Fiscal Consolidation and Borrowing Costs for Non‐Financial Enterprises in the West African Economic and Monetary Union: A Path to Lower Interest Rates?

This study examines the effect of fiscal consolidation on the borrowing costs of non‐financial enterprises in the West African Economic and Monetary Union (WAEMU), using quarterly panel data for its eight member states over 2005–2020. Consolidation is measured as an improvement in the cyclically adjusted primary balance (CAPB), and dynamic responses are estimated with Arellano–Bond local projections. An improvement in the CAPB is followed, with a delay, by a statistically significant but small and short‐lived decline in the lending rates of formal private non‐financial enterprises: a 1‐percentage‐point shock is associated with rates about 1.9 basis points lower in the third quarter and 1.5 basis points lower in the fourth. Revenue‐based consolidation has larger and more persistent effects than expenditure‐based consolidation, and the decline is concentrated in periods of tight monetary policy. No significant effect is found for individual enterprises. The results are robust to Driscoll–Kraay standard errors, controlling for the policy rate, alternative interpolation and panel vector autoregressions, and are consistent with fiscal‐credibility and loanable‐funds channels. Consolidation strategies should favor revenue mobilization, be coordinated with the monetary policy stance and be complemented by measures easing the credit constraints of small, informal borrowers.