Russia–Ukraine war and the cost of borrowing in the West African Economic and Monetary Union sovereign debt market

Abstract

This paper contributes to the emerging literature on the economic impacts of the Russia–Ukraine war by estimating the effects of that war on FCFA-denominated sovereign bond yields and spreads for the West African Economic and Monetary Union (WAEMU) countries. Using ordinary least squares regressions on monthly panel data from January 2020 to December 2022, we found three key results. First, the Russia–Ukraine war significantly increased long-term government bonds but had no impact on short-term sovereign bond yields. Second, the Russia–Ukraine war raised sovereign bond spreads in WAEMU countries. These results suggest that WAEMU countries may consider reducing sovereign long-term bond issuances and exploiting alternative financing sources, such as concessional financing, until the war and its corollary of global economic and financial imbalances are resolved. Finally, we found that the Central Bank of West African States's policy rate hikes increase governments' borrowing costs. Given this impact, we recommend complementing monetary policy with nonmonetary and fiscal policy measures to ease inflationary pressure from the Russia–Ukraine war. This approach may help mitigate the upward pressure driven by monetary policy tightening on sovereign borrowing costs in the WAEMU government securities markets.