"There is currently a serious liquidity crisis for states on the regional financial market. The interest rates offered do not reflect the reality of the market," said Isidore Tanoe, director of Abidjan-based financial services firm Majoris Financial Group.
Tanoe said interest rates should be between 6.5% and 6.80%, instead of the 5.80% to 5.95% offered by governments currently.
Ivory Coast, the biggest economy in the West African Economic and Monetary Union, failed to raise 85 billion CFA francs ($142 million) through bonds issued at an interest rate of around 5.5%. It returned to the market to raise the funds at an interest rate above 6%.
The failure to raise much-needed funds from the regional market may force states to look for alternative, cheaper financing sources such as the International Monetary Fund (IMF) to avoid budget shortfalls, the sources told Reuters.
Ivory Coast reached an agreement with the IMF earlier this month for a $2.6 billion loan, while Senegal will start negotiating for a new program at the IMF spring meetings next month.
Ivory Coast failed to issue local currency debt in March, while Senegal, Mali, Niger and Burkina Faso have cancelled or postponed bond issuance in recent weeks.
Mali, Benin, Burkina Faso and Senegal have all had to postpone debt auctions. Senegal returned to the market to raise over 201 billion CFA at an interest rate above 6%, the finance ministry said in a statement on March 31.
Commercial banks, which make up more than 80% of the investor base for government securities, have seen their liquidity positions deteriorate, said London-based economist Emmanuel Kwapong at Standard Chartered Bank.
Kwapong said financing needs were greater given the deterioration in the region's fiscal position following global external shocks, forcing more countries to turn to the regional debt market.
"As a result, sovereign demand for financing on the regional debt market rose significantly, putting pressure on it," he said.
West Africa's regional central bank, the BCEAO, raised its main lending rate to 3.00% from March 16 to bring inflation within its target range of 1-3%. Inflation was around 6% in January, it said.
"With the BCEAO tightening monetary conditions to contain elevated inflationary pressures and preserve FX reserves, the cost of funds for banks has increased," Kwapong said.