit to the economy as a residual. A main component of the net position of the government toward the banking system is the use of the statutory advance from the central bank; the possible use by the government of its deposits at the central bank and the commercial banks must also be estimated. Finally, in order to determine the amount of central bank refinancing compatible with the credit projection, the reserves held by the commercial bank at the central bank have to be estimated, together with the split of the net foreign asset position between central and commercial banks. To derive the refinancing available to the financial institutions, central bank credit available to the government is deducted from the overall ceiling on central bank financing. In October and November, all projections are reviewed in consultation between headquarters and the national agencies.

In December, the board of directors of the BCEAO reviews the credit objectives and ceilings for central bank refinancing proposed by each committee and submits them to the council of ministers for endorsement. Until 1989, crop financing had been excluded from the refinancing ceilings. The liberal concession of such a refinancing by the central bank, in the context of a decline in commodity prices and of losses of the marketing boards, resulted, however, in financial woes for the commercial banks. Since 1990, crop financing is subject to a subceiling. Ceilings on the total credit expansion in each country are also established, with a subceiling for credit to government, and are communicated to the national credit committees. The national credit committees, in turn, establish credit ceilings bank by bank, together with rediscount ceilings. While crop credit was traditionally excluded from the ceilings, the practice was terminated in 1990 to introduce more discipline in the concession of this credit.

In the BEAC, no comprehensive monetary programming is formulated. Refinancing limits are the main instruments of control. Two different ceilings are applied for short-term credit: one for crop credit, which is refinanced in full, and one on short-term credit, which is limited to 80 percent of the primary credit. A separate refinancing ceiling applies to medium-term credit. Refinancing limits are proposed by the national monetary committees, on the basis of projections of sources and uses of funds for each banking institution and are submitted for approval to the board. Until 1988, a large unused margin existed under the refinancing limits, which, therefore, were not binding. The refinancing limits were tightened across the area in 1988 and 1989 because of the negative net foreign asset position.

Sectoral credit controls have been implemented in both monetary areas with a variety of instruments, but lately, a shift away from these controls has occurred. In the WAMU, an important instrument of selective control has been the prior approval system, under which commercial banks are required to submit to the central bank, for prior approval, credits that raise total outstanding loans to any given borrower above a certain amount, in the range of CFAF 30–100 million ($120,000–400,000), depending on the country. This system was abolished on October 1, 1990 and replaced by a general classification of primary borrowers to determine their eligibility for central bank refinancing. A system of ratios requiring commercial banks to allocate a portion of their resources to preferential sectors has not been implemented effectively and has recently been repealed.

Prudential ratios are imposed by both central banks. The BEAC imposes several, the values of which are set by the national monetary committees. These ratios include a minimum liquidity ratio; a solvency ratio, currently set at 5 percent; and a ratio of deposits to nonrediscountable credits, which limits nonrediscountable credit to a maximum of the sum of 25 percent of demand deposit liabilities and 50 percent of time deposit liabilities. In the WAMU, the BCEAO imposes a minimum liquidity ratio and two solvency ratios, a risk distribution ratio, which is the maximum ratio of unsecured loans to any single borrower to the bank’s own funds—currently one to one—and a capital/risk ratio, currently set at 6 percent.

Interest Rate Policy and the Money Market

Until recently, interest rate policy was used only sparingly as a policy instrument. In the WAMU, the discount rate serves as a reference for the whole structure of lending and deposit rates, which is uniform in the area. In the CAMA, national monetary committees have the authority to establish the structure of deposits and lending rates, which have, therefore, been somewhat different across countries. Until recently, in addition to a normal discount rate, the two central banks also maintained a preferential rate for operations in favor of crop financing, small and medium-sized enterprises, and individual housing. The preferential rates were eliminated in October 1989 (BCEAO) and in October 1990 (BEAC). In the WAMU, the normal and preferential discount rates, and consequently the lending and deposit rates, were adjusted only three times between 1975 and 1985; they were adjusted four times between 1986 and 1989; even less frequent adjustments have been made by the BEAC (Chart 1).

Chart 1.CFA Franc Zone: Interest Rates, 1980–89

(In percent)

Sources: International Monetary Fund, International Financial Statistics; and Fund staff estimates.

1Overnight rate.

2Rate paid on overnight interbank advances.

The rate of the money market in the WAMU is fixed by the central bank but adjusted more frequently. The money market had been established in 1975 with a view to recycling the excess liquidity of deposit money banks within the union, and thus curbing capital outflows. Until recently, access to money market funds was limited to deposit money banks. The money market is managed by the BCEAO. Surplus funds are deposited in the central bank, which grants advances to banks in need of liquid funds; these advances are guaranteed by rediscountable papers deposited in the central bank. The money market rate has been modified 5 to 7 times a year, on average; a small spread exists between the rate on advances and on deposits. These rates are identical throughout the union and are kept above the Paris market rates to prevent capital flight. Since October 1989, all BCEAO credits to commercial banks are extended through the money market, except for occasional debit balances and for consolidated credits.

Operationally, the market works as follows. In the morning, in each WAMU country, each commercial bank advises the national agency of the BCEAO of the amount they want to borrow or deposit on the market. By the end of the morning, each national agency communicates to the BCEAO headquarters in Dakar the net situation of its money market; the position of each country is consolidated, and the funds available in the surplus countries are allocated to the national agencies of the deficit countries, through transfers in their accounts with the BCEAO headquarters. If necessary, each national agency provides the market out of its own resources with the funds needed to balance the offer and demand of funds. Interest rates on advances are applicable only to the extent that the corresponding funds are provided by commercial banks in the WAMU; interest rates for funds provided by the BCEAO out of its own resources are computed on the basis of the discount rate. Since October 1989, the discount rate has been higher than the money market rate by 0.5 percentage points. This method results in a higher cost of funds for banks in deficit areas; however, the difference is modest, given the small differential between money market and discount rate.

The development of the money market has important implications for the future of monetary policy in the WAMU. Refinancing ceilings, which traditionally have been the main credit and monetary instrument of the BCEAO, are losing some of their relevance, because in many countries (Mali, Niger, Togo, Burkina Faso) the offer of funds by local banks exceeds the demand. In this context, the BCEAO may sterilize excess liquidity in some countries with a system of reserve requirements, but there may be a reluctance to set the reserve requirement too high. Bank credit ceilings are an alternative system of control, which the BCEAO envisages to strengthen, by giving a more active role in their establishment to the central bank’s headquarters. Moreover, given the drawbacks that the allocation of individual ceilings to banks represent for the efficiency of the banking system, the BCEAO recognizes that a policy of indirect credit control will have to be developed, relying on a further development of the money market, for instance through issues of central bank bills and secondary market operations. A policy of indirect credit control could have the effect of increasing interest rates in countries with a liquidity shortage, and ultimately, through liquid funds flowing from surplus to deficit areas by interbank transactions, of raising interest rates throughout the zone.

Restructuring the Banking System

In recent years, the two central banks have had to address the serious deterioration of the banking system, which requires comprehensive restructuring. In the two areas, a number of banks have become burdened by a large amount of nonperforming loans, as a result of inadequate management, extension of credit without proper collateral, accumulation of arrears by governments, and the deficits of crop-marketing boards, which have prevented the repayment of crop credits. The consequence was increased demand for central bank refinancing, which could not ultimately be accommodated. These burdens were particularly acute in Cameroon and Côte d’Ivoire, where a liquidity crisis occurred in 1989. In these circumstances, governments had to intervene to recapitalize the troubled banks, partly through external assistance on concessional terms. At the same time, the two central banks agreed to consolidate a large part of their outstanding credit to the restructured banks. The amount of credits consolidated by the BCEAO has been substantial, accounting at the end of 1988 for about one third of total outstanding claims on commercial banks. The number of troubled banks is evidence of a weakness in the system of bank supervision—a responsibility that had been left to the national authorities. To tighten bank supervision, two new supranational banking commissions were established in 1990, which are under the oversight of the two central banks.

Economic Performance

This section includes a short presentation of the main aspects of the domestic and external financial performance of the countries of the region, as they relate to the policies of the central banks.

Domestic Financial Performance

The central banks have, in general, succeeded in containing credit growth within limits consistent with a containment in the rate of inflation. Before 1983, domestic credit expanded rapidly in the BCEAO area, contributing to a decline in the net foreign asset position. After 1983, credit expansion stabilized, and the external position improved. In the CAMA, credit expansion was relatively rapid up to 1986, but was reduced thereafter (Chart 2). The rapid growth of credit in the economy was associated with a strong investment expansion spurred by high oil revenues in three oil producing countries of the region. Reflecting the growth of credit, in the period 1980–85, monetary expansion in the CAMA was sustained, close to 20 percent a year. The rates of inflation declined in both areas after 1982 and have been close to those prevailing in France.

Chart 2.CFA Franc Zone: Counterparts of Money Supply, 1980–89

(In billions of CFA francs; end of period)

Sources: Date provided by Banque des Etats de l’Afrique Centrale and Banque Centrale des Etats de l’Afrique de l’Ouest.

1Excluding Equatorial Guinea.

2Excluding Mali before 1984.

While monetary policy in the two CFA franc areas has been successful in preventing inflationary growth in domestic credit, it has not prevented the emergence of large public sector financial imbalances, which were financed by an accumulation of external debt and domestic and external payments arrears. In the early 1980s, most countries in the WAMU and the CAMA pursued expansionary fiscal policies related to ambitious investment programs. In the CAMA, oil revenues were substantial, so that overall deficits did not exceed 2 percent of gross domestic product (GDP). In the WAMU, total government financing needs were on average 11 percent of GDP in the 1980–83 period (Chart 3). Domestic financing averaged 3 percent of GDP, and external grants 2.3 percent, so that external financing excluding grants was very large, leading to a further buildup of external debt; fiscal adjustment was made difficult during the 1980s by declines in the non-oil revenue/GDP ratios, while current expenditure was difficult to contain. Contractual interest payments due on the external debt roughly doubled between 1980 and 1989 both in the WAMU and the CAMA. The external debt burden proved unsustainable for most countries of the WAMU by 1983–84, so that the governments had to resort to debt rescheduling.

Chart 3.CFA Franc Zone: Financing of Government Operations, 1980–89

(In percent of GDP)

Sources: Data provided by the authorities; and Fund staff estimates.

Note: CAMA = Central African Monetary Area; WAMU = West African Monetary Union.

In the CAMA, the three oil exporters (Cameroon, Gabon, and the Congo) enjoyed growing oil revenues up to 1985, so that the overall fiscal position of the region was relatively strong; however, with the decline of oil revenues in 1986–87, fiscal deficits widened substantially, exceeding 10 percent of GDP; because of lags in curtailing investment outlays, all the countries of the area had to have recourse to debt rescheduling; they also accumulated large domestic payments arrears.

Thus, while the fiscal situation has not affected the stance of monetary and credit policy differently than in many other developing countries, the inadequate fiscal discipline in the CFA franc countries has led to serious financial difficulty and a buildup of external debt and payments arrears.

The Balance of Payments and the Foreign Reserve Position

As mentioned, the credit policy of the two central banks has been formulated in a framework that gives weight to the need to maintain a strong reserve position. In practice, however, the central banks could do little to reverse the sharp deterioration, in the late 1970s, in the current account and in the overall balance. The current account deficit (including official transfers) of the CFA franc zone averaged 8 percent of GDP in the period 1978–82; following a decline in the deficit in 1984–85 owing to favorable developments in Côte d’Ivoire and in the oil producing countries, it widened again in 1986–88, to an average of 8.5 percent of GDP (Chart 4). The deterioration in the early 1980s stemmed from a number of factors, such as declines in the prices of the main export commodities of the drought-stricken Sahelian countries and the sharp increase in international interest rates. The terms of trade deterioration worsened after 1985, as export prices of the main commodities plummeted.

Chart 4.CFA Countries: Current Account Balances, 1980–891

(As percent of GDP)

Source: International Monetary Fund, World Economic Outlook: A Survey by the Staff of the International Monetary Fund, World Economic and Financial Surveys (Washington, October 1990).

1 Including transfers.

As a result of these factors, the net foreign position of the BCEAO became sharply negative in 1980 and reached a trough in 1983 (Chart 5). Thereafter, the position improved somewhat, owing to the mobilization of external assistance, including debt rescheduling, by member countries, but it remained substantially negative. Extensive use of IMF resources attenuated the impact on the BCEAO’s Operations Account with the French Treasury, which was in a negative position between 1980 and 1984 but became positive in 1985–87; after deteriorating in 1988–89, the account was again positive in 1990. Credit policy was generally not able to deter the deterioration of the balance of payments. In fact, the convertibility of the currency also facilitated capital outflow, which was prompted on some occasions by political uncertainty in the member countries; the modest interest rate differential with France was not an effective disincentive.

Chart 5.CFA Franc Zone: Central Bank Net Foreign Assets, 1980–89

(In billions of CFA francs; end of period)

Sources: Date provided by Banque des Etats de l’Afrique Centrale, Banque Centrale des Etats de l’Afrique de l’Ouest; and Fund staff estimates.

1Excluding Equatorial Guinea.

2Excluding Mali before 1984.

During this period of balance of payments difficulty, the stability and convertibility of the exchange rate has provided the benefit of moderating inflation and avoiding the emergence of parallel exchange rate markets. At the same time, there is some evidence of loss of competitiveness, and the diversification of these economies has not been very rapid.

Concluding Remarks

The two supranational central banks in Western and Central Africa represent a successful example of two institutions managing a monetary union among sovereign states. Their institutional features and their operating procedures present a balance between independence and responsiveness to the economic situation of the member countries. The independence in the conduct of overall monetary credit policy has benefitted from the existence of a fixed exchange rate rule and from the associated constraints in the expansion of credit to government and in overall credit that are firmly established in the statutes of the two central banks. Thus, monetary policy has generally followed a steady course; the national authorities, which control the decision-making process of the two central banks, have had to abide by the predetermined rules of operations; however, the strict limits on credit to the government have not resulted in overall government financial discipline, as individual governments have had large recourse to external assistance, including exceptional assistance in the form of debt rescheduling. While preserving monetary stability, the two central banks have not been able to stop the emergence of serious imbalances in the balance of payments during the last decade, a fact that reflects to a large extent exogenous factors, but also the inability of the member countries to diversify rapidly their economies.

Two major challenges that confront the two central banks are the restructuring of the banking systems, which in recent years have been affected by a sharp deterioration of the loan portfolio, and the improvement in the instruments of monetary control, to attenuate the reliance on quantitative ceilings. Stronger bank supervision is being put in place, accompanied by a consolidation and recapitalization of the banks in difficulty.

With regard to monetary controls, the development of money markets and of the intervention of the central banks in these markets are under consideration. To the extent that this would imply more intense flows of funds through each of the two areas, it would require an acceptance by the political authorities of a larger degree of financial integration among the member countries’ economies.

*The author is Advisor in the African Department of the International Monetary Fund.
1Mali left the WAMU in 1962 and rejoined in 1984. Equatorial Guinea joined the CAMA in 1985. Mauritania, an original member of WAMU, resigned its membership in 1973.
2Communauté Economique des Etats de I’Afrique de l’Ouest (CEDEAO) in the WAMU area and Union Douanière et Economique de l’Afrique Centrale (UDEAC) in the CAMA area.
3Separate monetary accounts, including foreign assets, are established for each member country of the two monetary unions. The currency put in circulation in each country by the agency of the central bank is identified by a separate code (in the WAMU), or by different bank notes (CAMA area).
4Until a reform in October 1, 1989, the refinancing of crop credit was maintained outside the global ceiling.

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