IMF and World Bank Support Additional Debt Relief for Burkina Faso Under Enhanced HIPC Initiative

The International Monetary Fund (IMF) and the World Bank's International Development Association (IDA) agreed this week that Burkina Faso has taken the steps necessary to reach its completion point under the enhanced framework of the Heavily Indebted Poor Countries (HIPC) Initiative. Burkina Faso becomes the fifth country to reach this point, joining Bolivia, Mozambique, Tanzania and Uganda.¹

Debt relief under the enhanced HIPC Initiative from all of Burkina Faso's creditors amounts to US$195 million in net present value (NPV) terms. This comes in addition to US$229 million in NPV terms the country received when it reached its completion point under the original HIPC framework in July 2000. Although this relief cuts its debt stock by nearly 50 percent, exogenous factors have adversely affected Burkina Faso's export performance and capacity, raising the NPV of debt to export ratio at completion point substantially above the 150 percent target set out under the enhanced HIPC framework. Despite prudent policy responses, Burkina Faso would not be able to exit from external debt rescheduling, a key objective of the HIPC Initiative.

In light of this, and as provided for under the HIPC Initiative, the Boards of the IMF and World Bank agreed that Burkina Faso would require exceptional debt relief, or "topping-up", to achieve debt sustainability, and endorsed an additional US$129 million in NPV terms of debt relief to mitigate the adverse effect on Burkina Faso's debt ratios resulting from exogenous shocks to its exports. ² These factors included falling world cotton prices—resulting in part to heavy subsidies in industrialized country markets—political and economic events in neighboring countries, and crop damage due to agricultural parasites. With this additional treatment, the total nominal debt service relief provided under the HIPC Initiative is about US$930 million.

This exceptional treatment, together with additional bilateral assistance beyond HIPC relief (US$22 million in NPV terms), brings Burkina Faso's debt to exports ratio down to the HIPC target of 150 percent at the completion point reference date of end-2001. However, its debt level is projected to remain high during the next decade, with new borrowing contributing to this. This borrowing is of a highly concessional nature and is intended for poverty reduction and growth enhancing purposes. NPV of external debt as a percentage of GDP is projected to fall from over 30 percent in 2001 to 20 percent in 2003 and remain at an annual average below 22 percent through 2010. Moreover, the burden of debt service is expected to remain on a downward trend, with the ratio of debt service-to-exports falling from 23 percent in 1999 to 6 percent in 2003 and averaging 7.4 percent annually over 2001-2010. Debt service as a percentage of revenue declines from 11 percent in 1999 to 4.6 percent in 2003, and averaging 5.5 percent per annum over the coming decade.

The nominal debt service relief required of bilateral and commercial creditors under the enhanced HIPC Initiative, including the topping-up portion and additional relief provided by some Paris Club members on a voluntary basis, equals about US$120 million. Multilateral creditors will be expected to provide about US$410 million in nominal terms. Of this, IDA will provide $237 million. The IMF will provide US$52 million. While the topping-up assistance at completion point will be committed on an individual basis by each of Burkina Faso's creditors, it is expected that the majority of creditors, including the most important ones, will agree to help Burkina Faso reach a sustainable external debt position.

ANNEX

1. Burkina Faso

Steps Taken to Reach the Completion Point Under the Enhanced HIPC Initiative

Burkina Faso's eligibility for debt relief under the enhanced HIPC Initiative underscores recognition by the international community of its continued progress in implementing sound macroeconomic and structural policies, and of the overall quality of its Poverty Reduction Strategy Paper (PRSP).

Upon reaching its decision point under the enhanced framework of the HIPC Initiative in July 2000, Burkina Faso committed to undertake work in three areas in order to reach the completion point and receive irrevocable debt relief under the enhanced framework:

(i) Continued implementation of its PRSP, with satisfactory assessment of first year progress report;
(ii) Maintenance of strong macroeconomic and structural policies supported by an IMF Poverty Reduction and Growth Facility (PRGF) program; and,
(iii) Implementation of a set of social and governance reforms monitored under the Initiative and outlined at the decision point.

All of the policy reform conditions for the floating completion point pertaining to the areas of health, education and governance had been fully met, with targets exceeded in certain areas.

Poverty Reduction Strategy Paper:

Basic Education: Burkina Faso met or exceeded most targets listed in the PRSP for the year 2000, including gross enrollment rates for girls and primary school registration in rural areas. The budget allocation for basic education as a percentage of the total budget increased from 15.3 percent in 1999 to 18.3 percent in 2000. School infrastructure building efforts continued, with the construction of 159 schools, 342 latrines and 206 housing units. In March 2001, the government adopted the Education Policy Letter, which presented a plan to reform the hiring and retention of teachers.

Health: Notable progress has been achieved in raising immunization coverage rates, ensuring a good supply of essential drugs, and improving staffing of primary health facilities. This implementation record demonstrates that solid progress can be made in critical areas which will facilitate progress toward attaining the Millennium Development Goals. Overall health appropriations for 2000 increased by 11.3 percent from 1999. In response to the HIV/AIDS pandemic, an agreement was reached in May 2001 with three large pharmaceutical companies, which resulted in a substantial drop in the price of certain anti-retroviral drugs

The Economic Program:
Burkina Faso has established a solid record of economic performance over the past several years. After averaging 5.7 percent between 1996 and 2000, real GDP growth decelerated to 2.2 percent in 2000, because of a severe drought which resulted in a smaller cotton crop and a significant cereal deficit, and other adverse exogenous shocks. In 2001, real GDP growth rebounded strongly to 5.7 percent thanks to good performance in the primary sector and the cotton sub-sector in particular. Inflation in 2001 increased to 4.9 percent as a result to the lower cereal production the previous year, while the current account deficit shrank from 17.6 percent of GDP in 2000 to 15.9 percent. For 2002, real GDP growth is expected to reach 5.7 percent, assuming some further increase in the cotton crop and a normal cereal crop year. The external current account deficit is projected to decline further to 14.1 percent of GDP in 2002.

Key Policy Measures and Reforms:
Overall, Burkina Faso has made substantial progress in carrying out the specific structural reforms and institutional strengthening the authorities identified at the time of the decision point. Gradual liberalization of the cotton sector has continued, with the state becoming a minority shareholder of SOFITEX, the national ginning and marketing company, ended the monopoly on marketing and opened up two new cotton planting zones open to the private sector. The overall privatization agenda is also moving forward, with the liquidation of or sale of 41 state enterprises.

In the area of governance, the government has improved their budgeting and public expenditure management practices in recent years and established a multi-year program to enhance staff capabilities on public financial management matters. To combat corruption, in December 2001 the authorities launched a unit with the power to investigate cases and refer them to competent judicial authorities, and a newly created Supreme Audit Court, with senior jurisdiction over the control over public finances, will be fully operational by end 2002.

2. General

The HIPC Initiative was launched by the IMF and the World Bank in 1996 as the first comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily indebted countries. In October 1999, the international community agreed to make the Initiative broader, deeper and faster by increasing the number of eligible countries, raising the amount of debt relief each eligible country will receive, and speeding up its delivery. The enhanced HIPC Initiative aims at reducing the NPV of debt at the decision point to a maximum of 150 percent of exports or 250 percent of government revenue, and will be provided on top of traditional debt relief mechanisms (Paris Club debt rescheduling on Naples terms, involving 67 percent debt reduction in NPV terms and at least comparable action by other bilateral creditors).

Eligible countries will qualify for debt relief in two stages. In the first stage, the debtor country will need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record, normally of three years, under IMF- and IDA-supported programs. In the second stage, after reaching the decision point under the Initiative, the country will implement a full-fledged poverty reduction strategy, which has been prepared with broad participation of civil society, and an agreed set of measures aimed at enhancing economic growth. During this stage, the IMF and IDA grant interim relief, provided that the country stays on track with its IMF- and IDA-supported program. In addition, Paris Club creditors, and possibly others, are expected to grant debt relief on highly concessional terms. At the end of the second stage, when the floating completion point has been reached, the IMF and IDA will provide the remainder of the committed debt relief, while Paris Club creditors will enter into a highly concessional stock-of-debt operation with the country involved. Other multilateral and bilateral creditors will need to contribute to the debt relief on comparable terms.

Some three dozen HIPCs are expected to qualify for assistance under the enhanced HIPC Initiative, the great majority of which are sub-Saharan African countries. Debt relief packages are now in place for 26 countries under the enhanced HIPC Initiative framework: Benin, Bolivia, Burkina Faso, Cameroon, Chad, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Sierra Leone, Tanzania, Uganda and Zambia, for total committed assistance estimated at more than US$40 billion over time, representing, with other sources of debt relief, an average NPV stock-of-debt reduction of nearly two-thirds.