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Burkina Faso—Letter of Intent,
Memorandum of Economic and Financial Policies,
Technical Memorandum of Understanding

Ouagadougou, November 2, 2001

The following item is a Letter of Intent of the government of Burkina Faso, which describes the policies that Burkina Faso intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Burkina Faso, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street, N.W.
Washington, D.C.  20431

Dear Mr. Köhler,

1. On behalf of the government of Burkina Faso, and in the context of the fourth review of the program supported by an arrangement under the Poverty Reduction and Growth Facility (PRGF) approved by the Executive Board of the International Monetary Fund on September 10, 1999, I am pleased to forward you the memorandum on economic and financial policies for 2001-02 (July -June). The memorandum describes progress made in implementing the program thus far in 2001, updated objectives for end-2001 and for 2002, and the policies to be implemented to achieve these targets.

2. The 2001 program has been implemented in the context of lingering growth in the first half of the year, following the downturn of 2000. Nonetheless, expenditure cuts made it possible to offset a shortfall in tax revenue, and all the end-June 2001 quantitative and structural performance criteria, benchmarks, and indicators were met, except for the indicator on the level of tax revenue.

3. Owing to the rigorous implementation of the program, the end-September 2001 quantitative benchmarks and structural performance criterion have also been observed. In particular, the National Savings Bank's deposits at the treasury were securitized on September 21, 2001 (a structural performance criterion by end-September 2001). For the year as a whole, the government is determined to achieve the programmed overall deficit target by offsetting the projected fiscal revenue shortfall (estimated at 0.5 percent of GDP) and an upward revision of the wage bill (0.4 percent of GDP) through expenditure cuts equivalent to 1.1 percent of GDP, while safeguarding priority poverty reduction expenditure. To strengthen tax receipts, the government has also decided to increase excise taxes on gasoline and to introduce an excise tax on diesel oil.

4. The outlook for 2002, during which important legislative elections will be held, remains favorable. The draft 2002 budget is in line with the program objectives. In particular, the overall fiscal deficit (commitment basis) will be kept to about 4 percent of GDP. The government remains resolved to carry out all the reforms and measures contained in the program. It considers that the policies and measures described in the memorandum are adequate to achieve its program objectives, but it is ready to take further measures that may prove necessary for this purpose. During the period of the third annual PRGF arrangement, the government will consult with the Managing Director on the adoption of any measure deemed appropriate, at its own initiative or whenever the Managing Director requests such a consultation. In addition, after the period covered by the third arrangement and while Burkina Faso has financial obligations to the Fund arising from loans granted under this arrangement, the government will consult with the Fund periodically, at the government's initiative or whenever the Managing Director requests a consultation on Burkina Faso's economic and financial policies.

5. As described in the memorandum, debt-service relief obtained since reaching the completion point under the original Heavily Indebted Poor Countries (HIPC) Initiative and the interim assistance obtained under the enhanced HIPC Initiative have been allocated to the priority poverty reduction programs contained in the poverty reduction strategy paper (PRSP). These resources, as well as stepped-up action on the part of the government with respect to poverty reduction, made it possible to meet all the policy reform conditions for the enhanced HIPC Initiative completion point by March 2001. A first PRSP progress report was finalized in October 2001 after broad consultations with civil society and the country's development partners.

6. The government solicits the continued support of the International Monetary Fund to help it meet its program objectives, including through the completion of the fourth review under the PRGF arrangement. Also, the Fund will, together with the government of Burkina Faso, complete a fifth review of the PRGF-supported program by June 30, 2002, so as to monitor progress made in its implementation. As in the past, the government consents to publication of the International Monetary Fund staff report.

Yours sincerely,

Jean-Baptiste Compaoré
Deputy Minister to the Prime Minister
   in charge of Finance and Budget
Ouagadougou, Burkina Faso

Attachments: Memorandum on economic and financial policies for
2001-02 and technical memorandum of understanding

Memorandum on Economic and Financial Policies for 2001-02

November 2, 2001

I. Program Implementation During the First Six Months of 2001

1. Despite some slowness in the economic recovery during the first half of 2001 as the result of the poor cereals harvest at end-2000, Burkina Faso resolutely pursued the implementation of its program for 2000/01, supported by the Poverty Reduction and Growth Facility (PRGF), as described in the memorandum on economic and financial policies of June 6, 2001. The government also stepped up its poverty reduction program, as outlined in the poverty reduction strategy paper (PRSP). It allocated to priority programs increased budget resources, debt-service relief obtained after Burkina Faso had reached the completion point under the original Heavily Indebted Poor Countries (HIPC) Initiative, and interim assistance received under the enhanced HIPC Initiative. As a result, Burkina Faso had already met all the policy reform conditions for the completion point under the enhanced HIPC Initiative by March 2001 and strengthened the country's health and education coverage. These developments are described in the first progress report on the PRSP, finalized in October 2001 after broad consultations with civil society and development partners.

2. The weak growth of 2000 depressed fiscal revenue during the first half of 2001. Faced with this shortfall and a low level of budgetary assistance in the early part of the year, the government appropriately slowed the rate of expenditure commitments. This enabled it to meet all quantitative performance criteria, benchmarks, and indicators at end-June 2001, with the exception of the tax revenue indicator. All the end-June and end-September 2001 structural performance criteria and benchmarks were also met. By end-June 2001, the interconnections between the civil service and payroll databases had been completed, and a centralized database to monitor social expenditure and outcomes had been set up. The National Savings Bank's deposits at the Treasury were securitized on September 21, 2001.

3. The subdued growth and consumption in the first half of 2001 adversely affected revenue. Tax revenue totaled CFAF 103.0 billion (12 percent of GDP), against a target of CFAF 128 billion for that period. Income and profit tax revenues were particularly affected, ending up approximately 30 percent below forecast. As a result of a freeze in commitments, current expenditure totaled CFAF 107 billion (12.5 percent of GDP), approximately CFAF 7 billion (0.4 percent of GDP) below the program target. This outcome also reflected smaller-than-expected subsidies on petroleum products. The end-June indicator on expenditure on wages and salaries was met. Domestically financed capital expenditure was in line with projections. Overall, the basic and overall deficits (on a commitment basis, including grants) were larger than forecast and some cash-flow pressures led to a substantial increase in deposits with the treasury. In light of the relatively low level of external support, the government financed the deficit through a CFAF 9.4 billion issue of treasury bills in February, while observing the performance criterion on net bank credit to the government.

4. The money supply and credit to the economy were stable during the first half of 2001. Bank portfolio soundness deteriorated slightly during the first half of the year, as some banks had not yet provisioned new doubtful claims. The key prudential ratios of the West African Monetary Union (WAMU) were nonetheless observed. One of the main local banks, which had experienced management problems, replenished its capital as recommended by the WAMU Banking Commission. Microfinance institutions (the network of credit unions and other local networks) continued to develop, in particular through a stronger concentration in cities, as illustrated by a 38 percent rate of growth in deposits in 2000. By contrast, credit declined by 26 percent, resulting in some excess liquidity, which was for the most part deposited with local commercial banks.

II. Objectives and Policies for End-2001

5. Real GDP growth is estimated to be slightly above 6 percent in 2001, as projected in the program. Stimulated by an increase in producer prices of approximately 18 percent (including the bonus payment), along with propitious rainfalls, cottonseed production is expected to grow by 45 percent to 400,000 tons. This abundant harvest should increase the revenue of cotton growers (about 18 percent of the population) by approximately 73 percent, contributing significantly to poverty reduction in rural areas. Moreover, as a result of the anticipated good cereals harvest, the primary sector can be expected to grow by 8.6 percent after a decline of about 4 percent in 2000. By contrast, reflecting a slow recovery in economic activity during the first six months, the secondary and tertiary sectors are expected to grow only moderately. Because of cereals shortages, consumer prices had risen by 4.9 percent on a year-on-year basis by end-September 2001. However, with the expected decline in cereals prices in the last quarter of the year, the average increase in consumer prices should be about 3 percent in 2001, as originally targeted. The GDP deflator is projected to increase by 3.7 percent. Despite an increase in public investment financed by external resources, combined with a slight increase in private investment, the savings-investment balance should improve slightly to 14 percent of GDP, compared with 14.3 percent in 2000.

6. The external current account deficit, excluding grants, is projected to decline to 17.7 percent of GDP in 2001 (14 percent of GDP, including grants) from 17.9 percent of GDP in 2000. The increase in export receipts, owing to higher prices and larger volumes of cotton exports, is expected to be offset by the substantially higher-than-initially projected level of imports on account of higher petroleum prices. In addition, the increase in official transfers would be offset by a drop in workers' remittances. The overall deficit is expected to be only half the level in 2000 on account of larger external disbursements, thereby leading to an accumulation of gross external reserves of CFAF 7 billion.

7. On the fiscal policy side, the decline in revenue projected for the rest of the year will be balanced by a decrease in nonessential expenditure to achieve the programmed deficit. To secure a tax revenue level of 14 percent of GDP (which would be 0.5 percent of GDP below target but up by 1 percent of GDP from the level achieved in 2000), the government has, inter alia, increased the tax on petroleum products (TPP) applicable to premium and regular gasoline and introduced a TPP on diesel oil in October 2001. The direct impact of the increase in petroleum taxation on poverty will be limited, as it primarily affects more affluent households, and as socially sensitive products (kerosene and butane gas) will remain exempted. Nonetheless, the government will regularly review the indirect effect of this measure on poverty, including through its impact on transportation costs. Moreover, the government is undertaking a full tax census and will intensify its efforts to expand the tax base—actions that are expected to have positive effects on revenue before the end of the year.

8. On the expenditure side, the freeze in commitments, which generated savings of CFAF 7 billion during the first half of the year, will be continued, resulting in savings totaling CFAF 12.5 billion (0.7 percent of GDP), compared with program projections; at the same time, the priority sectors of health, education, and rural development will be protected. While the wage bill for the full year has been revised upward by 0.4 percent of GDP to accommodate new hiring in the social areas (in particular education and health) and some retroactive wage and indemnities adjustments linked to the new salary grid, petroleum subsidies have been revised downward by 0.3 percent of GDP because of the decline in international prices; meanwhile current expenditure will be cut on a cumulative basis by 0.8 percent of GDP through contingency measures. Special attention will be paid to refunds of value-added tax (VAT) credits owed to the cotton company (SOFITEX) for prior and current fiscal years, which amount to at least CFAF 6.7 billion. Capital expenditure, devoted essentially to the priority sectors, will be in line with projections. In addition, projections indicate that, on a commitment basis, the share of budget expenditure (excluding external financing and HIPC Initiative related resources) allocated to the health and education sectors will amount to 13.4 percent and 16.2 percent, respectively, as targeted in the program (compared with targets of 12.4 percent and 15 percent in 2000) (Appendix I, Table 2). In addition, to offset the shortfalls in the mobilization of resources freed as a result of the HIPC Initiative and to ensure that the poverty reduction program of the PRSP is implemented in its entirety, CFAF 3.4 billion in budgetary grants will be used to finance the HIPC Initiative 2001 expenditure program, which will therefore amount to the CFAF 25 billion initially provided in the PRSP.

9. Because the lower revenue was offset by expenditure cuts, the overall deficit (on a commitment basis, including grants) will be limited to the programmed level of about 5 percent of GDP. Excluding expenditure financed by the HIPC Initiative, the basic deficit 1 of 1.4 percent of GDP will be slightly lower than in 2000. A higher-than-expected mobilization of external assistance will allow for some reduction in domestic debt at the level of the treasury. Also, the decline in domestic banking indebtedness has been revised to CFAF 5.2 billion, slightly larger than the projected level, to take into account the first scheduled repayments under the securitized postal debt.

10. The government has pursued its objective of improving public expenditure management. In 2001, the government has promptly paid its water, electricity, and telephone bills. It has also finalized the settlement of all balances still owed to the related suppliers by securitizing the last remaining balances owed to the electricity company SONABEL, in September 2001. In addition, to improve cash-flow management, the treasury is continuing its efforts to reduce the number of deposit accounts in its books, following the sharp increase in the number of accounts in recent years, particularly by closing out private sector accounts. So far, 230 accounts to be closed before end-2001 were identified, and 14 accounts of private depositors have already been closed. In addition, the structural performance criterion at end-September on the securitization of CNE (Postal Savings Bank) deposits with the treasury was met on September 21, 2001, thus restoring the liquidity of the CNE and allowing for reentry of the CCP/CNE into the clearinghouse.

11. The money supply is projected to expand by 6.4 percent in 2001. Domestic credit should increase by approximately 8 percent, reflecting a very slight increase in net credit to the government and a rise in credit to the economy of approximately 9 percent. Following the delays observed during the first half of the year, crop credits should be repaid on schedule. Moreover, the government will comply with the decision to be taken by the WAMU Council of Ministers in December 2001 concerning the repayment of statutory advances from the central bank.

12. In the area of structural reform, substantial progress was made in improving public expenditure management with the assistance of the World Bank. The Budget Management Improvement Plan (PRGB), which will serve as a frame of reference for budget management reform, was adopted by Burkina Faso's Council of Ministers in September 2001. This would include more effective expenditure programming, enhanced discipline and transparency, and the strengthening of expenditure control. In this regard, the government plans to accelerate the establishment and beginning of operation of the four courts that will be replacing the Supreme Court. 2 In light of the importance of the Audit Court for monitoring budget management, the government will ensure that the required administrative and institutional steps are taken so that this court is fully operational by end-December 2001 (a structural benchmark under the program). Efforts will also be made to ensure that reliable treasury balances and operating accounts, which are essential for the Audit Court to examine the government's financial situation, are available. Preparation of the Budget Review Law (loi de règlement) for fiscal-year 1999 is well advanced, and the act for fiscal-year 2000 should be finalized more quickly than in the past as a result of the interconnection of the various financial computer software programs involved. The government also intends to finalize the Country Financial Accountability Assessment by end-2001. In addition, the action plan concerning the capacity of budget management to monitor HIPC Initiative related expenditure and other outlays earmarked for poverty reduction, which was developed with technical assistance from the IMF, is being implemented.

13. Progress has been made with the National Good Governance, particularly through the continued consultations among the government, private sector, and civil society. The reform program of the judiciary was finalized and discussed with development partners in June 2001. To solve the problems related to the awarding of public contracts identified during surveys by the National Institute of Statistics and Demographics (INSD), the reform of public contracting procedures will be finalized by the end of the year. Furthermore, the anticorruption unit envisaged in the PRSP will become operational by end-December 2001 (a structural performance criterion under the program). The unit will be independent of the government and will have the jurisdiction to investigate and review cases and to refer them to the competent judicial authorities.

III. Objectives and Policies for 2002

14. 2002 will be marked by a difficult international environment, in particular by falling cotton export prices; at the same time, important legislative elections will be held. The farmers' keen interest in increasing land areas planted with cotton and related cereals, particularly in the new zones open to these crops, is something that the government aims to preserve as a key factor in the fight against poverty. In close collaboration with the cotton producers' associations, the government intends to continue to offer farmers a profitable price while ensuring the financial equilibrium of the sector. Accordingly, the government remains confident that cottonseed production could increase by approximately 5 percent in 2002, and the primary sector by about 4 percent. As a result of the positive spillovers of the abundant cotton and cereals harvests expected for end-2001, the secondary and tertiary sectors are expected to increase by 7.5 percent and 6.5 percent, respectively. All in all, GDP growth is projected at 5.8 percent in 2002. With the abundant availability of foodstuffs, the inflation rate is projected at an annual average of 2 percent. For the period 2003-05, real GDP growth should increase on average by approximately 5½ percent per annum, and include an uptick in private sector investment.

15. In light of the uncertainties linked in particular with low international cotton prices, the government reviewed its downside risk scenario for 2002 and the medium term (i.e., lower cotton and cereals production and a continued low level of workers' remittances). Based on these assumptions, real GDP growth should reach only 4.9 percent in 2002 and 4.6 percent, on average, in 2003-05. The savings-investment balance will deteriorate. Beginning in 2003, the lower level of cotton exports and workers' remittances should cause a widening of the external current account deficit. The overall fiscal balance will show the emergence of financing gaps; however, these will be sustainable and financeable through a mix of domestic adjustment and some higher level of financing.

16. With regard to the balance of payments for 2002, the substantial increase in the volume of cotton harvested in late 2001 but exported in 2002 should lead to a sharp recovery in exports. The expected decline in petroleum prices and in the exchange rate of the dollar against the euro should result in a modest decline in the level of imports. Hence, notwithstanding a further decline in workers' remittances, the current account deficit, excluding grants, is expected to improve by 14.6 percent of GDP (10.4 percent, including grants) as against 17.7 percent in 2001. The overall deficit is also projected to improve, leading to an accumulation in official reserves, projected at approximately CFAF 15 billion. In the medium term, the current account deficit is projected to continue to decline, mainly as a result of an expected increase in cotton exports in the baseline scenario.

17. The fiscal policy objective for 2002 and the medium term is a gradual reduction in the basic and overall deficits, with a view to limiting government borrowing. Consistent with this objective, the basic deficit (excluding HIPC initiative resources) will be kept at around 1 percent of GDP, and the overall deficit (on a commitment basis and including grants) at about 4 percent of GDP in 2002. Tax revenue is projected at 14.5 percent of GDP, an increase of 0.5 percentage point of GDP compared with 2001, reflecting the upturn in growth, as well as a number of new measures in the area of domestic taxation that the government intends to submit to parliament in the 2002 budget exercise. In particular, to offset the weaknesses observed in recent years, the government plans to assign the collection of the tourism development tax to the tax directorate (DGI). In addition, to adhere to the West African Economic and Monetary Union (WAEMU) regional norms, the thresholds for income taxes and the VAT will be revised downward. The necessary steps will be taken so that VAT credits would offset VAT liabilities on receipts (a benchmark for end-December 2001 under the program). The government will also undertake a study to subject the hydrocarbon transport sector to the VAT. If the downward trend in petroleum product prices continues, the government will consider increasing the rates of the petroleum product tax during the year to protect revenue levels.

18. Current expenditure (excluding HIPC initiative resources) is projected at CFAF 223 billion in 2002, a slight decline as a percentage of GDP (to 12 percent of GDP, compared with 12.2 percent in 2001). There will be no general wage increase in 2002; the wage drift and some recruitment in the social sectors should account for about a 3 percent increase in the overall wage bill, and an allowance was added for the planned adjustment in indemnities. As part of the fight against poverty, expenditure on basic education and decentralization will be above the average increase in expenditure. By contrast, current outlays allocated to the presidency and defense will be held well below the average increase in expenditure, correcting the sharp increases recorded in recent years. The government will pursue its policy of promptly paying its water, electricity, and telephone bills, and will not incur any arrears in this area. A slight increase in capital expenditure is projected as a result of a special effort to mobilize domestic resources for investment, particularly in areas related to poverty reduction. In this connection, expenditure will encompass HIPC related resources totaling CFAF 25.2 billion (1.4 percent of GDP). All in all, a substantial planned mobilization of external assistance will enable a further reduction in domestic indebtedness. In addition, efforts planned by key donors to improve the intra-annual distribution of external aid disbursements should make it possible to avoid the liquidity problems experienced by the treasury in the past.

19. In light of the importance of regional integration for a landlocked economy such as Burkina Faso's government will make every effort necessary to comply with the directives of the West African Economic and Monetary Union (WAEMU). Mindful that the country will be unable to meet all the convergence criteria by end-2002, the government will strive to comply within a reasonable time frame. In accordance with the WAEMU directives that are expected to be issued following consultations with the World Trade Organization, it will reduce the still substantial list of products subject to administratively set customs values, which was reviewed in May 2001. In addition, to supplement the substantial progress already made in this area, the government will continue to adapt its national legislation to comply with the five directives for harmonization of the government finance statistics and the accounting and legal framework. In particular, the computerized government accounting framework will be fully operational by end-2001. Moreover, progress is being made to improve the statistical base of the decentralized entities and autonomous agencies—a necessary step to widen before end-2002 the coverage of the summary table of financial operations (TOFE).

20. In keeping with the monetary policy objectives of the Central Bank of West African States (BCEAO) directed at consolidating the union's international reserves and maintaining a level of inflation in line with that of the anchor currency, the money supply is projected to expand by approximately 8 percent in 2002, thereby keeping pace with nominal GDP growth. Credit to the government is projected to decline slightly and credit to the economy to increase by approximately 8.5 percent, consistent with projected trends in economic activity. With a favorable cotton harvest, it is expected that crop credits will be repaid on time and residual balances from earlier growing seasons cleared. The banking system will be strengthened further, particularly through increases in bank capital and reserves, and banks will endeavor to comply with the new capital adequacy ratio that will become effective on January 1, 2002. The government will continue to promote sound development of microfinance, including through a strengthening of the supervision capacity. To implement the WAEMU Council of Ministers' decision to eliminate statutory advances from the BCEAO and to permit full substitutability between bank financing and bills or bonds issued by the treasury on the national or regional financial market, the performance criterion on the change in net bank credit to the government will be replaced from 2002 onward with a performance criterion on net domestic financing (bank and nonbank). The indicative ceilings under this new performance criterion are set at CFAF 11.5 billion at end-March 2002, and -6.3 billion at end-June 2002.

21. With support from the World Bank, the privatization program will be pursued in 2002. After the privatization of the railroad hotel company (SHG) and the national film company (SONACIB), scheduled for end-2001, the first wave of the privatization program for 2002 includes three companies: the national agricultural equipment center (CNEA), following its merger with APICOMA; the management of the airports; the telecommunications company (ONATEL); and, in the energy sector, the opening of the capital of the electricity company (SONABEL) and the petroleum distribution company (SONABHY) to private investors. When these operations have been completed, 47 enterprises, representing 79 percent of the government's original portfolio, will have been liquidated or sold. The remaining 21 enterprises will form part of the second wave of privatizations, which could begin already in 2002. In addition, the government will accelerate studies on the interconnection of the electricity grid with the grids of certain countries in the subregion, with a view to rapidly reducing the cost of electricity in Burkina Faso.

22. The reform of the cotton sector continues. The government is undertaking a study on the financing of cotton inputs, an activity from which SOFITEX intends to withdraw as of the 2002/03 season. The various industry participants will remain vigilant and take timely steps to restore equilibrium in the sector if such steps are required by developments in international cotton prices. These might include a call for increased donors' assistance to finance some subsidization of the producer price, so as to minimize the social impact of a decline in prices.

23. Following the adoption of the new merit-based promotion system, the civil service reform will continue. Special emphasis will be placed on decentralization and devolution policies, including the transfer of human resources. With the continued assistance of the World Bank, the government will intensify its efforts to create an environment more conducive to development of the private sector, in particular through the establishment of the business resource center and the simplification of the administrative procedures for setting up enterprises. The number of formalities has already been reduced from fifteen to eight, and the target of four formalities will be reached by end-2002. Finally, an action plan with a completion timetable will be adopted to enhance the competitiveness of enterprises, as indicated in the study on the macroeconomic implications for aggregate supply of the enterprise taxation policy.

24. The program will continue to be monitored quarterly on the basis of the quantitative performance criteria, benchmarks, and indicators found in Table 1 and in the technical memorandum of understanding, as well as on the basis of the structural performance criteria and benchmarks for end-December 2001 shown in Table 3. For 2002, the key benchmark/performance criterion is the ceiling on the cumulative change in net domestic credit. Others include zero ceilings on new nonconcessional external borrowing 3 and on the accumulation of domestic and external payments arrears. The quantitative indicators include a cumulative floor on government revenue, and cumulative ceilings on expenditure on wages and salaries and current expenditure. Making the anticorruption unit operational is a performance criterion for end-December 2001. Amendment of existing legislation to deduct VAT credits henceforth from receipts and adoption of administrative and institutional measures to make the Supreme Audit Court operational are structural benchmarks for end-December 2001. Quantitative and structural performance criteria, benchmarks, and indicators for end-June 2002 with respect to the seventh disbursement will be established during the fifth program review, scheduled to be completed by June 30, 2002.

25. Statistical data. As part of the national strategy in the area of statistical data, the government is stepping up its efforts to improve the quality and regular production of the national accounts and other economic statistics. In this connection, the INSD's allocations in human and material resources will be significantly raised in the 2002 budget, following the INSD's conversion into an autonomous agency. A report on the General Data Dissemination System (GDDS) has been forwarded to the Council of Ministers for adoption. The national accounts for 1998 will be finalized by end-2001, after some delays. The effort to harmonize the industrial production index in the context of the WAEMU will be completed in 2002.

IV. Poverty Reduction and Social Sectors

26. After broad consultation with civil society, the government presented the first progress report on the PRSP in October 2001. The report (i) takes stock of the progress made and problems encountered in implementing the plan of priority actions for each of the four pillars of the strategy; (ii) reports on the results of consultations undertaken with all parties involved in preparing the assessment and update of the PRSP; and (iii) outlines some possible approaches for remedial actions to be taken in light of the analyses provided in the report and the concerns expressed by the various partners during the consultation process.

27. This progress report was presented in conjunction with a separate report, assessing the conditionalities for the completion point under the enhanced HIPC Initiative. The latter report shows that, despite lower-than-envisaged debt relief for Burkina Faso under the Initiative and a slower-than-anticipated mobilization of resources, all targets set as conditions for reaching the completion point have been achieved. In addition, the technical work to calculate debt sustainability has already been undertaken.

28. Steps taken to implement the PRSP and forthcoming stages are described in the progress report. Effective monitoring of the mobilization and use of HIPC initiative resources has been achieved through the treasury's special account for the use of these resources. The other monitoring procedures continue to be strengthened at the central and regional levels. In particular, the monitoring unit created in June 2001 to establish a centralized database on the evolution of all poverty-reducing expenditure and outcomes will be able—as soon as its software is operational, but certainly before end-2001—to collect and disseminate detailed, real-time data on the results achieved. Furthermore, the government will endeavor to eliminate certain bottlenecks observed in the commitment and settlement of available appropriations. In particular, HIPC initiative resources for 2001 will be committed in their entirety by the end of the year and disbursed by June 30, 2002. Moreover, the decree allocating the disbursement of HIPC initiative resources in 2002 will be adopted at the latest by March 31, 2002.

29. Budgetary decentralization, that is, giving the authority to manage funds through the delegation of appropriations to decentralized units of ministries (down to health districts in the area of health), has yielded compelling results. Expansion of this process is being studied. Now limited to the Ministries of Health, Basic Education, and Decentralization, devolution should also be extended to the Ministries of Agriculture, Animal Husbandry, Environment and Water Resources, and then gradually to other ministries. Devolution, which now only affects expenditure on goods and services, will also be extended to capital expenditure.



Technical Memorandum of Understanding

November 2, 2001

1. This memorandum provides the definitions of the performance criteria and benchmarks of the program supported under the Poverty Reduction and Growth Facility (PRGF) of the International Monetary Fund (IMF). It also sets out the data-reporting requirements for monitoring the program.

I. Definition of Terms

2. For the purpose of this memorandum, the following definitions of "debt," "government," "payment arrears," and "government obligation" will be used:

  • As specified in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted by the Executive Board of the IMF on August 24, 2000, 4 debt will be understood to mean a current, that is, not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, that is, advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, that is, contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods have been delivered or services provided; and (iii) leases, that is, arrangements under which property is provided that the lessee has the right to use for one or more specified period(s) of time, which are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair, or maintenance of the property. Under the definition set out above, debt includes arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. The external debt excludes treasury bills and bonds issued in CFA francs on the regional financial market of the West African Economic and Monetary Union (WAEMU).

  • Government is defined as the government of Burkina Faso and does not include any political subdivision or central bank or any government-owned entity with a separate legal personality.

  • External payment arrears are external payments due but unpaid. Domestic payment arrears under the program for 2001 and 2002 include domestic payments due (following the expiration of a grace period of 90 days, except where the obligation provides for a specific grace period, in which case that grace period will apply) but unpaid.

  • Government obligation is any financial obligation of the government recorded as such by the government (including any government debt).

II. Quantitative Performance criteria

A. Cumulative Change in Net Bank Credit to Government and Net Domestic Credit

Definition – net bank credit to the government

3. For the purposes of the 2001 program, net bank credit to the government is defined as the balance of the Burkinabè Treasury's claims and debts vis-à-vis national banking institutions. Treasury claims include the cash holdings of the Burkinabè Treasury, deposits with the central bank, deposits with commercial banks, secured obligations, and deposits with the postal system. Treasury debt to the banking system includes funding from the central bank (essentially IMF financing and refinancing of secured obligations), government securities held by the central bank, funding from commercial banks (including government securities held by commercial banks), and funding from the postal system (including deposits of the postal system with the treasury).

4. Government securities held outside the Burkinabè banking system are not included in the net bank credit to the government.

5. Net bank credit to the government is calculated by the Central Bank of West African States (BCEAO), whose figures are those deemed valid within the context of the program.

6. As of June 30, 2001, the net government position thus defined was CFAF 109.3 billion. At that date, the cumulative change on net bank credit to government so defined was
CFAF -4.5 billion, compared with the stock at end-December 2000.

Definition – net domestic credit

7. Starting in 2002, the key quantitative performance criterion will be the net domestic credit, defined as the sum of (i) net bank credit to the government, encompassing both the net bank credit to the Burkinabè Treasury as defined above and the other claims and debt of the government vis-à-vis national banking institutions; and (ii) nonbank financing of the government, which includes, inter alia, treasury bills and bonds held outside the national banking institutions and the proceeds of asset sales by the government.

8. Net bank credit to the government is calculated by the BCEAO, whose figures are those deemed valid within the context of the program. The nonbank financing is calculated by the Burkinabè Treasury, whose figures are deemed valid within the context of the program.

Performance criterion/benchmark

9. The ceiling on the cumulative change in net bank credit to the government is set at CFAF -5.2 billion at December 31, 2001. This ceiling is a performance criterion at December 31, 2001.

10. The stock of net bank credit to the government, broadly defined, is programmed at CFAF 78.8 billion at end-December 2001. The ceiling on the cumulative change in net domestic credit of the government is projected at CFAF 11.5 billion at March 31, 2002 and
CFAF -6.3 billion at June 30, 2002. This target will be set as a benchmark for end-March 2002 and as a performance criterion for end-June 2002 during the fifth review under the arrangement.

Adjustments to performance criterion/benchmark

11. These ceilings on the cumulative changes in the net bank credit to the government position vis-à-vis the banking system and in net domestic credit will be subject to adjustments if disbursements of external budgetary assistance, including traditional debt relief—but excluding the assistance to be provided under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative)—exceed or fall short of program forecasts. In the event of excess disbursements at the end of each quarter (end-September 2001, end-December 2001, end-March 2002, and end-June 2002), the ceiling will be adjusted downward pro tanto by the amount of the excess disbursements. In contrast, if at the end of each quarter, disbursements are less than the programmed amounts, the ceiling will be raised pro tanto by the amount of the shortfalls up to the limits (on a noncumulative basis) of a maximum of CFAF 12 billion at end-September 2001, a maximum of CFAF 20 billion at end-December 2001, a maximum of CFAF 1 billion at end-March 2002, and a maximum of CFAF 20 billion at end-June 2002. Concerning HIPC Initiative assistance granted to Burkina Faso, the savings on the debt service will be lodged in a separate account at the Burkinabè Treasury and used to finance priority programs specified in the poverty reduction strategy paper (PRSP), as defined in the 2001 and 2002 finance laws.

Reporting requirement

12. Detailed data on the net government position vis-à-vis the banking system will be provided monthly by the BCEAO within seven weeks following the end of each month, and those concerning the nonbank financing of the government by the Burkinabè Treasury within the same time frame.

B. Nonaccumulation of Domestic Payment Arrears on Government Obligations


13. Domestic payment arrears on government obligations are reduced through the payment of these obligations as defined under paragraph 2 above. The government undertakes not to accumulate any new domestic payment arrears on government obligations on a net basis. The treasury keeps and updates the inventory of domestic payment arrears on government obligations and maintains records of their repayments.

Performance criterion

14. The government will not accumulate any domestic payment arrears on government obligations in 2001 and 2002. The nonaccumulation is a performance criterion for end-December 2001, a benchmark for end-March 2002, and a performance criterion for end-June 2002.

Reporting requirement

15. Data on the outstanding balance, accumulation, and repayment of domestic payment arrears on government obligations will be provided monthly within four weeks following the end of each month.

C. Nonaccumulation of External Payment Arrears

Performance criterion

16. Government debt is outstanding debt owed or guaranteed by the government. It excludes treasury bills and bonds issued in CFA francs on the WAEMU regional financial market. External payment arrears are debt obligations due but not paid on the due date. Under the program, the government undertakes not to accumulate external payment arrears on government debt, with the exception of external payment arrears arising from government debt being renegotiated with creditors, including Paris Club creditors. The nonaccumulation of external payment arrears on government debt is a performance criterion to be observed continuously.

Reporting requirement

17. Data on the outstanding balance, accumulation, and repayment of external payment arrears will be provided monthly within four weeks following the end of each month.

D. External Nonconcessional Loans Contracted or Guaranteed
by the Government of Burkina Faso

Performance criterion

18. Under the program, the avoidance of nonconcessional external debt contracted in guaranteed by the government is a continuous performance criterion. Nonconcessional external debt is defined as all external debt with a concessionality level of less than 35 percent. To calculate the level of concessionality for loans with a maturity of at least 15 years, the discount rate to be used is the ten-year average commercial interest reference rate (CIRR) calculated by the IMF, based on the rates published by the OECD; for loans of less than 15 years, the six-month average CIRR is used. This performance criterion applies not only to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted on August 24, 2000, 5 but also to commitments contracted or guaranteed for which value has not been received. However, this performance criterion does not apply to financing provided by the Fund, and to treasury notes and bonds issued in CFA francs on the WAEMU regional financial market.

Reporting requirement

19. Details on any external government debt will be provided monthly within four weeks following the end of each month. The same requirement applies to guarantees extended by the central government.

E. Short-Term External Debt of the Central Government

Performance criterion

20. The government will not contract or guarantee external debt with an original maturity of less than one year. The avoidance of external debt with an original maturity of less than one year contracted or guaranteed by the government is a continuous performance criterion. This performance criterion applies not only to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are short-term, import-related trade credits, and short-term treasury notes issued in CFA francs on the regional financial market. As of June 30, 2001, the government of Burkina Faso had no short-term external debt obligations.

III. Structural Performance Criterion

A. Performance Criterion

21. The anticorruption unit will be made operational by December 31, 2001. It will be independent of the government and will have jurisdiction to investigate and review cases and to refer cases to the competent judicial authorities.

B. Reporting Requirement

22. The information concerning the implementation of this structural performance criterion will be communicated to the IMF within two weeks following its scheduled implementation date.

IV. Quantitative Benchmarks

23. The program also includes quantitative benchmarks on current government revenue, the civil service wage bill, and total current expenditure.

24. Current government revenue is defined as tax revenue, plus nontax revenue, excluding the revenue collected through treasury checks.

25. Total current expenditure is defined as the difference between total budgetary expenditure, on one hand, and total capital expenditure and net lending, on the other. Capital expenditure is defined as the sum of investment spending identified as such in the national budget and foreign-financed investment outlays.

26. This information will be provided to the IMF monthly within four weeks following the end of each month.

V. Structural Benchmarks

27. The program also includes two structural benchmarks at end-December 2001: the amendment of the value-added tax (VAT) legislation to henceforth deduct VAT credits from receipts; and adoption of the administrative and operational stipulations for the effective operation of the Supreme Audit Court.

VI. Additional Information for Program-Monitoring Purposes

A. Public Finances

28. The government will report to IMF staff the following:

  • a monthly table of government financial operations (TOFE) and the 13 customary appendix tables, to be provided monthly within three weeks (provisional version) and within six weeks (final version) following the end of each month; if the data on actual public investment financed by external grants and loans are not available in time, a linear estimate based on the annual projection will be adopted;
  • complete monthly data on domestic budgetary financing, to be provided within six weeks following the end of each month;
  • quarterly data on implementation of the public investment program, including details on financing sources, to be provided quarterly within six weeks following the end of each quarter;
  • monthly data on debt service, to be provided within four weeks following the end of each month;
  • monthly data on the taxation of the petroleum sector, including (i) the price structure prevailing during the month; (ii) the detailed calculation of the price structure, going from the f.o.b.-MED price to the retail price; (iii) the volumes purchased and supplied to the domestic market by the petroleum distributor (SONABHY); and (iv) the breakdown of receipts from the taxation of petroleum products—customs duties, tax on petroleum products (TPP), and value-added tax (VAT)—and of subsidies, to be provided monthly within four weeks following the end of each month;
  • monthly data on the resources and use of the Burkinabè Treasury's special account created for the use of the resources from the debt-service savings under the HIPC Initiative, to be provided monthly within six weeks following the end of each month; and
  • the status of all the deposit accounts at the treasury classified by major category (administrative services, state enterprises, mixed enterprises, public administrative enterprises, international organizations, private depositors, and others), to be provided within four weeks following the end of each month.

B. Monetary Sector

29. The government will provide the following information within eight weeks following the end of each month:

  • the consolidated balance sheet of monetary institutions and, if the need arises, details pertaining to individual banks;
  • the monetary survey, seven weeks after the end of each month for provisional data, and ten weeks after the end of each month for final data;
  • borrowing and lending interest rates; and
  • customary banking supervision indicators for bank and nonbank financial institutions—as needed, indicators for individual institutions may also be provided.

C. Balance of Payments

30. The government will provide the following information:

  • any revision to balance of payments data (including services, private transfers, official transfers, and capital transactions) whenever they occur; and
  • preliminary annual balance of payments data, within nine months following the end of the year concerned.

D. Real Sector

31. The government will provide the following information:

  • disaggregated monthly consumer price indices, monthly within two weeks following the end of each month;
  • provisional national accounts, no later than six months after the end of the year; and
  • any revision in the national accounts.

E. Structural Reforms and Other Data

32. The government will provide the following information:

  • any study or official report on Burkina Faso's economy, within two weeks following its publication; and
  • any decision, order, law, decree, ordinance, or circular with economic or financial implications, upon its publication or, at the latest, when it enters into force.

F. Summary of Main Data Requirements

Type of Data



Reporting Lag

Real sector

Provisional national accounts


Six months after year's end


Revisions of national accounts

Ad hoc

Eight weeks following revision


Disaggregated consumer price index


End of month + two weeks

Public finances

Net treasury and government at large position with the central bank, and details of nonbank financing


End of month + six weeks


Table of government financial operations (TOFE) and the 13 usual appendix tables


End of month + three weeks (provisional)
End of month + six weeks (final)


Execution of investment budget


End of quarter +six weeks


Petroleum product pricing formula, tax receipts on petroleum products, and subsidies paid


End of month + four weeks


Status of the special account at the Burkinabè Treasury handling the use of the HIPC Initiative resources


End of month + six weeks


Status of the deposit accounts at the Burkinabè Treasury classified by major category


End of month + four weeks

Monetary and financial data

Monetary survey


End of month + seven weeks (provisional)

End of month + ten weeks (final)


Consolidated balance sheet of monetary institutions and, as needed, balance sheets of individual banks


End of month + eight weeks


Borrowing and lending interest rates


End of month + eight weeks


Banking supervision ratios


End of quarter + eight weeks

Balance of payments

Balance of payments


End of year + nine months


Revised balance of payments data

Ad hoc

When revisions occur

External debt

Outstanding external payment arrears and repayments (if applicable)


End of month + six weeks


Details of new external borrowing


End of month + six weeks


1 Defined as total revenue, excluding grants, less total expenditure, excluding externally financed investment expenditure.
2 Council of State, Constitutional Court, Supreme Audit Court, and Court of Cassation.
3 Excluding treasury bonds and bills issued in CFA francs on the national or WAEMU regional financial market.
4 See EBS/00/128 (6/30/00: "Limits on External Debt on Borrowing in Fund Arrangements - Proposed Changes in Coverage of Debt Limits."
5 See paragraph 2 above.