(Ecofin Agency) - The banking sector in the West African Economic and Monetary Union (WAEMU) is facing increasing pressure on its net foreign assets, a situation influenced by several factors and posing a significant risk. However, this also opens potential opportunities for financial entities capable of injecting foreign currency capital.

Data from the Central Bank of West African States (BCEAO) reveals that commercial banks within WAEMU are experiencing strains on their external assets. Ecofin Agency analyzed 12 monthly economic reports from 2023 to 2024, finding that in 10 of these instances, the financial institutions reported a negative net transfer position.

This means that, almost every month, WAEMU's commercial banks have paid out more in foreign bills than they have received in payments. This has led to a gradual yet steady deterioration of liquidity within the sector over time. Despite the CFA franc's unlimited convertibility guarantee a legacy of a historical agreement with France several indicators suggest emerging difficulties within the region's banking sector.

A key indicator is the significant decrease in the commercial banks' reserve surpluses, which plummeted from around CFA2,635.8 billion in January 2022 (278% of the mandatory reserves) to CFA402.7 billion by January 2024, though there was a slight recovery in February 2024. Concurrently, the central bank’s ability to cover imports with its own net external assets also decreased, from 4.5 months' worth of imports in June 2023 to just 3.4 months at the end of the year.

This reduction in net external assets might explain why, despite falling inflation rates, the BCEAO has maintained its key rates at relatively high levels compared to historical averages. The central bank aims to avoid facilitating an easy credit system that could further disrupt currency coverage rates. However, it is worth noting that all WAEMU economies do not share the same external liquidity situation.

Benin stands out for the strength of its commercial banks, with net external assets amounting to CFA2,590 billion as of November 2023. While this represents a challenge for many banks within the WAEMU, it simultaneously creates opportunities for other financial institutions. For instance, Côte d'Ivoire has implemented a new mechanism enabling secure external payments totaling €96 million (approximately CFA63 billion). Similarly, Senegal is in negotiations to set up a similar mechanism for about $326.4 million.

Currently, the general public may find it challenging to grasp the exact reasons behind the continuous decline in the banks’ net positions on their transfer operations. However, economic and financial literature suggests that this situation could be tied to trade imbalances exacerbated by global inflation or to capital outflows resulting from international investors seeking to shield themselves from economic downturn risks.