II The Central Bank of West African States, 1962–74: Its Structure and Functions (2024)

Rediscount Ceilings

Rediscount ceilings were the principal instrument of monetary control exercised by the BCEAO. They were fixed separately for each country and, within each country, separately for each bank. Credit limits were also prescribed for individual enterprises. Finally, separate ceilings were fixed for short-term and medium-term credit. The rules for establishing these ceilings were agreed by the Bank’s Board of Directors in February 1963.

The 1963 rules distinguished between two layers of decision making—by the central Board of Directors and by the National Monetary Committees.

The Board of Directors was charged with fixing overall rediscount ceilings, both short term and medium term, for each member country, and with establishing the general rules and conditions under which the National Monetary Committees distributed rediscount ceilings among banks and other enterprises in individual member countries. The ceilings were fixed twice a year for the succeeding six months, and the Board of Directors reviewed these limits at the request of the National Monetary Committees. The latter were charged with, first, the preparation and submission of requests for global rediscount ceilings and individual limits on enterprises to the Board of Directors; and, second, the allocation of the ceilings among banks and individual enterprises in their respective countries.

The short-term rediscount ceilings were fixed for the following monthly periods: December 1-May 31, generally covering the period of the crop season, and June 1-November 30, the low season-—the rationale for higher ceilings during crop seasons being that most WAMU countries were agricultural, and seasonal cycles in money demand were strong. To determine these ceilings, each commercial bank was required to submit to the respective national agency of the BCEAO its expected demand for bank credit, on the basis of specific formulas prescribed by the BCEAO. Given this information, the National Monetary Committees made monthly estimates of total credit needs and of the banks’ own resources—deposits, and free reserves (including external borrowing, or other financial support)—and, taking into account the national monetary situation, the Committees submitted proposals for global rediscount ceilings to the central Board of Directors. The latter, after taking into consideration the monetary situation in the Union, then decided on national rediscount ceilings.

The procedure was similar for medium-term ceilings, except that those for enterprises were fixed by reference to the total cost of investment projects (and were normally 50 percent but could be relaxed to SO percent). To be eligible, these projects had to be profitable and conform to the country’s development policy. However, under the 1962 modified statutes, the Board of Directors, on the initiative of a National Monetary Committee, had to review its total medium-term ceilings for a country where the national agency recorded a negative position in its net monetary assets for the last three months.

Each National Monetary Committee then proceeded to allocate the allotted rediscount ceilings among local banks and enterprises. In determining individual bank ceilings, each Committee examined each bank’s resources and its use of them, including any investment of funds abroad. Under the prescribed rules, the ceiling assigned to each bank did not exceed 50 percent of its expected short-term credit. However, under a decision of the Board made in 1971), this limit could be relaxed and a ceiling of up to 80 percent was permitted for total loans made for the marketing of agricultural produce. Limits on individual banks were automatically re-examined if the liabilities of the bank fell below 20 percent of the respective rediscount ceilings in any six-month period. Re-examination was also automatic if the liabilities of all banks fell below 20 percent of the ceilings.

The limits on rediscount ceilings for credit 10 individual enterprises were fixed by National Monetary Committees on the basis of an examination of the financial position of the enterprise and took into account the contribution of the enterprise to the productive base of the country. The statutes prescribed a maximum limit on an enterprise’s total debt at ten times its equity capital, except for enterprises whose activities were characterized by marked seasonally, in which case the limit was set at 15 times the equity capital.

Liquidity Ratio

The BCEAO was empowered to impose minimum liquidity ratios upon banks and other nonbank financial institutions. The purpose of such ratios was to limit the expansion in nonrediscountable credit, by definition of low priority, and to assure that short-term liabilities were appropriately covered by short-term assets.

As defined by the BCEAO, the liquidity ratio related short-term assets (actifs disponibles on mobilisables) to short-term liabilities. The “short term” was defined as six months (this was also the maximum maturity for assets eligible for rediscount with the BCEAO). The ratio (Q) was defined as follows:

$Q=\frac{{\displaystyle \mathrm{cash}\mathrm{reserves}\mathrm{+}\mathrm{rediscountable}\mathrm{credit}\mathrm{+}\mathrm{credit}\mathrm{rediscounted}\mathrm{at}\mathrm{BCEAO}}}{{\displaystyle \mathrm{short}\mathrm{-}\mathrm{term}\mathrm{deposits}\mathrm{and}\mathrm{other}\mathrm{liabilities}\mathrm{+}\mathrm{credit}\mathrm{rediscounted}\mathrm{at}\mathrm{BCEAO}}}$

This definition implied an upward bias in the ratio, because the short-term assets in the numerator covered all rediscountable credit, whether actually redisounted with the Central Bank or not, while the part rediscounted with the BCEAO also appears as a short-term liability in the denominator.4 This upward bias exaggerates the restrictive effect of monetary policy based on the ratio. Another feature of this ratio was that it pre-empted more of any marginal increase in a bank’s resources for rediscountable credit if it was already operating at the minimum required liquidity level than it would if the ratio totally excluded rediscounted credits. In a situation of excess liquidity, the ratio as defined will not guarantee that additional resource flows into banks will be rediscountable. Indeed, as pointed out by Marquis (1966), the liquidity ratio was more a safety device designed to assure the repayment of short-term liabilities, including rediscounts, when they fell due, rather than a way of channeling credit into rediscountable assets.

The liquidity ratio was initially fixed at 70 percent and was raised by I percentage point a year, beginning in 1966, until it reached 75 percent in September 1970. This ratio was maintained until 1974.

Rediscount Rate

The statutes of the BCEAO specifically required the rediscount rate to be raised when the ratio of the Bank’s gross external reserves to its short-term liabilities fell below a critical minimum. As will be shown later, during almost the entire period between 1962 and 1974 the BCEAO regarded its role as supplementing banks’ resources to meet “legitimate” credit needs. Accordingly, it did not use the rediscount rate as a penalty rate to regulate banks* access to the BCEAO, but as an inducement to encourage them to use the BCEAO’s rediscount facilities to extend credit to desirable sectors. Hence, the rediscount rate remained unchanged for more than a decade until 1973.

Until 1966 the structure of interest rates (linked to the discount rate) charged by commercial banks was uniform among purposes of loans but varied according to the assessed creditworthiness of the borrower. After 1966 interest rates were also differentiated according to the purpose of borrowing; loans to productive and “priority” sectors, as determined by the BCEAO, were made at relatively low interest rates, while others were at higher rates. In addition, penalty rates were prescribed for credit operations beyond the individual discount limits prescribed by the BCEAO. Although the discount rate policy was not used actively as a monetary policy instrument, it did affect commercial bank rates.

Special Deposits

The statutes of the BCEAO empowered it to require banks to maintain special deposits as a proportion of a bank’s deposit liabilities “if the monetary situation so requires,” In practice, this instrument was regarded as exceptional by monetary authorities, and the BCEAO did not use it during the period under consideration.

Credit to Governments

The 1962 statutes of the BCEAO contained strict limitations on bank credit to the governments of member countries; such credit could not exceed a certain proportion of fiscal receipts and could not be granted for more than 240 days in any calendar year, whether consecutive or not. Initially, the maximum credit was fixed at 10 percent of fiscal receipts in the previous year, but in the revised statutes of December 1968 the maximum was raised to 15 percent, and, in the revision of November 1973, to 20 percent. For purposes of calculation, this limit comprised not only direct advances to a government by the BCEAO but also the latter’s holdings of national treasury paper as well as the indebtedness of the treasury vis-à-vis banks and other financial institutions using the BCEAO’s rediscount facilities.

These statutes circ*mscribed the member governments as well as the BCEAO. The former were limited in their recourse to bank financing even though their “needs” may have been high. Since these advances were basically short term, at least in theory, the monetary arrangements appeared to have established the philosophy of the need for a balanced budget. The statutes also constrained the BCEAO in its operations vis-à-vis the governments. It had no right to refuse credit to a treasury as long as the statutory ceilings were not exceeded. Thus, even when other considerations would have justified restricting credit, loans to governments could not in general be refused if their drawings happened at that juncture to be below the statutory minimum.