Protecting Public Investment against Shocks in the West African Economic and Monetary Union : Options for Fiscal Rules and Risk Sharing

West African Economic and Monetary Union arrangements have been instrumental in helping member countries maintain low inflation. However, a lesser-known characteristic of the West African Economic and Monetary Union, with possible implications for economic growth, is the high exposure to shocks and the pro-cyclicality of fiscal policy associated with these arrangements. Evidence from a panel of 80 low-income and lower middle-income countries over the period 1995-2012 suggests that, in the Union, both public investment and current public expenditure are more pro-cyclical than they are in other countries. In particular, public investment contracts more in "bad times" than it increases in "good times" in order to absorb negative shocks to the budget in the context of strict fiscal convergence criteria. The asymmetric response of public investment to shocks could thus be a reason for the relatively low levels of infrastructure in the Union. Comparisons with earlier periods suggest that public investment has become pro-cyclical since the introduction of the fiscal convergence criteria in 1994. Moreover, the shocks that affect Union member countries appear to be highly idiosyncratic and thus difficult to mitigate by the Union's common monetary policy. The pro-cyclicality of public expenditure and the high asymmetry of shocks that affect Union member countries justify exploring options for greater counter-cyclicality of rules-based fiscal frameworks and for risk-sharing.