MACROECONOMIC CONVERGENCE REPORT FIRST HALF 2009
Executive Summary
ECOWAS countries faced significant challenges in the first half of 2009 and performance on the convergence criteria was mixed. Budget deficits deteriorated, reserves were much lower but there was some improvement in the inflation. Some of the outturn reflected developments in the international economy.
On the international economic developments and their impact for ECOWAS member States, the review shows that the world economy continues to experience significant challenges as a result of the financial crisis and an acute loss of confidence. The repatriation of foreign assets by investors and the tightening of credit terms have compelled companies across the world to reduce production and postpone their investment plans. As a result, world Gross Domestic Product (GDP) declined by 1.7 percent in 2009 compared to an increase of 3.3 percent in 2008. The economic recession had a high impact on countries that specialized in capital goods production such as Germany, United States, Japan and Taiwan (China). Low and middle income countries were equally affected and therefore experienced slowdown in economic activity. Growth in developing countries was estimated to decline from 5.8 percent in 2009 to 2.1 percent by the end of 2009.
However, economic growth in ECOWAS was less affected as shown by a slight decline from 5.8 percent in 2008 to 4.9 percent. While economic activity in UEMOA slightly declined from 3.8 percent in 2008 to 3.5 percent in 2009, economic growth in the WAMZ significantly declined from 6.4 percent to 5.3 over the same period.
The high inflationary pressures that originated from the high oil prices as well as the food crises experienced downward trends at the level of ECOWAS in 2009, although the rates of inflation were still high in few of the countries by community standards. Inflationary pressures in ECOWAS decreased from 13.6 percent in 2008 to 9.2 percent in 2008. In UEMOA, inflation rates significantly reduced from 8.5 percent in 2008 to 0.9 percent during the review period, as the effects of the oil prices, drought and food crises eased off. Inflation rate, which declined from 15.3 percent in 2008 to 11.7 percent by mid-2009, was still relatively high in the WAMZ.
Similarly, ECOWAS Member countries also experienced fiscal challenges, which were linked to the decline in performance of the external sector.
Regarding the situation of macroeconomic convergence in the first half of 2009, the review shows that performance under inflation generally improved in the first half of 2009 compared with the position in the corresponding period of 2008, with eight countries meeting this criterion, compared to one in 2008. On the other hand, performance with respect to the budget deficit criterion deteriorated from 10 to 8 countries over the same period. Fourteen countries met the required target for central bank financing of the budget deficit, compared to 13 in 2008. Regarding gross external reserves, nine countries (Nigeria and the eight UEMOA countries) met the target during the period, thus maintaining the same level attained in the first half of 2008. Performance under the secondary criteria was generally below expectation. Two countries met the tax receipts/GDP target during the period under consideration. Performance on the wage bill was relatively better, as nine countries achieved this target during the period; an improvement of one country compared to the first half of 2008.There was prevalence of negative real interest rates in a majority of countries as at end-June 2009. In general, real exchange rates remained stable in member countries and the criterion was satisfied by 14 countries by mid 2009, compared to 13 in 2008.
In addition, a summary of the total number of criteria (primary and secondary) satisfied by each country indicates that none of the countries was able to meet all the primary and secondary convergence criteria. As at Mid-2009, the best performance of 8 targets was recorded by Senegal. Benin, Guinea and Mali followed with 7 targets each, while Nigeria and Togo attained 6 benchmarks each. Burkina Faso and Cote d’Ivoire met 5 targets each, while The Gambia, Guinea-Bissau, Liberia and Niger met 4 benchmarks each. Cape Verde, Ghana and Sierra Leone achieved 2 targets each.
Finally the details in country analyses epitomise the key macroeconomic developments that accounted for the non-observance of the criteria and policy recommendations proffered to improve their performance. In the area of policy harmonisation and institutional arrangements the report shows that there still remain some major challenges. Formation and effective functioning of National Coordinating Committees in WAMZ member countries remain a formidable challenge that needs to be addressed to facilitate multilateral surveillance especially at the level of the WAMA-ECOWAS Joint Secretariat. In addition, there is still the need to deepen the level of payments system development and interconnectivity, capital account liberalisation, implementation of the ECOWAS Common External Tariff, Statistical Harmonisation as well as to eliminate all other barriers to free movement of people, capital and goods within the community.