As in 1999, African franc area countries experienced external shocks as a result of sharp variations in their terms of trade. The rise in oil prices and the dollar's appreciation since the start of 1999, together with the recovery in tropical wood prices, led to an improvement in the trade terms of the countries in the Central African Economic and Monetary Community (CAEMC), estimated at around 50% in 2000, after 20% the previous year. Conversely, the fall in the price of tropical goods and cotton had a negative impact on the economies of the West African Economic and Monetary Union (WAEMU). The situation in this area was exacerbated by the sharp rise in the price of oil products, which account for 28% of the area's imports. The erosion of trade terms for WAEMU economies over 1999 and 2000 may well top 12%.
Change in the terms of trade (as a %)
|
1997
|
1998
|
1999
|
2000
|
|
Sub-Saharan Africa
|
- 1.2
|
- 8.5
|
+ 5.0
|
+ 13.4
|
|
WAEMU
|
1.2
|
6.2
|
- 6.9
|
- 5.3
|
|
CAEMC
|
- 6.1
|
- 17.2
|
+ 20.0
|
+ 49.0
|
Sources: IMF, Central Banks
In WAEMU countries, growth declined sharply to stand at 1.5%, compared with 3.2% in 1999 and 5.0% in 1998. This slowdown is mainly due to the fall in activity levels in Côte d'Ivoire, which accounts for 40% of WAEMU countries' GDP. Cocoa and coffee harvests improved considerably in volume terms, but this was not sufficient to offset the ongoing fall in the world market prices. Furthermore, the freezing of international financing to the Côte d'Ivoire and Togo, in conjunction with the rise in oil import prices in all WAEMU countries, exacerbated the slowdown in activity and worsened the fiscal problems in several countries. The negative impact of external shocks experienced by WAEMU countries (fall in commodity prices and the rise in oil import prices) is estimated at 0.3% of sub-regional GDP in 2000. Lastly, ongoing political and social tensions in a number of countries, especially in Côte d'Ivoire, weighed on activity and private investment.
Conversely, CAEMC countries saw a recovery in their growth rate, to stand at around 3.5% in 2000, after practically zero in 1999 and 4.9% in 1998. Oil exporting countries benefited from the surge in oil prices (59% year-on-year), compounded by the appreciation of the dollar. This recovery was also attributable to the strength of wood prices, as well as fiscal consolidation measures. Moreover, social and political tensions subsided somewhat, and relations improved between CAEMC countries and the Bretton Woods institutions.
Economic activity in the Comoros declined in 2000, due to the ongoing separatist conflict on the island of Anjouan.The fall in real GDP is likely to have come out at 3.9%, with inflation estimated at 4.6%. Moreover, since 19 November 1999, all the central banks' official rates have been pegged to the Euro Overnight Index Average, the EONIA, leading to a stabilisation of interest rate differentials with the euro, the Comorian franc's anchor currency.The above monetary policy reforms are also designed to encourage repatriation of the banking system's external assets.
Sources: Central Banks, IMF
Despite this unstable environment, which is typical of the entire African continent, the African franc area countries have managed to keep their economies on a relatively stable macroeconomic footing. The franc area is particularly noteworthy for its price stability. Inflation was kept under control in both regional unions. In 2000, as a yearly average, it stood at around 1.8% in WAEMU and 1.3% in CAEMC countries. These figures mark a sharp contrast with those of sub-Saharan Africa, where the average inflation rate was around 17%, and even exceeded 25% in six countries.
Sources: Central Banks, IMF
This price stability can be attributed first and foremost to the nominal pegging of the CFA and Comorian francs to the euro; African franc area countries carry out almost half of their foreign trade with the euro area. Multilateral surveillance of national policies, together with the financial and fiscal convergence criteria, also lend credibility to this pegging and aid its sustainability.
The sound pegging of the CFA and Comorian francs to the euro is also the fruit of vigilant monetary policies conducted by franc area central banks. The Central Bank of West African States pursued its policy centred on building up external assets and price stability.In 2000, money supply grew by 6.6% as a result of soaring net external assets and lending to the economy, while net claims on these countries declined.In order to keep inflation under control and maintain a positive spread with euro area interest rates, the Central Bank of West African States decided to implement a 75-basis point hike in its key rate on 19 June 2000. It accordingly raised the securities repurchase rate to 6% and the discount rate 6.50%.
The Central Bank of West African States also pursued its policy aimed at boosting external reserves, while focusing on containing inflationary pressures and supporting growth. Money supply ballooned by 22% due to burgeoning income from oil and oil-related products, which has substantially bolstered the international investment position. Lending to the economy also rose, in line with the recovery in sub-regional activity. However, domestic credit as a whole declined as a result of the shrinking net claims on governments, in relation to the consolidation of public finances.
Thanks to the growth in external assets, the Central Bank of West African States slashed its intervention rates in 2000. The tender rate, which had reached 7.6% on 12 May 1999, was cut to 7.3% on 14 January 2000 and then to 7% on 25 May. The repurchase rate, which had remained at 9.6% since 12 May 1999, was also lowered on the same dates to 9.30% and 9.0% consecutively. Furthermore, the Central Bank of West African States has set up a system of remunerated minimum reserves, in order to help to absorb the banking system's excess liquidity and to improve the effectiveness of monetary policy. This system will come into force as of September 2001.
Within the WAEMU, a fall was seen in the overall public finance deficit.This was mainly the result of the decrease in capital expenditure, which is nevertheless a necessary factor for the economic development of the sub-region, and of the increase in external outstanding payments in some countries in the Union.The investment ratio of African franc area countries, despite exceeding that of the rest of Sub-Saharan Africa, still falls short of the 30% threshold deemed necessary by the World Bank to trigger a fully-fledged economic take-off.For CAEMC countries as a whole, a budget surplus was recorded in 2000 after several years of deficits, notably until 1998. This is essentially due to the rise in income from oil and oil-related products, as well as the impact of fiscal consolidation measures. Fiscal expenditure mainly rose as a result of increased result capital expenditure, arising from major reconstruction work and the implementation of infrastructure in most of the sub-region's countries.
Sources : Banques centrales, FMI
The slowdown in activity under way since 1998 highlights the need to pursue policies aiming to restore macroeconomic balances, via "second generation" reforms. These reforms, which initially set out to combine productive investment and the development of human resources, could be carried out through greater private sector involvement in the development of infrastructure and the management of public services, as well as stricter control on fiscal expenditure, with a view to achieving good governance.
In tandem with fiscal adjustment, second generation reforms should make it possible to channel public spending to priority sectors such as health and education, thus helping to combat poverty in the franc area. Over a third of the area's population is living below the poverty threshold, while around one-fifth of the population is facing conditions of extreme poverty. Given the rate and distribution of growth, it appears unlikely that any rapid progress will be made in these conditions. The illiteracy rate in adults is above 50%, and life expectancy is falling due to the HIV/AIDS epidemic. As in the rest of sub-Saharan Africa, the prevalence of poverty results partly from the accumulation of a considerable deficit in basic infrastructure and the social sector.
Above all, the growth rate – 4.5% on average between 1994 and 2000 – remains well below the 7% threshold the World Bank deems necessary to reduce poverty. To effectively combat poverty, a development strategy cannot solely focus on welfare spending. It must also take into account all variables liable to create the conditions for strong and sustainable growth. In particular, the promotion of savings and investment must be prioritised, notably with a view to achieving the necessary diversification of the productive system. At the same time, growth must be accompanied by a better distribution of income, which should lead to greater social stability and boost household consumption. The implementation of poverty reduction programmes, with the aid of its development partners, should help the African franc area countries to rise to the challenge. As part of the debt relief programme for Heavily Indebted Poor Countries (HIPC), for which the eight African franc area countries were deemed to be eligible, several franc area countries have already undertaken to create a strategic framework for fighting poverty. This strategy aims to improve governance, achieve economic and social stability, develop human resources and infrastructures, promote private initiative and diversify the economies.
Furthermore, despite mixed economic results, African franc area countries have pursued their regional integration efforts. As part of the ongoing regional integration process, CAEMC countries set up a Court of Justice and an Interparlimentary Commission in N'Djamena on 12 April 2000, and in Malabo on 22 June 2000. The customs union became fully effective in WAEMU as of 1 January 2000, completing the customs duty harmonisation process initiated in July 1998.
Over and above the numerous institutional developments in 2000, the franc area's mechanisms continue to play an essential stabilising role in the cohesion of the area. First, solidarity between Member States, via the pooling of foreign exchange reserves in each issuing area, greatly encourages a rigorous administration of public finances. Second, the principle of free-transferability within the franc area facilitates economic and monetary trade flows, and thus boosts investment. Furthermore, the contingency measures accompanying the co-operation agreements with France guarantee that monetary policy will be conducted with the necessary vigilance vis-à-vis the risk of inflationary pressures. Franc area institutions therefore provide a favourable framework for enhancing regional integration and economic development.
Lastly, the economic outlook that prevailed in 2000 should persist in 2001. WAEMU countries are likely to continue to be affected by tropical product prices, the restructuring of export channels and the wait-and-see stance of investors in Côte d'Ivoire. CAEMC countries should benefit from positive oil price trends and experience even more sustained growth.
