Can domestic debt contribute to the financing of the “Millennium Development Goals” ? The case of the West African Economic and Monetary Union (WAEMU)

Developing countries are being urged to extent public spending to reach The Millennium Development Goals (MDGs). Following a series of debt cancellations, the public debt of many developing countries has reached low levels, so that external borrowing is a plausible option. However, developing countries can not exclusively rely on external financing. Consequently, is an increase in the domestic debt possible and desirable? This paper investigates this issue in the case of the West African Economic and Monetary Union (WAEMU), of which several countries have benefited from important debt cancellations. We show that an increase in the domestic debt is feasible for some of the WAEMU countries since 1) there exist excess bank liquidity and foreign reserves which involve a low cost for public finance, 2) the main macroeconomic risks (debt distress, crowding out of private investment and real exchange rate appreciation) can be averted and 3) absorptive capacity may be enlarged by giving larger role to regional institutions or local communities.