KEY MESSAGES

As the Ivoirian saying goes: “One should not wait for the rain to take a
shower�. Côte d'Ivoire has been enjoying an impressive economic recovery
since the return of political stability in 2012, with a growth rate around 9%
on average per year. The country has become one of the African champions
in a somewhat difficult regional environment. The success of Côte d'Ivoire is
visible through the planes full of businessmen and women from all parts of
the world, the increase in the ratings of international credit rating agencies,
the commitment of donors with more than 15 billion dollars pledged during
the recent Consultative Group meeting held in Paris and the new
constructions raising in many residential suburbs of Abidjan.

Yet, this economic upturn, although it brings opportunities, also imposes
responsibilities to the policy-makers of the country. Indeed, maintaining
rapid growth will have to be accompanied by an increase in productivity
gains and a sharing of its benefits with the majority of the population.
Although progress has been made in the last few years, almost half of the
Ivorian households still live below the poverty threshold. The country also
suffers from deficiencies in the management of its public resources and from
insufficient competition in a set of priority sectors. In short, the country
must improve its competitiveness and its governance, to achieve more
efficiency and equity over time.

One of the current weaknesses of Côte d'Ivoire is the underdevelopment of
its financial system, which appears not performing and inclusive enough
compared to standards observed in emerging economies. At present, the
Ivorian financial system offers 3 to 4 times less credits, in percentage of
GDP, than in African middle income countries such as South Africa and
Morocco and even less than in Senegal and Togo. Because this insufficiency
can harm the ambition of Cote d'Ivoire to achieve its emergence, it is the
focus of the second part of this third economic update.

Part 1: State of the Ivorian economy

The Ivorian TGV continues to run at high speed. The economy continues to
grow at a rate close to 10%, so much so that the GDP of the country almost
doubled since 2011. This growth is multidimensional as it is driven by the
good performance of agriculture and the expansion of the manufacturing
sector and services. The external accounts have also been able to fare well,
due in part to favourable terms of trade, whilst the Government continued
its fiscal policy oriented towards investments in infrastructure, including
through partnerships with the private sector.
Most indicators are positive, with inflation under control (even if the prices of
some food products –attiéké and fresh vegetables – have considerably
increased in the last quarter) and with stabilized external trade as well as
fiscal deficits. The expansion of credit granted by the financial system, which
stood at more than 30% in 2015, reflects the strong demand of the private
sector and an increased competition due in part to the entry of new banks
over the last few years.

The real question today is to determine how long the Ivorian economy will
be able to continue with this pace of accelerated growth. The catch-up
effect which prevailed when the country was coming out of the crisis has
arguably started to wane. For instance, the contributions of donors and
those of foreign investors may have reached a ceiling, at least in terms of
GDP. The external context could also prove to be less favourable, especially
the evolution of commodity prices on international markets as well as the
tightening of the US monetary policy, which has already increased borrowing
costs for African countries, including Côte d'Ivoire, on global financial
markets.

The Ivorian economy should continue to grow around 8% in the next few
years. This forecast will be influenced by the evolution of external risks the
country will have to face. These risks are not insignificant, ranging from the
terrorism threat to the instability of commodity prices and of global financial
markets. The climate risks, in particular the rainfall unpredictability, will
continue to influence the performance of agriculture both in the short to long
terms.

There is a broad consensus that the economic future of Côte d'Ivoire will
also greatly depend on its capacity to generate productivity
gains while ensuring a better sharing of the benefits of economic growth
with a vast share of poor households. Yet, achieving these goals will require
reforms and changes in behavior that go to the very heart of the functioning
of the economy and the Ivorian society.

Two examples can be provided. The first one concerns productivity, which
will require a sustained effort to reduce the barriers at entry and hence
increase competition, which remains the best way to encourage innovation
and a cost reduction (as well as an improvement in the quality) for
consumers. This implies an improvement of the business environment,
especially a reduction in the multiple and complex administrative barriers
that are often a disguised protection for existing business operators. The
supply of better quality and cheaper services also requires higher
competition in priority sectors such as communication, energy,
transportation and financial services, which all have a cross-cutting impact
on all economic operators in the country. President Ouattara has well
understood this challenge and announced opening up the energy sector to
private operators in his speech of 1 May 2016.

The second example is on the need to improve the management of public
resources. Looking ahead the Government is unlikely to be able to continue
to increase its expenses at the pace of the last few years (an increase of
50% from 2012 to 2015). As a result, the authorities will have to improve
the efficiency of public spending or to get more value for money in social
sectors as well as in public investment. This will require a strong effort to
upgrade the allocative and financial efficiency of the budget.

One of the main challenges for Côte d’Ivoire will be to finance its economic
development. Since independence, the country’s strategy has been to rely
on external financing, either in the form of aid or foreign direct investments.
However, in view of what is done in emerging countries, such as Morocco
and South Africa, domestic resources will have to play a major role in the
future. This means improved tax collection by the Government and, above
all, the development of a performing financial sector in the country.

Part 2: How can the Ivorian financial system respond to the
challenge of emergence?

The challenge of emergence requires a performing and inclusive financial
system. Yet, at present, the limited amount of credits delivered by the
Ivorian financial sector explains that around two thirds of domestic private
operators complain about the lack of access to external financing. This ratio
is higher than in most other countries of the sub-region and far from the
standards achieved in middle-income countries. The financial system is also
insufficiently diversified, since commercial banks account for around 80% of
total financial assets in Côte d’Ivoire.

To illustrate the stakes at play, it can be estimated that if Côte d'Ivoire was
to reach a level of financial development similar to that achieved in Namibia
or Cape-Verde today, its GDP growth rate would increase by an additional
2% per year. If it was to reach the level of South Africa, the impact would be
around 5%.

The lack of depth of the Ivorian financial system is reflected by the relatively
low level of credits but also by its lack of inclusion. Indeed, only one Ivoirian
out of 8 report to own a bank account. The use of mobile accounts partially
compensate for its low figure but even after including these mobile accounts,
the proportion of adults who have a bank or a mobile account was lower
than 35% in 2014 when it was exceeding 70% and 59% in South Africa and
Namibia respectively.

This lack of depth can be attributed to two main factors. The first one is that
if the Ivoirians save more than the rest of Africa, they do not do so in
financial institutions. There are no more than 15% of Ivorian savers who put
their money in financial institutions; this is 3 times less than the average
African. If there are several reasons behind this behaviour, it can be
explained as a simple portfolio choice by savers, who want to optimize their
benefits while minimalizing their costs. The transaction costs for opening an
managing a banking account are high for costumers through lost time in
transport, the long waiting lines in offices and the excessive commissions
received by the banks.

The second reason is that the rate of transformation of the deposits into
credit remains low in Côte d'Ivoire. This rate is equivalent to around 75%
(against nearly 100% in Senegal), indicating that most banks prefer to keep
excessive liquidity or invest in other placements, such as securities issued by
the State. In addition, when commercial banks do lend to the private sector,
they often do so for a select group of clients (5 clients constitute one third of
all credits) and for less than one year. The reasons invoked by the bankers
include incomplete or unattractive projects as well as the lack of guarantees
provided by potential clients. The chronic lack of financial information on
credit applicants is also a significant barrier. Unfortunately, Côte d’Ivoire,
like most countries in WAMEU, still lack appropriate collective information
mechanism (such as operational credit bureaux) that can help reduce this
market failure.

This economic update suggests three possible pathways. The first one
suggest that banks should aim at reducing transaction costs by coming
closer to their potential customers. This can be done physically by building
more bank branches and ATM machines like it was done in Kenya between
2006 and 2009. Clients continue indeed to prefer physical contacts with their
bankers. This can also be achieved by taking advantage of the technological
revolution in the communication sector. Although Ivorian banks have already
taken initiatives, they can do much more to bring their activities in the
computer or smartphone of their customers. In parallel to reducing
transactions costs, the emphasis should be on lowering risks through the use
of new financial instruments (such as leasing) and by making more effective
collective information mechanisms (i.e., the credit bureau established by the
BECAO) and alternative distribution networks (e.g., non-bank financial
agents).
The second pathway would be to diversify further the financial system. Such
diversification has been initiated through the emergence of non-banking
operators, including mobile companies and microfinance institutions. The
next step would to extend the range of activities performed by these new
operators. For example, mobile operators could follow the example of their
Kenya’s counterparts and issue credits to customers. Microcredit
establishments could be given the ability to deliver credit and debit cards to
their clients. These innovations would nonetheless require changes in the
legal and regulatory environment.

Finally, the third pathway would be to improve the stability of the financial
system through the combination of comprehensive regulations, close
monitoring (and eventual sanctions) as well as the education of clients.
Several tangible examples are discussed in the main text.