• Capital movements

Capital movements

Local currency-denominated government securities play a key role in the implementation of fiscal and monetary policy in developing countries. This paper analyses trends and developments in the rapidly growing government securities markets of the West African Economic and Monetary Union (WAEMU). Within the WAEMU there is a high level of crossborder transactions for government securities.

As markets are still developing, overall supply and demand conditions appear to override rating considerations and remain the key determinant of the government yield curve. This is due to several imperfections in the market:

• excess liquidity in the regional banking system
• quasi-nonexistence of money markets
• limited secondary markets for government securities

The WAEMU thus faces several policy challenges. As local debt markets develop, the dominant objective must be to minimise the cost of funding at a reasonable level of risk. Following debt relief it will therefore be important to:

• improve cash and liquidity forecasting methods
• improve the sustainability of new debt and risk management
• develop and implement a medium-term debt strategy 
• provide timely and relevant information to market participants 
• develop more efficient markets, in particular interbank markets; this will necessitate a legal framework, appropriate collateral and a network to match supply and demand
  to adapt the conduct of monetary policy in the Union as financial markets become more integrated

The proper functioning of money markets will also be significant when excess liquidity diminishes.

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