(Ecofin Agency) – Prices are rising in the WAEMU zone, and have already exceeded the Central Bank’s safety thresholds. In countries like Benin and Côte d’Ivoire, food prices are up 12%. The data suggests that a grassroots production revival is becoming urgently needed.
According to the economic situation note for the month of April 2022 published by the Central Bank of WAEMU member countries (BCEAO), inflation or even a general increase in price levels reached 6.8% in this sub-region. This level is low when compared to that of Ghana (23.4%) and Nigeria (16.8%). But this is twice the monetary policy objectives of the BCEAO.
In fact, when it decides to put the money into the economy, the institution responsible for issuing and regulating the currency within the WAEMU sets itself as a benchmark a price increase target, ranging from 1% minimum to 3% maximum. For a certain period, this threshold has been largely exceeded.
The main challenge of the current situation is that inflation is not only of monetary origin, that is to say due to a greater presence of money than the economy requires. On the contrary, all sectors of the economy within the Union (States, companies, households) need money and for many, the resource has become rare and expensive.
These last two points are illustrated by the following facts: on the one hand, banks are ready to remunerate customer deposits at more than 5%. By way of comparison, this remuneration does not exceed an average of 3% in the CEMAC zone, where the same type of currency is used. On the other hand, lending rates increased in most countries to more than 6.8% against an average of 4% two years ago.
The options for the BCEAO are quite limited. Economic theory suggests that the Central Bank drastically raises its key rates, in order to reduce credit within the economy. This could cause a drop in money in circulation and therefore a drop in prices. But such a decision would risk producing the opposite effects and plunging the West African Economic and Monetary Union into a deep crisis.
In countries where monetary policy tools work well, there are various levers for absorbing the shocks caused by an increase in rates. Existing debt can be transformed into investment securities and give flexibility to debtors, but especially to creditor banks. As in many countries in sub-Saharan Africa, a large proportion of transactions between economic agents are made in cash and the lack of money is not likely to help matters.
Increase supply to reduce prices, not the mass of money in circulation.
Also, an essential component of the inflation that the countries of the WAEMU zone are currently experiencing is the peg of their currency (the FCFA) to the euro. Currently, the reference currency is weak against the US dollar, resulting in a weakening of the African currency. As a result, it takes more FCFA to pay international bills, due to higher exchange costs. Also, the international situation marked by the rise in prices on various raw materials, those of several energy-related services and the actions of speculators on various markets adds an additional factor of price rises experienced by WAEMU, and the policy monetary policy of the BCEAO cannot have a relevant effect on these elements.
The current situation suggests that it is urgent to put in place a reform of the financial sector within the WAEMU as in that of many African countries. Price stability must be the result of better consistency between monetary and budgetary policies. It is essential to minimize exposure to external factors. To achieve this, regulation of the banking sector oriented towards the production of goods and services should be more effective than the current one, which is more focused on minimizing risks.
WAEMU banks often claim to play a central role in the financing of the Union. The indicators prove them right in a certain sense. Indeed, the total balance sheet assets of banks increased from 7,605.1 billion FCFA in 2006 to 47,718.5 billion FCFA in 2020, according to information published by the WAEMU Banking Commission in 2021. The volume has been multiplied by nearly 7, and the average annual growth is 12%.
But this amount only represents 72 billion euros for the 130 million inhabitants of the sub-region. For comparison, the balance sheet assets of the six largest banking groups in France in 2020 were 7864 billion euros in 2020. Thus, there are still technically opportunities to inject more money into WAEMU countries.
In addition to having a more modest exposure to their economies, WAEMU commercial banks provide little financing to the basic production sector. The segments that benefit the most from credit are those of services (28% in 2020), and the share of activities such as agriculture, fishing and livestock farming, which was already low in 2018 (5%), fell back to 3% in 2020, according to data consulted by theEcofin Agency.
Idriss Linen