The effectiveness of monetary policy in Cote d`Ivoire

The effectiveness of monetary policy in Cote d`Ivoire

WORKING PAPER 30
THE EFFECTIVENESS
OF M O N E T A R Y POLICY
IN C O T E D ' i V O I R E
Christopher E Lane
November 1989
ISBN 0 85003 125 7
OVERSEAS DEVELOPMENT INSTITUTE
Regent's C o l l e g e
Inner C i r c l e , Regent's Park
London NWl 4NS
Acknowledgements
ODI w o r k i n g p a p e r s p r e s e n t i n p r e l i m i n a r y form work r e s u l t i n g
from r e s e a r c h u n d e r t a k e n u n d e r t h e a u s p i c e s o f t h e I n s t i t u t e .
V i e w s e x p r e s s e d a r e t h o s e o f t h e a u t h o r s and do n o t n e c e s s a r i l y
r e f l e c t t h e v i e w s o f ODI o r s u p p o r t i n g i n s t i t u t i o n s .
Comments
are welcomed and s h o u l d be a d d r e s s e d d i r e c t l y t o t h e a u t h o r s o r
project leaders.
T h i s w o r k i n g p a p e r i s one o f s e v e n c o u n t r y s t u d i e s p r e p a r e d as
p a r t of a study of t h e r o l e of monetary p o l i c y i n p r i m a r y p r o d u c t
d e p e n d e n t , low income c o u n t r i e s .
The o b j e c t i v e o f t h e g e n e r a l
s t u d y i s t o examine what m o n e t a r y p o l i c y c a n be e x p e c t e d t o
a c c o m p l i s h and what a r e t h e p r i n c i p a l c o n s t r a i n t s upon i t s
effectiveness.
The c o u n t r y s t u d i e s examine t h e d e v e l o p m e n t o f
monetary i n s t i t u t i o n s , t h e d e t e r m i n a t i o n o f money s u p p l y and
demand, and t h e o b j e c t i v e s
and e x p e r i e n c e o f g o v e r n m e n t s i n
implementing monetary p o l i c y i n i n d i v i d u a l c o u n t r i e s .
Other
c a s e s t u d i e s i n c l u d e C h i n a , Keyna, B a n g l a d e s h , and I n d o n e s i a .
I t i s hoped t h a t t h e f i n a l r e p o r t w i l l be p u b l i s h e d i n 1991.
The p r o j e c t i s d i r e c t e d a t ODI by S h e i l a Page. We a r e g r a t e f u l
for
financial
support
from
the
Overseas
Development
A d m i n i s t r a t i o n , t h e R o c k e f e l l e r F o u n d a t i o n and t h e I n t e r n a t i o n a l
Development R e s e a r c h C e n t r e o f Canada.
The a u t h o r o f t h i s w o r k i n g p a p e r w o u l d l i k e t o e x p r e s s h i s
a p p r e c i a t i o n f o r t h e a s s i s t a n c e g i v e n by t h e s t a f f o f t h e A f r i c a n
C e n t r e f o r M o n e t a r y S t u d i e s (ACMS/CAEM), Dakar and a l s o a t t h e
C e n t r e I v o i r i e n de R e c h e r c h e s Economiques e t S o c i a l e s ( C I R E S ) ,
Abidjan.
CONTENTS
L i s t o f T a b l e s and F i g u r e s
1.
Introduction
2.
The M o n e t a r y S y s t e m i n I v o r i a n Development
9
3.
Instruments of Monetary P o l i c y
27
4.
Problems o f Monetary C o n t r o l
45
5.
Real
61
6.
E v a l u a t i n g Membership o f t h e UMOA
64
7.
Conclusions
74
A p p e n d i x : E s t i m a t i n g Money Demand
Bibliography
77
81
Economy E f f e c t s o f M o n e t a r y P o l i c y
8
Acknowlec^ments
ODI w o r k i n g p a p e r s p r e s e n t i n p r e l i m i n a r y f o r m work r e s u l t i n g
f r o m r e s e a r c h undertaken under the a u s p i c e s o f t h e I n s t i t u t e .
V i e w s e x p r e s s e d a r e t h o s e o f t h e a u t h o r s and do n o t n e c e s s a r i l y
r e f l e c t t h e v i e w s o f ODI o r s u p p o r t i n g i n s t i t u t i o n s .
Comments
a r e welcomed and s h o u l d be a d d r e s s e d d i r e c t l y t o t h e a u t h o r s o r
project leaders.
T h i s w o r k i n g p a p e r i s one o f seven c o u n t r y s t u d i e s p r e p a r e d as
p a r t o f a s t u d y o f t h e r o l e o f monetary p o l i c y i n p r i m a r y p r o d u c t
d e p e n d e n t , low income c o u n t r i e s .
The o b j e c t i v e o f t h e g e n e r a l
s t u d y i s t o examine what m o n e t a r y p o l i c y can be e x p e c t e d t o
a c c o m p l i s h and what a r e t h e p r i n c i p a l c o n s t r a i n t s upon i t s
effectiveness.
The c o u n t r y s t u d i e s examine t h e d e v e l o p m e n t o f
monetary i n s t i t u t i o n s , t h e d e t e r m i n a t i o n o f money s u p p l y and
demand, and t h e o b j e c t i v e s
and e x p e r i e n c e o f g o v e r n m e n t s i n
implementing monetary p o l i c y i n i n d i v i d u a l c o u n t r i e s .
Other
c a s e s t u d i e s i n c l u d e C h i n a , Keyna, B a n g l a d e s h , and I n d o n e s i a .
I t i s hoped t h a t t h e f i n a l r e p o r t w i l l be p u b l i s h e d i n 1991.
The p r o j e c t i s d i r e c t e d a t ODI by S h e i l a Page. We a r e g r a t e f u l
for
financial
support
from
the
Overseas
Development
A d m i n i s t r a t i o n , t h e R o c k e f e l l e r F o u n d a t i o n and t h e I n t e r n a t i o n a l
Development R e s e a r c h C e n t r e o f Canada.
The a u t h o r o f t h i s w o r k i n g p a p e r would l i k e t o e x p r e s s h i s
a p p r e c i a t i o n f o r t h e a s s i s t a n c e g i v e n by t h e s t a f f o f t h e A f r i c a n
C e n t r e f o r M o n e t a r y S t u d i e s (ACMS/CAEM), Dakar and a l s o a t t h e
C e i T c r e I v o i r i e n de R e c h e r c h e s Economiques e t S o c i a l e s ( C I R E S ) ,
Abidjan.
CONTENTS
L i s t o f T a b l e s and F i g u r e s
1.
Introduction
2.
The M o n e t a r y System i n I v o r i a n
3.
Instruments o f Monetary P o l i c y
4.
Problems o f Monetary
5.
Real
6.
E v a l u a t i n g Membership o f t h e UMOA
7.
Development
Control
Economy E f f e c t s o f M o n e t a r y P o l i c y
Conclusions
A p p e n d i x : E s t i m a t i n g Money
Bibliography
Demand
Ljst of Tables
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Economic Growth i n C o t e d ' l v o i r e
M a j o r F i n a n c i a l System A s s e t s 1987
G r o w t h o f B a n k i n g and F i n a n c i a l System
Elements o f Domestic S a v i n g
C r e d i t and R e f i n a n c i n g
UMOA M o n e t a r y P o l i c y S t a n c e 1986 and 1987
C e n t r a l Bank R e f i n a n c i n g : C e i l i n g s and R e s u l t s
Recent R u r a l C r e d i t R e f i n a n c i n g
C o t e d ' l v o i r e M o n e t a r y S u r v e y : T a r g e t s and A c t u a l s
S e c t o r a l C r e d i t : O b j e c t i v e s and Outcomes
I n t e r e s t R a t e s and R e s t r i c t i o n s
Changes i n P r i v a t e S e c t o r C r e d i t and R e f i n a n c i n g
Changes i n C o u n t e r p a r t s To The M o n e t a r y Base 1976-87
Money M u l t i p l i e r and Changes i n Money S u p p l y
F i n a n c i n g S o u r c e s F o r Government D e f i c i t 1980-87
F o r e i g n S e c t o r : Summary Data
S e c t o r a l C r e d i t and O u t p u t S h a r e s
C o t e d ' l v o i r e and C o u n t r y G r o u p i n g s GDP Growth
Cote d ' l v o i r e : Trade Shares
10
16
17
25
28
30
31
34
37
39
42
47
49
51
54
58
62
66
71
List Of R g u r e s
1.
2.
3.
4.
5.
6.
7.
8.
I n d i c a t o r s o f F i n a n c i a l Development
Gross Savings Rates
Seasonality of Rural Credit
Selected I n t e r e s t Rates
Real Deposit Rate
D o l l a r P r i c e s and Terms o f T r a d e
T r a d e Volume
R e a l Exchange R a t e s
13
24
32
41
43
56
57
59
Descriptive Glossary of Abbreviations
BCEAO
Banque C e n t r a l e des E t a t s de I ' A f r i q u e de
( C e n t r a l Bank o f West A f r i c a n S t a t e s )
BIAO-CI
Banque I n t e r n a t i o n a l e p o u r I ' A f r i q u e de
BICI-CI
Banque I n t e r n a t i o n a l e p o u r l e Commerce e t 1 ' I n d u s t r i e
de l a C o t e d ' l v o i r e
CAA
Caisse
Fund)
CFA
F r a n c F r a n c de l a Communaute F i n a n c i e r e
( A f r i c a n F i n a n c i a l Community F r a n c )
CSSPPA
I n C a i s s e de S t a b i l i s a t i o n e t des S o u t i e n des P r i x
des P r o d u c t i o n s A g r i c o l e s ( A g r i c u l t u r a l E x p o r t s
S t a b i l i s a t i o n Fund)
ECU
European Currency U n i t
EMS
European Monetary
ERM
Exchange R a t e Mechanism
FNI
Fond N a t i o n a l
Fund).
GDP
Gross Domestic Product
GNP
Gross N a t i o n a l Product
PCDI
P a r t i D e o m c r a t i q u e de l a C o t e d ' l v o i r e
SGBCI
S o c i e t e G e n e r a l e de Banques en C o t e
SIB
S o c i e t e I v o i r i e n n e de Banque
TEN
Taux d'Escompte Normale
TEP
Taux d'Escompte P r e f e r e n t i e l
Rate)
UMOA
Union Monetaire O u e s t - A f r i c a i n e
Monetary Union)
Autonome
d'Amortissement
(Debt
I'Ouest
I'Ouest
Amortisation
Africaine
System
(of the
d' I n v e s t i s s e m e n t
EMS)
(National
Investment
d'lvoire
( O r d i n a r y D i s c o u n t Rate)
( P r e f e r e n t i a l Discount
(West
African
1. I N T R O D U C T I O N
T h i s w o r k i n g p a p e r examines t h e e f f e c t i v e n e s s o f m o n e t a r y p o l i c y
i n c o n t r o l l i n g m o n e t a r y a g g r e g a t e s and t h e i m p a c t o f m o n e t a r y
p o l i c y upon t h e I v o r i a n economy, l o o k i n g i n p a r t i c u l a r a t t h e
i m p a c t and e f f e c t i v e n e s s o f t h e e x i s t i n g a r r a y o f m o n e t a r y
i n s t r u m e n t s a v a i l a b l e t o t h e monetary a u t h o r i t i e s .
M o n e t a r y p o l i c y i n C o t e d ' l v o i r e o p e r a t e s i n an i n s t i t u t i o n a l
e n v i r o n m e n t t h a t i n many r e s p e c t s r e s t r i c t s t h e r a n g e o f p o l i c y
o p t i o n s a v a i l a b l e t o t h e monetary a u t h o r i t i e s .
As t h e l a r g e s t
member o f a r e g i o n a l m o n e t a r y u n i o n . C o t e d ' l v o i r e c a n n o t s e t
i n t e r e s t r a t e s i n d e p e n d e n t l y o f o t h e r u n i o n members n o r c a n i t
u n i l a t e r a l l y change i t s exchange r a t e , w h i c h h a s r e m a i n e d pegged
t o t h e F r e n c h F r a n c s i n c e 1948.
The u n i o n a l s o manages i t s
f o r e i g n r e s e r v e s c o l l e c t i v e l y and c o n t r o l s c r e d i t e x p a n s i o n w h i c h
i n f l u e n c e s t h e d i r e c t i o n and m a g n i t u d e o f t h e m o n e t a r y s t a n c e
t h a t i n d i v i d u a l c o u n t r i e s may f o l l o w .
T h i s Working paper looks
a t t h e d i s t i n c t i v e f e a t u r e s o f t h e o p e r a t i o n o f monetary p o l i c y
w i t h a f i x e d exchange r a t e and r e g i o n a l i n v o l v e m e n t i n m o n e t a r y
policy decisions.
Cote d ' l v o i r e i s a good example o f p o l i c y c o n t i n u i t y .
Monetary
p o l i c y i n s t r u m e n t s have r e m a i n e d v i r t u a l l y unchanged s i n c e 1973.
The e c o n o m i c e n v i r o n m e n t however, h a s a l t e r e d f r o m r a p i d e x p o r t based g r o w t h i n t h e 1970s, t o economic s t a g n a t i o n and p r o l o n g e d
a d j u s t m e n t t o i n t e r n a l and e x t e r n a l f i n a n c i a l i m b a l a n c e s d u r i n g
t h e 1980s.
A c c e s s t o c o m m e r c i a l f o r e i g n f u n d s h a s been
e f f e c t i v e l y c u t s i n c e d e b t s e r v i c i n g a r r e a r s emerged i n 1983.
In t h i s p e r s p e c t i v e , the d e c l i n e i n gross n a t i o n a l savings t o
l e s s t h a n 10 p e r c e n t o f GDP a p p e a r s as a s e r i o u s p r o b l e m l i k e l y
t o r e s t r i c t t h e growth o f c a p i t a l s t o c k , p a r t i c u l a r l y as p r i v a t e
f o r e i g n i n v e s t m e n t h a s a l s o d r a m a t i c a l l y slumped.
Domestic
monetary
policy
h a s t h e r e f o r e become more i m p o r t a n t t h a n
p r e v i o u s l y as a p o l i c y t o o l t o I n c r e a s e t h e o v e r a l l s a v i n g s r a t e .
The o r g a n i s a t i o n o f t h e w o r k i n g p a p e r i s a s f o l l o w s : S e c t i o n two
surveys t h e f i n a n c i a l system, assesses i t s r e c e n t development,
and p l a c e s t h e monetary u n i o n i n c o n t e x t ; s e c t i o n t h r e e a n a l y s e s
t h e s c o p e and e f f e c t i v e n e s s o f c r e d i t and i n t e r e s t r a t e p o l i c i e s
w h i c h a r e t h e main forms o f monetary management; s e c t i o n f o u r
c o n s i d e r s t h e d i f f i c u l t i e s i n managing money demand and s u p p l y ;
s e c t i o n f i v e examines t h e r e a l economy e f f e c t s o f m o n e t a r y p o l i c y
and t h e p r o b l e m s o f i n f l e x i b l e exchange r a t e s ; s e c t i o n s i x
b r i e f l y e v a l u a t e s t h e i m p a c t o f membership o f a m o n e t a r y u n i o n
and i s f o l l o w e d by c o n c l u d i n g r e m a r k s upon t h e p o s s i b i l i t i e s f o r
and l i m i t a t i o n s o f monetary p o l i c y i n C o t e d ' l v o i r e .
2.
T H E M O N E T A R Y S Y S T E M IN IVORIAN D E V B . O P M E N T
A n a l y s i s o f t h e e f f e c t i v e n e s s o f monetary p o l i c y i n C o t e d ' l v o i r e
( o r e l s e w h e r e f o r t h a t m a t t e r ) s h o u l d make a l l o w a n c e f o r t h e f a c t
t h a t monetary i n s t i t u t i o n s cannot s o l v e t h e d i v e r s e problems o f
u n d e r d e v e l o p m e n t a l o n e . As J a k o b e i t (1985) a p t l y comments:
'they c a n o n l y f a c i l i t a t e ( o r i n h i b i t , a s t h e c a s e may be) t h e
r e a l i s a t i o n o f r e a l p r o c e s s e s , n o t engage them.'
B o t h p o l i t i c a l and economic f a c t o r s have been i n s t r u m e n t a l i n t h e
r a p i d economic g r o w t h o f C o t e d ' l v o i r e f r o m i n d e p e n d e n c e up t o
1980:
*
The p o l i t i c a l e n v i r o n m e n t h a s r e m a i n e d s t a b l e ; t h e PCDI
( P a r t i D e m o c r a t i q u e de l a C o t e d ' l v o i r e ) l e d b y P r e s i d e n t
Houphouet-Boigny
h a s been c o n t i n u o u s l y i n power s i n c e
a c h i e v i n g independence.
*
A p o l i c y of encouraging the long standing p a t t e r n of
i m m i g r a t i o n from n e i g h b o u r i n g s t a t e s h a s p r o v i d e d a l o w c o s t
l a b o u r f o r c e i n c o n s t r u c t i o n , a g r i c u l t u r e and s e r v i c e
s e c t o r s c o m p r i s i n g a b o u t 25 p e r c e n t o f t h e w o r k f o r c e .
Buoyant o r booming p r i c e s f o r c o f f e e and c o c o a e x p o r t s u n t i l
t h e l a t e 1970s, c o u p l e d w i t h a s u c c e s s f u l m a r k e t i n g and
development p o l i c y f o r c a s h c r o p s , have p r o v i d e d a l a r g e
s u r p l u s f o r t h e e x p a n s i o n o f t h e n o n - a g r i c u l t u r a l economy.
From 198 0 onwards t h e economy has been i n s t a g n a t i o n ; monetary
and f i s c a l p o l i c y were t i g h t e n e d t o r e d u c e t h e b a l a n c e o f
payments and f i s c a l d e f i c i t s w h i c h emerged a s a r e s u l t o f r a p i d
monetary e x p a n s i o n d u r i n g and a f t e r t h e commodity boom.
The
I v o r i a n Economy
The economy o f C o t e d ' l v o i r e i s r e l a t i v e l y open and c h a r a c t e r i s e d
by a h i g h l e v e l o f dependence upon p r i m a r y p r o d u c t e x p o r t s .
A b o u t 3 5 p e r c e n t o f GDP i s e x p o r t e d ( f o r c o m p a r i s o n , B a n g l a d e s h
6 p e r c e n t , C h i n a 13 p e r c e n t , Ghana 2 0 p e r c e n t , I n d o n e s i a 2 6
p e r c e n t and Kenya 21 p e r c e n t ) o f w h i c h 90 p e r c e n t i s composed
o f n o n - f u e l c o m m o d i t i e s , c o c o a and c o f f e e b e i n g - t h e ,most
i m p o r t a n t commodity e x p o r t s . E x p o r t s a r e s u b j e c t t o c o n s i d e r a b l e
p r i c e i n s t a b i l i t y w h i c h i s r e f l e c t e d i n s i z e a b l e income changes
from y e a r t o y e a r .
C o t e d ' l v o i r e a l s o had a r a p i d l y g r o w i n g government s e c t o r u n t i l
1980 (20-28 p e r c e n t o f GDP) w h i c h c o n t r i b u t e d t o a r e l a t i v e l y
r a p i d g r o w t h o f s e r v i c e s i n GDP ( s e e T a b l e 1 ) . C o n s e q u e n t l y ,
l e a v i n g f a c t o r p r o d u c t i v i t y i s s u e s a s i d e , t h e r e a l and f i n a n c i a l
p o s i t i o n o f t h e economy i s p r i m a r i l y d e t e r m i n e d by t h e e f f e c t i v e
t e r m s o f t r a d e and t h e f i s c a l s t a n c e o f t h e p u b l i c s e c t o r ^ .
Table 1: Economic Growth i n Cote d ' l v o i r e
Growth R a t e s
(% p e r annum) from c o n s t a n t p r i c e d a t a
1965-73
1973-80
1980-87
Gross Domestic Product
8.5
7.0
2.2
Agriculture
4.9
3.3
1.6
Industry
12.5
11.7
-2.4
Services
11.2
6.5
4.2
Source:
( W o r l d Bank, 1988:p x v i i i and
W o r l d Bank, 1989 f o r 1980-87 d a t a )
1960-80 Export-Led
Growth
From i n d e p e n d e n c e i n 1960 t h e I v o r i a n economy grew r a p i d l y
a v e r a g i n g r e a l GDP g r o w t h o f 8.5% pa between 1965-73 and 7.0%
o v e r t h e 1973-80 p e r i o d . A g r i c u l t u r e , t h e d o m i n a n t s e c t o r i n t h e
economy e m p l o y i n g n e a r l y t h r e e q u a r t e r s o f t h e l a b o u r f o r c e i n
1973, grew a t a s l o w e r r a t e ( s e e T a b l e 1) b u t was t h e b a s i s f o r
strong
e x p o r t growth
particularly
from
cocoa
and
coffee
production.
The a g r i c u l t u r a l s e c t o r , v i a t h e p u b l i c p r i c e s t a b i l i s a t i o n f u n d
{Caisse de S t a b i l i s a t i o n et de Soutien des Productions
Agricoles,
CSSPPA) c o n s i s t e n t l y p r o v i d e d f i n a n c i a l s u r p l u s e s o f up t o 15 p e r
c e n t o f GDP
( S c h i l l e r , 1988:p3) w h i c h c o n s t i t u t e d a l a r g e
p r o p o r t i o n o f government r e v e n u e .
The e x p a n s i o n o f p u b l i c
e x p e n d i t u r e f u n d e d by t h e a g r i c u l t u r a l f i n a n c i a l s u r p l u s (AFS)
and from t h e mid-1970s by f o r e i g n c o m m e r c i a l b o r r o w i n g p e r m i t t e d
r a p i d g r o w t h i n i m p o r t s u b s t i t u t i n g i n d u s t r i e s , c o n s t r u c t i o n and
tertiary sectors.
The 1975-78 p e r i o d marked t h e apex o f t h e c o u n t r y ' s economic
s u c c e s s w i t h a boom i n c o f f e e and c o c o a p r i c e s i m p r o v i n g t h e
t e r m s o f t r a d e by 80 p e r c e n t and l e a d i n g t o e x c e p t i o n a l l y r a p i d
income g r o w t h .
F o r example g r o s s d o m e s t i c income ( a t c o n s t a n t
F o r summaries o f t h e I v o i r i a n Economy s e e : T u i n d e r
(1978) M i n i s t e r e d'Economie e t F i n a n c e s ( 1 9 8 8 a ) , D u r u f l e
(1989) R i d d e n ( f o r t h c o m i n g 1990).
p r i c e s ) r o s e by 14.5 p e r c e n t i n 1976 and 12.7 p e r c e n t i n 1977.
The
1980s
- Prolonged
Adjustment
By 1980, s e v e r e d i s e q u i l i b r i a were p r e s e n t i n t h e I v o r i a n
economy.
Government b o r r o w i n g had i n c r e a s e d r a p i d l y f r o m 1976
t o f i n a n c e an a m b i t i o u s i n v e s t m e n t programme i n i n f r a s t r u c t u r e
and
a g r o i n d u s t r y w i t h t h e c o n s o l i d a t e d government
deficit
r e a c h i n g 12 p e r c e n t o f GDP by 1980.
The d e c l i n i n g t e r m s o f
t r a d e f r o m 1979 onwards c o n t r i b u t e d t o a c u r r e n t a c c o u n t d e f i c i t
e q u i v a l e n t t o 17 p e r c e n t o f GDP (1980) and d e b t s e r v i c e on
n e a r l y US$ 6 b i l l i o n f o r e i g n d e b t a c c o u n t e d f o r n e a r l y 25 p e r
cent of export proceeds.
The 1980s have been marked by a p e r i o d o f p r o l o n g e d e c o n o m i c
s t a b i l i s a t i o n and a d j u s t m e n t , n o t a b l y c h a r a c t e r i s e d by W o r l d Bank
S t r u c t u r a l A d j u s t m e n t L e n d i n g programmes i n 1981, 1983 and 1986.
IMF f i n a n c i n g o f b a l a n c e o f payments i m b a l a n c e s h a s been a l m o s t
c o n t i n u a l s i n c e 1980
.
S e v e r e d r o u g h t and a c o n t r a c t i o n o f
government e x p e n d i t u r e l e d t o a deep r e c e s s i o n d u r i n g 1982-84,
a l t h o u g h t e m p o r a r i l y b u o y a n t commodity p r i c e s and a m o r a t o r i u m
on t h e s u b s t a n t i a l a c c u m u l a t i o n o f f o r e i g n d e b t i m p r o v e d t h e
b a l a n c e o f payments and a i d e d a c o n s i d e r a b l e r e c o v e r y i n 1985 and
1986.
A s t e e p f a l l i n t h e t e r m s o f t r a d e i n 1987 p r e c i p i t a t e d a new
r e c e s s i o n and r e a l income f e l l i n 1987 and 1988.
By 1989, t h e
economy was i n a c r i t i c a l p o s i t i o n : i n t e r n a t i o n a l c o f f e e and
c o c o a p r i c e s i n l o c a l c u r r e n c y e q u i v a l e n t (CFA) r e m a i n e d a t h a l f
the
l e v e l p r e v a l e n t i n t h e 1985/6 s e a s o n f o r t h e s e c o n d
s u c c e s s i v e y e a r , and t h e government d e f i c i t had i n c r e a s e d t o o v e r
10 p e r c e n t o f GDP.
The F i n a n c i a l
Svstem
The d e v e l o p m e n t o f t h e m o n e t a r y s y s t e m i n C o t e d ' l v o i r e and o t h e r
f o r m e r F r e n c h t e r r i t o r i e s i n West A f r i c a was b a s e d upon t h e
e x t e n s i o n o f t h e F r e n c h F r a n c as l e g a l c u r r e n c y .
Soon a f t e r t h e a b o l i t i o n o f s l a v e r y i n 1848 p r i v a t e i s s u i n g banks
[banques
d'emission)
were formed i n r e s p o n s e t o p l a n t a t i o n
owners' newfound r e q u i r e m e n t s f o r w o r k i n g c a p i t a l . I n 1901, t h e
c o m m e r c i a l Banque de I'Afrique
Occidentale
was formed w h i c h
i s s u e d c u r r e n c y f o r a l l West A f r i c a n c o l o n i e s and a l s o t h e Congo
(Kouame, 1988:pp29-32).
I n 1955, t h e r i g h t o f n o t e i s s u e ' w a s
t r a n s f e r r e d t o a p u b l i c l y owned i n s t i t u t i o n w h i c h became t h e
Banque Centrale
des Etats de I'Afrique
de L'Ouest
(BCEAO) i n
^ E x p o r t F i n a n c i n g F a c i l i t y 1981-83, S t a n d b y A r r a n g e m e n t s
1984 and 1986. S t a n d b y 1988 a p p r o v e d b u t n o t d i s b u r s e d
f o l l o w i n g C o t e d ' l v o i r e d e f a u l t on f o r e i g n d e b t r e p a y m e n t s .
Compensatory F i n a n c i n g F a c i l i t y , 1988. N e g o t i a t i o n s i n 1989
f o r new S t a n d b y A r r a n g e m e n t o f a r o u n d SDR 150 m i l l i o n .
19 59.
F r e n c h c d n t r o l o f t h e c o l o n i a l i s s u i n g b a n k s a l l o w e d no
t e r r i t o r i a l autonomy o r d e c e n t r a l i s a t i o n o f d e c i s i o n m a k i n g
{ B o r t o l a n i , 1975:p5)
C l o s e l y f o l l o w i n g p o l i t i c a l i n d e p e n d e n c e f o r F r e n c h West A f r i c a n
s t a t e s t h e Union Monetaire
Quest A f r i c a i n e (UMOA) was c r e a t e d i n
1962 w i t h B e n i n , C o t e d ' l v o i r e . U p p e r V o l t a , N i g e r , S e n e g a l a n d
M a u r i t a n i a a s t h e f o u n d i n g member s t a t e s .
A t t h i s time, t h e
BCEAO t o o k on t h e u s u a l r e s p o n s i b i l i t i e s o f a c e n t r a l bank s u c h
as r e s e r v e management, f o r m u l a t i o n o f m o n e t a r y p o l i c y , c r e d i t
facilities
t o banks,
governments
and o t h e r
financial
i n s t i t u t i o n s , a l t h o u g h t h e bank i t s e l f was l o c a t e d i n P a r i s w i t h
a g e n c i e s i n e a c h member s t a t e ( B h a t i a , 1 9 8 5 ) .
French p o l i c y
makers i n t h e Tresorie
a n d t h e Banque de France e f f e c t i v e l y h a d
a power o f v e t o i n BCEAO d e c i s i o n s .
I n 1973, UMOA c o n s t i t u e n t a g r e e m e n t s were r e n e g o t i a t e d w i t h a
s t r e n g t h e n e d r o l e f o r t h e BCEAO whose h e a d q u a r t e r s were moved t o
Dakar, Senegal.
F r a n c e ' s r e p r e s e n t a t i o n i n UMOA was r e s t r i c t e d
t o two members o f t h e c e n t r a l B o a r d o f D i r e c t o r s , t h e same a s a l l
UMOA member s t a t e s .
I n t e r m s o f m o n e t i s a t i o n o f t h e economy. C o t e d ' l v o i r e h a s
g e n e r a l l y been one o f t h e most a d v a n c e d c o u n t r i e s i n s u b - S a h a r a n
Africa.
B o r t o l a n i (1975) shows t h a t i n 1966-68 C o t e d ' I v o i r e ' s
Ml/GDP r a t i o was 2nd h i g h e s t
o f 30 s e l e c t e d
sub-Saharan
c o u n t r i e s . The r e l a t i v e l y e a r l y m o n e t i s a t i o n o f t h e economy c a n
be a t t r i b u t e d t o t h e i m p o r t a n c e o f c a s h c r o p a g r i c u l t u r e i n t h e
economy combined w i t h t h e e a r l y i n c o r p o r a t i o n o f t h e i n d i g e n o u s
r u r a l p o p u l a t i o n i n t o p r o d u c t i o n f o r exchange.
From i n d e p e n d e n c e u n t i l 1977 t h e r e was an i n c r e a s e i n t h e
'banking h a b i t ' w i t h a c l e a r l y d e c r e a s i n g r a t i o o f cash t o narrow
money ( f r o m .60 t o .36) and r i s i n g r a t i o s o f b o t h b r o a d and
n a r r o w money t o GDP ( s e e F i g u r e 1 ) , a s w e l l a s a s i z e a b l e
e x p a n s i o n i n t h e number o f b a n k i n g o f f i c e s .
The peak l e v e l s o f
f i n a n c i a l i n t e r m e d i a t i o n i n t h e mid-1970s w e r e , however, a
r e f l e c t i o n o f t h e e x p o r t commodity boom r a t h e r t h a n a more
d e v e l o p e d f i n a n c i a l s y s t e m . W i n d f a l l income r e c e i p t s t e m p o r a r i l y
i n c r e a s e d s a v i n g s a n d l o w e r e d t h e income v e l o c i t y o f money. So
i t was n o t s u r p r i s i n g t h a t l e v e l s o f m o n e t i s a t i o n s l i p p e d b a c k
i n t h e l a t e 1970s p o s t boom p e r i o d .
I n t h e 1980s money t o GDP
ratios
stayed
fairly
constant
and t h i s
stability
c a n be
a t t r i b u t e d t o t h e r e l a t i v e l y s l o w g r o w t h o f i n c o m e , money a n d
p r i c e s a s w e l l a s a p e r i o d marked by l i t t l e e x p a n s i o n , i f a n y ,
of the banking s e c t o r .
P e r i o d s o f f i n a n c i a l d e e p e n i n g , p r o x i e d by i n c r e a s e s i n t h e b r o a d
money t o GDP r a t i o , a r e g e n e r a l l y a s s o c i a t e d w i t h r e a l income
g r o w t h . T h i s i s e v i d e n t from i n c r e a s e s i n t h e l e v e l o f f i n a n c i a l
i n t e r m e d i a t i o n d u r i n g r a p i d g r o w t h 1968-76, and f a l l s i n 1979 and
1980 a s r e a l GDP g r o w t h f e l l t o 2.8 p e r c e n t a n d t h e n -0.7 p e r
c e n t . T h i s c o n c l u s i o n i s a l s o s u p p o r t e d by e c o n o m e t r i c e v i d e n c e
p r e s e n t e d i n s e c t i o n 4, w h i c h i d e n t i f i e s an income e l a s t i c i t y o f
demand f o r money g r e a t e r t h a n o n e .
Figure 1: I n d i c a t o r s Of F i n a n c i a l
Development
0 BO
19B6
19B8
1970
1374
1978
1982
1986
1972
197B
1980
19B4
1988
Source IFS
T h e r e i s however, l i t t l e e v i d e n c e t h a t m o n e t a r y p o l i c y h a s
p o s i t i v e l y encouraged f i n a n c i a l deepening.
The c o n t i n u i t y o f
m o n e t a r y p o l i c y , i n t e r m s o f i n s t r u m e n t s and a p p r o a c h e s , o v e r t h e
p a s t two d e c a d e s h a s i m p l i e d a more s u p p o r t i v e t h a n i n n o v a t i v e
role.
The s u b s e q u e n t
discussion of the financial
system
i n d i c a t e s t h a t a l t h o u g h t h e economy h a s grown s u b s t a n t i a l l y ,
f i n a n c i a l i n s t r u m e n t s o u t s i d e t h e c o m m e r c i a l b a n k i n g s e c t o r have
n o t been d e v e l o p e d s i g n i f i c a n t l y .
U n i o n M o n e t a i r e Quest
Africaine(UHOA)
Membership o f t h e UMOA i s t h e most i m p o r t a n t f e a t u r e o f t h e
I v o r i a n f i n a n c i a l system.
I t d e f i n e s t h e u n i t o f exchange,
e x c h a n g e r e l a t i o n s w i t h t h e r e s t o f t h e w o r l d , money and b a n k i n g
l e g i s l a t i o n a n d t h e framework f o r m o n e t a r y and c r e d i t p o l i c y .
The t h r e e m a i n f e a t u r e s o f t h e UMOA a r e :
*
Common M o n e t a r y A r e a . A l l s t a t e s i n t h e UMOA b e l o n g t o a
common m o n e t a r y a r e a i n w h i c h t h e CFA (Communaute
Financiere
Africaine)
Franc c i r c u l a t e s f r e e l y as l e g a l currency.
C o m m e r c i a l banks o r government a r e c o n f i n e d t o t h e i s s u e o f
notes bearing the l e t t e r o f i d e n t i f i c a t i o n o f the country
i n q u e s t i o n . T h i s e n s u r e s a d i s t i n c t i s s u e zone f o r e a c h
s t a t e i n t h e u n i o n and a l l o w s a l i m i t e d i n d e p e n d e n t m o n e t a r y
p o l i c y a t country l e v e l .
W i t h i n t h e monetary u n i o n t h e r e
i s h a r m o n i s a t i o n o f b a n k i n g a n d m o n e t a r y l e g i s l a t i o n and
c e n t r a l i s a t i o n o f e x t e r n a l r e s e r v e h o l d i n g s w i t h t h e BCEAO.
*
Convertibility.
An agreement between F r a n c e a n d t h e
member s t a t e s o f t h e UMOA a s s u r e s f r e e c o n v e r t a b i l i t y o f
t h e CFA F r a n c b y means o f an o p e r a t i o n s a c c o u n t
{compte
d'operations)
a t t h e French t r e a s u r y .
The BCEAO i s
r e q u i r e d t o d e p o s i t n o t l e s s t h a n 65 p e r c e n t o f i t s p o o l e d
foreign
exchange
reserves i n French
Francs
on t h e
operations account.
A l t h o u g h t h e r e i s no s t a t u t o r y l i m i t
on t h e o v e r d r a f t l e v e l a n i n d i v i d u a l UMOA member may have
on t h e o p e r a t i o n s a c c o u n t , i t i s c o n s t r a i n e d by t h e d e g r e e
of monetary c o n t r o l
e x e r c i s e d by t h e BCEAO i n e a c h
i n d i v i d u a l country.
*
F i x e d R a t e o f Exchange. The CFA F r a n c h a s a f i x e d r a t e o f
p a r i t y w i t h t h e F r e n c h F r a n c w h i c h , s i n c e 1948, h a s r e m a i n e d
unchanged a t 50 CFA t o 1 F r e n c h F r a n c . Exchange r a t e s w i t h
o t h e r c u r r e n c i e s are determined a c c o r d i n g t o the market r a t e
with the French Franc
O b j e c t i v e s of UMOA
Membership
The 1973 t r e a t y ' ' e n v i s a g e d t h a t r e g i o n a l m o n e t a r y u n i o n w o u l d
c o n t r i b u t e t o r a p i d e c o n o m i c d e v e l o p m e n t and s i m u l t a n e o u s l y
' h a r m o n i s e ' t h e e c o n o m i e s o f member s t a t e s , i m p l y i n g o b j e c t i v e s
o f e c o n o m i c s t a b i l i s a t i o n and i n t e g r a t i o n . The l i n k a g e w i t h t h e
F r e n c h F r a n c was v i e w e d a s i n c r e a s i n g t h e a v a i l a b i l i t y o f
financial
resources
f o r development
(presumably
via
the
o p e r a t i o n s a c c o u n t and t h r o u g h e n c o u r a g i n g f o r e i g n c a p i t a l f l o w s )
y e t i t a l s o r e f l e c t e d a commitment t o r e t a i n s t r o n g p o l i t i c a l and
e c o n o m i c l i n k s w i t h i n t h e F r a n c o p h o n e community. The o b j e c t i v e s
o f m o n e t a r y and c r e d i t p o l i c y were t o a s s u r e t h e v a l u e o f t h e
common c u r r e n c y and t h e a b i l i t y t o f i n a n c e e c o n o m i c a c t i v i t y and
development.
The c r e a t i o n o f t h e West A f r i c a n Development Bank (BOAD) i n 1973
s i g n i f i e d an i n c r e a s e d e m p h a s i s o n a d e v e l o p m e n t a l r o l e f o r t h e
UMOA. BOAD, p a r t l y f i n a n c e d by t h e BCEAO, h a s c o n c e n t r a t e d on
reducing
regional
economic d i s p a r i t i e s .
The t h r e e
largest
r e c i p i e n t s o f i n v e s t m e n t b e i n g l o w - i n c o m e S e n e g a l , B e n i n and
B u r k i n a F a s o . C o t e d ' l v o i r e h a s r e c e i v e d 12 p e r c e n t ($34
m i l l i o n ) o f t o t a l c u m u l a t i v e i n v e s t m e n t t o d a t e (BOAD,1988).
Organisation
of the UMOA
The s t a t u t o r y a r r a n g e m e n t s
BCEAO 1973b and BCEAO 1973c.
a r e d e s c r i b e d i n BCEAO 1973a,
' F o r a d e t a i l e d d i s c u s s i o n o f t h e changed e m p h a s i s o f t h e
r e v i s e d 1973 UMOA s t a t u t e s s e e B h a t i a ( 1 9 8 5 ) ; A l l e c h i (1989)
r e v i e w s s p e c i f i c changes.
The h i g h e s t a u t h o r i t y i n t h e UMOA i s t h e i n t e r - s t a t e C o u n c i l o f
Heads o f S t a t e f o l l o w e d by t h e C o u n c i l o f M i n i s t e r s (2 f r o m e a c h
s t a t e ) . These b o d i e s by unanimous d e c i s i o n a c c e p t o r e x c l u d e
c o u n t r i e s from t h e u n i o n and s e t t h e v a l u e o f t h e CFA F r a n c .
The a d m i n i s t r a t i o n a n d management o f U n i o n w i d e m o n e t a r y p o l i c y
i s c a r r i e d o u t by t h e B o a r d o f D i r e c t o r s o f t h e BCEAO
(Conseil
d'Administration)
c o m p r i s i n g two members from e a c h s t a t e and two
from F r a n c e . Most i m p o r t a n t l y t h e Conseil
d'Administration
sets
t h e amount o f t o t a l a s s i s t a n c e (concours
globale)
a c c o r d e d by t h e
BCEAO t o member s t a t e s e a c h y e a r , s e t s t h e d i s c o u n t r a t e a n d
d e c i d e s t h e a p p r o p r i a t e p o l i c y c h a n g e s t o be made when BCEAO
f o r e i g n a s s e t s f a l l s b e l o w t h e 20 p e r c e n t c o v e r a g e l e v e l .
M o n e t a r y p o l i c y i n e a c h UMOA c o u n t r y i s i m p l e m e n t e d by a l o c a l
BCEAO agency ( c o u n t r y c e n t r a l bank) and i s a d m i n i s t e r e d by a
N a t i o n a l C r e d i t Committee {Comite National
du C r e d i t ) . T h i s
c o m m i t t e e , c h a i r e d by t h e M i n i s t e r o f F i n a n c e , d e c i d e s t h e
d i v i s i o n o f t h e c r e d i t a l l o c a t i o n from t h e BCEAO ( w i t h i n t h e
concours
g l o b a l e s e t by t h e C o n s e i l d ' A d m i n i s t r a t i o n ) and
implements s e c t o r a l c r e d i t p o l i c y .
Importance
of Cote
d'lvoire
in the UMOA.
C o t e d ' l v o i r e i s by f a r t h e l a r g e s t economy i n t h e UMOA, w i t h
o u t p u t more t h a n t w i c e t h a t o f t h e s e c o n d l a r g e s t economy,
S e n e g a l . I n t e r m s o f m o n e t a r y a g g r e g a t e s i t c o m p r i s e s n e a r l y 50
p e r c e n t o f UMOA b r o a d money, more t h a n h a l f o f t o t a l d o m e s t i c
c r e d i t , and i s t h e p r i n c i p a l u s e r o f p o o l e d UMOA r e s e r v e s . More
t h a n 80 p e r c e n t o f t h e o f f i c i a l UMOA n e t f o r e i g n a s s e t d e f i c i t
o f CFA 600 b i l l i o n i n 1987 was a c c o u n t e d f o r by C o t e d ' l v o i r e
a l o n e ^ . A l t h o u g h a l l UMOA c o u n t r i e s a r e e q u a l l y r e p r e s e n t e d i n
d e c i s i o n m a k i n g b o d i e s , t h e e c o n o m i c w e i g h t and i n d e b t e d n e s s o f
C o t e d ' l v o i r e a r g u a b l y p l a c e s i t i n a p o s i t i o n o f primus
inter
pares,
but nonetheless
i t s s o v e r e i g n t y i n monetary
policy
formulation i s considerably diminished.
The
Commercial Banking
Svstem
I v o r i a n f i n a n c i a l a s s e t s a r e predominantly h e l d i n commercial
and s a v i n g s b a n k s , a l t h o u g h t h e C e n t r a l Bank has a s i z e a b l e r o l e
i n t h e f i n a n c i a l system. Table 2 h i g h l i g h t s t h e e x t e n t o f
dependence upon t h e b a n k i n g s e c t o r w i t h o v e r 90 p e r c e n t o f 1987
f i n a n c i a l a s s e t s h e l d i n t h e b a n k i n g system*. Of o t h e r t y p e s o f
f i n a n c i a l a s s e t s t h e h o l d i n g s o f bonds and e q u i t i e s a r e t h e most
s i g n i f i c a n t . The c o n c e n t r a t i o n o f f i n a n c i a l a s s e t s i n t h e b a n k i n g
s y s t e m i s g r e a t e r t h a n i n most d e v e l o p i n g c o u n t r i e s where' t h e
^ The I v o i r i a n f o r e i g n d e f i c i t h a s e s s e n t i a l l y two
components, t h e o v e r d r a f t a t t h e compte d ' o p e r a t i o n s and
drawdowns o f IMF b o r r o w i n g s .
* T h e r e i s l i k e l y t o be some d o u b l e c o u n t i n g
c o m m e r c i a l banks o n - l e n d i n g c e n t r a l bank l o a n s .
from
a v e r a g e s h a r e f i n a n c i a l a s s e t s h e l d by t h e C e n t r a l Bank i s 20 p e r
c e n t and d e p o s i t b a n k s 48 p e r c e n t ( f o r 1985)''.
T a b l e 2;
Major F i n a n c i a l System Assets
(CFA B i l l i o n )
1987
C o m m e r c i a l and S a v i n g s Banks
C e n t r a l Bank a
Bonds
Equity
Mutual Funds, U n i t T r u s t s
1546.2
802.5
95.1
122.0
0.0
60.3
31.3
3.7
4.7
0.0
%
%
%
%
%
Total
2565.8
100.0
%
N o t e s : a E x c l u d e s some a s s e t s h e l d by BCEAO n o t a l l o c a t e d by
country.
S o u r c e : BCEAO, S t a t i s t i q u e s Econowiques
et Monetaires;
W o r l d Bank
(1988) .
We c o n s i d e r f i r s t t h e i n s t i t u t i o n a l b a s i s and f u n c t i o n i n g o f t h e
major
holders of f i n a n c i a l
a s s e t s i n Cote
d'lvoire,
the
e f f i c i e n c y o f i n t e r m e d i a t i o n and t h e r a m i f i c a t i o n s f o r m o n e t a r y
p o l i c y implementation.
Commercial
Banks
T a b l e 3 shows t h e number o f b a n k i n g i n s t i t u t i o n s h a s i n c r e a s e d
s u b s t a n t i a l l y from t h e immediate
p o s t independence
period,
n o t a b l y f r o m t h e e n t r y o f o v e r s e a s b a n k s and r e p r e s e n t a t i v e
agencies (non-deposit taking) i n the p e r i o d f o l l o w i n g banking
r e f o r m s i n 1975. The s t r u c t u r e o f t h e b a n k i n g s y s t e m however
r e m a i n s r a t h e r l e s s a l t e r e d . F o u r c o m m e r c i a l banks BIAO-CI, B I C I C I , SGBCI and S I B (see g l o s s a r y o f a b b r e v i a t i o n s f o r f u l l t i t l e s )
d o m i n a t e c o m m e r c i a l b a n k i n g w i t h n e a r l y 95 p e r c e n t o f t o t a l
c o m m e r c i a l bank a s s e t s and 69 p e r c e n t o f t o t a l b a n k i n g s e c t o r
a s s e t s i n 1987. E a c h o f t h e " b i g f o u r " has a p a r e n t F r e n c h bank
as
the
principal
shareholder ° with
remaining
holdings
d i s t r i b u t e d m a i n l y amongst o t h e r f o r e i g n b a n k s and t h e I v o r i a n
s t a t e . French p a r e n t banks t y p i c a l l y s u p p l y c r e d i t l i n e s t o t h e i r
c o u n t e r p a r t I v o r i a n banks w h i c h can s i g n i f i c a n t l y
supplement
domestic lending resources p a r t i c u l a r l y i n s i t u a t i o n s of t i g h t
domestic l i q u i d i t y .
World
Bank f i g u r e s r e p r o d u c e d
i n The
Economist
12/8/89.
* P a r e n t : I v o i r i a n s u b s i d i a r i e s a r e as f o l l o w s ; BIAO:
BIAO-CI, Banque N a t i o n a l e de P a r i s : B I C I - C I , S o c i e t e
Generale:SGBCI, C r e d i t Lyonnais:SIB.
T a b l e 3: Growth of Banking and F i n a n c i a l System
1965
1973
1980
Numbers I n P l a c e
Bank Type
1987
10
Commercial
3
5
9
Development-type ^
3
4
6
4'>
Overseas
0
0
5
5
0
0
7
7
2
3
11
13
Incorporated
Representative
Offices
Other F i n a n c i a l
Institutions
%
Total
1987
Assets
70.6
21.4
Development-type
Des
Banques
(1988)
and
Banks
Annual
%
4.6 %
-
3.5
a I n c l u d i n g t h e C a i s s e Autonome d ' A m o r t i s s e m e n t , CAA.
b Not i n c l u d i n g 2 l i q u i d a t i o n s , i n c l u d i n g 2 o p e r a t i o n s
f r o z e n c r e d i t l i q u i d a t e d i n 1989.
c E x c l u d i n g 4 i n s t i t u t i o n s w i t h no p u b l i s h e d a c c o u n t s .
Source: F i c h i e r
(Various).
%
%
with
Reports
Banks
The l e g a l d i s t i n c t i o n between d e v e l o p m e n t banks and c o m m e r c i a l
banks was a b o l i s h e d i n 1975 a l t h o u g h t h e d i s t i n c t i o n i s r e t a i n e d
h e r e t o i n d i c a t e s p e c i a l i s e d l e n d i n g f u n c t i o n s and s u b s t a n t i a l
state
i n v o l v e m e n t . Development
banks
were
created,
from
i n d e p e n d e n c e onwards, w i t h d u a l g o a l s o f a c c e l e r a t i n g s e c t o r a l
economic d e v e l o p m e n t and e x e r t i n g government
i n f l u e n c e over
investment patterns through d i r e c t
i n t e r v e n t i o n and
credit
p o l i c y . D e v e l o p m e n t - t y p e banks a r e g e n e r a l l y n o t d e p o s i t t a k e r s .
C a p i t a l f u n d s a r e r a i s e d from government as w e l l as f r o m f o r e i g n
d o n o r and c o m m e r c i a l a g e n c i e s . I n f o r m a t i o n upon d e v e l o p m e n t type banks a c t i v i t i e s i n Cote d ' l v o i r e i s e x t r e m e l y s c a r c e
b e c a u s e t h e y o p e r a t e i n a h i g h l y p o l i t i c i s e d e n v i r o n m e n t and
b e c a u s e o f a p o o r t r a c k r e c o r d i n t e r m s o f a c c o u n t a b i l i t y and
efficiency.
D e v e l o p m e n t - t y p e banks have e x p e r i e n c e d s e v e r e d i f f i c u l t i e s i n
t h e 1980s o w i n g t o a h i g h p r o p o r t i o n o f n o n - p e r f o r m i n g l o a n s and
p o o r management. F o u r o f t h e s i x d e v e l o p m e n t - t y p e b a n k s e x i s t i n g
i n 1980 have s i n c e been p u t i n t o l i q u i d a t i o n . The h o u s i n g and
p u b l i c w o r k s l e n d i n g a g e n c i e s (BNEC and BICT r e s p e c t i v e l y ) were
l i q u i d a t e d i n t h e 1986/87 f i n a n c i a l y e a r . A f t e r a t w o - y e a r
e n q u i r y , a c c o m p a n i e d by b l o c k e d d e p o s i t s and f r o z e n
credit
o p e r a t i o n s , t h e i n d u s t r i a l d e v e l o p m e n t banks C C I , o n c e t h e f i f t h
l a r g e s t bank i n C o t e d ' l v o i r e , and BIDI have a l s o been p u t
liquidation
into
BIDI and CCI a c c o u n t e d f o r 5.7 p e r c e n t o f b a n k i n g a s s e t s i n
1987, w h i l s t BNEC and BICT p r o b a b l y a c c o u n t e d f o r a b o u t 5 p e r
c e n t o f 1985 b a n k i n g a s s e t s . The t o t a l a s s e t s l i q u i d a t e d a r e
e q u i v a l e n t t o US$ 540 m i l l i o n a t 1987 e x c h a n q e r a t e s o r 5.3 p e r
c e n t o f 1987 GDP. The p r o p o r t i o n o f bank l o a n s r e c o v e r a b l e i s n o t
known.
The a g r i c u l t u r a l d e v e l o p m e n t bank (BNDA) w i t h 5 p e r c e n t o f t o t a l
b a n k i n g s e c t o r a s s e t s c o n t i n u e s t o o p e r a t e b u t i s p l a g u e d by
p r o b l e m s s i m i l a r t o t h o s e o f t h e o t h e r now d e f u n c t d e v e l o p m e n t
banks. BNDA has r e l i e d on 'temporary' BCEAO ( C e n t r a l Bank)
o v e r d r a f t s a t p u n i t i v e r a t e s o f i n t e r e s t t o keep a f l o a t and i t s
accounts are not p u b l i c l y a v a i l a b l e s u g g e s t i n g s e r i o u s balance
sheet problems.
The f i n a l d e v e l o p m e n t - t y p e bank i s t h e Compte de Gestion
des
Depots of the Compte Autonome d'Amortissement
(CAA) a p u b l i c
s e c t o r a g e n c y w h i c h a c c e p t s d e p o s i t s from t h e p u b l i c s e c t o r ,
i s s u e s bonds and o n - l e n d s t o s t a t e a g e n c i e s , s t a t e owned banks
o r t h e C e n t r a l Bank ( W o r l d B a n k , 1 9 8 8 : p l O l ) . D u r i n g p e r i o d s o f
e x p o r t boom t h e CAA c a n be a s o u r c e o f r a p i d l y
increasing
liquidity
i n t h e b a n k i n g s y s t e m , as t h e s u r p l u s from t h e
a g r i c u l t u r a l p r i c e s t a b i l i s a t i o n f u n d (CSSPPA) e n t e r s as d e p o s i t s
i n t o the banking system.
Foreign
Incorporated
Banks
The f i v e f o r e i g n i n c o r p o r a t e d banks p r o v i d e n o r m a l d e p o s i t money
s e r v i c e s a l t h o u g h a c c e s s t o a c c o u n t s i s r e s t r i c t e d t o h i g h income
and
expatriate
workers
by
internal
bank p o l i c y .
Lending
o p e r a t i o n s t e n d t o be more s p e c i a l i s e d t h a n l o c a l b a n k s and a r e
particularly
c o n c e n t r a t e d on e x p o r t and
import
financing.
R e p r e s e n t a t i v e banks a r e l e g a l l y n o t p e r m i t t e d t o a c c e p t d e p o s i t s
and a c t m a i n l y t o a d v i s e on t r a d e o r c o n d u c t b u s i n e s s w i t h
o v e r s e a s bank b r a n c h e s .
D e t e r i o r a t i o n of Banking
Svstem
The d e t a i l e d r e a s o n s f o r d e v e l o p m e n t t y p e b a n k i n g f a i l u r e s a r e
not y e t known b u t t h e i n t e r t w i n i n g o f p o l i t i c s and s t a t e b a n k i n g
a t t h e h i g h e s t l e v e l s a r e l i k e l y t o have c o n t r i b u t e d t o p o o r l y
p e r f o r m i n g l o a n p o r t f o l i o s . I t i s i n d i c a t i v e t h a t more t h a n 25
p e r c e n t o f t o t a l bank c r e d i t s i n t h e West A f r i c a n M o n e t a r y U n i o n
(which i s d o m i n a t e d by C o t e d ' l v o i r e ) a r e r e p o r t e d t o be nonp e r f o r m i n g ( W o r l d Bank,1989b:p72) and l i k e l y t h a t t h e s e c r e d i t s
have been c o n c e n t r a t e d i n s t a t e c o n t r o l l e d b a n k s . The l i q u i d a t i o n
o f f o u r d e v e l o p m e n t - t y p e banks has been a c h i e v e d w i t h o u t f u r t h e r
bank r u n s f o r o t h e r t r o u b l e d i n s t i t u t i o n s b u t has r e s u l t e d i n a
See West A f r i c a
24 J u l y
1989
pl222.
s u b s t a n t i a l l o s s o f b a n k i n g l i q u i d i t y and h a s h a d a c o n t r i b u t o r y
i m p a c t on t h e b a n k i n g s e c t o r l i q u i d i t y s h o r t a g e i n 1987.
A s e c o n d a r y f a c t o r i s t h a t Governments i n t h e UMOA a r e u n a b l e t o
monetise d e f e c t s , so t h e prospect of forced
(and p r o b a b l y
u n c o m m e r c i a l ) l e n d i n g from s t a t e c o n t r o l l e d banks i s a p o t e n t i a l
s u b s t i t u t e f o r government e x p e n d i t u r e . A r e c e n t r e p o r t ( W o r l d
Bank 1 9 8 9 c : p l 7 0 ) g o e s f u r t h e r and a r g u e s t h a t CFA c o u n t r i e s
governments
"...forced
the
commercial
banks
to
finance
e x p e n d i t u r e s t h a t w o u l d n o r m a l l y have been met by
government s u b s i d i e s . That l e d t o t h e c o l l a p s e o f t h e
b a n k i n g s y s t e m i n B e n i n and has p u t t h e s y s t e m
in
o t h e r CFA c o u n t r i e s u n d e r s t r a i n . "
The macroeconomic i m p a c t o f d e v e l o p m e n t bank c o l l a p s e s i s n o t
c o n f i n e d t o t h e d e f l a t i o n a r y i m p a c t o f l i q u i d a t i o n . The d i r e c t i o n
of c r e d i t t o l e s s p r o d u c t i v e e n t e r p r i s e s o r towards consumption
expenditure has lowered t h e e f f i c i e n c y of i n t e r m e d i a t i o n of t h e
b a n k i n g s e c t o r , and by i m p l i c a t i o n r e s t r i c t e d c r e d i t t o more
productive enterprises
The
' c r o w d i n g o u t ' " argument i s e s p e c i a l l y v a l i d f o r banks
h e a v i l y e x p o s e d t o a few n e a r b a n k r u p t b o r r o w e r s where i n c e n t i v e s
a r e t o l e n d more f u n d s r a t h e r t h a n demand repayment o r s e r v i c i n g
of e x i s t i n g debts which c o u l d t h r e a t e n t h e borrowers s u r v i v a l .
C r o w d i n g o u t i n t h e s e c i r c u m s t a n c e s g i v e s f a v o u r t o many o f l e a s t
c r e d i t w o r t h y b o r r o w e r s , whose i n t e r e s t payments a r e e f f e c t i v e l y
c a p i t a l i s e d b y a d d i t i o n a l l e n d i n g . The e x t e n t o f l i q u i d a t i o n s o f
development-type
banks
during
the
1980s
suggests
the
d e t e r i o r a t i o n o f t h e q u a l i t y o f t h e banks a s s e t p o r t f o l i o may
have been c o v e r e d up by s u c h l e n d i n g p r a c t i c e s .
The dominance o f s t a t e o w n e r s h i p and s u p p o r t f o r d e v e l o p m e n t t y p e banks h a s i n v o l v e d s u b s t a n t i a l l o s s e s o f p u b l i c f u n d s , w h i c h
i n t u r n , have r e t a r d e d t h e p r o c e s s o f f i s c a l a d j u s t m e n t d u r i n g
t h e 19B0S. To t h e e x t e n t t h a t p r i v a t e o r c o m m e r c i a l d e p o s i t s have
been l o s t o r b l o c k e d by d e v e l o p m e n t - t y p e b a n k s , f l i g h t o f c a p i t a l
may be e n c o u r a g e d t o f o r e i g n banks where t h e r i s k o f b a n k i n g
i n s o l v e n c y i s p e r c e i v e d as lower.
Other F i n a n c i a l
Institutions
Some r e p o r t s a l l e g e w i d e s p r e a d w i d e s p r e a d f r a u d a n d
embezzlement o c c u r i n g i n d e v e l o p m e n t banks e.g. West A f r i c a 1
May 89 p677.
" Crowding o u t r e f e r s t o t h e e f f e c t s o f g i v i n g p r e f e r e n c e
to lending p a r t i c u l a r borrowers c r e a t i n g shortages f o r other
(non-privileged) borrowers. I t i s u s u a l l y applied t o
governments b o r r o w i n g b e h a v i o u r i n r e l a t i o n t o t h e p r i v a t e
sector.
The
non-bank f i n a n c i a l i n s t i t u t i o n s (3.5 p e r c e n t o f t o t a l
f i n a n c i a l s e c t o r a s s e t s i n 1987)
a r e , b r o a d l y , l e a s i n g and
f i n a n c i n g o p e r a t i o n s (most s i g n i f i c a n t l y f o r v e h i c l e f i n a n c e ) and
a r e f r e q u e n t l y c o n t r o l l e d by c o m m e r c i a l b a n k s . M o n e t a r y p o l i c y
w i l l have i n d i r e c t r e p e r c u s s i o n s upon t h e s e i n s t i t u t i o n s as two
thirds
of
deposits
come d i r e c t l y
from
commercial
banks.
C o n t r a c t i o n a r y c r e d i t p o l i c y w i l l have o v e r s p i l l e f f e c t s i n
r a i s i n g t h e c o s t and a v a i l a b i l i t y o f t h e s p e c i a l i s e d l e n d i n g
u n d e r t a k e n by t h e s e f i n a n c i a l i n s t i t u t i o n s .
Insurance
Markets
I n s u r a n c e m a r k e t s a r e a more i m p o r t a n t s o u r c e o f d o m e s t i c s a v i n g s
m o b i l i z a t i o n w i t h t e c h n i c a l r e s e r v e s (provisions
techniques)
of
6-7 p e r c e n t o f t h e t o t a l a s s e t s o f t h e b a n k i n g s y s t e m . F o r t h e
32 c o m p a n i e s o p e r a t i n g i n 1982, n e a r l y h a l f o f premium t u r n o v e r
was a c c o u n t e d f o r by c o m p u l s o r y c a r i n s u r a n c e . A l t h o u g h g r o w i n g
r a p i d l y , l i f e assurance accounted f o r only 4 per cent of the
m a r k e t and d i d n o t r e c e i v e t a x c o n c e s s i o n s t o e n c o u r a g e t h i s
saving channel. Considering the r e l a t i v e l y informal c o l l e c t i o n
procedures a t t r a c t i v e t o s m a l l savers i n the insurance market
t h e r e w o u l d a p p e a r t o be s i g n i f i c a n t p o t e n t i a l f o r m o b i l i s i n g
a d d i t i o n a l s a v i n g s as shown by t h e Zimbabwean example where l i f e
a s s u r a n c e premiums a r e a m a j o r s o u r c e o f s a v i n g s f o r low and
m i d d l e income e a r n e r s and an i m p o r t a n t s o u r c e o f f u n d s f o r t h e
b a n k i n g s y s t e m , (see
Financial
Gazette
(Zimbabwe), F o c u s On
F i n a n c e S u p p l e m e n t 8 September 1 9 8 9 ) .
T e c h n i c a l r e s e r v e s must l e g a l l y be h e l d i n f i x e d p r o p o r t i o n s o f
d o m e s t i c f i n a n c i a l a s s e t s o f v a r y i n g l i q u i d i t y . T h i s e n s u r e s no
c a p i t a l l e a k a g e frOm t h e d o m e s t i c f i n a n c i a l s y s t e m . I n s u r a n c e
c o m p a n i e s a r e , f o r e x a m p l e , a c a p t i v e m a r k e t f o r CAA l o n g t e r m
bonds w i t h n e a r l y h a l f o f t h e i r r e s e r v e s i n v e s t e d i n t h i s
i n s t r u m e n t i n s t r u m e n t (World Bank,1988 show t h a t 85 p e r c e n t o f
CAA
issues
1984-87 were
accounted
f o r by
institutional
investors).
The
Stock
Exchange
I n 1976, t h e A b i d j a n s t o c k e x c h a n g e was opened t o r e g u l a t e
e n c o u r a g e an e m e r g i n g f i n a n c i a l m a r k e t . A r e v i e w o f t h e f i r s t
years' trading
e m p h a s i s e d t h a t t h e Bourse
des Valeurs
c r e a t e d as a way o f m o b i l i s i n g d o m e s t i c s a v i n g s , and t h a t
g o v e r n m e n t w i s h e d t o b r o a d e n s h a r e h o l d i n g amongst I v o r i a n s
hence t o i n c r e a s e l o c a l o w n e r s h i p o f f o r e i g n f i r m s .
and
few
was
the
and
The CAA i s s u e s bonds t w i c e - y e a r l y b u t n e t i s s u e s r a r e l y e x c e e d
h a l f a p e r c e n t o f GDP. T h i s i n d i c a t e s t h a t non-bank f i n a n c i n g
Financiere
T h i s p a r a g r a p h draws p r i n c i p a l l y on Revue Economique
Ivoirienne
No 18 J a n
1986.
See Revue Economique
I ' a c t i v i t e de l a B o u r s e des
et
(1980) R a p p o r t de s y n t h e s e s u r
q u a t r e d e r n i e r e s a n n e e s , pp56-63 .
o f t h e government d e f i c i t i s l i m i t e d i n q u a n t i t y . T h e s e bonds a r e
g e n e r a l l y p u r c h a s e d by i n s u r a n c e companies and
institutional
i n v e s t o r s as a r e q u i r e d a s s e t and n o t by p r i v a t e i n d i v i d u a l s ,
a l t h o u g h p r i v a t e p u r c h a s e s have i n c r e a s e d s i n c e 1984
when
a d v e r t i s i n g was i n c r e a s e d . T r a d i n g v o l u m e s a r e l o w (<3% t o t a l
t r a d e d 1980-87 a v e r a g e ) and p r i c e s move s l o w l y w i t h t h e r e s u l t
t h a t t h e y i e l d c u r v e i s u n f a v o u r a b l e f o r l o n g e r t e r m b o n d s . CAA
bonds g e n e r a l l y have a t e n y e a r m a t u r i t y r e p a y a b l e i n t e n e q u a l
i n s t a l l m e n t s . FNI (Fond National
d'Investissement)
bonds a r e
i s s u e d a g a i n s t FNI c e r t i f i c a t e s w h i c h a r e p u r c h a s e d c o m p u l s o r i l y
f r o m p r o f i t s as an i n c e n t i v e t o i n c r e a s e i n v e s t m e n t . The FNI
bonds a r e p a r t o f a complex
t a x - r e b a t e system which o n l y
p a r t i a l l y augment s a v i n g s by r e q u i r i n g one t h i r d o f t h e bond
p r i c e i n c a s h and two t h i r d s i n FNI c e r t i f i c a t e s . RCI bonds a r e
long term
(40 y e a r ) m a t u r i t i e s when FNI c e r t i f i c a t e s
are
t r a n s f e r r e d i n t o bonds w i t h o u t a d d i t i o n a l c a s h i n j e c t i o n s as i n
t h e c a s e o f FNI bonds. I n b o t h t h e l a t t e r c a s e s t h e bonds do n o t
r e p r e s e n t new s a v i n g s b u t a r e c y c l i n g o f p r e v i o u s t a x p a i d . T h e r e
i s no s i g n i f i c a n t s h o r t t e r m t r e a s u r y b i l l m a r k e t n o r does t h e r e
a p p e a r t o have been a c o n c e r t e d e f f o r t t o d e v e l o p one.
In t h e l o n g run t h e development o f a s e c u r i t i e s market c o u l d l e a d
t o open m a r k e t o p e r a t i o n s t o c o n t r o l l i q u i d i t y i n t h e economy,
but a t p r e s e n t s e v e r a l f a c t o r s r e s t r i c t the development of such
a m a r k e t . F i r s t l y , t r a d i n g r e s t r i c t i o n s i n t h e Bourse
l i m i t bond
p r i c e movements t o 3 p e r c e n t and e q u i t y p r i c e s t o 5 p e r c e n t i n
a t r a d i n g s e s s i o n and q u o t a t i o n b r a c k e t s a r e n a r r o w .
Price
movements a r e l i m i t e d and t h e r e i s a w i d e r a n g e o f p o s t e d
e f f e c t i v e y i e l d s . S e c o n d l y , most p a r t i c i p a n t s i n t h e bond m a r k e t
i n v e s t i n s e c u r i t i e s f o r t a x reasons o r because o f s t a t u t o r y
r e g u l a t i o n s r e q u i r i n g them t o do s o .
I f t h e s e r e s t r i c t i o n s c o u l d be removed, w h i c h w o u l d i n c r e a s e t h e
l i q u i d i t y o f government s e c u r i t i e s , an i n v i g o r a t e d t r a d i n g m a r k e t
i n s h o r t e r term s e c u r i t i e s c o u l d encourage a d d i t i o n a l domestic
saving,
particularly
from f u n d s p r e s e n t l y
flowing
abroad.
F u r t h e r m o r e open m a r k e t o p e r a t i o n s c o u l d s u b s t i t u t e f o r t h e
p r e s e n t r e d i s c o u n t i n g s y s t e m as a method o f m o n e t a r y c o n t r o l
(rediscounting i s discussed i n section 3).
The number o f f i r m s q u o t e d on t h e B o u r s e r o s e f r o m 6 t o 24
between 1976 and 1988 w h i l s t s t o c k exchange c a p i t a l i s a t i o n has
i n c r e a s e d from 2 p e r c e n t o f GDP 1976 t o 4 p e r c e n t by 1987.
I v o r i a n b r a n c h e s o f f o r e i g n f i r m s ' ^ were p e r s u a d e d t o make
a v a i l a b l e up t o 20 p e r c e n t o f e q u i t y t o be p u r c h a s e d l a r g e l y by
I v o r i a n s t o f u r t h e r a p o l i c y o f I v o r i a n o w n e r s h i p o f t h e economy.
I n p r a c t i c e I v o r i a n h o l d i n g s o f s h a r e s have n o t i n c r e a s e d ' as a
p r o p o r t i o n o f t o t a l h o l d i n g s and i n t h e d e c a d e t o 1986 a v e r a g e d
c l o s e t o 30 p e r c e n t . S p e c u l a t i o n was t o be d i s c o u r a g e d by t h e
a f o r e m e n t i o n e d l i m i t s on d a i l y p r i c e movements and a l s o w i t h
r e s t r i c t i o n s upon n o n - n a t i o n a l s p u r c h a s e o f s h a r e s . As a r e s u l t
trading
levels
of
less
than
1 per
cent
stock
market
The most i m p o r t a n t s e c t o r s were b a n k i n g , commerce and
d i s t r i b u t i o n , and f o o d / b e v e r a g e s .
c a p i t a l i s a t i o n are u s u a l l y r e c o r d e d . U n t i l the s t o c k exchange
becomes c o n s i d e r a b l y
more s o p h i s t i c a t e d i n i t s o p e r a t i o n s i t
w o u l d seem t h a t i t i s u n l i k e l y t o b e n e f i t t h e s m a l l p r i v a t e
s a v e r , who d o e s n o t have a c c e s s t o u n i t - t r u s t ( m u t u a l fund) t y p e
i n v e s t m e n t s o r t o t h e s m a l l / medium e n t e r p r i s e a s a s o u r c e o f
f u n d s . We s h a l l see i n s e c t i o n 3 t h a t a c c e s s t o e q u i t y f i n a n c e
has many s i m i l a r i t i e s t o t h e c r e d i t m a r k e t , t h e r e c i p i e n t s o f
e q u i t y finance are predominantly l a r g e f i r m s , w i t h a l a r g e
foreign interest.
A l t h o u g h a f u n c t i o n i n g s t o c k m a r k e t i s n o t e s s e n t i a l f o r an
e f f i c i e n t p r o c e s s o f f i n a n c i a l i n t e r m e d i a t i o n , as a s p e c i a l i s e d
agency p r o v i d i n g l o n g t e r m f i n a n c e f o r t h e b u s i n e s s s e c t o r i t
f i l l s a p a r t i c u l a r r o l e i n t h e f i n a n c i a l s y s t e m w h i c h no o t h e r
i n s t i t u t i o n has t a k e n up i n C o t e d ' l v o i r e . D e v e l o p m e n t - t y p e banks
w h i c h had s p e c i a l i s e d i n l o n g t e r m l e n d i n g , i n r e t r o s p e c t do not
a p p e a r t o have been t h e b e s t i n s t i t u t i o n a l v e h i c l e f o r l o n g t e r m
industrial
finance
although
more e v i d e n c e
i s required
to
demonstrate t h i s c o n c l u s i v e l y .
Informal
Money M a r k e t s
U n o r g a n i s e d money m a r k e t s , d e f i n e d by Tun Wai (1977) as i n f o r m a l
c r e d i t s u p p l i e d by money l e n d e r s and r u r a l i n s t i t u t i o n a l c r e d i t ,
are
certainly
prevalent
i n Cote d ' l v o i r e although
little
i n f o r m a t i o n e x i s t s as t o t h e r e l a t i v e s i z e s o f i n f o r m a l
and
institutional credit.
R o t a t i n g s a v i n g s o r g a n i s a t i o n s , known as tontines
i n Francophone
A f r i c a , a r e o p e r a t e d by i n d i v i d u a l s making r e g u l a r f i x e d s a v i n g s
and b o r r o w i n g from t h e a c c u m u l a t e d p o o l i n t u r n . A l l e c h i (1988)
reports survey data
f r o m f i v e FZ c o u n t r i e s i n c l u d i n g C o t e
d ' l v o i r e w h i c h show p a r t i c i p a t i o n o f 28.6
per cent of
the
( a c t i v e ) p o p u l a t i o n i n t o n t i n e s compared w i t h 13.2
per cent
h o l d i n g a bank a c c o u n t and 13.4 p e r c e n t w i t h a s a v i n g s a c c o u n t .
(Toure,1985:pp234-246) r e p o r t s a s i m i l a r t y p e o f s y s t e m o p e r a t i n g
i n u r b a n a r e a s where s m a l l d a i l y s a v i n g s , f r o m t r a d e r s i n
p a r t i c u l a r , a r e banked by an i n t e r m e d i a r y i n t h e f o r m a l s e c t o r
and r e t u r n e d l e s s a c o m m i s s i o n c h a r g e a t t h e month end.
The
i n t e r m e d i a r y a l s o p r o v i d e s c r e d i t a r r a n g e m e n t s as a m u l t i p l e o f
t o t a l monthly d e p o s i t s .
I n t e r v i e w s ' ^ w i t h c o c o a and c o f f e e f a r m e r s r e p r e s e n t a t i v e s i n t h e
Gagnoa r e g i o n o f C o t e d ' l v o i r e r e v e a l e d t h a t b o r r o w i n g
was
p r e d o m i n a n t l y u n d e r t a k e n i n between h a r v e s t i n g s e a s o n s f o r
consumption
(such
as
school
fees,
funeral
and
marriage
o b l i g a t i o n s ) and f o r a g r i c u l t u r a l i n p u t s . These p r e t s a soudeur
( b r i d g i n g l o a n s ) were made from t h e f o r m a l s e c t o r , f r o m b r a n c h e s
o f t h e a g r i c u l t u r a l bank BNDA, and from acheteurs,
t h e middlemen
i n t h e a g r i c u l t u r a l m a r k e t i n g s y s t e m . More t h a n h a l f o f f a r m e r s
C a r r i e d o u t by t h e a u t h o r on an i n f o r m a l b a s i s 7-8
May
1989 w i t h v i l l a g e c h i e f s , PCDI l e a d e r s and f a r m e r s c o u n c i l s o f
three v i l l a g e s .
i n d i c a t e d , d u r i n g i n t e r v i e w s w i t h t h e a u t h o r t h a t i n t h e 1988/89
s e a s o n l o a n s were n o t a v a i l a b l e f r o m e i t h e r f o r m a l o r i n f o r m a l
sources which c o i n c i d e d w i t h acute l i q u i d i t y shortages i n t h e
I v o r i a n banking system. T h i s anecdotal evidence suggests t h a t
the a v a i l a b i l i t y of r u r a l i n f o r m a l c r e d i t i s s i g n i f i c a n t l y
r e l a t e d t o f o r m a l c r e d i t a v a i l a b i l i t y p a r t i c u l a r l y i n c a s e s where
informal loans are not the counterpart t o informal savings.
I t appears t h a t a s u b s t a n t i a l p r o p o r t i o n o f i n f o r m a l c r e d i t i s
i n f a c t f o r m a l c r e d i t o b t a i n e d t h r o u g h an i n t e r m e d i a r y , w h i c h
s u g g e s t s t h a t t h e e f f e c t s o f monetary c o n t r o l w i l l f i l t e r t h r o u g h
t o i n f o r m a l m a r k e t s . The e x i s t e n c e o f i n t e r m e d i a r i e s i s a d i r e c t
r e s u l t o f f o r m a l i t i e s and r e g u l a t i o n s c o n c e r n i n g o p e n i n g a bank
a c c o u n t . To o b t a i n a demand d e p o s i t a c c o u n t {compte a depots) a
s t a t e m e n t o f r e g u l a r income must be p r o d u c e d w h i c h i n i t s e l f
excludes t h e great majority of the I v o r i a n population
A
s a v i n g s a c c o u n t (compte d'epargne) i n one o f t h e b i g f o u r b a n k s
r e q u i r e s a minimum d e p o s i t o f 25,000 CFA o r 11 p e r c e n t o f p e r
c a p i t a GDP ( 1 9 8 8 ) , a s u b s t a n t i a l sum t o t h o s e w i t h o u t a r e g u l a r
income. A l t h o u g h m a j o r b a n k s have b r a n c h n e t w o r k s e x t e n d i n g t o
a l l major towns i n t h e c o u n t r y , b a n k i n g remains a s e r v i c e f o r t h e
u r b a n community w i t h a p p r o x i m a t e l y
70 p e r c e n t o f p e r s o n a l
a c c o u n t s h e l d i n A b i d j a n . Thus t h e e x i s t e n c e o f i n f o r m a l c r e d i t
m a r k e t s s h o u l d n o t be s e e n a s a m a j o r i m p e d i m e n t t o t h e c o n d u c t
of monetary p o l i c y b u t a consequence o f t h e d i f f i c u l t i e s o f
p r o v i d i n g b a n k i n g s e r v i c e s t o l o w o r i n t e r m i t t e n t income e a r n e r s .
The e x i s t e n c e o f i n f o r m a l money m a r k e t s a s a s u b s t i t u t e f o r
s a v i n g and b o r r o w i n g from c o m m e r c i a l o r d e v e l o p m e n t b a n k s h a s t h e
e f f e c t of m a i n t a i n i n g t h e cash r a t i o a t a higher l e v e l than i t
w o u l d be o t h e r w i s e .
This
reduces t h e s i z e
o f t h e money
m u l t i p l i e r . F o r t h e use o f r e s e r v e b a s e t a r g e t i n g o f t h e money
s u p p l y t h e e x i s t e n c e o f s u b s t a n t i a l i n f o r m a l money m a r k e t s c o u l d
r e d u c e t h e e f f e c t i v e n e s s o f m o n e t a r y c o n t r o l by i n c r e a s i n g t h e
i n s t a b i l i t y o f t h e cash r a t i o , as cash i s h e l d f o r nontransactionary
purposes,
and
increases
money
multiplier
i n s t a b i l i t y . However t h e o b s e r v e d s t a b i l i t y o f t h e c a s h r a t i o t o
t o t a l money s u p p l y , a p a r t from a d j u s t m e n t s t o p r i c e i n s t a b i l i t y ,
s u g g e s t s t h a t i n f o r m a l m a r k e t s do n o t s t r o n g l y i n f l u e n c e t h e
conduct o f monetary p o l i c y .
Savings M o b i l i z a t i o n
Figure 2 r e v e a l s c o n s i d e r a b l e f l u c t u a t i o n over t h e twenty year
p e r i o d t o 1987 i n t h e r a t i o o f g r o s s d o m e s t i c s a v i n g s (GDP l e s s
government and p r i v a t e c o n s u m p t i o n ) t o GDP. S h a r p i n c r e a s e s i n
g r o s s s a v i n g s o c c u r e d d u r i n g t h e b r i e f commodity e x p o r t boom
p e r i o d s o f 1977 and 1985. I n p e r i o d s s u b s e q u e n t t o t h e booms
gross domestic s a v i n g has tended t o d e c l i n e , f a l l i n g t o a r e c o r d
low o f 19 p e r c e n t GDP d u r i n g 1987 w h i c h i s i n d i c a t i v e o f a
secular d e c l i n e i n savings rates.
On t h e o t h e r hand banks a r e l e g a l l y o b l i g e d t o p r o v i d e
d e p o s i t f a c i l i t i e s f o r government and p a r a s t a t a l e m p l o y e e s .
Figure 2
GROSS SAVINGS RATES
1967-87
I
I I I I I I I I I I I I I I I I I I I I
1383 19B5 1 9 8 7
1957 1 9 6 9 1 3 7 1 1 3 7 3 1 9 7 5 1 3 7 7 1 9 7 9 19B1
1968 1970 1972 1974 137B 1978 1980 1982 1984
Source
World
Bank,
*orId
1986
Tables
Changes i n t h e l e v e l o f p u b l i c s a v i n g s a r e t h e p r i m a r y s o u r c e o f
a g g r e g a t e s a v i n g s c h a n g e s owing t o t h e o p e r a t i o n s o f t h e
p u b l i c commodity p r i c e s t a b i l i s a t i o n f u n d (CSSPPA). The m a g n i t u d e
o f t h e c h a n g e s a r e i n d i c a t i v e o f t h e i m p o r t a n c e o f commodity
e x p o r t s . The f u n d g u a r a n t e e s e x p o r t e r s a f i x e d p r i c e f o r c o c o a ,
c o f f e e , c o t t o n , s u g a r a n d r i c e , b a s e d upon a n a d m i n i s t r a t i v e l y
s e t p r o d u c e r p r i c e , t r a n s p o r t c o s t s and a p r o f i t markup. Any
d i f f e r e n c e between t h e w o r l d m a r k e t p r i c e a n d t h e g u a r a n t e e d
p r i c e accrues t o t h e s t a b i l i s a t i o n fund. I n p r a c t i c e export
p r i c e s h a v e been w e l l above t h e c . i . f . c o s t p r i c e and t h e
s t a b i l i s a t i o n fund has generated s u r p l u s e s which averaged 7 p e r
c e n t o f GDP d u r i n g 1975-85 and peaked a t 15.5 p e r c e n t o f GDP i n
1977
( S c h i l l e r , 1 9 8 8 ) . The s u r p l u s e s d i d n o t a c c u m u l a t e a s a
stabilisation
f u n d b u t were t r a n s f e r r e d
t o finance
other
government e x p e n d i t u r e , i n p a r t i c u l a r a l a r g e i n f r a s t r u c t u r a l
e x p a n s i o n programme.
The more r e c e n t commodity p r i c e f a l l s have r e v e r s e d t h e s i t u a t i o n
and t h e CSSPPA h a s o p e r a t e d a t a l o s s i n 1988 and 1989, t e d u c i n g
g r o s s d o m e s t i c s a v i n g , r e s u l t i n g i n s u b s t a n t i a l b o r r o w i n g from
t h e d o m e s t i c b a n k i n g s y s t e m t o f i n a n c e p u r c h a s e s . I n J u l y 1989,
t h e CSSPPA announced a r e d u c t i o n o f p r o d u c e r p r i c e s f o r t h e
1989/90 s e a s o n w i t h c o c o a p r i c e s , f o r example, f a l l i n g f r o m 400
CFA/Kg t o 250 CFA/Kg l a r g e l y i n r e s p o n s e t o t h e f a l l i n g w o r l d
c o c o a p r i c e . A l t h o u g h t h i s was c o n t r a r y t o p r e v i o u s Government
p o l i c y w h i c h had s t r e s s e d t h e i m p o r t a n c e o f s t a b l e p r o d u c e r
p r i c e s , the domestic f i n a n c i n g requirements of the marketing
b o a r d were h a v i n g t h e e f f e c t o f c r o w d i n g o u t p r i v a t e f i r m s from
access to c r e d i t ( t h i s i s discussed l a t e r i n d e t a i l ) .
Although
commodity e x p o r t booms t e n d t o i n c r e a s e d o m e s t i c s a v i n g s t h i s
e f f e c t i s g e n e r a l l y o n l y temporary. I n Cote d ' l v o i r e i n t h e l a t e
197 0s,
consumption
expenditure increases
rapidly
followed
i n c r e a s e s i n e x p o r t income so t h a t expanded s a v i n g s were a
t e m p o r a r y phenomenon ( s e c t i o n 4 ) .
By a d j u s t i n g g r o s s d o m e s t i c s a v i n g s f o r r e s o u r c e s w h i c h a r e
t r a n s f e r r e d a b r o a d , g r o s s n a t i o n a l s a v i n g i s o b t a i n e d w h i c h more
a c c u r a t e l y r e p r e s e n t s t h e r e s o u r c e s a v a i l a b l e f o r g r o w t h . From
F i g u r e 2 t h e e f f e c t o f r e m o v i n g n e t f a c t o r income ( p r o f i t s ,
d i v i d e n d s , i n t e r e s t ) and n e t t r a n s f e r s
(largely
expatriate
s a v i n g s and I v o r i a n s a v i n g s i n f o r e i g n a c c o u n t s ) f r o m d o m e s t i c
s a v i n g i s u n i f o r m l y n e g a t i v e . G r o s s n a t i o n a l s a v i n g s have a l s o
f a l l e n m a r k e d l y , from n e a r l y 15 p e r c e n t d u r i n g t h e 1970-78
p e r i o d t o 9 p e r c e n t o f GDP i n t h e 1979-87 p e r i o d .
The i n c r e a s e s i n f a c t o r payments made t o t h e r e s t o f t h e w o r l d
( T a b l e 4) a r e a t t r i b u t a b l e t o i n c r e a s e s i n f o r e i g n d e b t i n t e r e s t
payments d u r i n g t h e 1980s. A p a r t f r o m d e b t r e p u d i a t i o n and
repayment m o r a t o r i a t h e r e a r e no d o m e s t i c f i n a n c i a l p o l i c i e s
which
could
immediately reduce
t h e s e outward
flows.
The
p o s s i b i l i t y o f f u t u r e d e b t r e d u c t i o n may however r e d u c e n e t
outward f l o w s .
T a b l e 4: E l e m e n t s o f D o m e s t i c S a v i n g
( i n p e r c e n t o f GDP)
Period
72- -75
Gross Domestic Saving
25, . 8
29 . 0
Net F a c t o r Income
- 3 , .5
Net
Transfers
Gross N a t i o n a l Saving
84-8
7
20. . 0
22.
5
-3.9
- 6 . .4
-8.
0
-4 .7
-6.0
- 5 , .6
-4 . 2
13, .0
13.4
76-79
80-S n
8. . 0
10.
4
Note: Gross Domestic S a v i n g l e s s T r a n s f e r s l e s s F a c t o r Incomes e q u a l s Gross N a t i o n a l S a v i n g .
Source: World Bank, World T a b l e s 1988/89.
Net t r a n s f e r s , w h i c h v a r y between 4 and 6 p e r c e n t o f
GDP
( o u t w a r d ) , may be more r e a d i l y i n f l u e n c e d by p o l i c y . T r a n s f e r s
by e x p a t r i a t e s (European) c o u l d be d i m i n i s h e d by more a t t r a c t i v e
s a v i n g s i n s t r u m e n t s , as w o u l d be t h e c a s e f o r I v o r i a n s a v i n g s
channelled i n t o f o r e i g n accounts. T r a n s f e r s of migrant worker
savings t o neighbouring countries (Burkina, M a l i i n p a r t i c u l a r )
a r e a l s o known t o be s u b s t a n t i a l from a n a l y s i s o f movements o f
b a n k n o t e s between c o u n t r i e s i s s u i n g CFA n o t e s . A l t h o u g h t h e
breakdown o f n e t t r a n s f e r s i s n o t a v a i l a b l e i t i s c l e a r t h a t t h e y
remain a s i z e a b l e f r a c t i o n of domestic s a v i n g s t h a t i s not
a v a i l a b l e f o r investment purposes
I f f o r e i g n f i n a n c e i s not a v a i l a b l e t o supplement low domestic
s a v i n g s , i n v e s t m e n t l e v e l s and f u t u r e e c o n o m i c p r o s p e c t s may be
a f f e c t e d . I n t e r e s t r a t e p o l i c y may a c t t o i n c r e a s e t h e g r o s s
d o m e s t i c s a v i n g s r a t e by g i v i n g a h i g h e r r e t u r n on d e p o s i t s and
may a l s o r e d u c e t r a n s f e r s a b r o a d by n a t i o n a l s and e x p a t r i a t e s
t h e r e b y i n c r e a s i n g t h e n a t i o n a l s a v i n g s r a t e . These p o l i c y
r e f o r m s a r e d i s c u s s e d i n more d e t a i l i n s e c t i o n 3, m o n e t a r y
policy
instruments.
3. I N S T R U M E N T S O F M O N E T A R Y
POLICY
F o r c o n t r o l o f t h e l e v e l o f g l o b a l l i q u i d i t y i n t h e economy, t h e
C e n t r a l Bank h a s t h e f o l l o w i n g d i r e c t i n s t r u m e n t s t o i n f l u e n c e
the a v a i l a b i l i t y of c r e d i t :
*
*
*
C e n t r a l Bank R e f i n a n c i n g C r e d i t L i m i t s ( c o n c o u r s
Reserve requirements
Prior Authorisations
Indirect
i n money
although
sectoral
The
*
*
*
globaux)
c o n t r o l o f l i q u i d i t y i n t h e banking system v i a changes
demand a r e e f f e c t e d t h r o u g h i n t e r e s t r a t e a d j u s t m e n t s ,
i n t e r e s t r a t e p o l i c y i s more c l o s e l y c o n n e c t e d w i t h
a l l o c a t i o n of credit.
BCEAO a l s o h a s a s e c t o r a l c r e d i t p o l i c y w h i c h i s b a s e d upon:
P r i o r i t y sectors
Sectoral coefficients
Preferential interest rates.
This section considers
instruments i n turn.
C e n t r a l Bank
t h e scope
and e f f e c t i v e n e s s o f
these
Refinancing
The BCEAO d i f f e r s c r u c i a l l y from many o t h e r c e n t r a l b a n k s a s i t
a c t s n o t o n l y as a l e n d e r o f l a s t r e s o r t b u t i t i s an i m p o r t a n t
source
of refinancing (technically
rediscounting)
f o r the
d o m e s t i c b a n k i n g s e c t o r t h r o u g h i t s l o c a l a g e n c i e s i n e a c h UMOA
c o u n t r y . T a b l e 5 shows t h e p r o p o r t i o n o f c r e d i t t o t h e economy
w h i c h i s r e f i n a n c e d by t h e C e n t r a l Bank, w h i c h h a s a v e r a g e d c l o s e
t o 40 p e r c e n t s i n c e 1982.
R e f i n a n c i n g o p e r a t i o n s , which a f f e c t t h e s i z e o f t h e monetary
b a s e , have been t h e p r i n c i p a l i n s t r u m e n t u t i l i s e d t o i n f l u e n c e
the l e v e l and, t o a l e s s e r e x t e n t , t h e c o m p o s i t i o n o f c r e d i t i n
t h e economy. C e n t r a l Bank c r e d i t t a k e s t h e form o f s h o r t t e r m
money m a r k e t a d v a n c e s , r e d i s c o u n t s a t e i t h e r p r e f e r e n t i a l o r
n o r m a l d i s c o u n t r a t e and c o m p a r a t i v e l y few f i x e d r a t e l o a n s o f
up t o t e n y e a r s m a t u r i t y . These c r e d i t s a r e b a c k e d b y d i s c o u n t
b i l l s d e p o s i t e d a t t h e C e n t r a l Bank. The maximum p r o p o r t i o n o f
a medium t o l o n g t e r m l o a n r e f i n a n c e a b l e by t h e C e n t r a l Bank
v a r i e s according t o the l e v e l of p r i o r i t y accorded t o the
a c t i v i t y f i n a n c e d . T h i s r a n g e s from 90 p e r c e n t o f l o a n v a l u e s
f o r s m a l l and medium b u s i n e s s e s
and s o c i a l i n f r a s t r u c t u r e
investment,
t o 50 p e r c e n t f o r most t y p e s o f n o n - p r i o r i t y
investment.
O f f i c i a l p u b l i c a t i o n s s u m m a r i s i n g m o n e t a r y and c r e d i t
p o l i c y a r e BCEAO 1976a, 1976b and 1987a.
T a b l e 5: C r e d i t a n d R e f i n a n c i n g
(CFA B i l l i o n s )
Medium &
Long Term
Total
Per Cent
Credit/
Refinanced
GDP
By BCEAO
Year
Short-term:
Non A g r i c A g r i c
1979
436.3
91.0
264.5
791.7
40.7%
25.8%
1980
434.1
126.1
328.8
889.0
40.0%
30.6%
1981
424.9
187.2
354.3
966.5
42.2%
38.5%
1982
491.7
172.5
357.1
1021.3
41.1%
40.4%
1983
581.0
153.6
356.7
1101.3
42.7%
43.1%
1984
591.5
160.7
330.6
1082.8
37.7%
40.8%
1985
587.0
179.3
332.4
1098.7
35.0%
36.6%
1986
601.5
182.8
331.6
1115.9
34.4%
38.0%
198 7
677.0
231.0
302.5
1210.5
39.6%
42.5%
1988
607.9
302.8
289.3
1199.9
na
42.5%
N o t e s : C r e d i t t o economy c o n s t i t u t e s : - c r e d i t f r o m c o m m e r c i a l b a n k s ,
c r e d i t f r o m f i n a n c i a l i n s t i t u t i o n s r e f i n a n c e d by t h e
c e n t r a l bank,
obligations
cautionees
and b a d d e b t s from O c t 1985.
Source:
Refinancing
BCEAO, S t a t i s t i q u e s Economiques
and Monetary
et
Monetaires.
Stance
A n n u a l l y a c o u n t r y c e i l i n g {concours
global)
for total central
bank c r e d i t ( a l l t y p e s ) i s j o i n t l y d e t e r m i n e d by t h e N a t i o n a l
C r e d i t C o u n c i l and t h e BCEAO Conseil
d'administration.
Because
o f t h e s i g n i f i c a n c e o f c e n t r a l bank r e f i n a n c i n g o p e r a t i o n s i n t h e
c r e d i t m a r k e t , t h e change i n t h e l e v e l o f t h e c o u n t r y c e i l i n g
u s u a l l y d e f i n e s t h e g e n e r a l monetary stance f o r t h e year i n
question.
Determination o f a s p e c i f i c country c e i l i n g i s taken within the
framework o f t h e o v e r a l l o f f i c i a l g r o s s f o r e i g n a s s e t p o s i t i o n
o f t h e u n i o n w h i c h , a c c o r d i n g t o a r u l e i n BCEAO s t a t u t e s , s h o u l d
not f a l l b e l o w 20 p e r c e n t o f i t s s i g h t l i a b i l i t i e s ' ' f o r more
t h a n t h r e e c o n s e c u t i v e months w i t h o u t s t e p s b e i n g t a k e n t o remedy
t h e p o s i t i o n (BCEAO,1973e) . T h i s c o v e r a g e r u l e i s a s t r o n g
c o n s t r a i n t upon money c r e a t i o n i f e f f e c t i v e l y a p p l i e d , a s s i g h t
l i a b i l i t i e s c o m p r i s e v i r t u a l l y a l l l i a b i l i t i e s w h i c h t h e BCEAO
a g e n c y has d i s c r e t i o n a r y powers t o a d j u s t i n t h e s h o r t t e r m . So,
when t h e 20 p e r c e n t r a t i o i s b r e a c h e d , r e d u c t i o n s o f c e n t r a l
bank r e f i n a n c i n g s h o u l d f e e d t h r o u g h t o r e d u c t i o n s i n bank c r e d i t
t h e r e b y c o n s t r a i n i n g t h e r a t e o f money i s s u e .
S i n c e September 1985, t h e UMOA l e v e l o f f o r e i g n a s s e t s h a s been
c o n s i s t e n t l y b e l o w 20 p e r c e n t o f s i g h t l i a b i l i t i e s . D u r i n g 1988
a l o n e , i t d e c l i n e d from a c o v e r a g e o f 12.6 p e r c e n t t o 7.1 p e r
c e n t . T h i s d e v e l o p m e n t was a r e f l e c t i o n o f a d e t e r i o r a t i n g
t r a d i n g e n v i r o n m e n t and a l s o , a c e r t a i n r e l u c t a n c e t o impose a
c o n t r a c t i o n a r y m o n e t a r y p o l i c y i n a l l UMOA s t a t e s r e g a r d l e s s o f
t h e i r i n d i v i d u a l f o r e i g n asset p o s i t i o n as w e l l as a c e r t a i n
d i s a b i l i t y t o impose e f f e c t i v e r e s t r i c t i v e p o l i c y .
The 20 p e r c e n t c o v e r a g e r e q u i r e m e n t i s b r e a c h e d c o n s i s t e n t l y a t
a c o u n t r y l e v e l a s w e l l a s a t t h e UMOA l e v e l . C o t e d ' l v o i r e f o r
example h a s o p e r a t e d a t l e s s t h a n 2 p e r c e n t c o v e r a g e f o r most
o f t h e 1980s. However i t w o u l d a p p e a r t h a t t h e a g g r e g a t e s t a n c e
w i l l r e f l e c t t h e o v e r a l l UMOA f o r e i g n a s s e t c o v e r a g e and t h a t
c o u n t r i e s with low o r n e g a t i v e growth o f r e f i n a n c i n g are those
w i t h c o v e r a g e s u b s t a n t i a l l y l e s s t h a n 20 p e r c e n t .
F o r e x a m p l e , p r i o r t o 1987 UMOA f o r e i g n a s s e t c o v e r a g e was l e s s
t h a n 20 p e r c e n t (18.5% December 1986) and a somewhat r e s t r i c t i v e
r e f i n a n c i n g p o l i c y was r e q u i r e d . I n d i v i d u a l c o u n t r y r e f i n a n c i n g
t a r g e t s a r e set with reference t o l o c a l coverage l e v e l s (see
T a b l e 6) .
C o u n t r i e s s u c h a s C o t e d ' l v o i r e , B e n i n and S e n e g a l w i t h l o w
c o v e r a g e a r e programmed t o have a c o n t r a c t i o n a r y
refinancing
p o l i c y , w h i l s t c o u n t r i e s c o n t r i b u t i n g t o the p o o l e d r e s e r v e s have
a more e x p a n s i o n a r y s t a n c e . Thus t h e c o m b i n a t i o n o f d i s t i n c t
c o u n t r y i s s u e zones and d i f f e r i n g r e f i n a n c i n g p o l i c i e s a l l o w s a
c o n s i d e r a b l e d e g r e e o f v a r i a t i o n i n announced m o n e t a r y p o l i c y and
hence i n p o t e n t i a l p r i c e and o u t p u t d e v e l o p m e n t s i n UMOA
countries.
I t i s a l s o c l e a r from T a b l e 6 t h a t c o u n t r i e s w h i c h o v e r s h o t
r e f i n a n c i n g c e i l i n g s were t h o s e a c t u a l l y programmed t o i m p l e m e n t
a contractionary
r e f i n a n c i n g p o l i c y . Thus m o n e t a r y p o l i c y was
gold,
Gross f o r e i g n asset p o s i t i o n c o n s i s t s o f h o l d i n g s o f
IMF a s s e t s and h o l d i n g s o f f o r e i g n c u r r e n c y .
" The m a j o r s i g h t l i a b i l i t i e s o f t h e C e n t r a l Bank c o n s i s t
o f : n o t e s and c o i n s , s i g h t d e p o s i t s f r o m b a n k s and f i n a n c i a l
i n s t i t u t i o n s and f o r e i g n c u r r e n c y l i a b i l i t i e s .
Table 6: UMOA Monetary P o l i c y Stance 1986
C e n t r a l Bank L e n d i n g To The
(CFA B i l l i o n s )
1986
Country
Outcome
Ben 1 r
Burkina
Cote d' I v o i r e
Mali
Niger
Senegal
Togo
55.4
19.5
524.3
30.2
37.6
187.6
25.0
Total
879.6
1987
Economy
1987
Cei1ing
and
Change i n
Ceiling %
1986 Year
End O f f i c i a
Net F o r e i g n
Assets
Ceiling
Outcome
58.5
19.0
543.2
52.5
38.3
202.7
22.2
56.4
24.5
506.7
33.7
39.5
181.1
26.6
63.0
24.7
632.8
53.5
42.5
200.7
23.9
1.8
25.6
-3.4
11.6
5.1
-3.5
6.4
-29.9
54.0
-318.3
-46.9
17.1
-197.0
67.3
936.5
868.5
1041.0
-1.3
-454.0
Notes: T o t a l net f o r e i g n a s s e t s does not i n c l u d e an a d d i t i o n a l 95.5 CFA bn
a s s e t s j o i n t l y h e l d and a d j u s t m e n t s .
G l o b a l C e i l i n g r e p r e s e n t s t o t a l c e n t r a l bank c r e d i t t o p u b l i c and p r i v a t e s e c t o r s .
Source: Zone Franc Rapport 19B7.
l e a s t e f f e c t i v e where i t was s u p p o s e d t o be most e f f e c t i v e . T h i s
l a c k o f e f f e c t i v e n e s s e x p l a i n s t h e p e r s i s t e n c e o f low f o r e i g n
a s s e t c o v e r a g e by c o u n t r i e s s u c h as C o t e d ' l v o i r e . I n t h e n e x t
s e c t i o n we c o n s i d e r t h e components o f r e f i n a n c i n g and t h e r e a s o n s
f o r o v e r s h o o t i n g t h e r e f i n a n c i n g c e i l i n g s i n Cote d ' l v o i r e .
Breaking
the Refinancing
Ceilings
T a b l e 7 b r e a k s down t h e BCEAO r e f i n a n c i n g c e i l i n g s i n t o t h r e e
main c a t e g o r i e s : o r d i n a r y c r e d i t , r u r a l c r e d i t and c r e d i t t o t h e
T r e a s u r y . C o r r e s p o n d i n g t o e a c h c a t e g o r y c e i l i n g a r e t h e end y e a r
outcomes. R e f i n a n c i n g
c e i l i n g s are e f f e c t i v e l y t h e monetary
t a r g e t s o f t h e c e n t r a l Bank and t h e p e r f o r m a n c e o f outcomes
against c e i l i n g s i s a f i r m i n d i c a t i o n of the e f f e c t i v e n e s s of
monetary p o l i c y i n a t t a i n i n g p r e d e t e r m i n e d t a r g e t s .
From T a b l e 7 i t i s e v i d e n t
t h a t t h e main a r e a o f t a r g e t
overshooting i s f o r r u r a l c r e d i t (considered i n the next s e c t i o n
i n more d e t a i l ) . C r e d i t t o government a d h e r e d c l o s e l y t o t h e
t a r g e t s h i g h l i g h t i n g t h e i m p o r t a n t and e f f e c t i v e r e s t r a i n t on
T a b l e 7:
C e n t r a l Bank Refinancing - C e i l i n g s S Results
B i l l i o n s o f CFA
Year
Treasury
C r e d i t To Banks and
Ordinary
Ceiling
Result
1980
1981
1982
1983
1984
1985
1986
1987
1988
147.7
188.9
na
289.2
311.0
325.8
255. 0
216.0
na
139.6
177.4
239.9e
291.4
295.3
254.8
243.5
279.3
198. 5
Notes:
* i n d i c a t i v e , na
from t o t a l .
S o u r c e : BCEAO.
Francs
FI's
Credit
Rural
C e i l i n g * Result
7.0
163.0
na
153.7
150.0
142.0
145.0
161.0
na
125.6
193.9
172.5e
180.5
147.5
148.1
180.4
231.0
302.8
To
Ceiling
Result
37.0
87 . 7
na
106.5
115. 0
120.5
124. 3
129 .7
na
75.0
65.0
90.0
95.2
107.4
111.6
119.5
122.5
138.2
n o t a v a i l a b l e , e breakdown
estimated
d i r e c t c r e d i t t o government. O r d i n a r y c r e d i t ( c r e d i t t o t h e r e s t
o f t h e economy) e x c e e d e d t a r g e t i n 1987 b u t o t h e r w i s e was more
l i k e l y t o be s i g n i f i c a n t l y b e l o w t a r g e t , as was t h e c a s e i n 1985.
Rural
Credit
R e f i n a n c i n g of r u r a l c r e d i t f o r the three stages of p r o d u c t i o n
o f p u r c h a s e , s t o c k s and e x p o r t i s r e g a r d e d as p r i o r i t y c r e d i t
b o t h i n t e r m s o f a v a i l a b i l i t y and t h e d i s c o u n t r a t e a p p l i c a b l e ,
and has an i n d i c a t i v e c e i l i n g b a s e d upon e s t i m a t e d
requirements.
Requirements i n excess of the c e i l i n g f o r r u r a l r e f i n a n c i n g are
correspondingly
met
whenever
possible,
consequently
the
i n d i c a t i v e c e i l i n g i s f r e q u e n t l y e x c e e d e d . I n t h e 1980s, t h e
i n d i c a t i v e c e i l i n g was b r e a c h e d i n e v e r y y e a r b u t one t o 1988.
I n t h e o r y r u r a l c r e d i t r e f i n a n c i n g i s s h o r t t e r m , and c r e d i t
advanced d u r i n g or a f t e r the h a r v e s t p e r i o d i s r e p a i d f o l l o w i n g
exportation.
F i g u r e 3 shows a marked c y c l i c a l p e a k i n g
of
a g r i c u l t u r a l c r e d i t i n the f i r s t q u a r t e r of every year. Because
t o t a l r u r a l c r e d i t r a r e l y d i p s below CFA 120 b i l l i o n , i t i s
l i k e l y t h a t a c o n s i d e r a b l e p o r t i o n i s r o l l e d o v e r a n n u a l l y , and,
more i m p o r t a n t l y , t h a t t h i s p r o p o r t i o n i s r i s i n g as 1988 b a s e
l e v e l has r i s e n s u b s t a n t i a l l y t o more t h a n 170 CFA bn. T h i s i s
a strong i n d i c a t i o n of s t o c k p i l i n g p o l i c i e s .
The l a c k o f e f f e c t i v e r e s t r i c t i o n upon t h e l e v e l o f r u r a l c r e d i t
r e f i n a n c i n g has been e x p l o i t e d by t h e I v o r i a n government w i t h a
Figure 3:
SEASONALITY OF RURAL
CREDIT
1980-19BB
300
250
200
100
I ' ' ' I ' ' ' I ' ' ' I ' ' M ' ' ' I ' ' ' I
Mar-80
Mar-ai
Mar-82
source'
Mar-83
lvtar-B4
BCEAO,
Mar-SS
Notes
et
Mar-BB
Mar-g7
Mar-BB
Statistiques
p o l i c y of s t o c k p i l i n g of a g r i c u l t u r a l exports during the recent
commodity p r i c e slump. As a p r o p o r t i o n o f t o t a l d o m e s t i c c r e d i t
(excluding c r e d i t t o government), r e f i n a n c i n g f o r s t o c k p i l i n g
a l o n e h a s d o u b l e d i n t h e two y e a r s t o December 1988 ( s e e T a b l e
8) . W h i l s t r e f i n a n c i n g t y p i c a l l y p e a k s i n M a r c h f o l l o w i n g t h e end
o f t h e c o f f e e and c o c o a s e a s o n , BCEAO f i g u r e s show t h a t t h e
p r o p o r t i o n o f t o t a l c r e d i t a l l o c a t e d t o r e f i n a n c i n g has continued
t o r i s e i n 1989. BCEAO n o t e s on t h e 1988 m o n e t a r y s i t u a t i o n
d e s c r i b e r u r a l c r e d i t growth as 'explosive'^".
R u r a l R e f i n a n c i n g a n d The CSSPPA
From t h e e a r l i e r d i s c u s s i o n o f s a v i n g s m o b i l i z a t i o n , i t i s c l e a r
t h a t t h e i n c r e a s e d demand f o r r u r a l r e f i n a n c i n g i s a r e s u l t o f
the
commodity s t a b i l i s a t i o n scheme o p e r a t e d by t h e CSSPPA
d e s i g n e d t o i n s u l a t e f a r m e r s from commodity p r i c e f l u c t u a t i o n s .
With a d e c l i n e i n t h e w o r l d cocoa p r i c e (and c o f f e e p r i c e s i n
1989)
t h e CSSPPA c r e d i t r e q u i r e m e n t s have r a p i d l y i n c r e a s e d t o
meet t h e d i f f e r e n c e b e t w e e n t h e w o r l d and p r o d u c e r p r i c e s and t o
f u n d s t o c k p i l i n g . Owing t o t h e i m p o r t a n c e o f e x p o r t a g r i c u l t u r e
See
BCEAO, Banques
et Monnaies
No 381 A p r i l 1989.
i n t h e I v o r i a n economy i t i s i m p o r t a n t t o a n a l y s e t h e m o n e t a r y
e f f e c t s of the s t a b i l i s a t i o n fund.
S t a b i l i s a t i o n s u r p l u s e s a c c r u e t o government by t r a n s f e r t h r o u g h
t h e i n v e s t m e n t b u d g e t o f t h e CAA ( w h i c h i s o u t s i d e t h e f o r m a l
b u d g e t a r y framework o f government) . The e f f e c t o f f i n a n c i a l
t r a n s f e r s t o t h e CAA i s an e x p a n s i o n a r y f i s c a l i m p u l s e . S c h i l l e r
( 1 9 8 8 : p l l ) n o t e s t h a t s t a b i l i s a t i o n s u r p l u s e s r e s u l t i n g from t h e
d e p r e c i a t i o n o f t h e CFA a g a i n s t t h e US d o l l a r d u r i n g 1983-85 were
l a r g e l y t r a n s f e r r e d t o t h e CAA f o r d e b t s e r v i c i n g :
' . . . t h e t r a n s f e r s from t h e CSSPPA t o t h e CAA r e p r e s e n t e d . . . . a
r e d i s t r i b u t i o n o f w i n d f a l l g a i n s from t h o s e who b e n e f i t t e d from
the
t e m p o r a r y w e a k e n i n g o f t h e l o c a l c u r r e n c y t o t h o s e who
s u f f e r e d from i t . '
More g e n e r a l l y , s t a b i l i s a t i o n s u r p l u s e s were a f o r m o f t a x a t i o n
of
the
rural
economy
to
develop
the
industrial
and
i n f r a s t r u c t u r a l base.
S t a b i l i s a t i o n d e f i c i t s a r e f i n a n c e d by t h e d o m e s t i c b a n k i n g
s y s t e m u s i n g a c c e s s t o c e n t r a l bank r e f i n a n c i n g f a c i l i t i e s , hence
directly
increasing
t h e monetary b a s e .
As
crop
financing
( i n c l u d i n g s t o c k p i l i n g ) i s e f f e c t i v e l y w i t h o u t a c e i l i n g and a
p r i o r i t y c r e d i t a r e a , i n c r e a s e s e i t h e r d i s p l a c e r e f i n a n c i n g of
o t h e r a c t i v i t i e s o r expand d o m e s t i c c r e d i t o v e r a l l . I n p r a c t i c e ,
t h e r e a p p e a r s t o be a c o m b i n a t i o n o f b o t h m o n e t a r y e x p a n s i o n and
d i s p l a c e m e n t o f o r d i n a r y r e f i n a n c i n g . I n 1987, f o r example, t h e
b r e a c h i n g o f t h e r u r a l r e f i n a n c i n g c e i l i n g d i d n o t r e s u l t i n an
under a c h i e v e m e n t o f t h e o r d i n a r y c r e d i t c e i l i n g , i n f a c t q u i t e
t h e r e v e r s e . But o v e r s h o o t i n g r u r a l c r e d i t i n 1985 and 1986 was
accompanied by low l e v e l s o f o r d i n a r y r e f i n a n c i n g . D u r i n g 1988
however t h e c r o w d i n g o u t argument i s s t r o n g e r . An e x p a n s i o n o f
r u r a l r e f i n a n c i n g by CFA 71 b i l l i o n a c c o m p a n i e d
an o r d i n a r y
r e f i n a n c i n g c o n t r a c t i o n o f n e a r l y CFA 81 b i l l i o n . The l i k e l i h o o d
of c r o w d i n g o u t o f n o n - r u r a l b o r r o w e r s d u r i n g 1988 was
also
c o n f i r m e d i n d i s c u s s i o n s w i t h c o m m e r c i a l bank o f f i c i a l s .
A l t h o u g h t h e o p e r a t i o n o f t h e CSSPPA has e l i m i n a t e d t h e e f f e c t s
of f l u c t u a t i n g b e v e r a g e p r i c e s and exchange r a t e c h a n g e s from
producer p r i c e s at the c o s t of e i t h e r f i s c a l expansion (surplus)
of
domestic
credit
expansion
(deficit),
increased
price
f l e x i b i l i t y c o u l d smooth t h e a c t u a l income f l o w t o f a r m e r s from
e x p o r t p r o c e e d s and r e d u c e monetary and f i s c a l f l u c t u a t i o n s .
Cote d ' l v o i r e has a s u f f i c i e n t s h a r e o f w o r l d c o c o a o u t p u t t h a t
domestic output shocks w i l l a f f e c t world p r i c e s ( t h i s i s t r u e t o
a l e s s e r e x t e n t f o r c o f f e e as w e l l ) . Thus a p o o r I v o r i a n h a r v e s t
would be p a r t l y compensated f o r by i n c r e a s e d w o r l d p r i c e s b u t t h e
f i x e d p r o d u c e r p r i c e e l i m i n a t e s t h i s o f f s e t t i n g p r i c e movement
t o t h e p r o d u c e r . The r e c e n t announcement o f r e d u c e d p r o d u c e r
p r i c e s f o r t h e 1989/90 s e a s o n marks a s t e p t o w a r d s i n c r e a s e d
price
f l e x i b i l i t y and s h o u l d r e d u c e t h e amount o f
credit
a l l o c a t e d as p r i o r i t y r u r a l r e f i n a n c i n g , b u t i t i s l i k e l y t o
have o c c u r r e d b e c a u s e o f t h e u n s u s t a i n a b l e c r e d i t r e q u i r e m e n t s
of s t o c k p i l i n g a t t h e p r e v i o u s p r o d u c e r p r i c e s .
Table 8: Recent Rural C r e d i t
Maize
Refinancing
R e f i n a n c i n g o f : C o f f e e , Cocoa, R i c e , C o t t o n and
Stockpiling
CFA Bns
% Total
Dec 1985
113.5
10. 3
Dec 1986
113.7
10.2
Dec 1987
175.9
14 . 5
Dec 1988
247.4
20.6
J a n 1989
278.0
na
Feb 1989
299.6
na
Mar 1989
313.2
na
Credit
N o t e s : T o t a l C r e d i t = Non government c r e d i t f r o m
monetary system
S o u r c e ; BCEAO
I n summary a c c o r d i n g a h i g h p r i o r i t y t o r u r a l r e f i n a n c i n g i s t h e
main c a u s e o f o v e r s h o o t i n g t h e l i m i t s announced f o r c e n t r a l bank
i n t e r v e n t i o n . As a r e s u l t g r o s s f o r e i g n a s s e t c o v e r a g e r e m a i n s
f a r b e l o w t h e r e q u i r e d minimum (and n e t f o r e i g n a s s e t s t e n d t o
f a l l ) and m o n e t a r y p o l i c y i s r a r e l y a s c o n t r a c t i o n a r y a s had been
i n t e n d e d . I n e x t r e m e c a s e s , s u c h as 1988, t h i s s y s t e m c a n crowd
o u t o t h e r t y p e s o f b o r r o w i n g . However r e c e n t c h a n g e s i n
a g r i c u l t u r a l p r i c i n g and s a l e s p o l i c i e s w o u l d a p p e a r t o r e d u c e
r e f i n a n c i n g r e q u i r e m e n t s b e l o w t h e i r 1989 peak.
Government
Credit
C r e d i t t o Government i s s t r i c t l y l i m i t e d by A r t i c l e 16 o f BCEAO
s t a t u t e s t o 20 p e r c e n t o f t h e p r e v i o u s y e a r ' s f i s c a l r e c e i p t s .
I n p r a c t i c e , t h i s i s t r e a t e d as an a u t o m a t i c e n t i t l e m e n t .
However, as shown i n T a b l e 7, t h e i m p o s i t i o n o f a l i m i t i s an
e f f e c t i v e means i n c u r t a i l i n g d i r e c t c e n t r a l bank c r e d i t t o
government. I n t h e a b s e n c e o f s p e c i f i c c o o r d i n a t i o n o f f i s c a l and
monetary
policy,
the credit
limit
t o government
may
be
i n s u f f i c i e n t t o fund borrowing requirements p a r t i c u l a r l y as
s o u r c e s o f new f o r e i g n b o r r o w i n g a r e e x t r e m e l y l i m i t e d by d e b t
repayment m o r a t o r i a . T h e r e a r e s e v e r a l r o u t e s by w h i c h a d d i t i o n a l
c r e d i t c a n be o b t a i n e d h e n c e r e n d e r i n g t h e c e i l i n g i n e f f e c t i v e :
*
The c e i l i n g does n o t i n c l u d e t h e f i n a n c i n g o f p a r a s t a t a l
b o d i e s . By r e d u c i n g government n e t l e n d i n g t o p a r a s t a t a l s
t h e government d i r e c t b o r r o w i n g r e q u i r e m e n t i s r e d u c e d and
t h e p r i v a t e s e c t o r must compete w i t h p a r a s t a t a l s f o r c r e d i t .
*
Delaying
increased
*
Foreign
Borrowing.
L i m i t i n g d o m e s t i c bank c r e d i t t o
government d i d n o t r e s t r i c t o v e r a l l b o r r o w i n g . W i t h t h e
a d v a n t a g e o f a c o n v e r t i b l e c u r r e n c y and booming e x p o r t s C o t e
d ' l v o i r e b o r r o w e d h e a v i l y d u r i n g t h e 197 0s and e n t e r e d t h e
1980s w i t h what t u r n e d o u t t o be a s e v e r e f o r e i g n d e b t
s e r v i c i n g problem.
Other
payment t o t h e p r i v a t e s e c t o r
p r i v a t e s e c t o r c r e d i t demand.
which
creates
Credit
The
f i n a l component o f t h e g l o b a l c r e d i t a l l o c a t i o n i s t h e
refinancing
of ordinary
c r e d i t from c o m m e r c i a l b a n k s and
f i n a n c i a l i n s t i t u t i o n s . T h i s o p e r a t e s on t h e C e n t r a l Bank b a l a n c e
sheet as a balancing
item,
p a r t i c u l a r l y i n s i t u a t i o n s of
l i q u i d i t y shortage.
W i t h a l o w e r p r i o r i t y t h a n r u r a l r e f i n a n c i n g and c r e d i t t o
government ( w i t h i n t h e c e i l i n g ) , and a l o w e r l e v e l o f f o r e i g n
a s s e t s t h a n a n t i c i p a t e d , an i n c r e a s e i n o r d i n a r y
refinancing
r e q u i r e s e i t h e r an i n c r e a s e i n d e p o s i t s a t t h e C e n t r a l Bank o r
new money i s s u e ^ ' .
W i t h money i s s u e p r e - d e t e r m i n e d by t h e BCEAO and n o t s u b j e c t t o
t h e d i s c r e t i o n o f t h e l o c a l agency a f t e r t h e i s s u e t a r g e t i s s e t ,
t h e m a r g i n a l o r d i n a r y r e f i n a n c i n g d e c i s i o n i s d e p e n d e n t upon t h e
amount o f f u n d s p l a c e d on t h e o v e r n i g h t money m a r k e t and t h e
amount o f c r e d i t a v a i l a b l e t o t h e C o t e d ' l v o i r e agency f r o m t h e
BCEAO^^.
T h i s c a n be seen from a s i m p l i f i e d b a l a n c e s h e e t o f
c e n t r a l bank:
ASSETS
LIABILITIES
Notes & Coins +
Foreign Assets
+
Banks & O t h e r D e p o s i t s +
C r e d i t To Government +
Foreign L i a b i l i t i e s
Rural Credit Refinancing +
Ordinary Credit Refinancing
the
T h i s i s because s h o r t term r e f i n a n c i n g i s c a r r i e d o u t
on t h e i n t e r b a n k money m a r k e t w h i c h i s s u p e r v i s e d by t h e
agency o f t h e BCEAO.
C o m m e r c i a l banks know i n a d v a n c e t h a t t h e amount o f o r d i n a r y
r e f i n a n c i n g a v a i l a b l e i s dependent on the l i q u i d i t y o f t h e l o c a l
a g e n c y o f t h e c e n t r a l bank. I f t h e c e n t r a l bank h a s s u f f i c i e n t
l i q u i d i t y , t h e i n d i v i d u a l c o m m e r c i a l bank can e x p e c t r e f i n a n c i n g
up t o i t s p o r t i o n o f t h e c e i l i n g . I n p o s i t i o n s o f t i g h t l i q u i d i t y
i t s a l l o c a t i o n c a n o n l y be known o n a d a y t o d a y b a s i s . A s shown
i n T a b l e 7 t h e s t r e n g t h e n i n g o f t h e r e f i n a n c i n g c e i l i n g f r o m 1980
by r e m o v a l o f i t s " i n d i c a t i v e " n a t u r e h a s r e s u l t e d i n a f a i r l y
c l o s e a d h e r e n c e t o t h e r e f i n a n c i n g c e i l i n g s . However i n 1987, t h e
i n d i c a t i o n s a r e t h a t t h e c r e d i t c e i l i n g was e x c e e d e d by n e a r l y
30 p e r c e n t , and t h a t t h e C e n t r a l Bank h a d s e r i o u s d i f f i c u l t i e s
i n c a r r y i n g through s e r i o u s c r e d i t r e s t r i c t i o n s d e s p i t e having
the instruments t o s o .
From 1980, c e n t r a l bank c o n t r o l was e x t e n d e d by s t i p u l a t i o n o f
maximum m o n t h l y o r d i n a r y c r e d i t i n c r e a s e s ( i e c r e d i t e l i g i b l e f o r
r e d i s c o u n t i n g a t t h e C e n t r a l Bank) w h i c h o p e r a t e
counterc y c l i c a l l y t o t h e l e v e l o f r u r a l c r e d i t . P e n a l t i e s f o r noncompliance include n o n - i n t e r e s t bearing deposits a t the Central
Bank, a l t h o u g h i n p r a c t i c e t h i s h a s n o t o c c u r r e d . E v a l u a t i o n o f
m o n t h l y c r e d i t t a r g e t c o m p l i a n c e i s hampered by BCEAO s e c r e c y f o r
b o t h t a r g e t s and outcomes^'. L o c a l b a n k s r e p o r t e d
general
compliance t o the t a r g e t s w i t h the exception of during the f i r s t
q u a r t e r due t o d e l a y s i n r e l e a s i n g c r e d i t t a r g e t s .
Total Credit Ceilings
From 1976, t h e BCEAO h a s s e t c o m p r e h e n s i v e a n n u a l i n d i c a t i v e
t a r g e t s f o r monetary aggregates although the o p e r a t i o n a l p o l i c y
was c o n f i n e d t o a c h i e v i n g t h e n a r r o w e r C e n t r a l Bank r e f i n a n c i n g
t a r g e t s . Targets f o r o v e r a l l net f o r e i g n a s s e t s , domestic c r e d i t
components and t o t a l d o m e s t i c l i q u i d i t y a r e n o t p u b l i s h e d and
a p p e a r t o r e s u l t f r o m t h e framework u t i l i s e d t o d e t e r m i n e t h e
m o n e t a r y s t a n c e i n e a c h UMOA c o u n t r y w h i c h i s b a s i c a l l y an IMF
d e r i v e d e x e r c i s e o f f i n a n c i a l programming. B h a t i a (1985) p r o d u c e d
data
f o r years
1976-80 on t a r g e t s and a c t u a l s s h o w i n g a
s u b s t a n t i a l o v e r s h o o t i n UMOA d o m e s t i c c r e d i t a n n u a l l y t o 1979,
p r i n c i p a l l y due t o r a p i d p r i v a t e c r e d i t g r o w t h i n C o t e d ' l v o i r e
d u r i n g 1976-79 ( r e p r o d u c e d i n T a b l e 9 ) .
The income f r o m t h e commodity p r i c e boom 197 5-78 o n l y p e r m i t t e d
a v e r y s l i g h t improvement i n t h e n e t f o r e i g n a s s e t p o s i t i o n and
a somewhat more s i g n i f i c a n t i n c r e a s e i n government d e p o s i t s ^ * b u t
a l l o w e d v e r y s u b s t a n t i a l i n c r e a s e s i n d o m e s t i c c r e d i t . Thus
monetary p o l i c y o n l y p a r t i a l l y s t e r i l i s e d t h e f o r e i g n exchange
i n f l o w s . The t e n d e n c y f o r p r i v a t e c r e d i t t o i n c r e a s e a p p e a r e d t o
C r e d i t d a t a i s g i v e n by t y p e o f i s s u i n g i n s t i t u t i o n and
by p u r p o s e i n BCEAO, Notes et S t a t i s t i q u e s b u t n o t
s p e c i f i c a l l y by t y p e o f c r e d i t .
M a i n l y t h r o u g h a v o l u n t a r y d e p o s i t scheme a t t h e
c e n t r a l bank f o r CSSPPA.
Table 9:
Actuals
Cote d ' l v o i r e Monetary Survey - Targets
(CFA
Net
Foreign
and
billions)
Assets
Net C r e d i t To
Government
Target
Actual
Year
Target
Actual
1976
-17.1
-18.0
-19.6
-2.2
Net C r e d i t To
P r i v a t e Sector
Target
Actual
B r o a d Money
Target
Actual
322.9
391.9
282.5
350.0
1977
12.5
17.4
-21.2
-76.0
413.6
605.1
398.6
524.5
1978
40.0
24.3
-59.3
-107.5
577.5
696.3
548.7
581.6
1979
41.0
-69.0
-59.4
-114.0
740.0
791.7
670.0
566.2
1980
-28.3
-243.6
-60.7
-55.7
938.0
890.8
783.0
581.8
Notes: * Net f o r e i g n a s s e t s i n c l u d e long term l i a b i l i t i e s but e x c l u d e a l l o c a t i o n s of SDK's which
a r e i n c l u d e d i n o t h e r items n e t . (not shown)
Source : p54
Bhatia,
1985,
p54.
have developeca i t s own momentum by t h e l a t e 197 0s and t r a n s l a t e d
i n t o a r a p i d d e c l i n e o f f o r e i g n a s s s e t s as d o m e s t i c a b s o r b t i o n
e x c e e d e d income. The f a c t t h a t b r o a d money s u p p l y was e x p e c t e d
t o i n c r e a s e i n 1979
and 1980
yet a c t u a l l y f e l l or remained
c o n s t a n t d e m o n s t r a t e s t h a t m o n e t a r y o f f i c i a l s had,
wrongly,
a n t i c i p a t e d t h a t t h e boom y e a r s f o r e i g n e x c h a n g e r e c e i p t s were
s u s t a i n a b l e i n t o t h e 1980s.
Reserve Requirements
The C e n t r a l Bank can r e q u i r e t h e d e p o s i t o f f u n d s f r o m b a n k s and
f i n a n c i a l i n s t i t u t i o n s t o r e s t r i c t c r e d i t c r e a t i o n when d e p o s i t s
increase
r a p i d l y o r t o e n s u r e a c e r t a i n minimum l e v e l
of
l i q u i d i t y . I n p r a c t i c e , however r e s e r v e r e q u i r e m e n t s have not
been an i m p o r t a n t method o f c r e d i t c o n t r o l and i n p r e f e r e n c e t h e
r e f i n a n c i n g s y s t e m has been u s e d f o r r e s t r i c t i n g c r e d i t g r o w t h .
To r e c a p from t h e p r e v i o u s s e c t i o n t h i s i s a c h i e v e d by
a
r e d u c t i o n of o v e r n i g h t r e f i n a n c i n g o f o r d i n a r y c r e d i t . By v i e w i n g
r e f i n a n c i n g as b o r r o w e d r e s e r v e s , t h e BCEAO can be s a i d t o be
c a r r y i n g o u t an a p p r o a c h t o r e s e r v e s management.
The w e a k n e s s e s i n s e v e r a l o f t h e d e v e l o p m e n t - t y p e b a n k s d i s c u s s e d
i n the review of the f i n a n c i a l s e c t o r , w i t h the b e n e f i t of
h i n d s i g h t does s u g g e s t t h a t a c l o s e r s u r v e i l l a n c e o f b a n k i n g
l i q u i d i t y w o u l d have been b e n e f i c i a l . The C e n t r a l Bank has
two
instruments with which t o supervise
c o m m e r c i a l bank l e n d i n g
o p e r a t i o n s w h i c h do not a p p e a r t o be e x t e n s i v e l y e m p l o y e d . A
minimum r a t i o between t h e s h o r t - t e r m l i q u i d a s s e t s and s i g h t
l i a b i l i t i e s can be imposed { c o e f f i c i e n t de t r e s o r i e ) as w e l l as
a maximum r a t i o between n o n - g u a r a n t e e d l o a n s t o a
single
e n t e r p r i s e and t h e b a n k s own c a p i t a l and r e s e r v e s
{coefficient
de d i v i s i o n des risques).
The t h r u s t o f c e n t r a l bank r e g u l a t o r y
a c t i v i t y a p p e a r s t o be d i r e c t e d a t e n s u r i n g t h a t b a n k s comply
w i t h c o m p l e x r e g u l a t i o n s on t h e g r o w t h and d i s t r i b u t i o n
of
c r e d i t , r a t h e r than monitoring p r u d e n t i a l r e g u l a t i o n of banking
l i q u i d i t y and o v e r s e e i n g t h e q u a l i t y o f a s s e t p o r t f o l i o s .
Prior Authorisations
{Autorisations
Prealables)
Loans i n e x c e s s o f 100 m i l l i o n CFA
(US$
0.3m
) require
an
a u t o r i s a t i o n prealable
(AP) f r o m t h e N a t i o n a l C r e d i t Committee
o f t h e C e n t r a l Bank w h i c h e n t i t l e s a l o a n t o be r e f i n a n c e d up t o
a c e r t a i n p e r c e n t a g e a c c o r d i n g t o s e c t o r o f u s e . As made c l e a r
i n BCEAO (197 6a) t h i s i n s t r u m e n t i s i n t e n d e d b o t h t o c o n t r o l t h e
amount o f c r e d i t t o t h e p r i v a t e s e c t o r and t o augment t h e
s e c t o r a l c r e d i t p o l i c y . The g r a n t i n g o f APs i s a f a i r l y s t a n d a r d
p r o c e d u r e and depends upon t h e i n t e n d e d
use o f c r e d i t .
In
p r a c t i c e , t h e AP s y s t e m may have some e f f e c t i n r e s t r i c t i n g l o a n s
t o low p r i o r i t y s e c t o r s s u c h as p r o p e r t y , i m p o r t f i n a n c i n g and
distribution
by
denying
access
to
refinancing.
However,
a p p l i c a t i o n s may
be
scaled
up
f o r low
priority
sector
a p p l i c a t i o n s . APs a r e n o t , however, a p r i m a r y c o n t r o l i n s t r u m e n t ;
d e s p i t e t h e r e q u i r e m e n t o f c e n t r a l bank a s s e n t f o r l a r g e l o a n s
i t s l e v e l o f i n t e r v e n t i o n does n o t a p p e a r t o be s i g n i f i c a n t . T h i s
c o n c l u s i o n i s u n d e r l i n e d by t h e weakness o f s e c t o r a l c r e d i t
p o l i c y . I t i s q u i t e p o s s i b l e t h a t t h e s u p e r v i s o r y powers o f t h e
Central
Bank a r e
insufficient
to monitor
the
AP
system
effectively.
The e f f e c t i v e n e s s
factors:
of
the
AP
system
i s decreased
by
two
main
*
Time d e l a y s i n p r o c e s s i n g APs can r e s u l t i n l e n d i n g b e f o r e
n o t i f i c a t i o n . A u t h o r i s a t i o n t y p i c a l l y t a k e s s i x months but
i t i s n o t unknown f o r a p p l i c a t i o n s t o t a k e one o r two y e a r s ,
p a r t i c u l a r l y i n t h e c a s e o f new o r f o r e i g n f i r m s . I n 1987
t h e C e n t r a l Bank r a i s e d t h e p r o b l e m o f n o n - c o m p l i a n c e n o t i n g
i n s t a n c e s o f l o a n s g r a n t e d i n e x c e s s o f t h e AP.
*
The l i m i t e d amount o f r e f i n a n c i n g a v a i l a b l e a t t h e C e n t r a l
Bank, w h i c h has been s u b s t a n t i a l l y r e d u c e d i n r e c e n t y e a r s .
S e v e r a l b a n k e r s have p o i n t e d out t h a t o t h e r s o u r c e s o f
f i n a n c e c o u l d be f o u n d f o r a l o a n r e f u s e d an AP.
Sectoral Coefficients
A l t h o u g h APs can be s e e n as p a r t o f a s e c t o r a l a l l o c a t i o n p o l i c y
t h e s e c t o r a l c o e f f i c i e n t s a r e more d i r e c t i n t h e i r a p p r o a c h t o
a l l o c a t i n g c r e d i t to d i f f e r e n t uses.
The BCEAO u n i f o r m l y a p p l i e s t o e a c h b a n k i n g i n s t i t u t i o n minimum
p r o p o r t i o n s o f t o t a l c r e d i t t o t h e economy t o be a l l o c a t e d t o
p r i o r i t y s e c t o r s and maxima f o r non p r i o r i t y s e c t o r s . The s y s t e m
o f autorisations
prealables
i s i n theory applied to s h i f t c r e d i t
a l l o c a t i o n towards the p r i o r i t y s e c t o r s . C o e f f i c i e n t s are r e v i s e d
T a b l e 10:
Sector
S e c t o r a l C r e d i t - O b j e c t i v e s and Outcomes
Objective=
minimum
Primary
Industry
O b j e c t i v e = maximum
Property T e r t i a r y
Other*
1980
Objective
Outcome
5.0%
5.9%
37.3%
33.9%
11.5%
12.1%
22.0%
20.7%
24.2%
27.4%
1981
Objective
Outcome
5.0%
5.5%
37.3%
26.5%
11.5%
10.9%
22.0%
22.0%
24.2%
25.1%
1982
Objective
Outcome
5.6%
36.4%
10.2%
20.3%
27.4%
Objective
Outcome
5.3%
5.5%
36.4%
34.3%
11.1%
9.6%
22.4%
28.0%
1984 O b j e c t i v e
Outcome
5.3%
5.3%
36.4%
34.4%
11.1%
10.7%
20.7%
28.9%
1985
Objective
Outcome
6.0%
5.0%
35.0%
31.1%
10.0%
9.3%
22.1%
21.7%
26.9%
32.9%
1986
Objective
Outcome
7.5%
4.3%
37.0%
28.1%
9.0%
8.2%
21.1%
26.7%
25.4%
32.7%
1987
Objective
Outcome
7.5%
3.0%
37.0%
25.5%
9.5%
8.0%
21.7%
32.6%
24.3%
30.9%
1988
Objective
Outcome
7.5%
3.4%
37.0%
26.7%
9.5%
6.3%
21.7%
35.6%
24.3%
28.0%
1983
Note: O t h e r c o m p r i s e s : e n e r g y , w a t e r , t r a n s p o r t , c o m m u n i c a t i o n s ,
a d m i n i s t r a t i o n and h o u s e h o l d s . P r i m a r y : a g r i c u l t u r e , f i s h i n g .
S o u r c e ; BCEAO, C e n t r a l e des R i s q u e s .
a n n u a l l y . T a b l e 10 shows t h a t t h e minimum t a r g e t s f o r p r i m a r y
p r o d u c t i o n and i n d u s t r y have n o t been met i n any o f t h e l a s t
f i v e y e a r s , w h i l s t maximum t a r g e t s f o r s e r v i c e s and o t h e r
t e r t i a r y s e c t o r s a r e r e g u l a r l y e x c e e d e d by s u b s t a n t i a l amounts.
The a c t u a l s e c t o r a l d i s t r i b u t i o n h a s d e t e r i o r a t e d s u b s t a n t i a l l y
i n t e r m s o f t h e p r i o r i t i e s o u t l i n e d by t h e BCEAO. F o r e x a m p l e ,
t h e o b j e c t i v e f o r c r e d i t t o t h e p r i m a r y s e c t o r r o s e f r o m 5.0 p e r
c e n t t o t a l c r e d i t t o t h e economy i n 1980 t o 7.5 p e r c e n t i n 1988,
b u t a c t u a l c r e d i t f e l l f r o m 5.9 p e r c e n t t o 3.4 p e r c e n t ;
s i m i l a r l y t h e p r o p o r t i o n o f c r e d i t t o i n d u s t r y f e l l from n e a r l y
34 p e r c e n t t o 26.7 p e r c e n t .
BCEAO c i r c u l a r s i n d i c a t e t h a t b r e a c h i n g t h e s e c t o r a l c o e f f i c i e n t s
w i l l result i nthe imposition of non-interest bearing deposits
a t t h e C e n t r a l Bank. T h e r e i s , however, no e v i d e n c e t h a t t h i s
s a n c t i o n h a s e v e r been a p p l i e d a n d t h e c o e f f i c i e n t s c a n be s e e n
as p a r t o f t h e C e n t r a l Bank's 'moral s u a s i o n " .
I n c r e a s i n g d e v i a t i o n s froiti t h e s e c t o r a l c o e f f i c i e n t s have been
c a u s e d p r i m a r i l y f r o m s t a g n a t i n g macroeconoraic g r o w t h , w h i c h h a s
r e d u c e d t h e demand f o r c r e d i t a n d i n c r e a s e d t h e r i s k i n e s s o f
l o n g - t e r m d i r e c t l y p r o d u c t i v e i n v e s t m e n t i n p r i m a r y and secondary
s e c t o r s . The f o l l o w i n g s e c t i o n c o n s i d e r s t h e r e a l economy e f f e c t s
of c r e d i t p o l i c y .
A r e c e n t BCEAO m e e t i n g i n A u g u s t 1989 s u g g e s t e d t h a t t h e s e c t o r a l
c o e f f i c i e n t s y s t e m w i l l be abandoned a s i t c l e a r l y f a i l s i n i t s
own s t a t e d o b j e c t i v e s .
The c o m b i n a t i o n o f c r e d i t
allocation
d i r e c t i v e s and a c o n t r o l l e d
interest rate policy
(see next
s e c t i o n ) does n o t a l l o w banks t o a d j u s t t h e i r l e n d i n g terms t o
the p e r c e i v e d r i s k i n e s s o f t h e loan. I f t h e present system o f
e f f e c t i v e c o n t r o l s on l e n d i n g t e r m s b u t i n e f f e c t i v e c o n t r o l s on
c r e d i t volume d o e s n o t r e s u l t i n i n c r e a s e d l e n d i n g t o p r i o r i t y
s e c t o r s , t h e n when t h e s e c t o r a l p o l i c y i s abandoned, s i g n i f i c a n t
changes i n c r e d i t a l l o c a t i o n would appear u n l i k e l y
without
interest rate l i b e r a l i s a t i o n .
Interest
Rate
Policy
Base i n t e r e s t r a t e s i n t h e UMOA a r e s e t u n i f o r m l y t h r o u g h o u t t h e
U n i o n ; t h e r e f o r e a t a c o u n t r y l e v e l t h e r e i s no f l e x i b i l i t y f o r
interest
rate
determination. Lending rates a r e defined i n
r e l a t i o n t o t h e p r e f e r e n t i a l d i s c o u n t r a t e (TEP) o r t o t h e n o r m a l
d i s c o u n t r a t e (TEN), d e p e n d i n g upon t h e s e c t o r a l u s e o f c r e d i t .
The TEP a n d TEN a r e s e t by t h e UMOA C o u n c i l o f M i n i s t e r s and a r e
n o t u s u a l l y a d j u s t e d more t h a n once a y e a r . Most r e f i n a n c i n g by
the
BCEAO
(excluding
money m a r k e t
advances)
i s at the
p r e f e r e n t i a l rate, notably r u r a l credit.
I n December 1988 and A p r i l 1989, t h e d i s c o u n t r a t e s were r a i s e d
as p a r t o f a n announced a c t i v e i n t e r e s t r a t e p o l i c y
and t h e
s p r e a d b e t w e e n t h e n o r m a l a n d p r e f e r e n t i a l r a t e s was n a r r o w e d
f r o m 2.5 t o 1 p e r c e n t p o i n t ( s e e F i g 4 ) . The i n c r e a s e i n t h e
p r e f e r e n t i a l r a t e from 6 t o 9 p e r cent r e p r e s e n t s a s i g n i f i c a n t
t i g h t e n i n g o f m o n e t a r y p o l i c y a n d may s i g n a l an abandonment o f
t h e p r e f e r e n t i a l r e f i n a n c i n g r o l e o f t h e BCEAO.
The
money m a r k e t r a t e
f o r f u n d s d e p o s i t e d a t t h e BCEAO
( o v e r n i g h t , 1 o r 3 months) i s a d j u s t e d s e v e r a l t i m e s a n n u a l l y a t
t h e d i s c r e t i o n o f t h e BCEAO g o v e r n o r . I n p a r t i c u l a r i t i s s e t
w i t h r e f e r e n c e t o t h e F r e n c h i n t e r - b a n k i n t e r e s t r a t e ( F i g u r e 4)
"
The new i n t e r e s t p o l i c y c o i n c i d e d w i t h and i s
g e n e r a l l y a t t r i b u t e d t o t h e a p p o i n t m e n t o f a new BCEAO
g o v e r n o r A l a s s a n e O u a t t a r a d u r i n g 1988.
Figure 4:
Selected
Iinterest
Rates
1980-1989
16
00%
14
00%
12.00%
3
10
Q0%
S.D056
B
00%
1980
"1
1981
n—r—I
r
1982
19B4
4986
1983
1985
1988
19B7
19S9I
t o p r e v e n t t h e o u t f l o w o f s u r p l u s f u n d s from t h e UMOA, r e f l e c t i n g
t h e e a s e w i t h w h i c h f u n d s c a n be t r a n s f e r r e d t o a n d from F r a n c e .
The o v e r n i g h t money m a r k e t r a t e r e p r e s e n t s t h e m a r g i n a l c o s t o f
funds f o r t h e commercial banks. D e p o s i t r a t e s a r e c o n t r o l l e d ,
a g a i n on a UMOA w i d e b a s i s . Most t i m e d e p o s i t s have f i x e d r a t e s
e x c e p t f o r l a r g e d e p o s i t s a n d d e p o s i t s o f o v e r one y e a r where a
minimum r a t e o n l y i s p r e s c r i b e d (see T a b l e 1 1 ) .
The UMOA i n t e r e s t r a t e p o l i c y r e f l e c t s t h e t e n s i o n between
m a i n t a i n i n g i n t e r e s t r a t e s a t l e v e l s comparable t o i n t e r n a t i o n a l
r a t e s t o prevent l o d g i n g o f s u r p l u s funds i n overseas accounts
and r e d u c i n g t h e c o s t o f b o r r o w i n g t o d o m e s t i c b o r r o w e r s a s an
i n c e n t i v e t o investment
Lending r a t e s are s e t i n r e l a t i o n t o
the a d m i n i s t r a t i v e l y determined d i s c o u n t r a t e s w h i l s t marginal
f u n d s a r e p r i c e d a t t h e more m a r k e t o r i e n t a t e d money m a r k e t r a t e .
The d i s c u s s i o n o f s e c t o r a l c o e f f i c i e n t s n o t e d t h e p r i o r i t y
i n t e r e s t r a t e s c a l e and t h a t m o r a l s u a s i o n o f t h e C e n t r a l Bank
has n o t s u c c e e d e d a l t e r i n g t h e c r e d i t d i s t r i b u t i o n t o w a r d s medium
See f o r example F a d i g a M A, L'Experience
De La
P o l i t i q u e Monetaire
Commune Dans L'UMOA, BCEAO Symposium 25'
a n n i v e r s a r y o f t h e UMOA O c t o b e r 1987.
Table 11:
Lending
Interest
Rates and
Restrictions
Rates:
P r i o r i t y S e c t o r s - P r e f e r e n t i a l D i s c o u n t Rate
Rural Financing Credit
- TEP
+ 1-2
per cent
S m a l l & medium b u s i n e s s e s - TEP
+ 1-3
per
& Social
plus
cent
Infrastructure
Other C r e d i t s - Normal D i s c o u n t Rate
Time D e p o s i t R a t e s 1989)
BCEAO, Banques
(TEN)
+
0-5
5 . 5 0 - 9 . 5 0 per cent
S i g h t D e p o s i t s - From J a n u a r y
i n t e r e s t on
was removed.
Source:
(TEP)
1985
et Monnaies
per
cent
(March
t h e r e q u i r e m e n t t o pay
sight deposits
No 381 A p r i l
1989.
t e r m l e n d i n g t o p r i o r i t y a c t i v i t i e s . A p a r t from t h e r e l a t i v e l y
r i s k - f r e e f i n a n c i n g o f a g r i c u l t u r a l e x p o r t c r o p s , where t h e c r o p
a c t s as c o l l a t e r a l , f i x e d m a r g i n s do n o t a p p e a r t o be s u f f i c i e n t
t o i n d u c e banks t o l e n d more t o s e c t o r s s u c h as s m a l l and medium
b u s i n e s s e s . F o r o r d i n a r y c r e d i t i n 1988 t h e maximum b a n k i n g
m a r g i n f o r l e n d i n g (maximum o r d i n a r y c r e d i t r a t e l e s s t h e money
market r a t e ) was 4.25 p e r c e n t i n c r e a s i n g t o 5.50 p e r c e n t i n
A p r i l 1989 w h i c h compares t o a d e f a u l t r a t e o f 8 p e r c e n t minimum
^ . On t h e l a t t e r f i g u r e s a r e q u i r e m e n t o f c o l l a t e r a l o f a b o u t
50 p e r c e n t o f t h e o r i g i n a l l o a n w o u l d be r e q u i r e d t o b r e a k even,
a s u b s t a n t i a l r e q u i r e m e n t f o r most s m a l l b o r r o w e r s .
The d e f a u l t r a t e i s g i v e n by p e r c e n t a g e o f bad d e b t s i n
t h e b a n k i n g s e c t o r l o a n p o r t f o l i o , w h i c h i s l i k e l y t o be a low
e s t i m a t e as b a l a n c e s h e e t s p r o b a b l y do n o t r e f l e c t f u l l e x t e n t
o f n o n - p e r f o r m i n g l o a n s . C a p i t a l i s a t i o n o f u n p a i d i n t e r e s t on
the balance sheet obscures the q u a l i t y of loan p o r t f o l i o s .
Figure 5:
Real Deposit Rate
1963-88
1963
1965
1967
I ' I ' I ' I ' I ' I ' I ' I ' I ' I
1369
SOLTCG
Real
Interest
1971
1975
1979
1913
1977
1961
IFS
HOitQ
RR =
19S3
19S7
1985
C 1*''^,'C1*P)- 1
Rate
W h i l s t s t u d i e s s u c h a s W o r l d Bank (1988) have some m e r i t i n
a r g u i n g f o r more f l e x i b i l i t y i n d e p o s i t and l e n d i n g r a t e s , t o
increase competition
f o r d e p o s i t s and t o i n c r e a s e
lending
i n c e n t i v e s t o h i g h e r r i s k borrowers ( o r a l t e r n a t i v e l y reduce
c o l l a t e r a l requirements) several other f a c t o r s suggest t h a t
l i b e r a l i s a t i o n s h o u l d be c a u t i o u s :
*
S i n c e 1982 r e a l d e p o s i t i n t e r e s t r a t e s have been p o s i t i v e ,
o r m a r g i n a l l y n e g a t i v e i n 1987 and 1988 ( s e e F i g u r e 5) .
T h e s e a r e l i k e l y t o be minimum r e a l i n t e r e s t r a t e s a s
c a l c u l a t i o n s a r e made on t h e minimum d e p o s i t r a t e , n o t t h e
marginal
r a t e . Recent research i n d i c a t e s , although t h e
debate i s not y e t s e t t l e d , t h a t t h e i n t e r e s t e l a s t i c i t y o f
savings i n developing
(and d e v e l o p e d ) c o u n t r i e s i s n o t
p a r t i c u l a r l y high, but severely negative r e a l i n t e r e s t rates
do r e d u c e f i n a n c i a l i n t e r m e d i a t i o n [ f o r example F r y (1988)
and K h a t k h a t e ( 1 9 8 8 ) ] . Thus t h e l e v e l o f d e p o s i t r a t e s i n
C o t e d ' l v o i r e c a n n o t be s e e n a s a s t r o n g h i n d r a n c e t o
s a v i n g s m o b i l i s a t i o n . The s e c u l a r d e c l i n e o f s a v i n g s r a t e s
i n Cote d ' l v o i r e i s i n c o n t r a s t w i t h improving r e a l i n t e r e s t
rates.
*
The e f f o r t made by b a n k s t o m o b i l i s e s a v i n g s i s l i k e l y t o
influence deposit levels. U n t i l recently the difference
b e t w e e n t h e c o s t o f f u n d s from t h e C e n t r a l Bank a t t h e
p r e f e r e n t i a l d i s c o u n t r a t e and r e t a i l d e p o s i t s was n o t
s i g n i f i c a n t : r a t e s f o r l a r g e d e p o s i t s were h i g h e r t h a n t h e
preferential
rate
c o l l e c t i o n costs
*
and
were
likely
to
involve
higher
R e l i a n c e upon t h e C e n t r a l Bank a s a s o u r c e o f l o w c o s t f u n d s
i s l i k e l y t o have d i m i n i s h e d i n c e n t i v e s t o a t t r a c t p r i v a t e
d e p o s i t s and r a t i o n a l i s e s t h e e x t e n s i v e t a k e - u p o f c e n t r a l
bank
r e f i n a n c i n g as p r o f i t
maximising
behaviour f o r
commercial banks. I n d i c a t i v e o f low i n c e n t i v e s f o r d e p o s i t
m o b i l i z a t i o n have been w i d e s p r e a d q u e u i n g a t bank o f f i c e s .
In t h i s r e s p e c t t h e r e c e n t r a i s i n g o f t h e d i f f e r e n c e between
t h e p r e f e r e n t i a l d i s c o u n t r a t e (TEP) and t h e d e p o s i t r a t e
i s l i k e l y t o improve s a v i n g s c o l l e c t i o n e f f o r t s .
W h i l s t s a v i n g s i n a g g r e g a t e do n o t r e s p o n d t o t h e r e a l i n t e r e s t
r a t e , a l l o c a t i o n o f s a v i n g s among f i n a n c i a l a s s e t s i n C o t e
d ' l v o i r e do r e s p o n d t o i n t e r e s t r a t e d i f f e r e n t i a l s . R e a l i n t e r e s t
r a t e s were s h a r p l y n e g a t i v e d u r i n g t h e commodity boom o f 1977 and
t h e demand f o r c a s h c o n t r a c t e d s h a r p l y a l t h o u g h b r o a d money
m e a s u r e s t o GDP r e m a i n e d r e l a t i v e l y u n a f f e c t e d . I n 1985 t h e
r e m o v a l o f i n t e r e s t payments on s i g h t d e p o s i t s a p p e a r e d t o i n d u c e
a s i g n i f i c a n t s h i f t i n g o f d e p o s i t s t o i n t e r e s t b e a r i n g time
d e p o s i t s . A l s o t h e i n t e r e s t r a t e d i f f e r e n t i a l w i t h France remains
i m p o r t a n t ( s e e demand f o r money s e c t i o n ) . Thus p o l i c y r e f o r m s
s h o u l d f o c u s upon t h e i n t e r e s t r a t e d i f f e r e n t i a l s r a t h e r t h a n
l e v e l s , paying p a r t i c u l a r a t t e n t i o n t o French i n t e r e s t r a t e s ,
r e f i n a n c i n g r a t e s , t h e e f f e c t o f r e g u l a t i n g r a t e s and l e n d i n g b o r r o w i n g r a t e d i f f e r e n t i a l s upon banks l e n d i n g p o l i c i e s .
The a v e r a g e d e p o s i t r a t e i s l o w e r e d as a p p r o x i m a t e l y
one t h i r d o f a l l b a n k i n g d e p o s i t s do n o t pay i n t e r e s t b e i n g
s i g h t d e p o s i t s o r t i m e d e p o s i t s b e l o w t h e minimum d e p o s i t
level.
4. P R O B . E M S O F M O N E T A R Y
CONTROL
The p r e v i o u s s e c t i o n examined t h e i n s t i t u t i o n a l e n v i r o n m e n t f o r
m o n e t a r y p o l i c y , how t h e l a c k o f i n s t i t u t i o n a l d e v e l o p m e n t c o u l d
l i m i t m o n e t a r y p o l i c y e f f e c t i v e n e s s , and t h e weakness o f some o f
t h e C e n t r a l Bank i n s t r u m e n t s . I n t h i s s e c t i o n , we c o n s i d e r t h e
i n t e r r e l a t i o n s h i p between t h e o p e r a t i o n s o f t h e C e n t r a l Bank and
the monetary system as a whole.
The m o n e t a r y a u t h o r i t i e s i n C o t e d ' l v o i r e c a n n o t c o n t r o l t h e
t o t a l money s u p p l y . The f i x e d n o m i n a l exchange r a t e a g a i n s t t h e
F r a n c , a b s e n c e o f c o n t r o l s on c a p i t a l movements a n d l i m i t e d s c o p e
f o r open m a r k e t o p e r a t i o n s s e v e r e l y l i m i t t h e C e n t r a l Bank's
a b i l i t y t o c o n t r o l many o f t h e c o u n t e r p a r t s o f t h e money s u p p l y .
F o l l o w i n g t h e m o n e t a r y a p p r o a c h t o t h e b a l a n c e o f payments
a n a l y s i s (Khan and K n i g h t , 1 9 8 1 ) , w i t h a f i x e d e x c h a n g e r a t e , t h e
p u b l i c may h o l d e x c e s s r e a l money b a l a n c e s a s a r e s u l t o f an
i n c r e a s e i n d o m e s t i c c r e d i t ( s u p p l y s h o c k ) o r a money income
s h o c k (demand). The r e s u l t a n t e x c e s s r e a l money b a l a n c e s i n c r e a s e
expenditure which i n t u r n r e s u l t s i n increased imports. Without
o f f s e t t i n g c a p i t a l movements, t h e i n c r e a s e d c u r r e n t
account
d e f i c i t must t h e r e f o r e be f i n a n c e d by a l o w e r i n g o f r e s e r v e s .
I n e x t r e m e c a s e s an i n c r e a s e i n d o m e s t i c
money s u p p l y i s
c o m p l e t e l y o f f s e t by r e d u c t i o n s i n r e s e r v e s l e a v i n g t h e t o t a l
money s u p p l y unchanged. T h i s c o n c l u s i o n assumes t h a t m o n e t a r y
a u t h o r i t i e s a r e u n w i l l i n g o r u n a b l e t o s t e r i l i s e t h e e f f e c t s on
t h e money s u p p l y
of flows across
f o r e i g n e x c h a n g e s . The
e x p a n s i o n a r y m o n e t a r y e f f e c t o f an e x p o r t r e v e n u e s boom c o u l d be
o f f s e t by a c e n t r a l bank open m a r k e t s a l e o f government bonds.
Open m a r k e t o p e r a t i o n s i n t h e F r a n c zone w o u l d r a i s e i n t e r e s t
r a t e s and a t t r a c t a d d i t i o n a l o f f s e t t i n g c a p i t a l i n f l o w s n e g a t i n g
the e f f e c t o f i n i t i a l s t e r i l i s a t i o n e f f o r t s u n l e s s exchange r a t e
changes c o u l d be made. C o t e d ' l v o i r e i s f a c e d by a s h o r t a g e o f
i n s t r u m e n t s t o i n f l u e n c e t o t a l money s u p p l y , s p e c i f i c a l l y l i m i t e d
s c o p e f o r open m a r k e t o p e r a t i o n s by s a l e and p u r c h a s e o f
government s e c u r i t i e s , and no i n d e p e n d e n t i n t e r e s t r a t e o r
exchange r a t e p o l i c y .
F l o w o f Funds A n a l y s i s
From t h e c o n s o l i d a t e d b a l a n c e s h e e t i d e n t i t y
s y s t e m we d e r i v e t h e f l o w o f f u n d s i d e n t i t y :
1)
M
= NFA
+
DCG
+
DCP
-
Assets
DCP = D o m e s t i c C r e d i t To
Which c a n be r e w r i t t e n a s :
(Xj - I j )
+
CMj
banking
OIN
M
= B r o a d Money NFA = N e t F o r e i g n
DCG = D o m e s t i c C r e d i t To Government
Private Sector
OIN = O t h e r I t e m s N e t
M, =
of the
+ NDCj + OINj + NFA^.,
= E x p o r t s goods a n d s e r v i c e s
I , = I m p o r t s Goods and S e r v i c e s
CMj = C a p i t a l Movements n e t
Net f o r e i g n a s s e t s i n t h e p r e v i o u s t i m e p e r i o d a s w e l l a s o t h e r
i t e m s n e t a r e p r e d e t e r m i n e d v a r i a b l e s , w h i l s t c a p i t a l movements
a r e n o t s u b j e c t t o d i r e c t c e n t r a l bank c o n t r o l u n d e r t h e UMOA
s t a t u t e s . C a p i t a l movements a r e amenable t o i n d i r e c t management
v i a i n t e r e s t r a t e c h a n g e s , on t h e a s s u m p t i o n t h a t t h e r e i s some
s e n s i t i v i t y t o d i f f e r e n c e s w i t h i n t e r n a t i o n a l r a t e s . However
i n t e r e s t r a t e c o n t r o l i s c e n t r a l i s e d i n t h e UMOA l e a v i n g
individual countries
no e f f e c t i v e d i s c r e t i o n . C e n t r a l
bank
c o n t r o l i s c l e a r l y f o c u s s e d upon management o f n e t d o m e s t i c
credit.
Thus a l t h o u g h t h e f l o w o f f u n d s a p p r o a c h i s u s e f u l f o r a n a l y s i n g
c h a n g e s i n money s u p p l y i t i s n o t much o f a g u i d e a s t o t h e
e f f e c t i v e n e s s o f monetary p o l i c y .
Monetary C o n t r o l
- Refinancing
and T o t a l
Credit
C o a t s and K h a t k h a t e (1980) s u g g e s t t h a t t h e l i m i t a t i o n s o f t h e
r e f i n a n c i n g i n s t r u m e n t upon m o n e t a r y c o n t r o l a r e :
*
Asymmetry, t h e maximum c r e d i t r e s t r i c t i o n b e i n g a r e d u c t i o n
of t o t a l r e f i n a n c i n g t o zero.
*
R e l i a n c e upon b a n k s t o r e s p o n d t o t h e l e v e l o f t h e
r a t e when e x p a n s i o n i s r e q u i r e d .
*
The u n p r e d i c t a b l e r e l a t i o n o f t h e volume o f r e f i n a n c i n g t o
broader c r e d i t aggregates.
discount
I n C o t e d ' l v o i r e t h e r e i s c e r t a i n l y p l e n t y o f s c o p e t o employ t h e
refinancing
instrument
i n either
an
expansionary
or
c o n t r a c t i o n a r y manner, b e c a u s e o v e r 4 0 p e r c e n t o f t o t a l c r e d i t
i s r e f i n a n c e d by t h e C e n t r a l Bank ( T a b l e 5 ) . The p r e v i o u s s e c t i o n
of t h i s W o r k i n g P a p e r p r o p o s e d t h a t c o m m e r c i a l b a n k ' s l e n d i n g
p o l i c y c o u l d not be e x p e c t e d t o r e s p o n d v e r y s t r o n g l y t o c h a n g e s
i n the d i s c o u n t r a t e , because o f the importance o f d i f f e r e n t i a l s
w i t h o t h e r d e p o s i t and l e n d i n g r a t e s .
The
r a t i o between c h a n g e s i n p r i v a t e c r e d i t and c h a n g e s i n
r e f i n a n c i n g i s shown i n T a b l e 12 a s a g u i d e t o t h e i m p a c t o f
c h a n g e s i n t h e v o l u m e o f r e f i n a n c i n g . T h i s shows a d i f f e r e n t t y p e
o f a s s y m e t r y t o t h a t s u g g e s t e d by C o a t s and K h a t k h a t e . When t h e
economy i s b o u y a n t a n d c r e d i t g r o w t h i s r a p i d , r e f i n a n c i n g i s
q u a n t i t a t i v e l y an u n i m p o r t a n t f a c t o r i n f u n d i n g c r e d i t g r o w t h ,
t h e r e f o r e i t s i n f l u e n c e i s low. The r e f i n a n c i n g i n s t r u m e n t i s
more e f f e c t i v e when t o t a l c r e d i t g r o w t h i s s l o w .
Table 12: Changes i n P r i v a t e Sector c r e d i t and Refinancing
Year
Change i n
Refinancing
Bn CFA
Change i n C r e d i t V
Change i n R e f i n a n c i n g ^
1976
1977
1978
1979
6.4
3.4
9.4
4.0
15.5
63.6
9.6
25.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1.4
0.8
1.4
1.3
0.6
-0.4
0.8
1.0
2.1
67.8
100.4
39.8
62.5
-32.8
-39.8
21.9
90.4
-4.9
Notes: " I n c l u d e s r e d i s c o u n t e d c r e d i t from NBFI's.
^ Money m a r k e t and r e d i s c o u n t s .
S o u r c e : BCEAO, S t a t i s t i q u e s
Bconomiques
et
Monetaires.
In t h e l a t e 1970s, a u n i t i n c r e a s e
i n r e f i n a n c i n g c o u l d be
a s s o c i a t e d w i t h a t o t a l c r e d i t i n c r e a s e w h i c h was l a r g e r by a
f a c t o r o f between 3 t o 9. The r a t i o v a r i e d s u b s t a n t i a l l y b e c a u s e
r e f i n a n c i n g was n o t t h e o n l y , o r e v e n t h e most i m p o r t a n t , s o u r c e
o f f u n d s f o r new l e n d i n g . R a p i d c r e d i t e x p a n s i o n i n t h e l a t e
1970s c o u l d t a k e p l a c e w i t h o u t any c e n t r a l bank encouragement ( o r
despite
discouragement) because o f t h e increased
demand f o r
d e p o s i t l i a b i l i t i e s which had a r i s e n as a r e s u l t of r a p i d
i n c r e a s e s i n income from t h e commodity p r i c e boom.
In
the
1980s,
some
stability
was
restoredt o , the
c r e d i t / r e f i n a n c i n g r a t i o w h i c h v a r i e d i n a l o w e r r a n g e between 0.4 and 2.1. W i t h r e f i n a n c i n g a more i m p o r t a n t s o u r c e o f f u n d s
f o r c r e d i t e x p a n s i o n , i t s i n f l u e n c e upon t o t a l c r e d i t became more
predictable.
I n t h e two c o n s e c u t i v e y e a r s when r e f i n a n c i n g f e l l (1984 and
1985)
t h e i n d u c e d change i n t o t a l c r e d i t was l o w ( t o t a l c r e d i t
a c t u a l l y i n c r e a s e d i n 1 9 8 5 ) , g i v i n g some s u p p o r t t o t h e weakness
o f r e f i n a n c i n g o p e r a t i o n s i n c r e d i t c o n t r a c t i o n and u n d e r l i n i n g
the importance of other balance
sheet
amenable t o c e n t r a l bank c o n t r o l ^ ' .
items
which
are
not
The p r e d i c t a b i l i t y o f c r e d i t e x p a n s i o n f o r a g i v e n amount o f
r e f i n a n c i n g i s d e t e r m i n e d by t h e r a t e o f g r o w t h o f b a n k s '
l i a b i l i t i e s and h o l d i n g s o f l i q u i d a s s e t s . A p a r t f r o m r e f i n a n c i n g
funds, t h i s i n c l u d e s the a v a i l a b i l i t y of o b t a i n i n g f o r e i g n
f i n a n c e f r o m p a r e n t bank l i n k s , t h e w i l l i n g n e s s o f t h e p u b l i c and
p r i v a t e s e c t o r t o h o l d d e p o s i t l i a b i l i t i e s i n commercial banks
and c a s h h o l d i n g s .
The u n p r e d i c t a b l e v a r i a t i o n o f t h e c r e d i t / r e f i n a n c i n g r a t i o i s
b e s t e x p l a i n e d as a r e s u l t o f l i m i t e d o f f i c i a l c o n t r o l o v e r t h e s e
o t h e r b a l a n c e s h e e t i t e m s . O n l y government d e p o s i t s and c a s h
holdings are d i r e c t l y c o n t r o l l a b l e .
The l e v e l o f government d e p o s i t s w i t h c o m m e r c i a l b a n k s between
1976-1987 d a t a was c o n s i s t e n t l y p o s i t i v e and r e m a r k a b l y s t a b l e ,
r a n g i n g between 8 and 13 p e r c e n t o f t o t a l d e p o s i t s ( a p a r t from
a p o s i t i v e b l i p d u r i n g 1980-82). D e s p i t e t h i s s t a b i l i t y , t h e
C e n t r a l Bank has no d i r e c t c o n t r o l o v e r t r e a s u r y d e p o s i t s a p a r t
from t h e s t a t u t o r y c o n s t r a i n t upon government b o r r o w i n g . However
t r e a s u r y d e p o s i t s c o u l d be u s e d more a c t i v e l y t o c o n t r o l b a n k i n g
l i q u i d i t y . The t i l l c a s h r a t i o ( r a t i o o f c a s h t o d e p o s i t s w h i c h
r e d u c e s r e s o u r c e s a v a i l a b l e f o r l e n d i n g ) can be
statutorily
c o n t r o l l e d ( c o e f f i c i e n t de t r e s o r i e ) , b u t t h e p r e v a l e n t 2-3 p e r
c e n t c o v e r a g e i s u n l i k e l y t o be l o w e r e d by c o n s i d e r a t i o n s o f
banking prudence '"whilst i n c r e a s i n g the
r a t e reduces
the
e f f i c i e n c y o f f i n a n c i a l i n t e r m e d i a t i o n (see F r y 1 9 8 8 ) .
The i m p r o v e d s t a b i l i t y o f t h e t o t a l c r e d i t r e f i n a n c i n g r a t i o from
1980 does r e p r e s e n t an i m p r o v e d e f f e c t i v e n e s s o f t h e r e f i n a n c i n g
instrument
i n the
s e n s e t h a t t h e e f f e c t o f a change i n
r e f i n a n c i n g i s more p r e d i c t a b l e . T h i s s t a b i l i t y c a n n o t
be
a t t r i b u t e d t o b e t t e r t a r g e t i n g of r e f i n a n c i n g , which does not
seem t o h a v e i m p r o v e d m a r k e d l y d u r i n g t h e 1980s. More p l a u s i b l y ,
m a c r o e c o n o m i c s t a g n a t i o n has meant t h e g r o w t h o f d e p o s i t s was
s l o w e r t h a n r e f i n a n c i n g , w h i c h c o r r e s p o n d i n g l y had a g r e a t e r
influence
on
total
credit
finance
(for
example,
the
r e f i n a n c i n g : t o t a l d e p o s i t s r a t i o r o s e above 50 p e r c e n t i n 1 9 8 0 ) .
An i m p o r t a n t f a c t o r i n s l o w d e p o s i t g r o w t h was t h e s t e a d y f a l l
i n government d e p o s i t s from 34 p e r c e n t t o 7 p e r c e n t o f t o t a l
The c r e d i t m u l t i p l i e r r e l a t i o n s h i p : CR = m.BA + OFRL
w h i c h r e l a t e s t h e n e t d o m e s t i c l i a b i l i t i e s o f t h e c e n t r a l bank
( c a s h l e s s r e f i n a n c i n g ) and o t h e r f i n a n c i a l and r e a l
l i a b i l i t i e s t o t o t a l c r e d i t , where m i s t h e c r e d i t m u l t i p l i e r ,
has l i t t l e o p e r a t i o n a l meaning i n t h e c a s e o f C o t e d ' l v o i r e .
B e c a u s e BA, n e t d o m e s t i c l i a b i l i t i e s o f c e n t r a l bank,
f l u c t u a t e s j u s t above and b e l o w z e r o , c r e d i t m u l t i p l i e r s s i g n
and m a g n i t u d e v a r y w i t h o u t any r e a l s i g n i f i c a n c e .
I n M a r c h 1989, a m a j o r A b i d j a n c o m m e r c i a l bank had i t s
f r o n t g a t e s d e s t r o y e d by c u s t o m e r s a f t e r r e f u s i n g t o open them
due t o c a s h s h o r t a g e s .
deposits i n the period
1980-86. The e f f e c t s o f o t h e r n e t
l i a b i l i t i e s were m i x e d , a l t h o u g h i n a g g r e g a t e o v e r t h e s i x y e a r s
t o 1986 t h e y i m p a r t e d a n e g a t i v e e f f e c t on c r e d i t .
O v e r a l l , t h e r e f i n a n c i n g i n s t r u m e n t a p p e a r s t o be l e a s t e f f e c t i v e
when i t i s most needed i . e . when c r e d i t i s g r o w i n g r a p i d l y and
m o n e t a r y r e s t r a i n t may be r e q u i r e d t o a v o i d i n f l a t i o n and b u i l d
up
reserves.
M o n e t a r y Base
Control
The r e v i e w o f r e f i n a n c i n g mechanisms h a s d e m o n s t r a t e d some o f t h e
difficulties
and a s y m m e t r i e s o f c e n t r a l i s e d c o n t r o l o f c r e d i t .
Changes i n p r i v a t e r e f i n a n c i n g , however, r e p r e s e n t o n l y a p a r t i a l
e x p l a n a t i o n o f changes i n c o u n t e r p a r t s t o t h e monetary base. I n
T a b l e 13 b e l o w t h e changes i n t h e m o n e t a r y b a s e ( l i a b i l i t i e s o f
t h e C e n t r a l Bank) a r e r e l a t e d t o a s s e t c h a n g e s .
T a b l e 13: Changes i n Counterparts To Monetary Base 1976 - 87
CFA
billions
Year
dMB
dCBp
dCBg
dR
1976-80
133.4
176.2
93.3
-136.1
1981-87
180.5
213.6
168.0
-201.1
Notes:
MB =
CBp=
CBg=
R =
c a s h i s s u e d p l u s banks d e p o s i t s
c e n t r a l bank c r e d i t s t o p r i v a t e s e c t o r
c e n t r a l bank c r e d i t t o government ( n e t )
net foreign assets
S o u r c e : I F S Y e a r b o o k 1988.
T h a t t h e m o n e t a r y b a s e d i d n o t i n c r e a s e a s f a s t a s c e n t r a l bank
c r e d i t t o t h e p r i v a t e s e c t o r i n e i t h e r t h e 197 6-80 (boom) p h a s e
o r 1981-87 ( a d j u s t m e n t ) phase i s due p r i m a r i l y t o t h e f i n a n c i n g
r e q u i r e m e n t s o f b a l a n c e o f payments d e f i c i t s , w h i c h h a v e r e s u l t e d
in a f a i r l y continual decline i n the level of o f f i c i a l
foreign
r e s e r v e s . C r e d i t t o government h a s two components, t h e l a r g e s t
( a b o u t two t h i r d s o f g r o s s c r e d i t ) r e p r e s e n t s f u n d s from t h e IMF
o n l e n t t o government w h i c h a r e c o m p l e t e l y s t e r i l i s e d a d d i t i o n s
t o money s u p p l y ( a d d i t i o n s t o f o r e i g n r e s e r v e s a r e d e p l e t e d on
f o r e i g n c u r r e n c y e x p e n d i t u r e ) . The s e c o n d p o r t i o n o f g o v e r n m e n t
b o r r o w i n g i s t h a t s t a t u t o r i l y a l l o w e d by t h e BCEAO up t o 20 p e r
cent o f t h e p r e v i o u s year's f i s c a l revenues.
Whilst
balance
of
payments
considerations
reduce
the
e f f e c t i v e n e s s o f c o n t r o l o f t h e m o n e t a r y b a s e , i t c a n s t i l l be
concluded t h a t a c o n s i d e r a b l e degree o f i n f l u e n c e i s p o t e n t i a l l y
a v a i l a b l e i n t h e C e n t r a l Bank t h r o u g h c o n t r o l o f l e n d i n g t o
g o v e r n m e n t and t h e p r i v a t e s e c t o r . The e f f e c t i v e n e s s o f t h i s
depends upon t h e s t a b i l i t y o f t h e money m u l t i p l i e r .
Money M u l t i p l i e r
The money m u l t i p l i e r r e l a t i o n s h i p , w h i c h r e l a t e s t h e monetary
b a s e t o t h e money s u p p l y , i s d e t e r m i n e d by s i m i l a r c o n s i d e r a t i o n s
t o t h o s e d e f i n i n g t h e r e l a t i o n s h i p between r e f i n a n c i n g and t o t a l
credit
. The money m u l t i p l i e r i s d e p e n d e n t upon p r i v a t e a g e n t s '
and b a n k s ' w i l l i n g n e s s t o h o l d c a s h , d e p o s i t s and r e s e r v e s i n
d i f f e r i n g amounts and p r o p o r t i o n s .
From t h e i d e n t i t i e s :
1.
2.
MB = Cp + Res
M = Cp + DEP
MB = M o n e t a r y b a s e
r e s = c o m m e r c i a l banks h o l d i n g s o f c a s h and d e p o s i t s a t t h e
c e n t r a l bank.
Cp = c a s h w i t h p u b l i c
DEP = demand and t i m e d e p o s i t s
we o b t a i n :
3.
MS
= 1/ [ r ( l - c ) + c ]
.MB
where
r = reserve r a t i o
c = cash r a t i o
The b r o a d money'^ m u l t i p l i e r e x h i b i t s a s u r p r i s i n g s t a b i l i t y w i t h
an a v e r a g e p e r c e n t a g e v a r i a t i o n o f 7 p e r c e n t p e r annum between
1975 and 1987 ( s e e T a b l e 14) and h a s been d e c l i n i n g a n n u a l l y
s i n c e 1977 w i t h an e x c e p t i o n i n 1982. D u r i n g a p a r t i c u l a r y e a r
t h e c a s h r a t i o r i s e s d u r i n g t h e h a r v e s t s e a s o n a s f a r m e r s and
intermediaries
hold
increased
cash
balances
either for
t r a n s a c t i o n s p u r p o s e s o r b e c a u s e t h e y do n o t have
C o n c e p t u a l l y , m u l t i p l i e r s r e l a t e t h e a s s e t s and
l i a b i l i t i e s o f t h e c e n t r a l bank t o b r o a d e r c l a s s e s o f m o n e t a r y
a s s e t s and l i a b i l i t i e s r e s p e c t i v e l y .
The b r o a d money measure was p r e f e r a b l e t o a n a r r o w e r
d e f i n i t i o n . I n 1985 t h e r e m o v a l o f b a n k s ' r e q u i r e m e n t t o pay
i n t e r e s t on s i g h t d e p o s i t s l e a d t o s h i f t s t o w a r d s s a v i n g s and
t i m e d e p o s i t s . T h i s c r e a t e d i n s t a b i l i t y i n t h e n a r r o w money
m u l t i p l i e r but not the broad m u l t i p l i e r .
r a p i d a c c e s s t o f o r m a l s a v i n g s m a r k e t s . The d e c r e a s e i n t h e
m u l t i p l i e r ( f r o m t h e c a s h r a t i o r i s i n g ) i s l a r g e l y o f f s e t by t h e
i n c r e a s e i n t h e m o n e t a r y b a s e f r o m t h e C e n t r a l Bank's r o l e i n
f i n a n c i n g t h e h a r v e s t . D u r i n g t h e y e a r t h e r e i s no marked t r e n d
t o t h e money m u l t i p l i e r .
I n T a b l e 14 t h e i n d i v i d u a l e f f e c t s o f
c h a n g e s i n t h e m o n e t a r y b a s e a n d c h a n g e s i n t h e m u l t i p l i e r upon
money s u p p l y a r e shown. They a r e o b t a i n e d f r o m t h e a p p r o x i m a t i o n :
3.
dM
= dMB.m^.,
+
dm.MBj.,
d = difference operator
m = multiplier
T a b l e 14: Money M u l t i p l i e r and Changes i n Money Supply
B i l l i o n s o f CFA
Money
Year M u l t i p l i e r
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
Change
Money
Supply
2.44
2.89
3.12
2.62
2.46
2 .50
2.51
2.74
2.67
2.65
2.41
2.29
2.25
Total
22
106
174
57
-13
16
58
18
32
132
117
-11
1
708
S o u r c e o f Change:
Multiplier
Base
Note 1
Note 2
-7
44
28
-84
-35
9
1
60
-16
-5
-76
-48
-16
-143
Combined
Note 3
30
52
135
167
24
6
57
-39
49
138
212
39
17
-1
10
11
-27
-1
0
0
-4
-1
-1
-20
-2
-0
888
-36
N o t e s : S o u r c e s o f change d e f i n e d a s p r o d u c t o f :
1 Change i n m u l t i p l i e r and m o n e t a r y b a s e
2 Change i n b a s e and m u l t i p l i e r
3 Change i n b a s e and change i n m u l t i p l i e r
Source:IFS Yearbook.
Changes i n t h e m o n e t a r y b a s e p r e d o m i n a t e a s e x p l a n a t i o n s f o r
monetary e x p a n s i o n o v e r t h e l o n g e r t e r m , b u t i n p a r t i c u l a r y e a r s
t h e m u l t i p l i e r c a n be d o m i n a n t , a s o c c u r r e d i n 1932 a n d 1986.
These y e a r s a r e a s s o c i a t e d w i t h i n c r e a s e d r e s e r v e h o l d i n g s a t t h e
C e n t r a l Bank, f r o m d e p o s i t s and i n c r e a s e d l i q u i d i t y . I n most o f
t h e y e a r s c o n s i d e r e d , t h e m u l t i p l i e r h a s an o p p o s i t e e f f e c t t o
t h a t o f t h e monetary b a s e upon money s u p p l y . Thus i f t h e m o n e t a r y
a u t h o r i t i e s p u r s u e an e x p a n s i o n a r y m o n e t a r y p o l i c y ,
agents'
p r e f e r e n c e s t e n d t o r e d u c e t h e m u l t i p l i e r , and t h e i m p a c t upon
money s u p p l y , by f o r example h o l d i n g more money i n c a s h f o r m .
A l t h o u g h t h e i m p o r t a n c e o f t h e C e n t r a l Bank's r o l e i n c o n t r o l l i n g
the monetary base l e v e l i s emphasised i n the l o n g r u n , i t remains
c l e a r t h a t f a c t o r s o t h e r than changes i n the monetary base a f f e c t
s h o r t r u n money s u p p l y b e h a v i o u r . T h i s h e l p s t o e x p l a i n t h e
u n p r e d i c t a b i l i t y of the r e f i n a n c i n g instrument i n c o n t r o l l i n g
liquidity.
I t i s d i f f i c u l t t o i s o l a t e the proximate causes of other short
term
f a c t o r s which a f f e c t the s i z e of the m u l t i p l i e r .
By
d e f i n i t i o n , the m u l t i p l i e r changes i f the r e s e r v e : d e p o s i t s r a t i o
o r c a s h : d e p o s i t s r a t i o change. D e t a i l e d e m p i r i c a l s t u d i e s c o u l d
i n p r i n c i p l e determine p r i v a t e agents' s h o r t run p r e f e r e n c e s over
h o l d i n g c a s h and d i f f e r e n t t y p e s o f d e p o s i t s , u t i l i s i n g m o n t h l y
d a t a where a v a i l a b l e . A l i m i t e d d i s c u s s i o n o f money demand
f u n c t i o n s f o l l o w s l a t e r i n t h i s p a p e r , and i n common w i t h o t h e r
r e s e a r c h f i n d s money demand f u n c t i o n s s t a b l e and w e l l b e h a v e d .
S i m i l a r l y , f a c t o r s w h i c h a f f e c t t h e l e v e l o f c o m m e r c i a l bank
h o l d i n g s o f r e s e r v e s c o u l d be l o o k e d a t . These i s s u e s a r e n o t
addressed f o r l a c k of space.
S t a b i l i t y o f A s s e t and
Liability
Multipliers
The s t a b i l i t y o f t h e money ( l i a b i l i t y ) m u l t i p l i e r c o n t r a s t s q u i t e
s h a r p l y w i t h the p r e v i o u s d i s c u s s i o n of the a s s e t
(credit)
multiplier
and
the
weakness o f
the
relationship
between
r e f i n a n c i n g and c r e d i t . The p r i n c i p a l r e a s o n f o r t h i s a p p a r e n t
anomaly i s t h a t t h e a s s e t s a p p r o a c h i s r a t h e r p a r t i a l
in
a p p l i c a t i o n ; i t does not c o n s i d e r t h e n e t f o r e i g n a s s e t p o s i t i o n
o f t h e c e n t r a l o r c o m m e r c i a l b a n k s . Both can f l u c t u a t e w i d e l y
(and i n d e p e n d e n t l y b e c a u s e t h e r e a r e no r e s t r i c t i o n s upon c a p i t a l
movements) and t h i s may b r e a k t h e l i n k between r e f i n a n c i n g and
credit.
A t t h e C e n t r a l Bank, r e f i n a n c i n g l e v e l s a r e a f f e c t e d by t h e l e v e l
of f o r e i g n r e s e r v e s (or endogenously determined), t o the e x t e n t
t h a t t h e r e i s a c o n s t r a i n t upon how f a r r e s e r v e s c a n r i s e o r
f a l l . T h i s c o n s t r a i n t a p p l i e s somewhat a s s y m e t r i c a l l y , as t h e r e
is a reserve " f l o o r "
( d i s c u s s e d i n t h e s e c t i o n on m o n e t a r y
s t a n c e ) a t w h i c h r e f i n a n c i n g e x p a n s i o n becomes r e s t r i c t e d ^ ' . So
I t i s not c l e a r i f these d e p o s i t s o r i g i n a t e d d i r e c t l y
from c o m m e r c i a l banks o r o t h e r d e p o s i t o r s .
^'^ I n t h e o r y t h e r e s e r v e f l o o r i s a t 20 p e r c e n t g r o s s
f o r e i g n a s s e t coverage of s i g h t l i a b i l i t i e s , i n p r a c t i c e
r a t h e r lower.
reserve
shortages
can
reduce
the
level
of
refinancing
i n d e p e n d e n t l y of f a c t o r s i n f l u e n c i n g c o m m e r c i a l bank l e n d i n g ,
w h i l s t a b u n d a n t r e s e r v e s ( o r e x p o r t boom) may have t h e o p p o s i t e
effect.
I n a s i m i l a r way,
r e d u c t i o n s i n commercial banks' net f o r e i g n
a s s e t p o s i t i o n s ( f u n d i n g i n c r e a s e d d o m e s t i c l e n d i n g from a p a r e n t
bank) may be u n c o n n e c t e d t o t h e C e n t r a l Bank's r e f i n a n c i n g p o l i c y
at
that
time.
In
this
case,
domestic
credit
can
move
i n d e p e n d e n t l y of t h e l e v e l o f r e f i n a n c i n g .
I n summary, t h e money m u l t i p l i e r a n a l y s i s i s a u s e f u l t o o l f o r
medium t e r m monetary management. The r e l a t i o n s h i p between t h e
m o n e t a r y b a s e and b r o a d money a p p e a r s t o be s t a b l e o v e r t i m e .
Changes i n money s u p p l y o v e r t h e medium t e r m a r e p r e d o m i n a n t l y
a r e s u l t o f changes i n t h e m o n e t a r y b a s e . Changes i n t h e
m u l t i p l i e r u s u a l l y p a r t i a l l y o f f s e t c h a n g e s i n t h e b a s e , and a r e
t r e n d e d . I f money demand i s s t a b l e (as a r g u e d l a t e r ) ,
the
m u l t i p l i e r approach i s a u s e f u l guide t o e s t i m a t i n g the r e q u i r e d
monetary s t a n c e of the monetary a u t h o r i t i e s . A l t h o u g h the l e v e l
o f f o r e i g n a s s e t s and
d e s i r e d d o m e s t i c r e f i n a n c i n g can
be
programmed t o be c o n s i s t e n t w i t h t h e g r o w t h i n t h e m o n e t a r y b a s e ,
t h e a c t u a l outcomes w i l l be d e t e r m i n e d by t h e outcome on t h e
b a l a n c e o f payments.
C r e d i t t o Government
T a b l e 15 shows components o f t o t a l c o n s o l i d a t e d p u b l i c s e c t o r
b o r r o w i n g from a l l s o u r c e s . C o n s o l i d a t e d p u b l i c s e c t o r a c c o u n t s
a r e a b r o a d measure o f t h e p u b l i c s e c t o r i n c l u d i n g s u r p l u s e s o f
p u b l i c e n t e r p r i s e s and s t a b i l i s a t i o n o p e r a t i o n s , s o c i a l s e c u r i t y
o p e r a t i o n s and p u b l i c e n t e r p r i s e e x p e n d i t u r e as w e l l as c e n t r a l
and l o c a l government.
W i t h c e n t r a l government t h e key e c o n o m i c p o l i c y maker i n C o t e
d'lvoire,
the
consolidated
public
sector
grouping
allows
government a g r e a t e r d e g r e e o f freedom i n b y p a s s i n g l i m i t s s e t
on b o r r o w i n g by t h e C e n t r a l Bank. Between 1980 and 1987,
the
C e n t r a l Bank was
the source of about h a l f of government's
d o m e s t i c b o r r o w i n g , and o n l y 15 p e r c e n t o f t o t a l f i n a n c i n g .
P u b l i c s e c t o r b o r r o w i n g f r o m d o m e s t i c banks i s as i m p o r t a n t as
c e n t r a l bank f i n a n c i n g , and has become more so i n 1988 and
1989.
W h i l s t t r a d i n g a c c o u n t s and o t h e r s i m i l a r c u r r e n t t r a n s a c t i o n s
accounts w i l l account f o r a p o r t i o n of t h i s borrowing,
two
s i d e s t e p p i n g borrowing s t r a t e g i e s are p o s s i b l e v i a the commercial
b a n k s : f i r s t l y r u r a l r e f i n a n c i n g , eg f o r a s t a b i l i s a t i o n f u n d
w h i c h a l s o has a f o o d s u b s i d y p o l i c y , w h i c h d i r e c t l y i n c r e a s e s
t h e m o n e t a r y b a s e , o r s e c o n d l y , and more i n d i r e c t l y by p a r a s t a t a l
borrowing t o cover t r a n s f e r s h o r t f a l l s . In both cases the e f f e c t
c o u l d be t o crowd o u t t h e p r i v a t e s e c t o r a c c e s s t o c r e d i t .
Table 15:
Financing sources f o r Government D e f i c i t
Consolidated
Public Sector
CFA
1980-87
Billions
Financing
Year
1980
1981
1982
1983
1984
1985
1986
1987
Total
Deficit
272 .0
267.0
379 . 0
242.0
108.0
58 . 0
56.0
139 . 0
Foreign
BCEAO
176.0
152.0
282 . 0
32,0
187 . 0
92.0
64.0
76.0
73.4
74.7
-4.8
120.4
35.1
-11.4
-2.8
-43.2
Domestic
Banks
42.6
28.3
125.8
25.6
-42.1
-36.6
1.8
64.2
Percent
64.7
56.9
74.4
13.2
173.1
158.6
114.3
54.7
1980
1981
1982
1983
1984
1985
1986
1987
Note: F o r e i g n
financing
S o u r c e : W o r l d Bank
Estimating
27.0
28.0
-1.3
49.8
32.5
-19.7
-5.0
-31.1
15.7
10.6
33.2
10.6
-39.0
-63.1
3.2
46.2
Nonbank
-20.0
12.0
-24.0
64.0
-72 . 0
14 . 0
-7 . 0
42.0
of T o t a l
-7.4
4.5
-6.3
26.4
-66.7
24 . 1
-12.5
30.2
on c a s h b a s i s .
(1988).
Demand F o r Money
The
q u a l i t y of a v a i l a b l e macroeconomic data
required
for
e c o n o m e t r i c e s t i m a t i o n o f money demand i n C o t e d ' l v o i r e i s h i g h l y
u n s a t i s f a c t o r y i n s e v e r a l r e s p e c t s , which b r i n g i n t o q u e s t i o n the
v a l i d i t y o f a l m o s t any e c o n o m e t r i c r e s u l t s :
*
Quarterly
macroeconomic data
s e r i e s are
not
readily
o b t a i n a b l e . To c i r c u m v e n t t h i s p r o b l e m Medhora (1987b)
c o n s t r u c t s a p r o x i e d q u a r t e r l y GDP i n d e x f o r a s h o r t p e r i o d ,
b u t t h i s d o e s n o t d e a l w i t h s e a s o n a l i t y i n t h e s e r i e s . The
M i n i s t r y o f Economy and F i n a n c e i n C o t e d ' l v o i r e u t i l i s e s
power c o n s u m p t i o n as a p r o x y f o r s h o r t t e r m m a c r o e c o n o m i c
The t e c h n i c a l p a r t s o f t h i s s e c t i o n , and
equations are i n the appendix.
estimated
movements i n o u t p u t , a l t h o u g h t h i s i s n o t n e c e s s a r i l y
c o v a r i a n t w i t h output (except p o s s i b l y i n m a n u f a c t u r i n g ) .
D a t a a r e s u b j e c t t o w i d e m a r g i n s o f e r r o r . The r e t a i l p r i c e
i n d e x , f o r e x a m p l e , i s b a s e d upon a 1960 c o n s u m p t i o n b a s k e t .
*
Time d e l a y s i n p r o d u c i n g r e c e n t y e a r s ' d a t a . Data f o r up t o
f i v e o r s i x years past are frequently estimates.
*
A d d i t i o n a l d i f f i c u l t i e s f o r demand f o r money e s t i m a t i o n s a r e
t h e l i m i t e d number o f a n n u a l s e r i e s s t r e t c h i n g more t h a n 20
y e a r s and t h e a n t i c i p a t e d low i n f l u e n c e o f i n t e r e s t r a t e s
i n t h e l i g h t o f e x t e n s i v e a d m i n i s t r a t i v e i n t e r v e n t i o n and
r e g u l a t i o n o f money and c r e d i t m a r k e t s .
To summarise t h e r e s u l t s shown i n t h e a p p e n d i x
(on a n n u a l d a t a ) :
*
R e a l n a r r o w and b r o a d money a g g r e g a t e s were s i g n i f i c a n t
p o s i t i v e f u n c t i o n s o f r e a l income. B r o a d money demand a l s o
r e s p o n d e d p o s i t i v e l y t o t h e r a t e o f income g r o w t h .
*
G e n e r a l l y b r o a d money demand was s e n s i t i v e t o i n t e r e s t
rates. Increases
i n r e a l and n o m i n a l r a t e s r e s u l t e d i n
r e d u c e d money demand. I n c l u s i o n o f a t i m e t r e n d v a r i a b l e
tended t o s u b s t a n t i a l l y lower t h e s i g n i f i c a n c e o f t h e
interest
rate
variable.
As
the discount
rate
is
a d m i n i s t r a t i v e l y s e t and r a r e l y changed, i t s i m p a c t upon
money demand was l i k e l y t o be l o w . I n W o r l d Bank (1988)
money demand i s shown t o be s e n s i t i v e t o d i f f e r e n c e s b e t w e e n
F r e n c h a n d I v o r i a n money m a r k e t r a t e s .
*
A p a r t i a l a d j u s t m e n t mechanism d i d n o t g r e a t l y i m p r o v e t h e
e q u a t i o n p e r f o r m a n c e , s u g g e s t i n g t h a t money demand r e s p o n d s
r a p i d l y t o changes i n t h e economy.
Equation 4 i n t h e appendix i s t h e "best f i t " equation, showing
t h a t r e a l money demand i s a f u n c t i o n o f l a g g e d money, c u r r e n t
r e a l income and r e a l income g r o w t h . The r e a l r a t e o f i n t e r e s t
( d i s c o u n t r a t e ) h a s a n e g a t i v e ( b u t i n s i g n i f i c a n t ) e f f e c t upon
money demand. The i n c l u s i o n o f t h e income g r o w t h v a r i a b l e
suggests t h a t (unanticipated)
income s h o c k s have s u b s t a n t i a l
e f f e c t s upon r e a l money demand. O v e r a l l , t h e r e was no e v i d e n c e
t o s u g g e s t t h a t money demand was p a r t i c u l a r l y u n s t a b l e o v e r t i m e
and t h a t income was t h e most i m p o r t a n t d e t e r m i n i n g v a r i a b l e .
Money demand p r o j e c t i o n s c o u l d t h e r e f o r e be made on t h e b a s i s o f
income g r o w t h e s t i m a t e s .
The
Foreign
Sector
To t h e e x t e n t t h a t c u r r e n t a c c o u n t d e f i c i t s c a n be f i n a n c e d
e x t e r n a l l y , a s had been c a s e f o r C o t e d ' l v o i r e w h i l e i t was
considered
a credit-worthy country, they are not r e a l l y our
c o n c e r n h e r e a s t h e y do n o t d i r e c t l y i n f l u e n c e t h e money s u p p l y .
But t h e mechanism by w h i c h changes i n p r i m a r y e x p o r t s p r i c e s and
v o l u m e s a f f e c t m o n e t a r y v a r i a b l e s i s o f i n t e r e s t , as i s t h e
unfinanced
( e x t e r n a l l y ) p a r t of the c u r r e n t account d e f i c i t .
These two i s s u e s l i n k up i n t h e 1980s as commodity p r i c e s have
f a l l e n and c u r r e n t a c c o u n t d e f i c i t s have n o t been f i n a n c e d by
f o r e i g n c a p i t a l , a p a r t from 1984-86, c a u s i n g a r e d u c t i o n i n
r e s e r v e s and an o v e r a l l c o n t r a c t i o n i n money s u p p l y .
A source o f c o n s i d e r a b l e i n s t a b i l i t y i n the monetary system i s
from c h a n g e s i n t h e t e r m s o f t r a d e . I n p a r t i c u l a r t h e f l u c t u a t i n g
p r i c e o f e x p o r t s , more t h a n 80 p e r c e n t o f w h i c h a r e n o n - f u e l
primary products.
F i g u r e 6 shows t h e r e l a t i v e p r i c e e f f e c t s on m e r c h a n d i s e t r a d e
w i t h t h e s t r o n g improvement i n t e r m s o f t r a d e o v e r t h e 1976-79
l a r g e l y r e s u l t i n g from h i g h e r c o c o a and c o f f e e p r i c e s . These
" w i n d f a l l g a i n s " i n e x p o r t e a r n i n g s as d e s c r i b e d by D a v i s (1983)
d i d n o t , however, t r a n s l a t e i n t o an a c c u m u l a t i o n
of f o r e i g n
r e s e r v e s . R a t h e r , t h e y a l l o w e d a r a p i d i n c r e a s e i n t h e volume
(see F i g u r e 7) and v a l u e o f i m p o r t s from 1977 t o 1981.
Bhatia
(1985:p31) n o t e s t h a t a v o l u n t a r y r e s e r v e d e p o s i t a r r a n g e m e n t
between t h e BCEAO and CAA o p e r a t e d d u r i n g 1977-79 t o p a r t i a l l y
s t e r i l i s e the r a p i d l y r i s i n g l i q u i d i t y of the b a n k i n g system at
t h i s t i m e . D e s p i t e t h e v o l u n t a r y d e p o s i t scheme f o r e x p o r t
p r o c e e d s , d o m e s t i c c r e d i t t o b o t h government and t h e p r i v a t e
s e c t o r increased r a p i d l y during t h i s p e r i o d p e r m i t t i n g the
r e s u l t a n t r a p i d import growth.
Figure
6:
Do I Iar
Pr i ces
Terms Of
'V.iirrP
Wnr- i n
and
Trade
T^inloQ
1980
= 100
The f o r e i g n s e c t o r a l s o a f f e c t s c a p i t a l a c c o u n t t r a n s a c t i o n s v i a
the e x t e n s i v e
l i n k s o f t h e major d o m e s t i c banks a n d f o r e i g n
b a n k i n g s e c t o r w i t h banks i n F r a n c e , t o g e t h e r w i t h t h e r e l a t i v e
e a s e o f e f f e c t i n g c a p i t a l t r a n s a c t i o n s . The p r e v i o u s d i s c u s s i o n
o f p r i v a t e t r a n s f e r s , c o n c l u d e d t h a t t h e r e was a d i v e r s i o n o f
s a v i n g away f r o m t h e d o m e s t i c m a r k e t . Many e m p l o y e e s i n t h e
f i n a n c i a l s e c t o r r e p o r t e d t h a t s u c h c a p i t a l movements were a w e l l
e s t a b l i s h e d phenomenon. The l i k e l y i n c e n t i v e s f o r o u t w a r d c a p i t a l
movement, a p a r t
from p o r t f o l i o d i v e r s i f i c a t i o n ,
include the
u s u a l l y n e g a t i v e i n t e r e s t r a t e d i f f e r e n t i a l between F r e n c h a n d
Cote d ' l v o i r e d e p o s i t r a t e s and u n c e r t a i n t y over t h e f u t u r e o f
t h e pegged CFA F r a n c e x c h a n g e r a t e ( i e a n t i c i p a t e d d e v a l u a t i o n s ) .
The p r e v i o u s s e c t i o n n o t e d t h e s e n s i t i v i t y o f money demand t o t h e
C o t e d ' l v o i r e : F r e n c h money m a r k e t r a t e d i f f e r e n t i a l r a t h e r t h a n
the
l e v e l o f Cote d ' l v o i r e r a t e s . T r a n s f e r s
a b r o a d c a n be
described
as c a p i t a l
flight
i f t h e y evade t h e s y s t e m o f
a u t h o r i s a t i o n operated a department o f t h e M i n i s t r y o f Finance
on t r a n s f e r s o v e r CFA 175,000, o r l e a v e by abuse o f s y s t e m s f o r
payments o f i m p o r t s s u c h a s o v e r - i n v o i c i n g . A s i g n i f i c a n t p o r t i o n
of t h e l e a k a g e o f domestic s a v i n g s i n t o f o r e i g n exchange i s
however l i k e l y t o be e n t i r e l y l e g i t i m a t e .
Trade
1980
VoIume
CFA F r a n c s
"I—I—I—I—I—I—I—\—I—\—I—\—i—I—r
1972
1 9 7 4 1 9 7 6 1978 1 9 B D 1 9 8 2 1 9 8 4
1986
1973
1975 1977 1979 1981 1983 1985
19B7
SoLTce
World
Tables
Table 16:
Year
1986
Foreign Sector - Summary Data
Bn CFA
1980
1981
1982
1983
1984
1985
87
Net E x t e r n a l
33
Assets
-131
-162
-30
-142
41
105
8
84
100
183
164
497
548
545
636
662
771
787
1146
1229
1108
552
562
588
623
650
681
563
136
121
152
159
183
278
231
167
200
163
397
398
385
Trade Balance
337
Exports
841
Imports
504
Export Values:
Coffee
na
Cocoa
na
S o u r c e : W o r l d Bank
163
1988.
Real Exchange
Rates
Some o f t h e c o m p l e x i t i e s o f t h e many i n f l u e n c e s upon t h e f o r e i g n
s e c t o r can be c l a r i f i e d by an a n a l y s i s o f r e a l e f f e c t i v e e x c h a n g e
r a t e s ( R E E R s ) . These a r e shown t o g e t h e r w i t h n o m i n a l e f f e c t i v e
r a t e s i n F i g u r e 8 f o r t h e p e r i o d 1973 t o 1988. An i n c r e a s e i n t h e
i n d e x r e p r e s e n t s an a p p r e c i a t i o n .
The r e a l e f f e c t i v e r a t e i s a t r a d e w e i g h t e d b a s k e t o f
exchange r a t e s w h i c h a r e c o r r e c t e d f o r d i f f e r e n c e s i n d o m e s t i c
and f o r e i g n c o s t o r p r i c e i n f l a t i o n r a t e s . A r i s e i n t h e REER can
be i n t e r p r e t e d as an d e c r e a s e i n i n t e r n a t i o n a l c o m p e t i t i v e n e s s
(see D o r n b u s c h and H e l m e r s (1988) f o r a more d e t a i l e d d i s c u s s i o n
o f t h e s i g n i f i c a n c e o f t h e r e a l exchange r a t e ) .
D e s p i t e t h e f i x e d exchange r a t e w i t h F r a n c e , between 1980
and
1985 t h e r e was a f a i r l y s i z e a b l e n o m i n a l d e p r e c i a t i o n o f t h e CFA
( l a r g e l y against the d o l l a r ) . Real rates a l s o depreciated
as
d o m e s t i c p r i c e i n f l a t i o n was
comparable t o t h a t i n t r a d i n g
p a r t n e r s . The r e a l d e p r e c i a t i o n e n a b l e d an improvement o f t h e
t r a d e b a l a n c e , p a r t i c u l a r l y f r o m 1981, l a r g e l y as a r e s u l t o f
i m p o r t c o m p r e s s i o n . The r e a l a p p r e c i a t i o n o f t h e CFA i n 1986
and
Figure 8: Cote d ' l v o i r e Real and Nominal E f f e c t i v e
Rates.
Real
Exchange
Exchange Rates
1980=100
—
Rea I
~i—I—I
I
I
I
I
I I I
I I
1 I I r
1973
1975
1977
1979
1981
19B3
1985 1987
1974
1976
1978
19BG 1 9 8 2
1984
1986 1988
Derived
from
I F S . DOTS
1987 was c l o s e l y matched by a d e t e r i o r a t i n g b a l a n c e o f t r a d e ^ .
An a p p r e c i a t i o n o f t h e r e a l exchange r a t e , c a n o c c u r i f t h e
r e l a t i v e p r i c e of nontradables t o t r a d a b l e s i n c r e a s e s , which
s t r e n g t h e n s t h e home demand f o r t r a d a b l e p r o d u c t s . W i t h a f i x e d
exchange r a t e , t h e REER c a n o n l y be d e v a l u e d by e n g i n e e r i n g
r e l a t i v e r e d u c t i o n s i n non-tradable p r i c e s . I n p r a c t i c e t h i s can
be a c h i e v e d by i n d i r e c t l y a f f e c t i n g t h e p r i c e s o f i m p o r t s and
e x p o r t s v i a t a r i f f s and s u b s i d i e s , o r by m a i n t a i n i n g a l o w e r r a t e
o f d o m e s t i c t o f o r e i g n i n f l a t i o n ''.
Krumm (1987) p o i n t s t o t h e d i f f i c u l t i e s o f an
o v e r v a l u e d exchange r a t e and t h e o b s t a c l e s c r e a t e d by t h e l a c k
o f a d i r e c t i n s t r u m e n t t o change d o m e s t i c p r i c e s r e l a t i v e t o
international prices.
These r e l a t i o n s h i p s a r e d i s c u s s e d i n more d e t a i l i n a
f o r t h c o m i n g p a p e r on monetary p o l i c y and exchange r a t e
determination.
Government p o l i c y f o r t h e 1986-1990 p e r i o d s t r e s s e d t h e n e e d t o
change t h e t e r m s o f exchange between t r a d a b l e and n o n - t r a d a b l e
s e c t o r s and t o r e o r i e n t r e s o u r c e s t o e x p o r t s e c t o r s .
A l t h o u g h C o t e d ' l v o i r e does n o t have a d i r e c t i n s t r u m e n t t o a l t e r
t h e r e a l e x c h a n g e r a t e , two p o l i c i e s have been f o l l o w e d
in
pursuance of these o b j e c t i v e s :
*
From 1986, a scheme w h i c h e m u l a t e d exchange r a t e c h a n g e s by
the
import t a r i f f s
and
export
subsidies
method
was
i n t r o d u c e d on t h e a d v i c e o f t h e W o r l d Bank. The
actual
administration
of the
scheme has
highlighted
serious
d i f f i c u l t i e s o f r e a l exchange r a t e changes u n d e r a f i x e d
r a t e , most n o t a b l y i n e n f o r c i n g i m p o r t t a r i f f s and f i n a n c i n g
e x p o r t s u b s i d i e s . The r e a l a p p r e c i a t i o n o f t h e CFA F r a n c
from 1986
( u s i n g an i n d e x t h a t t a k e s a c c o u n t o f t r a d a b l e :
non t r a d a b l e p r i c e s ) i s an i n d i c a t i o n t h a t t h e scheme has
not a l t e r e d t h e e f f e c t i v e exchange r a t e s u b s t a n t i a l l y . One
p a r t i c u l a r p r o b l e m has been t h a t e x p o r t e r s have n o t r e c e i v e d
t h e e x p o r t premium, due t o t h e p r e c a r i o u s f i s c a l p o s i t i o n
o f t h e government.
*
The s e c o n d s t r a n d o f r e a l exchange r a t e management has been
r e s t r i c t i v e monetary p o l i c y t o r e s t r a i n domestic p r i c e s ,
w h i c h was
followed
from 1985
onwards. A l t h o u g h
price
i n f l a t i o n i n C o t e d ' l v o i r e was modest and t h e m o n e t a r y
s t a n c e was i n g e n e r a l c o n t r a c t i o n a r y , i n f l a t i o n i n t r a d i n g
c o u n t r i e s f e l l c o n s i d e r a b l y o v e r t h e same p e r i o d , w h i l s t t h e
French
Franc
appreciated
against
the
US$,
the
key
i n t e r n a t i o n a l t r a d i n g c u r r e n c y i n w h i c h most p r i m a r y p r o d u c t
e x p o r t s are denominated.
P o l i c y m a k e r s i n C o t e d ' l v o i r e have f o u n d t h e m s e l v e s w i t h o u t an
i n s t r u m e n t t o a l t e r t h e r e a l e f f e c t i v e exchange r a t e , p r i m a r i l y
due t o t h e f i x e d n o m i n a l r a t e r e g i m e o f t h e West A f r i c a n M o n e t a r y
U n i o n . T h a t s u b s t a n t i a l r e a l exchange r a t e c h a n g e s can t a k e p l a c e
i n an open economy w i t h few c o n t r o l s upon c a p i t a l movements i s
m a i n l y b e c a u s e o f t o t h e e x i s t e n c e o f t h e compte
d'operations
which a l l o w s p e r s i s t e n t o v e r v a l u a t i o n
of the exchange r a t e
a c c o m p a n i e d by an i n c r e a s i n g o v e r d r a f t a t t h e F r e n c h T r e a s u r y .
The
b e n e f i t s o f t h i s mechanism a r e d i s c u s s e d
i n the
final
s e c t i o n . W i t h o u t t h i s mechanism. C o t e d ' l v o i r e w o u l d h a v e been
f o r c e d t o d e v a l u e due t o e x h a u s t i o n o f f o r e i g n r e s e r v e s , o r t o
impose exchange r e s t r i c t i o n s t o r a t i o n f o r e i g n e x c h a n g e .
See
C o t e d ' l v o i r e Selection,
1988.
5. R E A L E C O N O M Y E F F E C T S O F M O N E T A R Y
POLICY
As a f i r s t s t e p t o w a r d s a s s e s s i n g t h e r e a l s e c t o r e f f e c t s o f
m o n e t a r y p o l i c y , t h i s p a p e r has t e s t e d t h e h y p o t h e s i s t h a t bank
c r e d i t t o the p r i v a t e s e c t o r i s used t o f i n a n c e working c a p i t a l .
T h e r e a r e some s u b s t i t u t e s f o r d o m e s t i c bank c r e d i t s u c h as
b o r r o w i n g f r o m an o v e r s e a s p a r e n t company and i n t e r n a l f u n d s b u t
t h e s e a r e l i m i t e d . T h e r e i s no s h o r t t e r m company p a p e r m a r k e t ,
w h i l s t a c c e s s t o f i n a n c e from t h e s t o c k m a r k e t i s r e s t r i c t e d t o
w e l l c a p i t a l i s e d l a r g e f i r m s . C o n s e q u e n t l y we can assume t h a t
f i r m s a r e h e a v i l y d e p e n d e n t upon bank c r e d i t , s u c h t h a t c r e d i t
r e s t r i c t i o n s c o u l d have r e a l e f f e c t s upon o u t p u t by r e d u c i n g t h e
a v a i l a b i l i t y o f w o r k i n g c a p i t a l and r e d u c i n g t h e l e v e l
of
capacity operation.
D i s c u s s i o n s w i t h bank o f f i c i a l s " i n 1989 i n d i c a t e d t h e h e a v y
r e l i a n c e o f c o m m e r c i a l f i r m s upon bank o v e r d r a f t c r e d i t i n
s i t u a t i o n s o f t i g h t b a n k i n g s e c t o r l i q u i d i t y . To i l l u s t r a t e t h e
l e v e l o f c r e d i t demand by c o m m e r c i a l c o n c e r n s , i t i s i n t e r e s t i n g
t o n o t e t h a t p e r s o n a l o v e r d r a f t f a c i l i t i e s had been c o m p l e t e l y
w i t h d r a w n i n s e v e r a l banks t o c r e a t e a d d i t i o n a l l i q u i d i t y .
Quarterly constant p r i c e production i n d i c e s f o r eight i n d u s t r i a l
s u b - s e c t o r s i n t h e p e r i o d 1982-87 '" were employed as i n d i c a t o r s
o f o u t p u t w i t h c o r r e s p o n d i n g q u a r t e r l y c r e d i t d a t a as r e p o r t e d
t o t h e Central
des Risques''^ a t t h e C e n t r a l Bank. The p r o d u c t i o n
i n d e x was s p e c i f i e d as a f u n c t i o n o f s h o r t - t e r m c r e d i t l a g g e d by
one q u a r t e r , and medium and l o n g t e r m c r e d i t by one t o t h r e e
quarters lagged.
R e g r e s s i o n s on b o t h a s e c t o r and p o o l e d t i m e - s e r i e s b a s i s f o r any
of the
i n d u s t r i a l sub-sectors
d i d not
show a
significant
r e l a t i o n s h i p between l a g g e d c r e d i t , w h e t h e r s h o r t , medium o r
l o n g - t e r m o r t o t a l c r e d i t , and o u t p u t as s p e c i f i e d above. The
weakness o f
these
conclusions
allows
several alternative
a s s u m p t i o n s t o be p o s t u l a t e d :
*
Bank c r e d i t may n o t be an i m p o r t a n t p a r t o f w o r k i n g c a p i t a l .
Company r e s u l t s f o r 1984 from t h e f i f t y l a r g e s t c o m p a n i e s
i n C o t e d ' l v o i r e (Bulletin
de I'Afrique
Noire,
1988) show
t h a t t o t a l n e t l o s s e s o f CFA 97 b i l l i o n were f i n a n c e d by a
'' D i s c u s s i o n s were h e l d by t h e a u t h o r w i t h s e n i o r bank
management s t a f f o f s e v e r a l m a j o r c o m m e r c i a l banks and
o v e r s e a s bank's agencies based i n A b i d j a n .
The s u b - s e c t o r s were: Food, d r i n k , t o b a c c o p r o c e s s i n g ;
t e x t i l e s and l e a t h e r ; wood p r o d u c t s ; c h e m i c a l s ; n o n - m e t a l l i c
m i n e r a l p r o d u c t s ; base metal products; other
manufacturing
industry; water,gas,electricity.
These d a t a a r e r e p o r t e d t o t h e C e n t r a l Bank by
c o m m e r c i a l b a n k s f o r a l l l o a n s o f o v e r CFA 10 m i l l i o n .
C o v e r a g e i s g e n e r a l l y a r o u n d 90 p e r c e n t .
drawdown o f c a s h r e s e r v e s ( d e t e r i o r a t i o n o f c a s h f l o w ) r a t h e r
t h a n by d e b t i n c r e a s i n g s u b s t a n t i a l l y .
*
The
marked
slowdown
of
credit
growth
1984-86
(and
c o n t r a c t i o n i n 1984) was a r e s u l t o f b o t h s u p p l y and demand
f a c t o r s , n o t a d e q u a t e l y e x p l a i n e d by s u p p l y s i d e c r e d i t
c o n s t r a i n t s . W h i l s t the banking system's l i q u i d i t y s h o r t a g e
was c l e a r , a s shown by a low c a s h r a t i o and h i g h l o a n s t o
d e p o s i t s r a t i o , e x t e n d e d r e c e s s i o n and d r o u g h t has r e d u c e d
t h e number o f c r e d i t w o r t h y b o r r o w e r s . I n 1984, e l e c t r i c i t y
s h o r t a g e s c o u l d a l s o h a v e c o n t r i b u t e d t o c r e d i t demand
r e d u c t i o n s , b u t a s p r o d u c t i o n would a l s o h a v e been a f f e c t e d ,
t h e c r e d i t t o o u t p u t r e l a t i o n s h i p i s u n l i k e l y t o h a v e been
affected.
As T a b l e 17 shows, c h a n g e s i n c r e d i t have n o t a l w a y s c o r r e s p o n d e d
w i t h o u t p u t . F o r p r i m a r y , s e c o n d a r y and t e r t i a r y s e c t o r s , changes
i n t h e p r o p o r t i o n o f t o t a l c r e d i t a l l o c a t e d and c h a n g e s i n t h e
s h a r e o f GDP d i d n o t v a r y s i g n i f i c a n t l y when c o m p a r i n g 1980-82
w i t h 1983-85. Changes d u r i n g t h e 1986-88 p e r i o d show t h a t c r e d i t
and o u t p u t s h a r e s g e n e r a l l y moved i n o p p o s i t e d i r e c t i o n s . The
i n c r e a s e i n t h e s h a r e o f t e r t i a r y c r e d i t (58.1 t o 65.8 p e r c e n t )
a c c o m p a n i e d by a f a l l i n t h e s h a r e o f o u t p u t , c a n l a r g e l y be
a t t r i b u t e d to the increase i n c r o p - f i n a n c i n g c r e d i t required f o r
s t o c k p i l i n g , d e s p i t e the sharp c o n t r a c t i o n of the s e c t o r d u r i n g
1987.
Table
17: S e c t o r a l
Sector
Credit
Per Cent
of:
and
Output Shares
1980-82
Average
1983-85
Average
1986-88
Average
Primary
Credit
GDP
6.9%
32.7%
6.4%
31.5%
3.9%
32 . 7%
Secondary
Credit
GDP
34.9%
21.2%
35.5%
20.1%
30. 3%
22.4%
Tertiary
Credit
GDP
58.2%
46. 1%
58.1%
48.5%
65.8%
44.9%
N o t e : S h a r e s o f GDP
a d j u s t e d t o e x c l u d e non-marketed
S o u r c e s : Ministere
de I'Economie
et Finances
Notes et S t a t i s t i q u e s ( v a r i o u s ) .
sector.
(1988) and BCEAO,
In t h e s e c o n d a r y s e c t o r s , a c r e d i t c o n t r a c t i o n ( p a r t i c u l a r l y t o
m a n u f a c t u r i n g ) was a c c o m p a n i e d by a s l i g h t improvement i n GDP
s h a r e , a l t h o u g h l i t t l e r e a l improvement i n t h e o u t p u t s h a r e .
One f e a t u r e w h i c h may e x p l a i n t h e o p p o s i t e movement o f c r e d i t and
o u t p u t s h a r e s i s t h a t c r e d i t c o n t r a c t i o n has been p r e d o m i n a n t l y
i n medium and l o n g t e r m c r e d i t s . Between 1980 and 1988, mediumt e r m c r e d i t f e l l CFA 224 b i l l i o n t o CFA 187 b i l l i o n (31 t o 20 p e r
c e n t o f t o t a l c r e d i t ) and l o n g - t e r m c r e d i t f e l l f r o m CFA 45
b i l l i o n t o CFA 37 b i l l i o n (7 t o 4 p e r c e n t o f t o t a l c r e d i t ) .
T h i s r e d u c t i o n o f l o n g e r t e r m f i n a n c i n g i n s t r u m e n t s has been a
r e f l e c t i o n o f c h a n g i n g C e n t r a l Bank p o l i c y on t h e t y p e o f
r e d i s c o u n t i n g made a v a i l a b l e . D u r i n g t h e 1980s, i t has r e d u c e d
a c c e s s t o t h e l o n g t e r m r e d i s c o u n t window and r e p l a c e d i t by
s h o r t - t e r m b o r r o w i n g from t h e money m a r k e t . The e f f e c t s o f c r e d i t
c o n t r a c t i o n c o u l d be e x p e c t e d t o be a m a i n t e n a n c e o f o u t p u t o w i n g
to the continued a v a i a b i l i t y of s h o r t term working c a p i t a l , but
more p r o m i n e n t o u t p u t e f f e c t s i n t h e l o n g e r t e r m as
growth
p r o s p e c t s a r e r e d u c e d by l o w e r e d a c c e s s t o d e v e l o p m e n t c a p i t a l .
A t t h e s e c t o r a l l e v e l an i n t e r e s t i n g f e a t u r e o f c r e d i t a l l o c a t i o n
i s t h a t c r e d i t t o t h e p r i m a r y s e c t o r (80 p e r c e n t t o a g r i c u l t u r e )
has d e c l i n e d s u b s t a n t i a l l y ( f r o m CFA 43 t o CFA 32 b i l l i o n )
between 1980 and 1988 y e t t h e s h a r e o f a g r i c u l t u r e i n GDP has
r e m a i n e d f a i r l y c o n s t a n t . Between 1983 and 1988 c r e d i t t o t h e
p r i m a r y s e c t o r h a l v e d i n n o m i n a l t e r m s y e t i t s GDP
share
i n c r e a s e d from 30.6 p e r c e n t t o 34.0 p e r c e n t .
A l t h o u g h c r o p f i n a n c i n g i s e x c l u d e d from p r i m a r y s e c t o r c r e d i t ,
t h e low l e v e l and d e c l i n e i n t h e p r o p o r t i o n o f c r e d i t t o t h e
primary s e c t o r without a corresponding f a l l i n output i s evidence
of a c o n s i d e r a b l e d e g r e e o f autonomy f r o m t h e o p e r a t i o n s o f
f o r m a l c r e d i t m a r k e t s . The presumed a c c e s s t o i n f o r m a l f i n a n c e ,
or more p l a u s i b l y i n v i e w o f t h e e a r l i e r c o n c l u s i o n s , a u t o f i n a n c e , has e n a b l e d a r e d u c t i o n i n f o r m a l c r e d i t and a h e a l t h y
i n s u l a t i o n from m o n e t a r y p o l i c y a c t i o n s .
P u b l i c and
Private Sectors
The d i s t r i b u t i o n o f c r e d i t between p u b l i c and p r i v a t e s e c t o r s has
f l u c t u a t e d w i d e l y beween 1980 and 1988. I n 1980, o u t s t a n d i n g
c r e d i t t o p u b l i c e n t e r p r i s e s was CFA 226 b i l l i o n (31.5 p e r c e n t
of t o t a l r e p o r t e d c r e d i t ) . Over t h e n e x t f o u r y e a r s , o u t s t a n d i n g
c r e d i t f e l l s h a r p l y t o CFA 70 b i l l i o n , r e f l e c t i n g t h e i n i t i a t i v e s
t a k e n u n d e r a d j u s t m e n t programmes t o a d d r e s s f i n a n c i a l p r o b l e m s
i n t h e most i m p o r t a n t p a r a t s t a t a l s . By 1988, t h i s c r e d i t had
r i s e n a g a i n t o CFA 209.8 b i l l i o n (22.5 p e r c e n t o f t o t a l c r e d i t ) ,
a t l e a s t i n p a r t r e f l e c t i n g t h e renewed d e t e r i o r i a t i o n o f t h e
f i s c a l d e f i c i t c r e a t i n g p r e s s u r e s on t h e l e v e l o f t r a n s f e r s t o ,
or p r o f i t s r e m i t t e d from p u b l i c e n t e r p r i s e s .
A w e a k l y n e g a t i v e c o r r e l a t i o n i s o b s e r v e d between t h e l e v e l o f
c r e d i t t o government ( n e t d o m e s t i c bank f i n a n c i n g ) and n e t c r e d i t
to
public
enterprises suggesting
a
certain
degree
of
s u b s t i t u t a b i l i t y between t h e two t y p e s o f c r e d i t . T h e r e f o r e t h e
r a p i d s h i f t s i n the a l l o c a t i o n of c r e d i t t o p u b l i c e n t e r p r i s e s
may have b e e n o f f s e t t o some e x t e n t by a more d i r e c t f i n a n c i n g
r o l e f o r t h e c e n t r a l government.
6. E V A L U A T I N G SWEiyiBERSHlP O F T H E U M O A
P a r t i c i p a t i n g i n t h e UMOA i s a p o l i t i c a l d e c i s i o n , a n d , a s
A l l e c h i and Mamadou (1989) n o t e , t h e f a c t t h a t t h e compte
d'operations
i s l o c a t e d a t t h e F r e n c h T r e a s u r y and n o t t h e Banque
de F r a n c e u n d e r l i n e s t h e p o l i t i c a l n a t u r e o f t h e m a i n s t a y o f
c o n v e r t i b i l i t y i n t h e UMOA. W h i l s t t h e m e r i t s and d e m e r i t s o f
F r e n c h p o l i t i c a l and e c o n o m i c l i n k s a r e l a r g e l y beyond t h e s c o p e
o f t h i s w o r k i n g p a p e r t h e r e a r e c e r t a i n a s p e c t s o f t h e UMOA by
which Cote d ' l v o i r e undoubtedly
g a i n s and o t h e r s where t h e
b e n e f i t s a r e l e s s c l e a r . D u r i n g t h e 1980s t h e b e n e f i t s o f UMOA
membership w h i c h had been p r e v i o u s l y i d e n t i f i e d were l e s s r e a d i l y
obvious.
C o s t s and B e n e f i t s
U n t i l t h e e a r l y 1980s, t h e p r e v a i l i n g v i e w h a s been t h a t C o t e
d ' l v o i r e was an economic s u c c e s s s t o r y . T h e r e f o r e i t was n o t
s u r p r i s i n g t h a t r e s e a r c h concluded t h a t the d i s t i n c t i v e monetary
a r r a n g e m e n t s o f t h e UMOA had a p a r t i n t h i s s u c c e s s , o r , a t l e a s t
t h a t t h e m o n e t a r y a r r a n g e m e n t s had n o t h i n d e r e d d e v e l o p m e n t .
P r e v i o u s r e s e a r c h on t h e c o s t s and b e n e f i t s o f b e l o n g i n g t o t h e
F r a n c Zone o r t o t h e UMOA and s t u d i e s o f C o t e d ' l v o i r e have
g e n e r a l l y concluded t h a t o v e r a l l the arrangements p r o v i d e a n e t
e c o n o m i c g a i n . However t h e e c o n o m i c s t a g n a t i o n i n C o t e d ' l v o i r e
s i n c e 1980, t o g e t h e r w i t h t h e more r e c e n t c u r r e n c y o v e r - v a l u a t i o n
r e s u l t i n g , i n p a r t , from commodity e x p o r t p r i c e f a l l s , s h o u l d
r a i s e d o u b t s a b o u t t h i s r e c e i v e d wisdom.
J a k o b e i t (1985) a r g u e s t h a t i t i s d i f f i c u l t t o q u a n t i f y t h e
b e n e f i t s o f F r a n c Zone membership o r t o i s o l a t e them from
other
e c o n o m i c f a c t o r s . However he s u g g e s t s t h a t t h e e a g e r n e s s o f
neighbouring
c o u n t r i e s ( f o r example N i g e r i a a n d Ghana a t
d i f f e r e n t t i m e s ) , t o j o i n one o f t h e F r e n c h - s p e a k i n g m o n e t a r y
u n i o n s i n d i c a t e s t h e n e t p e r c e i v e d b e n e f i t s o f membership. The
most e v i d e n t b e n e f i t o f membership t o many n e i g h b o u r i n g A f r i c a n
c o u n t r i e s , whose c u r r e n c i e s a r e i n c o n v e r t i b l e and s u b j e c t t o
e x t e n s i v e exchange r e s t r i c t i o n s , w o u l d p r o b a b l y be t h a t o f
exchange c o n v e r t i b i l i t y . I t i s n o t s u f f i c i e n t however, t o j u d g e
t h e UMOA a r r a n g e m e n t s a s somehow ' b e t t e r ' o r more c o n d u c i v e t o
d e v e l o p m e n t on t h e b a s i s o f n e i g h b o u r i n g c o u n t r i e s p e r c e p t i o n s .
T h i s i s b e c a u s e t h e i r p e r c e p t i o n s may be m i s g u i d e d o r s e l e c t i v e
and
a l s o b e c a u s e t h e e f f e c t s o f UMOA membership a r e n o t
n e c e s s a r i l y t h e same f o r e a c h c o u n t r y member, p a r t i c u l a r l y a s
o p e n n e s s , t r a d e d e s t i n a t i o n and c o m p o s i t i o n c a n v a r y w i d e l y
amongst UMOA members''^.
One example o f c o u n t r y d i f f e r e n c e s i s s i g n i f i c a n t l y
d i v e r g e n t r e a l exchange r a t e s . Macedo (1989:p357) shows t h e
c o n s i d e r a b l y d i f f e r e n t t r e n d s i n S e n e g a l e s e and I v o i r i a n r e a l
exchange r a t e s .
Growth
Performance
G u i l l a u m o n t , G u i l l a u m o n t and P l a n e (1988) u t i l i s i n g p o o l e d c r o s s
s e c t i o n a l d a t a f o r s u b - S a h a r a n A f r i c a n (SSA) c o u n t r i e s a r g u e t h a t
F r a n c Zone membership has a s i g n i f i c a n t p o s i t i v e e f f e c t upon a
'catch a l l ' economic p o l i c y v a r i a b l e . C o n s e q u e n t l y t h e y c o n c l u d e
t h a t F r a n c Zone membership has r e s u l t e d i n h i g h e r GNP g r o w t h
r a t e s a f t e r t a k i n g a c c o u n t o f exogenous g r o w t h c r e a t i n g o r
i n h i b i t i n g f a c t o r s . T h i s c o n c l u s i o n i s p a r t i c u l a r l y s t r o n g when
c o m p a r i n g t h e GNP w e i g h t e d mean o f F r a n c Zone c o u n t r i e s w i t h
o t h e r SSA c o u n t r i e s i n t h e p e r i o d 1970-81. F a c t o r s w h i c h t h e y
a t t r i b u t e t o the p o l i c y induced h i g h e r growth performance a r e :
g u a r a n t e e d exchange c o n v e r t i b i l i t y ; m o n e t a r y d i s c i p l i n e and a
l e s s o v e r v a l u e d exchange r a t e d u r i n g t h i s p e r i o d . These v a r i a b l e s
a r e not used as independent v a r i a b l e s i n t h e e s t i m a t i o n s c a r r i e d
out.
D e v a r a j a n and de M e l o (1987) a l s o d e m o n s t r a t e s i g n i f i c a n t l y
h i g h e r CFA-zone g r o w t h r a t e s t h a n i n o t h e r SSA c o u n t r i e s d u r i n g
t h e p e r i o d 1960-82 w i t h o u t c o n t r o l l i n g f o r exogenous e f f e c t s .
T h e r e i s a s i g n i f i c a n t improvement i n t h e g r o w t h p e r f o r m a n c e o f
CFA-zone c o u n t r i e s a g a i n s t most c o m p a r a t o r g r o u p s o f LDCs when
c o m p a r i n g t h e 1973-82 and 1960-73 s u b - p e r i o d s . T h i s r e s u l t
s u g g e s t s t h a t t h e 1973 monetary r e f o r m s i n t h e CFA-zone were
h e l p f u l i n minimising the costs of r a p i d l y changing o i l p r i c e s .
S i n c e 1981 however, t h e s i t u a t i o n f o r C o t e d ' l v o i r e has changed
c o n s i d e r a b l y ; economic g r o w t h s l o w e d down ( r e a l g r o w t h
was
n e g a t i v e i n 1983, 1984 and 1 9 8 7 ) , from 1983 r e s t r i c t i v e c r e d i t
p o l i c i e s were r e q u i r e d t o p r e v e n t d e t e r i o r a t i o n i n t h e f o r e i g n
a s s e t p o s i t i o n , and s h a r p i m p o r t c o m p r e s s i o n o c c u r r e d t o r e d u c e
t h e c u r r e n t a c c o u n t d e f i c i t w h i c h c o u l d no l o n g e r be s u p p o r t e d
by i n w a r d c a p i t a l f l o w s . A l t h o u g h t h i s b a l a n c e o f payments
a d j u s t m e n t p r o c e s s was s u p p o r t e d by a d e p r e c i a t i n g r e a l exchange
r a t e between 1980 and 1985, t h e l a c k o f c o n t r o l o f t h e exchange
rate
i n s t r u m e n t became n o t i c e a b l e once more as t h e
rate
a p p r e c i a t e d f r o m 1985 onwards ( F i g u r e 8) and began t o p l a c e
p r e s s u r e upon t h e l e v e l o f r e s e r v e s and t h e c u r r e n t a c c o u n t
balance.
T a b l e 18 shows how s i g n i f i c a n t l y C o t e d ' I v o i r e ' s r e l a t i v e g r o w t h
p e r f o r m a n c e has changed d u r i n g t h e 1967-1987 p e r i o d . W h i l s t a
more s o p h i s t i c a t e d a n a l y s i s i s r e q u i r e d t o i s o l a t e t h e e f f e c t s
of monetary
policy
regime
variables
upon g r o w t h
certain
n o t i c e a b l e changes have t a k e n p l a c e :
*
The d a t a a r e c o n s i s t e n t w i t h t h e h y p o t h e s i s t h a t growth- i n
C o t e d ' l v o i r e up t o 1980 compared f a v o u r a b l y w i t h o t h e r
developing country groupings over s u b s t a n t i a l periods of
t i m e . I v o r i a n g r o w t h i n t h e 1967-73 and 1973-80 p e r i o d s was
c l e a r l y h i g h e r t h a n t h e low-income A f r i c a ,
sub-Saharan
A f r i c a and a l l d e v e l o p i n g c o u n t r i e s w e i g h t e d a v e r a g e s .
F a v o u r a b l e c o m p a r i s o n s c a n a l s o be made a g a i n s t b o u y a n t o i l
e x p o r t e r s such as N i g e r i a .
C o m p a r i s o n o f C o t e d ' l v o i r e and S e n e g a l , t h e two l a r g e s t
e c o n o m i e s i n t h e UMOA, d i s p e l s t h e n o t i o n t h a t t h e r e i s
n e c e s s a r i l y a p r o c e s s o f convergent growth r a t e s w i t h i n the
monetary u n i o n .
From 1 9 8 0 , C o t e d ' I v o i r e ' s
growth performance
declined
m a r k e d l y , and more r a p i d l y t h a n i n l o w income a f r i c a , s u b Saharan A f r i c a o r the d e v e l o p i n g c o u n t r y average. I v o r i a n
performance i s c e r t a i n l y not markedly b e t t e r than those o f
t h e d i s p l a y e d c o u n t r y g r o u p i n g s , a s had p r e v i o u s l y b e e n t h e
case.
Sable 18: Cote d ' l v o i r e and Country Groupings GDP Growth
GDP
Growth p a
Country/Group
1967-73
1973-80
Cote d ' l v o i r e
8.5a
7.0
1.2
-3.9
-0.3
2.1
3.2
6.2
Nigeria
6.9
9.6
-3.2
-3.6
Low
3.2
1.2
1.4
2.9
5.6
3.3
0.4
-1.3
6.5
5.1
3.1
4.4
Senegal
(UMOA)
Income A f r i c a
Sub-Saharan
Africa
A l l developing
economies
1980-86
1987
N o t e s : a 1965-73.
b Group f i g u r e s a r e GDP w e i g h t e d a v e r a g e s .
c P e r i o d Growth r a t e s computed b y l e a s t s q u a r e s method.
S o u r c e s : W o r l d Bank, W o r l d T a b l e s (1989) a n d W o r l d Bank, W o r l d
Development R e p o r t ( v a r i o u s ) .
Inflation
I n r e s p e c t o f C o t e d ' l v o i r e t h e W o r l d Bank ( 1 9 8 8 : p l 4 )
the p r e v a i l i n g o p i n i o n :
summarise
" UMOA membership
seems t o have s e r v e d C o t e d ' l v o i r e w e l l .
As a r e s u l t o f m o n e t a r y d i s c i p l i n e , t h e I v o r i a n economy d i d n o t
s u f f e r f r o m t h e m a j o r u p h e a v a l s and h y p e r - i n f l a t i o n o b s e r v e d i n
other A f r i c a n countries
a s w e l l a s i n some L a t i n A m e r i c a n
c o u n t r i e s whose economies r e s e m b l e t h a t o f C o t e d ' I v o i r e i n many
respects."
I n f l a t i o n h a s i n d e e d been m o d e r a t e , o n l y r i s i n g once above 20 p e r
cent s i n c e independence, and i n s i n g l e d i g i t s s i n c e 1981.
A l t h o u g h membership o f a m o n e t a r y u n i o n i s l i k e l y t o b e an
important f a c t o r i n maintaining low i n f l a t i o n r a t e s , i t i s a
s e p a r a t e i s s u e whether t h i s n e c e s s a r i l y c o n f e r s
considerable
b e n e f i t s . We c o n s i d e r
these issues
i n turn, arguing
that
i n f l a t i o n i s l i k e l y t o be l o w e r t h a n o t h e r w i s e w o u l d b e t h e c a s e ,
b u t t h a t n o m i n a l exchange r a t e r i g i d i t y c a n r e d u c e t h e b e n e f i t s
of low i n f l a t i o n .
The b u l k o f t h i s w o r k i n g p a p e r h a s been c o n c e r n e d w i t h t h e
w o r k i n g o f t h e r u l e s o f t h e UMOA. The most i m p o r t a n t r u l e s a r e :
t h e s i z e o f t h e concours
globaux
(refinancing), the level of
c r e d i t t o t h e t r e a s u r y and m a i n t a i n a n c e o f a t a r g e t l e v e l o f
f o r e i g n r e s e r v e c o v e r a g e a t t h e l o c a l agency o f t h e BCEAO.
D e s p i t e some s h o r t c o m i n g s , t h e b a s i c t h r u s t o f BCEAO m o n e t a r y
p o l i c y i s c o u n t e r - i n f l a t i o n a r y , a n d t h e r u l e s o f t h e BCEAO a r e
d e s i g n e d w i t h t h i s o b j e c t i v e i n mind. I t i s c l e a r t h a t t h e s e
r u l e s have n o t a l w a y s f u n c t i o n e d
i d e a l l y . F o r example, t h e
announcement d u r i n g 1989 o f t h e abandonment o f s e c t o r a l c r e d i t
a l l o c a t i o n i s o f f i c i a l recognition that p o l i c y instruments can
be i n e f f e c t i v e .
I n t h e l e x i c o n o f t h e " r u l e s v e r s u s d i s c r e t i o n " l i t e r a t u r e on t h e
t h e o r y o f e c o n o m i c p o l i c y [ s e e , f o r e x a m p l e , K y d l a n d and P r e s c o t t
(1976) and B a r r o and Gordon ( 1 9 8 3 ) ] , t h e a n t i - i n f l a t i o n a r y p o l i c y
f o l l o w e d by t h e BCEAO h a s been b o t h r u l e - b a s e d a n d a c r e d i b l e
m o n e t a r y policy'*'.
The r u l e f o l l o w e d i s t h a t money s u p p l y s h o u l d be e x p a n d e d w i t h
reference t o t h e l e v e l o f f o r e i g n reserve coverage (see s e c t i o n
3 ) . T h e r e a r e two r e a s o n s why t h i s i s a b r o a d l y c r e d i b l e n o n i n f l a t i o n a r y p o l i c y , d e s p i t e the obvious d i f f i c u l t i e s experienced
i n t h e a t t a i n m e n t o f monetary o b j e c t i v e s :
*
The BCEAO agency h a s no p a r t i c u l a r i n c e n t i v e o r s t a t u t o r y
authority
during
t h e course o f t h e year t o deviate
i n t e n t i o n a l l y from i t s p o l i c y .
*
Government c a n n o t r e s o r t t o r o l l i n g t h e p r i n t i n g p r e s s e s
to a u t o m a t i c a l l y monetise f i s c a l d e f i c i t s .
T h r e e f a c e t s o f t h e UMOA have been i m p o r t a n t i n s u s t a i n i n g t h i s
c r e d i b i l i t y . F i r s t l y , t h e s u p r a n a t i o n a l a u t h o r i t y o f t h e UMOA,
where i m p o r t a n t d e c i s i o n s
a r e made by s i m p l e m a j o r i t y o r
u n a n i m i t y o f o p i n i o n i n member s t a t e s . S e c o n d l y , t h e l e g a l r i g h t
o f r e f u s a l o f c r e d i t t o government. T h i r d l y , t h e f i x e d e x c h a n g e
r a t e t o t h e French Franc. A l l these features a r e important i n
A c r e d i b l e m o n e t a r y p o l i c y i s d e f i n e d a s one i n w h i c h
t h e m o n e t a r y a u t h o r i t i e s a r e p e r c e i v e d n o t t o have a n
i n c e n t i v e t o d e v i a t e f r o m announced p o l i c y o b j e c t i v e s ( i e t o
make i n f l a t i o n s u r p r i s e s , r e a l wage f a l l s and employment
increases).
p r e v e n t i n g t h e emergence o f i n f l a t i o n a r y p r e s s u r e s . By way o f
example, S a r g e n t (1981) i d e n t i f i e s t h e same t h r e e f a c t o r s o f : an
i n d e p e n d e n t c e n t r a l bank, t h e r i g h t o f r e f u s a l o f c r e d i t t o
government and a g o l d s t a n d a r d o r f i x e d e x c h a n g e r a t e , a s b e i n g
i n s t r u m e n t a l i n stopping f o u r major h y p e r i n f l a t i o n s i n other
countries.
Despite
l o w i n f l a t i o n , p a r t i c u l a r l y d u r i n g t h e 1980s, C o t e
d ' l v o i r e has e x p e r i e n c e d s u b s t a n t i a l v a r i a t i o n o f i t s r e a l
exchange r a t e ( F i g u r e 8 ) , n o t i c e a b l y a sharp a p p r e c i a t i o n s i n c e
1985. A F r e n c h M i n i s t r y o f C o o p e r a t i o n r e p o r t ( T h i l l , 1 9 8 9 ) a r g u e s
t h a t o v e r v a l u a t i o n o f t h e CFA r e l a t i v e t o o t h e r n e i g h b o u r i n g
currencies,
particularly
those
of N i g e r i a
and Ghana, i s
u n d e r m i n i n g CFA c o u n t r y e c o n o m i e s . T h i s o c c u r s t h r o u g h i l l e g a l
c r o s s - b o r d e r t r a d e i n t o CFA c o u n t r i e s , and p r i c e u n d e r c u t t i n g
on w o r l d m a r k e t s . As an i n d i c a t i o n o f how f a r t h e e x c h a n g e r a t e
had moved f r o m p u r c h a s i n g power p a r i t y by 1988, f a r m l a b o u r e r s
wages p a i d i n C o t e d ' l v o i r e a r e more t h a n t h r e e t i m e s g r e a t e r
t h a n t h e G h a n a i a n e q u i v a l e n t i n d o l l a r terms'''^. S i m i l a r l y , U n i t e d
Nations
i n t e r n a t i o n a l comparisons o f l i v i n g
costs
f o r UN
o f f i c i a l s i n US d o l l a r s " ' show t h e c o s t s i n A b i d j a n ,
Cote
d ' l v o i r e t o be h i g h e r t h a n i n P a r i s , and more t h a n t w i c e t h e
l e v e l i n A c c r a , and L a g o s .
The
two main r e a s o n s f o r t h e more r e c e n t
exchange
rate
a p p r e c i a t i o n a r e a p p r e c i a t i o n o f t h e pegged c u r r e n c y , t h e F r e n c h
F r a n c a g a i n s t t h e US d o l l a r , and a f a l l i n i n t e r n a t i o n a l c u r r e n c y
p r i c e s o f t h e m a j o r commodity e x p o r t s , c o c o a and c o f f e e , w h i c h
has n o t been r e f l e c t e d i n t h e d o m e s t i c p r i c e l e v e l . Because
c u r r e n c y a p p r e c i a t i o n has o c c u r r e d d e s p i t e low i n f l a t i o n and
fairly
effective
credit
restraint,
i t is
relatively
s t r a i g h t f o r w a r d t o conclude t h a t monetary p o l i c y i s u n l i k e l y t o
be a c o m p l e t e s u b s t i t u t e f o r exchange r a t e f l e x i b i l i t y .
The r e a s o n t h a t UMOA does n o t r e q u i r e e x c h a n g e r a t e f l e x i b i l i t y ,
ie
independent
a l t e r a t i o n of rates
against
major
world
c u r r e n c i e s , i s t h a t t h e r e s e r v e s u p p o r t g i v e n by t h e compte
d'operations,
w h i c h , by m a i n t a i n i n g c o n v e r t i b i l i t y o b v i a t e s t h e
need f o r e x c h a n g e c o n t r o l o r a l t e r a t i o n o f t h e e x c h a n g e r a t e . The
need f o r exchange r a t e f l e x i b i l i t y w i l l t h e r e f o r e become b o t h
o b v i o u s and a p p a r e n t a t t h e t i m e t h a t t h e compte
d'operations
f a i l s t o d e l i v e r c o n v e r t i b i l i t y , notwithstanding the d i f f i c u l t i e s
m e n t i o n e d p r e v i o u s l y . P r i o r t o t h i s , t h e CFA c o u l d move away f r o m
a f i x e d o f f i c i a l r a t e w i t h t h e Franc ( i e a p a r a l l e l market r a t e
could
emerge),
i f difficulties
are
experienced
with
convertibility.
See
The Economist,6
August 1988:pl5.
T h e s e a r e g i v e n i n t h e March and September i s s u e s o f
t h e UN M o n t h l y B u l l e t i n o f S t a t i s t i c s .
Pooling
Reserves
One o f t h e m a j o r b e n e f i t s o f t h e u n i o n , a c c e s s t o p o o l e d
r e s e r v e s , h a s been e l i m i n a t e d i n t h e l a t e 1980s.
Reserve
requirements
f o r a p a r t i c u l a r country f o r coverage
of a
p a r t i c u l a r l e v e l o f imports are lowered as long as t h e c o v a r i a n c e
i n (pooled) r e s e r v e s o f d i f f e r e n t c o u n t r i e s i s not z e r o . That i s ,
i f a l l c o u n t r i e s ' r e s e r v e s move i n s t e p , t h e r e i s no g a i n f r o m
p o o l i n g . W o r l d - w i d e e c o n o m i c s t a g n a t i o n h a s l e a d most o f t h e
UMOA t o draw upon p o o l e d r e s e r v e s s i m u l t a n e o u s l y , e x h a u s t i n g them
and
furthermore
overdrawing
significantly
a t t h e compte
d ' o p e r a t i o n s . D u r i n g t h e 1980s C o t e d ' l v o i r e h a s been by f a r t h e
most s u b s t a n t i a l b o r r o w e r . W i t h o u t a c r e d i b l e r e s t r i c t i v e p o l i c y
t o reverse reserve l o s s , t h e French Treasury i s understandably
c o n c e r n e d a t t h e c o n t i n u e d draw down o f t h e compte
d'operations.
W h i l s t o f f i c i a l l y o v e r d r a f t borrowing pays i n t e r e s t , t h e r e s t i l l
remain prudent l i m i t s t o access. T h i s i s p a r t i c u l a r l y t h e case
when C o t e d ' l v o i r e c o m m e r c i a l d e b t t r a d e s on t h e s e c o n d a r y m a r k e t
a t a r o u n d 10 p e r c e n t o f f a c e v a l u e .
Trade
and I n v e s t m e n t
The v a l u a t i o n o f t h e t r a d e and i n v e s t m e n t b e n e f i t s o f m o n e t a r y
u n i o n s [ s e e M u n d e l l ( 1 9 6 1 ) , Kenen (1969)] need n o t n e c e s s a r i l y
be p o s i t i v e o r c o n s t a n t o v e r t i m e . D u r i n g t h e s t a g n a t i o n o f t h e
1980s i n C o t e d ' l v o i r e , t h e b e n e f i t s a r e l e s s e v i d e n t . I t i s
p o s s i b l e t h a t monetary u n i o n p r o v i d e s i n c e n t i v e s which l o w e r
f o r e i g n investment and e n t r e n c h i n e f f i c i e n t t r a d i n g p a t t e r n s .
O b j e c t i v e s such as a t t r a c t i n g f o r e i g n c a p i t a l a r e f u n d a m e n t a l l y
concerned
with
real
factors
such
as labour
relations,
productivity
and g r o w t h
prospects
and c u r r e n t
business
c o n f i d e n c e . The monetary r e g i m e c a n f a c i l i t a t e s u c h f l o w s b u t n o t
d e l i v e r . F o r example i n C o t e d ' l v o i r e , p r i v a t e c a p i t a l f l o w s h a v e
c e r t a i n l y been n e g a t i v e s i n c e 1985 w i t h o u t any marked change i n
F r a n c Zone a r r a n g e m e n t s . W h i l s t t h i s i s n o t c o n c l u s i v e e v i d e n c e ,
a f i x e d e x c h a n g e r a t e and r e l a t i v e l y s t a b l e m o n e t a r y p o l i c y do
n o t a u t o m a t i c a l l y i m p l y n e t i n w a r d f o r e i g n i n v e s t m e n t . The l a c k
o f e x c h a n g e r e s t r i c t i o n s h a s been seen a s a c o n s i d e r a b l e
i n c e n t i v e t o a t t r a c t i n g f o r e i g n i n v e s t m e n t , b u t a t t h e same t i m e
as b u s i n e s s c o n f i d e n c e slumps i n C o t e d ' l v o i r e , t h e l a c k o f
e x c h a n g e r e s t r i c t i o n s c a n work i n t h e o p p o s i t e d i r e c t i o n , n o t i n
the host country's favour.
The i n c r e a s e o f i n t r a - u n i o n t r a d e h a s l o n g been r e g a r d e d a s a
p r o b a b l e d e v e l o p m e n t and b e n e f i t from t h e UMOA, d e s p i t e t h e f a c t
t h a t monetary u n i o n i s n e i t h e r n e c e s s a r y n o r s u f f i c i e n t f o r
e c o n o m i c i n t e g r a t i o n . O u a t t a r a a r g u e s (1987:p6) :
" The e x i s t e n c e o f a common c u r r e n c y and t h e c o n s e q u e n t a b s e n c e
o f any e x c h a n g e r i s k i n t r a n s a c t i o n s w i t h i n t h e u n i o n h a s
c e r t a i n l y f a c i l i t a t e d b o r d e r t r a d e among t h e member c o u n t r i e s ,
but i t i s a l s o u n l i k e l y t h a t t h e share o f border t r a d e w i t h i n t h e
Union has i n c r e a s e d r e l a t i v e t o border t r a d e w i t h non-union
countries."
T r a d e f l o w s ( T a b l e 19) show t h a t C o t e d ' l v o i r e t r a d e w i t h o t h e r
members o f t h e F r a n c Zone expanded s l o w l y between 1972 a n d 1986.
E x p o r t s t o o t h e r UMOA c o u n t r i e s i n c r e a s e d f r o m 5.5 p e r c e n t t o
8.4 p e r c e n t o f t o t a l e x p o r t s b u t l a g g e d b e h i n d t h e e x p a n s i o n o f
exports t o other A f r i c a n c o u n t r i e s . Conversely, t h e share o f
e x p o r t s t o t h e e n t i r e F r a n c Zone ( F r a n c e , t h e UMOA and t h e
C e n t r a l A f r i c a n M o n e t a r y U n i o n ) h a s f a l l e n s i n c e 1972.
I m p o r t s f r o m UMOA have r i s e n more s u b s t a n t i a l l y f r o m a 2.2 p e r
c e n t s h a r e i n 1972 t o 7.3 p e r c e n t i n 1986. A l s o t h e s o u r c i n g o f
i m p o r t s f r o m t h e F r a n c Zone h a s d e c l i n e d l e s s r a p i d l y t h a n
e x p o r t s t o t h e Zone.
Trade w i t h France has d e c l i n e d s u b s t a n t i a l l y , t h e share o f
e x p o r t s t o F r a n c e h a s h a l v e d w h i l s t o n l y 31 p e r c e n t o f i m p o r t s
as a g a i n s t 47 p e r c e n t i n 1972 a r e s o u r c e d f r o m F r a n c e . However
t r a d e t o c o u n t r i e s whose e x c h a n g e r a t e s a r e pegged t o t h e F r a n c
o r move w i t h i n c l o s e m a r g i n s t o i t ( i n c l u d i n g e x c h a n g e r a t e
mechanism (ERM) c o u n t r i e s f r o m 1979) h a s i n c r e a s e d s i n c e 1981.
A l t h o u g h t h e r e i s a s l o w l y r i s i n g t r e n d w i t h i n UMOA, t h e r a p i d i t y
o f t h e d e c l i n e o f t r a d e w i t h F r a n c e , w h i c h commenced w e l l b e f o r e
t h e f o r m a t i o n o f t h e ERM mechanism, makes i t d i f f i c u l t t o come
t o f i r m c o n c l u s i o n s on w h e t h e r UMOA membership i s s u f f i c i e n t t o
s t i m u l a t e i n t r a - U n i o n t r a d e . The W o r l d Bank (1989c) a r g u e t h a t
convertibility
i s n o t a s u f f i c i e n t c a t a l y s t f o r promoting
r e g i o n a l t r a d e , c i t i n g the poor performance i n the neighbouring
customs u n i o n a s s o c i a t e d w i t h c o u n t r i e s i n t h e c e n t r a l A f r i c a
Monetary Union. Other r e l e v a n t f a c t o r s would i n c l u d e f a c t o r
m o b i l i t y a n d e x c h a n g e r a t e f l e x i b i l i t y . We d i s c u s s t h e s e i s s u e s
in turn.
Factor
mobility
F o l l o w i n g M u n d e l l ( 1 9 6 1 ) , an i m p o r t a n t i s s u e i n d e f i n i n g w h e t h e r
a c o u n t r y i s i n an optimum c u r r e n c y a r e a , i s t h a t f a c t o r s o f
p r o d u c t i o n s h o u l d be mobile w i t h i n t h e area b u t immobile
i n t e r n a t i o n a l l y . T h i s may a l l o w more r a p i d n o n - i n f l a t i o n a r y
g r o w t h by e a s i n g f a c t o r s h o r t a g e s .
C o t e d ' l v o i r e i s an i m p o r t a n t
r e g i o n a l l a b o u r m a r k e t and
approximately 2 5 p e r cent o f t h e p o p u l a t i o n a r e immigrants,
l a r g e l y f r o m B u r k i n a F a s o , Ghan and M a l i . T h e r e a r e a l s o F r e n c h
s k i l l e d w o r k e r s and L e b a n e s e t r a d e r s . S i g n i f i c a n t amounts o f c a s h
f l o w a s r e m i t t a n c e s t o o t h e r UMOA and non-UMOA c o u n t r i e s , a s c a n
be d e t e r m i n e d f r o m i n t e r - a g e n c y movements o f b a n k n o t e s w i t h i n t h e
UMOA. Whether i t i s p a r t o f a n optimum c u r r e n c y a r e a however i s
more d i f f i c u l t t o a s c e r t a i n a s t h e West A f r i c a n r e g i o n h a s a
t r a d i t i o n o f l a r g e s c a l e movement o f p e o p l e . A s UMOA i s n o t a
u n i f i e d g e o g r a p h i c b l o c k , a n d l a b o u r movement t a k e s p l a c e w i t h
non-UMOA c o u n t r i e s s u c h
a s Ghana,
i t appears
that the
g e o g r a p h i c a l e x t e n t o f UMOA i s d e t e r m i n e d ,
n o t by f a c t o r
m o b i l i t y , b u t common h i s t o r i c a l l i n k s . The e x t e n t o f m o n e t a r y
t r a n s f e r s between UMOA s t a t e s f o r t r a d e and w o r k e r s ' r e m i t t a n c e s
(the f a c t o r m o b i l i t y argument f o r u n i o n ) a l s o s u g g e s t s t h a t t h e r e
Table
19: Cote d'lvoire
- Trade Shares
Exports
1972
1976
1981
1986
EEC
o f w h i c h FRANCE
63.4
29.1
61.3
25.4
54 . 7
18.6
59.3
14.2
AFRICA
o f w h i c h UMOA
11.2
5.6
11.9
5.0
17.2
7.3
15.6
8.4
US
13.9
10.5
11.5
10.5
OTHER
11.4
16.3
16. 6
14.6
TOTAL
100.0
100. 0
100.0
100.0
Imports
1972
EEC
o f w h i c h FRANCE
73.2
47.1
61.3
38.4
59. 1
31.1
54 . 7
31.0
AFRICA
o f w h i c h UMOA
8.8
2.2
11.9
5.0
7.8
1.6
17.2
7.3
US
6.1
10.5
7.4
11.5
OTHER
11.9
16. 3
25.7
16.6
TOTAL
100.0
100.0
100.0
100.0
Memorandum:
Exports
Imports
1976
1981
19S
F r a n c Zone and ERM (*)
34.7
49.3
N o t e : (*) EMS c o u n t r i e s from 1981
S o u r c e : BCEAO,Notes e t S t a t i s t a q u e s .
30.5
43.4
56.4
47 . 0
59.5
57 . 3
are c o n s i d e r a b l e b e n e f i t s from a r e g i o n a l c u r r e n c y , b u t
n e c e s s a r i l y a t t h e c u r r e n t pegged r a t e t o t h e F r e n c h F r a n c .
not
Exchanqe R a t e A r r a n g e m e n t s
I n t h e l o n g r u n a p o l i t i c a l d e c i s i o n may be made t o i n c r e a s e t h e
c o m p e t i t i v e n e s s o f t h e CFA F r a n c , and s o l i m i t t h e d r a i n on t h e
compte
d'operations,
by i n c r e a s i n g t h e f l e x i b i l i t y
of the
e x c h a n g e r a t e . T h i s w o u l d r e q u i r e r e n e g o t i a t i o n o f t h e UMOA
s t a t u t e s a n d unanimous agreement f r o m UMOA s t a t e s a n d F r a n c e .
Several options area v a i l a b l e :
*
A new d e v a l u e d f i x e d r a t e a g a i n s t t h e F r e n c h F r a n c , e i t h e r
f o r t h e UMOA a s a w h o l e o r f o r i n d i v i d u a l c o u n t r i e s a t
d i f f e r e n t r a t e s . D i f f e r i n g exchange r a t e s w o u l d i n c r e a s e
the
incentives
f o r monetary e x p a n s i o n
i n individual
c o u n t r i e s t o maximise t h e i r use o f pooled r e s e r v e . T h i s i s
l i k e l y t o remove t h e p o t e n t i a l f o r t h e b e n e f i t s o f p o o l e d
r e s e r v e s , a s t h e c e n t r a l b a n k i n g agency w o u l d h a v e l e s s
c o n t r o l on i n d i v i d u a l c o u n t r y monetary p o l i c y a n d a f r e e
r i d e r p r o b l e m c o u l d emerge. T h e r e i s now an e m e r g i n g
c o n c e n s u s on t h e i m p o r t a n c e o f an a p p r o p r i a t e e x c h a n g e r a t e
s t r u c t u r e . The W o r l d Bank (1989c: p l 6 0 ) o b l i q u e l y r e f e r s t o
this
by s t a t i n g " C u r r e n c y c o n v e r t i b i l i t y
and c a p i t l a
m o b i l i t y are important f o r s u s t a i n a b l e increases i n r e g i o n a l
trade but are not s u f f i c i e n t . "
*
An a l t e r n a t i v e w o u l d be t o i n t r o d u c e a new t y p e o f p e g . As
t h e F r e n c h F r a n c i s a l r e a d y a member o f t h e E u r o p e a n
Exchange R a t e Mechanism, where r e a l i g n m e n t s t o o t h e r member
c u r r e n c i e s a r e i n c r e a s i n g l y i n f r e g u e n t , t h e CFA F r a n c i s
a l r e a d y n e a r l y de facto
pegged t o t h e ECU. A s w i t c h t o an
ECU
peg c o u l d
be c a r r i e d o u t s i m u l t a n e o u s l y
with a
d e v a l u a t i o n . The p r o b l e m s w i t h an ECU p e g i n t h e l o n g e r r u n
w i l l be s i m i l a r t o t h e p r e s e n t F r a n c peg. M o n e t a r y r e s t r a i n t
w i l l be e s s e n t i a l t o a v o i d i n f l a t i o n and hence o v e r v a l u a t i o n
of
t h e exchange r a t e . A s e c o n d a r y p r o b l e m w o u l d be
d i s t a n c i n g t h e agreement o f n o n - F r a n c e EMS members t o
s u p p o r t ECU-CRA c o n v e r t a b i l i t y .
I f t h e E u r o p e a n M o n e t a r y U n i o n i s a c h i e v e d i n t h e 1990s, E u r o p e a n
i n f l a t i o n c o u l d f a l l even l o w e r , w h i c h w i l l r e q u i r e g r e a t e r CFA
m o n e t a r y d i s c i p l i n e . The p r e s e n t monetary i n s t r u m e n t s i n C o t e
d ' l v o i r e do n o t a p p e a r t o be a b l e t o a c h i e v e t h a t l e v e l o f
c o n t r o l , p a r t i c u l a r l y i n t h e face o f primary product p r i c e
f l u c t u a t i o n s . A l t e r n a t i v e pegs c o u l d t a k e a c c o u n t o f t r a d e
c o m p o s i t i o n and p r i c e s , o r c u r r e n c y c o m p o s i t i o n o f t r a d e . B o t h
m e a s u r e s w o u l d r e s u l t i n an i n c r e a s e d w e i g h t i n g f o r t h e US d o l l a r
and r e g u l a r exchange r a t e c h a n g e s .
*
G i v e n t h e r e l u c t a n c e o f many p a r t i e s t o move away f r o m a
French Franc peg, t h e p o s s i b i l i t y o f independent f l o a t i n g
f o r t h e CFA seems r e m o t e . T h e r e a r e a l s o no d e v e l o p i n g
c o u n t r y p r e c e d e n t s o f movement from a s i n g l e f i x e d r a t e t o
s u s t a i n e d f r e e f l o a t i n g . There
c h a n g e s t o a c r a w l i n g peg.
a r e however,
examples
of
7.
CONCLUSIONS
For
n e a r l y twenty
years
after
independence the
monetary
a r r a n g e m e n t s i n C o t e d ' l v o i r e f u n c t i o n e d w e l l , p e r m i t t i n g low
i n f l a t i o n and s t a b l e e c o n o m i c g r o w t h . M e m b e r s h i p o f t h e West
A f r i c a n M o n e t a r y U n i o n was an i m p o r t a n t f a c t o r i n a c h i e v i n g t h e s e
o b j e c t i v e s . C o n f i d e n c e i n t h e v a l u e o f t h e d o m e s t i c c u r r e n c y was
encouraged
by
the
fixed
exchange
rate
and
guaranteed
c o n v e r t i b i l i t y w i t h the French Franc.
S e v e r a l f a c t o r s c o m b i n e d t o g i v e an
impression of
fairly
e f f e c t i v e m o n e t a r y management. F i r s t l y , r a p i d e c o n o m i c g r o w t h
a l l o w e d a c o r r e s p o n d i n g i n c r e a s e i n money s u p p l y ,
without
c r e a t i n g e x c e s s demand f o r demand f o r goods and a c c o m p a n y i n g
i n f l a t i o n a r y i m p u l s e s . S e c o n d l y , c r e d i t t o g o v e r n m e n t from t h e
d o m e s t i c b a n k i n g s y s t e m was e f f e c t i v e l y l i m i t e d by UMOA s t a t u t e s ,
w h i c h e l i m i n a t e d a s i g n i f i c a n t s o u r c e o f money c r e a t i o n . T h i r d l y ,
f i n a n c e was r e a d i l y a v a i l a b l e i n f o r e i g n c u r r e n c y , i n p a r t due
t o t h e c o n v e r t i b i l i t y o f t h e CFA, w h i c h a l s o r e d u c e d t h e p r e s s u r e
on d o m e s t i c c r e d i t e x p a n s i o n .
By t h e l a t e 1970s, as e c o n o m i c g r o w t h s l o w e d , some o f t h e
s h o r t c o m i n g s o f m o n e t a r y p o l i c y i n s t r u m e n t s were more a p p a r e n t .
I n e f f e c t i v e use o f m o n e t a r y c o n t r o l i n s t r u m e n t s c o i n c i d e n t w i t h
r a p i d e x p o r t - b a s e d e c o n o m i c g r o w t h had p e r m i t t e d a c c e l e r a t e d
m o n e t a r y g r o w t h , i n c r e a s e d p r i c e i n s t a b i l i t y , an o v e r - v a l u e d r e a l
e f f e c t i v e e x c h a n g e r a t e and t h e emergence o f l a r g e f i n a n c i a l
i m b a l a n c e s i n t h e b a l a n c e o f payments and government o p e r a t i o n s .
Although the r a p i d monetary expansion
i n t h e 1970s had
an
e x t e r n a l o r i g i n , o w i n g t o t h e dependence o f t h e economy upon
e x p o r t e d a g r i c u l t u r a l p r o d u c t s ( c o c o a , c o f f e e ) whose p r i c e s
f l u c t u a t e d w i d e l y , i t i s c l e a r t h a t the monetary i n s t r u m e n t s o f
t h e C e n t r a l Bank c o u l d n o t have been as e f f e c t i v e i n c u r t a i l i n g
demand as t h e y were t o be i n t h e 1980s. T h i s was b e c a u s e t h e most
important c o n t r o l instrument, the r e f i n a n c i n g o p e r a t i o n of the
C e n t r a l Bank, i s n o t v e r y e f f e c t i v e a t t i m e s o f r a p i d l i q u i d i t y
growth because of c o n c u r r e n t s h i f t s i n the p r o p o r t i o n s of
f i n a n c i a l a s s e t s h e l d t o w a r d s l e s s l i q u i d a s s e t s . I n d i v i d u a l s and
f i r m s moved from h o l d i n g c a s h t o w a r d s bank d e p o s i t s , w h i c h
p e r m i t t e d c o m m e r c i a l b a n k s t o expand c r e d i t r a p i d l y and r e d u c e d
t h e i r r e l i a n c e upon C e n t r a l Bank f i n a n c i n g . C o m m e r c i a l b a n k s a l s o
have a c c e s s t o b o r r o w i n g from f o r e i g n p a r e n t b a n k s , w h i c h i s
beyond t h e c o n t r o l o f t h e C e n t r a l Bank i n t h e a b s e n c e o f e x c h a n g e
controls.
The renewed a p p l i c a t i o n o f r e s t r i c t i v e m o n e t a r y p o l i c y , d u r i n g
a p r o l o n g e d p e r i o d o f a d j u s t m e n t i n t h e 1980s, has c o n t r i b u t e d
t o p r i c e s t a b i l i t y and a r e d u c t i o n i n t h e f i s c a l and t r a d e
d e f i c i t s . C r e d i t p o l i c y has been more r e s t r i c t i v e and c l o s e r t o
C e n t r a l Bank o b j e c t i v e s . However, t h e p r o v i s i o n o f s u b s i d i s e d
c r e d i t t o f i n a n c e e x p o r t c r o p s , e f f e c t i v e l y w i t h o u t l i m i t , has
a l w a y s meant t h a t c r e d i t p o l i c y has n o t been as r e s t r i c t i v e as
intended.
There i s l i t t l e evidence t o separate the e f f e c t s of g e n e r a l
economic s t a g n a t i o n from t h o s e o f r e s t r i c t i v e c r e d i t p o l i c i e s .
Although
t h e r e have been s u b s t a n t i a l movements i n
credit
allocation
towards
financing
agricultural
exports
and
s t o c k p i l i n g , and away f r o m medium and l o n g t e r m c r e d i t t o s h o r t
term r e f i n a n c i n g , t h e r e i s l i t t l e observed c o r r e l a t i o n w i t h
o u t p u t movements. The a g r i c u l t u r a l s e c t o r i n p a r t i c u l a r a p p e a r s
t o be more i n s u l a t e d t h a n o t h e r s e c t o r s f r o m t h e g e n e r a l s t a n c e
o f money and c r e d i t p o l i c i e s . T h i s o b s e r v a t i o n i s somewhat
c o n t r a d i c t o r y to the evidence presented t h a t i n f o r m a l r u r a l
f i n a n c e p e r f o r m s e s s e n t i a l l y an i n t e r m e d i a r y r o l e f o r f o r m a l
i n s t i t u t i o n s , u n l e s s r u r a l c r e d i t i s used f o r consumption
p u r p o s e s o n l y . The i m p l i c a t i o n i s t h a t much o f t h e r u r a l s e c t o r
i s s e l f - f i n a n c e d , and n o t r e l i a n t upon f o r m a l o r i n f o r m a l l e n d e r s
to f i n a n c e p r o d u c t i v e a c t i v i t i e s .
A c c e s s t o i n t e r n a t i o n a l f i n a n c i a l m a r k e t s i s u n l i k e l y t o open up
for t h e f o r e s e e a b l e f u t u r e f o l l o w i n g a debt moratorium announced
i n 1985 and more r e c e n t payment d e l a y s , t h u s t h e e m p h a s i s o f
m o n e t a r y p o l i c y i n t h e 1990s i s l i k e l y t o be upon i m p r o v i n g
d o m e s t i c s a v i n g s m o b i l i z a t i o n . T h i s i s p a r t i c u l a r l y t h e c a s e as
t h e b a n k i n g s y s t e m has n o t been i n s t r u m e n t a l i n i n c r e a s i n g
d o m e s t i c s a v i n g s m o b i l i s a t i o n . D o m e s t i c and n a t i o n a l s a v i n g s
r a t e s h a v e f a l l e n and t h e r e i s e v i d e n c e o f c o n t i n u e d o u t w a r d
f l o w s o f p r i v a t e s a v i n g s . I n p a r t , t h i s i s due t o t h e l a c k o f
i n c e n t i v e s t o m o b i l i s e d e p o s i t s which r e s u l t from generous
c e n t r a l bank p r o v i s i o n o f r e f i n a n c i n g f a c i l i t i e s w i t h g u a r a n t e e d
p r o f i t margins. Also there i s l i t t l e evidence t h a t commercial
banks have made a s i g n i f i c a n t e f f o r t t o m o b i l i s e r u r a l s a v i n g s
or provide
savings
instruments
to small savers.
Improving
i n c e n t i v e s t o m o b i l i s e d e p o s i t s , by f o r example t y i n g r e f i n a n c i n g
t o d e p o s i t m o b i l i z a t i o n , w o u l d i m p r o v e t h e l i k e l i h o o d o f more
d i f f e r e n t i a t e d i n s t r u m e n t s and b e t t e r s e r v i c e p r o v i s i o n .
T h e r e i s l i t t l e e v i d e n c e t o s u g g e s t t h a t m o n e t a r y and f i n a n c i a l
p o l i c y has s t i m u l a t e d f i n a n c i a l d e v e l o p m e n t , b e c a u s e t h e p r i m e
c o n c e r n has been t o m a i n t a i n s t a b i l i t y . I n c r e a s e s i n f i n a n c i a l
d e e p e n i n g have been c l o s e l y a s s o c i a t e d w i t h income g r o w t h and n o t
f i n a n c i a l reform. I f the p r i v a t e f i n a n c i a l s e c t o r i s t o o f f e r a
wide
range
of
financial
services
and
instruments,
some
d i v e r s i f i c a t i o n from the p r e s e n t c o n c e n t r a t i o n o f
financial
a s s e t s i n t h e c o m m e r c i a l and c e n t r a l bank s e c t o r w o u l d
be
b e n e f i c i a l . W h i l s t t h e r e a r e a number o f e m e r g i n g bank and
non-bank i n s t i t u t i o n s , t h e i r d e v e l o p m e n t c o u l d be a c c e l e r a t e d by
l e g i s l a t i v e changes. F i n a n c i a l i n n o v a t i o n c o u l d occur at b o t h
ends o f t h e s p e c t r u m o f s o p h i s t i c a t i o n : T h e r e i s c o n s i d e r a b l e
scope f o r m o b i l i s i n g i n f o r m a l s a v i n g s i n t h e t r a d i t i o n a l s e c t o r .
The s i z e a b l e modern s e c t o r i n t h e I v o r i a n economy d o e s n o t have
access
t o sources
o f f i n a n c i n g / s a v i n g s u c h as s h o r t
term
government and c o m m e r c i a l p a p e r w h i l s t e q u i t y f i n a n c i n g c o u l d be
developed w i t h reforms of the c u r r e n t l y r e s t r i c t i v e s t o c k market.
In the l o n g e r term, the development of s e c u r i t y markets c o u l d
a l s o supplement the r e f i n a n c i n g instrument of monetary c o n t r o l .
S e v e r a l a s p e c t s o f C e n t r a l Bank i n t e r v e n t i o n i n c r e d i t m a r k e t s
appear
less
than
effective.
Refinancing
operations
have
l i m i t a t i o n s i n c o n t r o l l i n g b r o a d money a g g r e g a t e s , a s m e n t i o n e d
above,
and d i s c o u r a g e
saving.
The l i q u i d a t i o n
o f many
d e v e l o p m e n t - t y p e b a n k s d u r i n g t h e 1980s a l s o s u g g e s t s t h a t
refinancing
operations
may have a l l o w e d
political
lending
c o n s i d e r a t i o n s t o o v e r r i d e c o m m e r c i a l c o n c e r n s o f l o a n repayment.
S e c t o r a l c r e d i t a l l o c a t i o n p o l i c i e s , such as s e c t o r a l l e n d i n g
c o e f f i c i e n t s and p r i o r a u t h o r i s a t i o n have n o t w o r k e d . P r i o r i t y
s e c t o r s have l o w a n d f a l l i n g l e v e l s o f c r e d i t . The most o b v i o u s
reform
o f t h e c u r r e n t s y s t e m w o u l d be t o i n t r o d u c e more
f l e x i b i l i t y i n interest rate setting t o replace administrative
d e c i s i o n . T h i s c o u l d be a c h i e v e d by a l l o w i n g c o m m e r c i a l b a n k s t o
t r a d e d i r e c t l y w i t h e a c h o t h e r i n t h e i n t e r - b a n k money m a r k e t .
UMOA r u l e s however p r e v e n t i n c r e a s e d f l e x i b i l i t y f o r i n t e r e s t
r a t e s e t t i n g , u n l e s s t h e agreement o f p a r t n e r c o u n t r i e s i s
o b t a i n e d , s o t h e BCEAO c o u l d p l a y a c o o r d i n a t i n g f u n c t i o n a t an
international level.
The n e t b e n e f i t s o f UMOA membership a r e now no l o n g e r a s c l e a r
as t h e y were i n t h e 1960s o r 1970s. C o t e d ' l v o i r e i s c a u g h t i n
a low g r o w t h , t i g h t monetary p o l i c y e n v i r o n m e n t due t o an a d v e r s e
e x t e r n a l c i r c u m s t a n c e s , and t h e e v i d e n c e p o i n t s t o an o v e r v a l u e d
real
exchange r a t e which s t r e n g t h e n s
t h e argument f o r a
r e s t r i c t i v e monetary p o l i c y .
A b a n d o n i n g t h e f i x e d exchange r a t e peg w i l l n o t be an e a s y
d e c i s i o n t o t a k e , owing t o t h e h i s t o r i c a l a s s o c i a t i o n s o f
s t a b i l i t y c o n n e c t e d t o t h e a r r a n g e m e n t and t h e u n c e r t a i n t y w h i c h
change may c r e a t e . A l s o , a s w i t h a l l d e v a l u a t i o n s , t h e r e w i l l be
g a i n e r s and l o s e r s from a change i n t h e e x c h a n g e r a t e i n t h e
s h o r t t o medium t e r m . A l t h o u g h monetary p o l i c y c a n be r e a s o n a b l y
e f f e c t i v e i n a c h i e v i n g c r e d i t r e s t r i c t i o n t o reduce i n f l a t i o n ,
e x t e r n a l l y d e t e r m i n e d exchange r a t e changes o r i n t e r n a t i o n a l
p r i c e c h a n g e s c a n have a f a r g r e a t e r e c o n o m i c i m p a c t t h a n
d o m e s t i c monetary p o l i c y r e s p o n s e s c a n a c h i e v e . W i t h i n c r e a s e d
exchange r a t e f l e x i b i l i t y
Cote d ' l v o i r e c o u l d
respond t o
f u n d a m e n t a l exchange r a t e m i s a l i g n m e n t c r e a t e d b y d i f f e r e n t i a l
price
movements, a n d , t o a c e r t a i n e x t e n t
offset
these
developments.
Appendix : Estimating Money Demand
A simple p a r t i a l adjustment f u n c t i o n i s u t i l i s e d which minimises
t h e number o f v a r i a b l e s and t h e number o f t r a n s f o r m e d v a a r i a b l e s .
R e a l money demand i s g i v e n a s :
M/P, = f ( Y/P^, M/P^.,, r,) + u^
where l o n g r u n d e s i r e d money h o l d i n g s :
M/P^
and
=
a„ + a^ Y/P, + a j r^ + v,
w i t h a n a d j u s t m e n t mechanism
M/P^
= b M/P'' + (1-b) M/P,.,
R e t a i l P r i c e Index i s used as d e f l a t o r ,
demand + t i m e d e p o s i t s .
r - i n t e r e s t ( d i s c o u n t , TEN) r a t e .
Y = GDP , M = c a s h +
R e a l income (Y/P,) r e p r e s e n t s a s c a l e v a r i a b l e f o r t r a n s a c t i o n s
money demand w h i l s t t h e i n t e r e s t r a t e r e p r e s e n t s t h e o p p o r t u n i t y
c o s t o f h o l d i n g money. B e i n g a d m i n i s t r a t i v e l y s e t , t h e i n t e r e s t
r a t e i s u n l i k e l y t o be an a c c u r a t e r e f l e c t o r o f t h e r e t u r n on
n o n - f i n a n c i a l a s s e t s . However no a l t e r n a t i v e s e r i e s was a v a i l a b l e
f o r t h e r e a l r a t e o f r e t u r n , s o C e n t r a l Bank d i s c o u n t r a t e s were
utilised.
A s i m p l e o r d i n a r y l e a s t s q u a r e s r e g r e s s i o n r e l a t i n g money demand
t o c u r r e n t income and l a g g e d money v i a a p a r t i a l a d j u s t m e n t
mechanism ( n o t shown) p r o v i d e s a s h o r t r u n demand e l a s t i c i t y o f
1.15 and l o n g r u n demand e l a s t i c i t y o f 1.37 w i t h r e s p e c t t o
income. The c o e f f i c i e n t on income i s d i f f e r e n t from z e r o a t t h e
99 p e r c e n t c o n f i d e n c e l e v e l w h i l e t h e c o e f f i c i e n t on l a g g e d
money i s n o t s i g n i f i c a n t l y d i f f e r e n t from z e r o a t a n y m e a n i n g f u l
c o n f i d e n c e i n t e r v a l . The p r e s e n c e o f a l a g g e d d e p e n d e n t v a r i a b l e
i s l i k e l y t o i n d u c e s e r i a l c o r r e l a t i o n , w h i c h a p p e a r e d t o be
p r e s e n t f r o m a n a l y s i s o f t h e r e s i d u a l s and o v e r e s t i m a t e t h e
significance of coefficients'* .
T h i s e q u a t i o n s u g g e s t s a c o n s i d e r a b l e i n f l u e n c e upon money demand
o f an income s h o c k i n t h e i n i t i a l y e a r , w i t h m i n o r e f f e c t s i n
s u b s e q u e n t p e r i o d s . To t e s t t h e h y p o t h e s i s t h a t a h i g h income
e l a s t i c i t y r e f l e c t s t h e p r o c e s s o f m o n e t i s a t i o n and f i n a n c i a l
d e e p e n i n g u n d e r g o n e i n C o t e d ' l v o i r e a t i m e t r e n d v a r i a b l e was
added
(equation
1 ) . The t r e n d v a r i a b l e t u r n e d
o u t t o be
s i g n i f i c a n t l y ( a t 95 % c o n f i d e n c e ) n e g a t i v e . T h i s r e s u l t c o u l d
The p r e s e n c e o f s e r i a l c o r r e l a t i o n and a l a g g e d
dependent v a r i a b l e i s s u f f i c i e n t t o render t h e o r d i n a r y l e a s t
s q u a r e s e s t i m a t i o n p r o c e s s b i a s s e d and i n c o n s i s t e n t ( P i n d y c k
and R u b i n f e l d 1976 p l 4 7 ) .
be e x p l a i n e d b y t h e s h a r p f a l l , and t h e n s t a g n a t i o n , o f r e a l
money demand i n t h e 1980s. A p r e f e r a b l e p r o x y v a r i a b l e f o r
m o n e t i s a t i o n w o u l d be t h e number o f b a n k i n g o f f i c e s , w h i c h w o u l d
r e f l e c t t h e l i q u i d a t i o n s i n t h e b a n k i n g s e c t o r i n t h e 1980s and
t h e c o n c u r r e n t r a p i d g r o w t h o f b a n k i n g o f f i c e s and money demand
i n t h e two p r e v i o u s d e c a d e s .
I n c o r p o r a t i n g p r i c e e x p e c t a t i o n s as: P
= P,_, h a d no s i g n i f i c a n t
e f f e c t upon r e a l money demand p o s s i b l y s h o w i n g i t s l o n g t e r m
stability.
The c o e f f i c i e n t s on b o t h r e a l ' ^ and n o m i n a l i n t e r e s t r a t e s a r e
c l e a r l y s i g n i f i c a n t l y d i f f e r e n t f r o m z e r o ( a t 95 % c o n f i d e n c e )
i n s e v e r a l e s t i m a t i o n s ( e q u a t i o n s 2 and 3 ) , and more s o t h a n i n
e s t i m a t i o n s by A l l e c h i ( 1 9 8 7 ) . The c o e f f i c i e n t s a r e n e g a t i v e l y
signed, apparently r e f l e c t i n g t h e opportunity cost of other
a s s e t s . As t h e d i s c u s s i o n o f f i n a n c i a l m a r k e t s made c l e a r . C o t e
d ' l v o i r e i s c h a r a c t e r i s e d by few a l t e r n a t e f i n a n c i a l a s s e t s s o
i n t e r e s t r a t e s i n t h e b a n k i n g s e c t o r s h o u l d n o t be c o m p e t i n g w i t h
closely
substitutable assets
(which
could
make
deposits
i n s e n s i t i v e t o i n t e r e s t r a t e changes). Indeed i f i n t e r e s t r a t e s
are h e l d below t h e market c l e a r i n g r a t e , i n c r e a s e s i n t h e r a t e
s h o u l d have a p e r v e r s e e f f e c t and i n c r e a s e r e a l money h o l d i n g s .
OLS B r o a d Money Demand R e g r e s s i o n
1.
SEE
constant
-7.26
=
.05
mt-1
0.03
(.26)
yt
1.68
(9.39)
Equations
1962-1987
Nominal Discount
-.26
(5.11)
RSQUARE = .991
F STAT =
Rate
337 .2
DW=
1.29
DW=
0.90
2.
constant
-3.64
SEE
=
.065
mt-1
.10
(.80)
yt
Real Discount
1.23
-.60
(6.26)
(-2.41)
RSQUARE = .985
Rate
F STAT =
473.3
3.
constant
-4.67
SEE
=
.066
mt-1
Time T r e n d
yt
.19
1.32
(1.47)
(6.28)
RSQUARE = .985
-0.01
(-2.25)
F STAT =
459.6
DW=
.79
4.
mt-1
yt
Real Rate
Real
Income Growth
constant
- 1 . 82
.57
(3.10)
.60
(2.30)
-.28
(-1.19)
Real discount r a t e (l+r)/(l+p) -1.
0.86
(3.14)
SEE
=
.05
RSQUARE = .99
F STAT =
507.09
DW=
1.56
OLS Narrow Money R e g r e s s i o n s
constant
-4.33
SEE
=
6.
SEE
.054
constant
-1.59
=
.075
yt
1.39
(12.93)
Time T r e n d
-.01
(-2.46)
RSQUARE = .988
yt
.73
(3.29)
Real
Discount Rate
-.04
(-1.65)
F STAT =
593.1
DW=
1.03
m t-1
.343
(2.01)
RSQUARE = .971
F STAT =
374.0
DW=
.62
The i n t e r b a n k money m a r k e t r a t e c a n n o t be u t i l i s e d a s t h e s e r i e s
does n o t e x t e n d b e f o r e 1974, t h e n o m i n a l d i s c o u n t r a t e (TEN) i s
a d m i n i s t r a t i v e l y l i n k e d t o most l e n d i n g r a t e s and some d e p o s i t
r a t e s . I n v i e w o f t h e f a c t t h a t t h e d i s c o u n t r a t e o n l y changed
f i v e t i m e s b e f o r e 1986, and t h a t i t p r e d o m i n a n t l y s e t s l e n d i n g
r a t e s r a t h e r than deposit/savings r a t e s , t h e high s i g n i f i c a n c e
o f i n c r e a s e s i n d i s c o u n t r a t e s upon d e c r e a s e s i n t h e money s u p p l y
seems s p u r i o u s . I n t e r e s t r a t e s a r e a l s o s e t u n i f o r m l y a c r o s s t h e
UMOA s u c h t h a t i n t e r e s t r a t e c h a n g e s w i l l n o t a l w a y s d i r e c t l y
r e f l e c t d e v e l o p m e n t s i n t h e I v o r i a n economy.
I n s e r t i o n o f a t r e n d v a r i a b l e w i t h i n t e r e s t r a t e s i n each
e q u a t i o n h a d t h e e f f e c t o f r e m o v i n g s i g n i f i c a n c e from t h e r e a l
d i s c o u n t r a t e , b u t r e t a i n i n g 95 p e r c e n t s i g n i f i c a n c e f o r t h e
nominal
rate.
One
possible
explanation
i s that
changes
( i n c r e a s e s ) i n t h e d i s c o u n t r a t e , when t h e y o c c u r , a r e a t t i m e s
o f e x t r e m e l y s h o r t l i q u i d i t y and t h e r e f o r e
l o w r e a l money
balances, thus t h e a d m i n i s t r a t i v e r u l e b r i n g s t h e a s s o c i a t i o n
r a t h e r t h a n 'market f o r c e s ' .
D r o p p i n g t h e p a r t i a l a d j u s t m e n t mechanism had l i t t l e s u b s t a n t i a l
e f f e c t upon c o e f f i c i e n t e s t i m a t e s i n b r o a d money e s t i m a t i o n s
l e n d i n g w e i g h t t o t h e argument t h a t a d j u s t m e n t t o d e s i r e d money
h o l d i n g s i s a f a i r l y r a p i d p r o c e s s . E l a s t i c i t y o f money demand
t o income was 1.42 i n t h i s c a s e and s i g n i f i c a n t a t 99 p e r c e n t
c o n f i d e n c e . The D u r b i n - W a t s o n s t a t i s t i c s t i l l showed e v i d e n c e o f
serial
c o r r e l a t i o n . Plots of residuals f o r the d i f f e r e n t
r e g r e s s i o n s were r e m a r k a b l y s i m i l a r , s h o w i n g u n d e r p r e d i c t i o n
o f money demand between 1969 and 1978, f o l l o w e d by o v e r p r e d i c t i o n
up t o 1985.
Taking s e r i a l c o r r e l a t i o n as evidence of m i s p e c i f i c a t i o n , a r e a l
income g r o w t h v a r i a b l e was added ( e q u a t i o n 4) and a s u b s t a n t i a l
improvement i n e q u a t i o n p e r f o r m a n c e was f o u n d . B o t h r e a l income
g r o w t h and l a g g e d money were s i g n i f i c a n t a t t h e 99 p e r c e n t
c o n f i d n e c l e v e l , r e a l income a t t h e 95 p e r c e n t l e v e l , w h i l s t
r e a l i n t e r e s t l o s e s s i g n i f i c a n c e . The D u r b i n - W a t s o n s t a t i s t i c i s
i n the indeterminate
r e g i o n , a l s o d e m o n s t r a t e d by t h e more
d i s p e r s e d p l o t o f r e s i d u a l s . The s h o r t r u n income e l a s t i c i t y o f
demand i s 0.6 w h i l s t l o n g r u n e l a s t i c i t y i s 1.39, c l o s e t o t h a t
o f p r e v i o u s e s t i m a t i o n s . The r e a l g r o w t h v a r i a b l e s u g g e s t s t h a t
r e a l income s h o c k s have a s u b s t a n t i a l e f f e c t upon money demand,
n o t a d e q u a t e l y i n c o r p o r a t e d i n t h e p a r t i a l a d j u s t m e n t mechanism.
When s h o c k s a r e l a r g e , money h o l d i n g s a p p e a r t o a d j u s t v e r y
r a p i d l y . T h i s f e a t u r e may r e s u l t from t h e f i x e d r a t e r e g i m e
whereby t h e e f f e c t o f r e a l s h o c k s ( i f e x t e r n a l i n o r i g i n , o r i n
t r a d e d goods s e c t o r ) w i l l r a p i d l y have a m o n e t a r y e f f e c t v i a
changes i n r e s e r v e h o l d i n g s .
A l t h o u g h t h e F r e n c h bond r a t e a l s o h a d a s i g n i f i c a n t n e g a t i v e
e f f e c t upon money demand, f o r more p l a u s i b l e r e a s o n s o f c a p i t a l
f l i g h t , a s i g n i f i c a n t l i n k between F r e n c h - C o t e d ' l v o i r e i n t e r e s t
r a t e d i f f e r e n t i a l s and r e a l money demand c o u l d n o t be f o u n d on
a n n u a l d a t a . W o r l d Bank (1988) show a demand f u n c t i o n f o r M2 ( a s
above) on m o n t h l y d a t a a s f o l l o w s :
dM =
0.0401 - 0.03 dM-1 +.567 R d i f f - 1.954 Time
(3.16)
R^=.941
(3.92)
SEE= .0262
(1.93)
+ dummies.
(1-93)
DW= 1.81
dM = m o n t h l y l o g a r i t h m i c change M2
R d i f f = money m a r k e t r a t e s C o t e d ' l v o i r e - F r a n c e
Dummies = t o h a n d l e s e a s o n a l i t y o f money demand from
harvest
Here i n c r e a s e s
i n t h e money m a r k e t r a t e above t h e F r e n c h
e g u i v a l e n t a r e a s s o c i a t e d w i t h e x p a n d i n g money demand a s c a p i t a l
i s a t t r a c t e d , o r o u t g o i n g c a p i t a l r e d u c e d . T h i s r e f l e c t s one
mechanism i n t h e p o s i t i v e r e a l b a l a n c e e f f e c t s o f i n t e r e s t r a t e
rises.
E q u a t i o n s 5 and 6 f o r n a r r o w money demand d e t e r m i n a t i o n
d i f f e r s u b s t a n t i a l l y from t h e b r o a d money e s t i m a t i o n s .
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