Public Information Notice No. 00/57

Public Information Notice: IMF Concludes Article IV Consultation with Burkina Faso

August 8, 2000

On June 26, 2000, the International Monetary Fund (IMF) Executive Board concluded the Article IV consultation with Burkina Faso.¹

Background

Burkina Faso's sustained adjustment effort has been supported by the IMF under successive programs since 1991, first under the Structural Adjustment Facility (SAF), approved in March 1991, followed by a first three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF) approved on March 31, 1993, and an additional three-year arrangement under the ESAF, approved on June 14, 1996. A new arrangement was approved in September 1999 supported since November 1999 under the Poverty Reduction and Growth Facility (PRGF). Under these programs the government of Burkina Faso implemented a broad range of macroeconomic and structural reforms which have contributed to redirect the economy from a centralized to a market-oriented one, raise per capita GDP and reduce internal and external imbalances. In September/October 1997, the IMF and the World Bank approved a decision concerning the country's eligibility under the Highly Indebted Poor Countries Initiative (HIPC), under which external debt would be reduced by April 2000 by about 15 percent to the equivalent of 205 percent of exports in net present value terms. Under the enhanced HIPC Initiative, the total external debt reduction will be such as to bring the ratio of external debt to exports to 150 percent.

Macroeconomic performance was favorable in 1999. Real GDP grew by 5.8 percent with strong growth in construction, manufacturing and services. Cotton production stabilized at 274,000 tons and cereal production exceeded marginally the record level reached in 1998. With abundant food supply, the consumer price index (CPI) declined during 1999, and was on average 1 percent lower than in 1998. Gross investment remained high at about 28 percent of GDP in 1999, due to a strong increase in public construction activity; domestic saving declined by an estimated 3 percentage points of GDP, owing in part to lower profits in the cotton sector. Reflecting these developments, the external current account deficit (including official grants) widened to 12.6 percent of GDP in 1999 from 10.0 percent of GDP in 1998.

The main objectives of the program for 1999 in the fiscal area were to achieve a revenue level of 14.3 percent, and a primary surplus of 0.2 percent (excluding foreign financed investment expenditure). These targets took into account the revenue loss caused by the full year effect of the reduction on July 1, 1998 of the maximum custom tariff rate to 25 percent from 31 percent, in accordance with the phased introduction of the common external tariff (CET) of the UEMOA. A further cut of the maximum rate to 20 percent took take place on January 1, 2000, together with the reduction of the statistical tax to 1 percent from 4 percent. The 1999 revenue objective was exceeded by 0.7 percent of GDP, reflecting the authorities' continuing efforts to improve tax administration, in particular concerning customs duties and the value added tax. The objective for the primary current surplus was also largely exceeded, as current primary expenditure was in line with the program. At the same time, however, the reduction of external arrears, restructuring expenditure, external and domestic amortization payments were above the program's target. As a result, the target concerning the increase in net bank credit to government during 1999 was exceeded.

Monetary policy is conducted at the regional level by the Central Bank for West African States, and remained prudent. Credit to the economy rose in 1999 by 4.3 percent, reflecting the fact that the new crop credit was not yet in place by the end of the year. The delay in the collection of cotton export proceeds resulted in a decline in the net foreign assets of the banking system in 1999.

In 1999 and early 2000, the Burkinabè authorities strengthened the implementation of structural reforms, in particular as regards the civil service, the cotton sector, and the liberalization of the telecommunications sector. In the cotton sector, the sale of 30 percent of the shares of the cotton ginning and marketing company to producers' associations was finalized in early 1999. A broad civil service reform entered into effect on January 1, 1999, which includes a new merit-based promotion system, a wider wage scale to stimulate productivity, and a larger recourse to contractual workers to increase flexibility in the allocation of staff.

It is expected that in 2000 GDP will increase by 5.7 percent, spurred by a further expansion in agricultural production and a high level of public investment. Inflation is expected to remain low. Notwithstanding the drop in the international price of cotton, the external current account deficit, excluding grants, is expected to narrow to 14.4 percent of GDP in 2000, compared to 16.0 percent in 1999; including grants the deficit would narrow to 10.2 percent of GDP. Fiscal policy will continue to put emphasis on the widening of the tax base, and the provision of larger budgetary allocations to social sectors, while maintaining a very prudent wage policy in the coming years; the planning and the execution of the investment program will be strengthened in a medium-term framework.

Executive Board Assessment

Executive Directors commended the authorities on the favorable economic performance in recent years, attributable in large part to prudent macroeconomic policies and the pursuit of structural reforms. Directors observed that, in 1999, economic growth had been sustained, inflation had declined further, the main budgetary targets had been met, and progress had been made in the area of structural reform. Directors also noted the continuing strength of agricultural production, and the increased cotton production, despite the depressed world prices for that commodity during the major part of 1999. Several Directors expressed concern, however, that the external current account deficit had deteriorated further, although they recognized that this decline was partly the result of a sharp deterioration in the terms of trade.

Directors considered the budgetary results in 1999 generally satisfactory, especially in relation to government revenue, in a year when the impact of the reduction of the common external tariff of the West African Economic and Monetary Union (WAEMU) was fully felt. Looking ahead, the further strengthening of overall tax administration and compliance, as well as improvement in budgetary management, will be essential, especially as the government steps up its anti-poverty programs in the context of the HIPC Initiative.

Directors underscored the need to reduce current expenditure. They agreed that the introduction of a merit based promotion and compensation system and the decompression of the wage scale should allow more flexibility in wage policy and improve incentives. They noted, however, that the reform had proved significantly costlier than expected, in part because of the need to update the position of civil servants, and that the wage bill increase in 1999 had been relatively large, which has made it even more essential to be prudent on wage policy in the coming years.

Directors noted the importance of reforms to strengthen the competitiveness of the economy and to promote economic diversification. They welcomed the partial divestment of the cotton ginning and marketing company (SOFITEX) in early 1999, and urged the authorities to adhere closely to the schedule established for restructuring and privatizing the telecommunications and electricity sectors.

Directors were encouraged by the efforts of the authorities to improve the environment for private sector activity, in particular through steps to strengthen the banking system and the network of small scale credit institutions. They stressed that the further broadening of the networks of these institutions should be a key priority in the strategy for rural development.

Directors noted that the incidence of poverty remains high and social indicators low, even in a regional context. They therefore welcomed the adoption by the government of a full, participatory PRSP and its focus on improving rapidly social indicators and promoting income-generating activities of the more vulnerable groups. In this connection, Directors underlined the need for technical assistance to help improve Burkina Faso's implementation capacity for the envisaged measures, including poverty reduction initiatives. Stressing the importance of regional stability for economic development in Burkina Faso—as for other countries in the region—Directors urged Burkina Faso to provide full support—and indeed, to contribute to—international efforts to promote regional stability.