Financial deepening dynamics and implications for financial policy coordination in a monetary union: the case of WAEMU

Johannesburg, 30 October 2013 - To what extent can financial deepening dynamics have implications for financial policy coordination? The case of the West African Economic Monetary Union (WAEMU) was one of the papers discussed during a session on “Financial Regulation and Transport Liberalization" held Wednesday, October 30, the third day of the African Economic Conference in Johannesburg.

Christian Lambert Nguena, a Cameroonian researcher and consultant at the African Development Bank (AfDB), presented the paper co-authored with Professor Temilade Abimbola, Division Manager at AfDB, and explained globally how economic convergence is a major factor of regional integration, and the most appropriate framework for policy coordination.

He said the convergence is a process that implicitly supposes the reduction of heterogeneity and creates an environment in which a policymaker can coordinate and apply the same policy. Based on experiences from the WAEMU sub-region, he argued that, since regional financial integration, there has been a creation of a financial market in the sub-region in 1996 within a supranational regulator. This, according to him, has led to the need to rethink financial policy as to see how to implement it commonly.

“We have, in one hand, an implementation of common monetary policy for all member states and, in other hand, a financial policy for each state,” he explained.

Also, through an estimate of financial development level in the countries of the franc zone, the investigations show that the most problematic aspect due to its low degree is financial deepening. The results demonstrate that the financial development problem in WAEMU zone could be reduced to financial deepening problems relatively to other financial development aspects.

Referring to some research project results, the speaker highlighted the need to take the problem of low financial depth in the sub-region seriously compared to other aspects of financial development. Indeed, through an estimate of financial development level in the franc zone, the findings generally show the problematic aspect due to the low degree of financial deepening especially. “As a result, the financial development problem in WAEMU zone could be reduced to financial deepening problems relative to other financial development aspects,” Nguena said.

For the speaker financial systems have always played an important role in supporting economic activities around the world.

The speaker also cited financial systems in other areas in the world, stating that all developed countries “have one thing in common, which is a developed financial system”. According to the research results, he highlighted that “the WAEMU sub-region authorities should implement expansionary financial policies on GDP growth rate, density and exchange rate.” Regarding the dynamics, the findings of the work shows that there is a convergent dynamic, which means that a high or lower initial level of financial deepening is favourable to the improvement of the financial deepening index over the time in the WAEMU zone. After some years, according to him, “the implementation of harmonized financial policies in the sub-region without distinction of locality or country will therefore have an optimal impact."