IMF Executive Board Approves US$9.2 Million PRGF Arrangement for Burkina FasoPress Release No. 07/77
April 24, 2007
The Executive Board of the International Monetary Fund (IMF) has approved a three-year, SDR 6.02 million (about US$9.2 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for Burkina Faso, which will support the government's economic reform program for 2007-10. The decision will make available to Burkina Faso an amount equivalent to SDR 0.5 million (about US$0.8 million).
The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.
In commenting on the Executive Board's decision, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:
"The Burkinabè authorities' prudent macroeconomic policies have underpinned a decade of sustained economic growth and macroeconomic stability. Since 2004, however, adverse external developments, in particular the drop in world cotton prices, have posed significant economic challenges. Against this background, advancing toward the Millennium Development Goals will require further reforms. These should aim at maintaining a high rate of growth and increasing tax revenues, thereby creating sustainable fiscal space for higher poverty-reducing expenditures.
"The government has made a commitment to substantially improve revenue performance through modernization of tax and customs administration and through comprehensive tax policy reform. Revenue administration reform will concentrate on efficiency gains through computerization, improved audits, and reduced compliance costs for taxpayers. Tax policy reform will aim at simplifying the tax regime by broadening the tax base and abolishing nuisance taxes, including by eliminating costly tax exemptions.
"The decline in the world market prices for cotton has led to significant financial difficulties for cotton ginning companies. Fundamental reform is needed to put the sector on a sustainable footing. In particular, the cotton producer price setting mechanism must closely link producer prices to world market prices. Over the medium term, it will be important to reduce the role of the government in the cotton sector to allow for a full liberalization of the sector.
"The successful privatization of the telecommunication company has made a major contribution to enhancing the role of the private sector in the economy. Nevertheless, Burkina Faso's business environment remains restrictive, requiring further reform to promote private-sector led growth. Likewise, implementation of the governments' anti-corruption strategy will be necessary to improve governance.
"Maintaining debt sustainability will require a commitment from the government and donors to rely mostly on grant financing, in particular for a scaling up of aid. External borrowing should continue to take place on highly concessional terms. Over time, it will be necessary to reduce the overall fiscal deficit including grants to reduce external borrowing requirements and keep external debt at sustainable levels," Mr. Portugal said.
Recent Economic Developments
Macroeconomic performance under the previous PRGF arrangement (2003-2006) was good, with a real GDP above 6 percent and a low and stable inflation despite financial difficulties in the cotton sector. Average inflation declined to 2.4 percent. Cereal and cotton production were boosted by favorable rainfall and activity also picked up in the construction and service sectors. However, low revenues overshadowed fiscal performance in 2006. They were 0.9 percent of GDP lower than projected during the sixth review of the previous PRGF arrangement, mainly because profit taxes and taxes on domestic goods and services underperformed. Nevertheless, the overall fiscal balance met earlier projections. The deficit including grants on a commitment basis was 5.2 percent of GDP, as projected, but on a cash basis, it was 1.2 percent of GDP lower than expected because of payment delays in the face of financial constraints.
In 2006, Burkina Faso received debt relief of about 21 percent of GDP through the Multilateral Debt Relief Initiative (MDRI). This will provide an average annual flow relief of 0.4 percent of GDP through 2010.
The primary objectives of the new program are to prepare the way to meeting the Millennium Development Goals (MDGs) while keeping the economy stable. Macroeconomic performance in 2007 is expected to be favorable, with real GDP growth stable at 6 ½ percent. The processing of the record 2006 cotton harvest, a positive fiscal impulse, and the expected improvement in the terms of trade form the basis for this projection. However, downside risks related to financial difficulties in the cotton sector exist and will have to be addressed.
Despite a moderate increase in revenues, the fiscal stance in 2007 is expected to be expansionary. The tax ratio will increase by ½ percent of GDP, capturing the effects of recent revenue administration reforms. Fiscal deficit will decline during the program as revenue collection efforts gain ground.
The structural reform agenda will mainly focus on modernizing tax administration and the cotton sector. Computerizing the tax payer office and improving collections enforcement and tax dispute resolution are some of the key elements of the tax administration reform.