• The West African Economic and Monetary Union (WAEMU) faces rising liquidity costs despite a stable official interest rate.
• Banks across the region are building up reserves to cope with uncertainty and tighter conditions.
• As monetary policy tightens, public debt yields show widening risk premiums between member states.

Banks in the West African Economic and Monetary Union (WAEMU) are taking a cautious approach, holding on to more liquidity despite official claims of monetary stability. While the Central Bank of West African States (BCEAO) has kept its main policy rate at 3.5%, the real cost of liquidity in the region is higher, hovering around 5.5%. This is the rate banks face when they need urgent liquidity, signaling an underlying tightening in the financial system.

Since December 2023, the BCEAO hasn’t changed its rates but has acknowledged a shift in the macroeconomic environment. Inflation has been kept in check, falling to 2.1% in February, and growth projections remain strong at 6.2% for 2024 and 6.5% for 2025. Commodity prices for key exports like gold, cocoa, and coffee have also risen. Yet, this economic recovery doesn’t hide the growing constraints felt by commercial banks in the region.

A key change came in February 2023, when the BCEAO switched back to variable interest rates for its weekly and monthly refinancing operations. Since then, the cost of liquidity has risen sharply. In one of the first operations under the new system, the marginal rate was 2.8%, with an average weighted rate of 3.15%. By March 2025, however, these rates had jumped to 5.03% on average, with a marginal rate of 5.5%. This shift indicates a growing demand for liquidity, with amounts borrowed more than tripling from CFA2.6 trillion in 2023 to over CFA8.2 trillion in 2025.

The interbank market has also seen a sharp increase in rates, with the average rate climbing from 5.1% in 2023 to 6.12% by February 2025. Longer-term rates are reaching even higher levels, with three-month rates now touching 6.7%, and occasionally approaching 7%.

The BCEAO is not restricting liquidity to curb activity. On the contrary, it highlights in its own publications its role in financing growth. Still, it is treading carefully, mindful of persistent uncertainties: geopolitical tensions, climate instability, and the risk of rising imported food prices.

By reducing the amount of liquidity it injects while keeping its key rate unchanged, the central bank is taking a defensive stance—without explicitly saying so. Even though its foreign reserves have improved in recent months, the trend remains fragile. Monetary policy now relies more on market-based mechanisms than traditional instruments. It is a quiet but effective form of tightening that is redefining the cost of money in the Union.

Banks, for their part, have adjusted their behavior. They are massively over-reserving. Across the Union, credit institutions have built up CFA4,617.4 billion in reserves, compared to the CFA1,524.9 billion required—a net surplus of CFA3,092.4 billion. More than CFA3,000 billion set aside to face uncertainty, absorb shocks, and perhaps offset tighter access to liquidity.

In Côte d’Ivoire, reserves reached CFA1,759.2 billion for a required minimum of CFA507.8 billion. The same cautious approach is seen in Togo, with CFA164.9 billion held versus a requirement of CFA66.7 billion, and in Mali, where the surplus exceeds CFA36 billion.

Even in smaller banking systems like Guinea-Bissau, the excess reserves are significant: CFA21.7 billion held for CFA7.8 billion required—nearly 2.8 times the minimum threshold. Only Niger stands out, with a net negative balance of CFA2.9 billion.

This cautious behavior reflects not so much confidence in abundant liquidity, but rather the expectation of more difficult access to funds—or a potential shock. It also responds to a structural shift: since December 2023, the BCEAO raised the minimum capital requirement for banks in WAEMU to CFA20 billion, up from CFA10 billion. The reform, which will be phased in through 2027, is pushing banks to strengthen their capital base—resulting in more cash being held. In a region where the marginal rate has become the norm, liquidity is no longer borrowed—it is conserved. It is hoarded.

Yet banks are still lending—cautiously. Credit to the private sector grew by just 6.3% year-on-year at the end of December 2024, barely in line with the region’s 6.2% economic growth.

At the same time, average lending rates ticked down slightly, settling at 6.79% in February. This trend is telling: in an environment where liquidity is more expensive, banks are accepting smaller margins. They would rather protect the quality of their loan books than expand their exposure. Caution has overtaken the search for yield.  Credit is moving, but slowly.

Risk Spreads Widen Across WAEMU States

The silent tension in the market is now showing up in the region’s public debt. On April 1, yield curves published by UMOA-Titres revealed growing fragmentation among WAEMU countries. While Côte d’Ivoire, seen as the benchmark borrower, raised three-year funds at around 7.5%, Niger and Guinea-Bissau had to offer over 10% to attract investors. Even for one-year bonds, the gap is striking—7.2% for Abidjan, 10.7% for Niamey. In what is supposed to be an integrated regional market, risk premiums have clearly reappeared.

The shape of the curves speaks volumes. Flat in Benin, upward-sloping in Côte d’Ivoire, but inverted in Burkina Faso and Niger. This inversion—where short-term yields exceed long-term ones—is a rare sight in WAEMU. In other regions, it might signal an upcoming recession, yet the Union just announced a growth forecast of 6.3% for 2025. Investors would rather lend for the long term than face short-term uncertainty. Immediate maturities are now more expensive, reflecting both rising perceptions of sovereign risk and the delayed effects of monetary tightening.

Without officially changing its rates, the BCEAO has allowed the yield curve to become a raw and direct indicator of the real cost of money. And that cost has gone up. As a result, governments will now have to deal with tighter financing conditions, tougher budget choices, and a market that has become more selective.

This article was originally written in French by Fiacre E. Kakpo

Then edited in English by Firmine AIZAN