Determinants of fiscal rules policy credibility in West African Economic and Monetary Union countries

Abstract

More than a quarter century after implementing fiscal rules, and despite extensions of the convergence phase, West African Economic and Monetary Union (WAEMU) countries are still unable to comply with the fiscal rules established. In addition, these countries are facing multiple shocks, exerting pressure on public finances. Based on this context, this paper empirically investigates the drivers of fiscal rules policy credibility of seven WAEMU countries over the period 1994–2019. Using two measures of fiscal rules policy credibility and pooled mean group (PMG) econometric estimator of dynamic panel, we find that internal and external macroeconomic variables are the main determinants of fiscal rules policy credibility in WAEMU countries in the long run. The institutional and political variables have mitigated effects. Specifically, we find that debt accumulation, economic activity fluctuation (gross domestic product), fiscal space reduction, and international commodity price fluctuation harm fiscal rules policy credibility, meaning that these variables deviate the fiscal policy from its target value. Our results suggest that WAEMU governments should pay attention to global shocks to reduce their macroeconomic vulnerabilities and better manage their economic resilience. In addition, they should better manage debt by allocating it to productive sectors, or improve the quality of institutions by establishing a genuine democracy that improves decision‐making and reduces deviant behaviour.