IMFSurvey Magazine: Countries & Regions
POVERTY REDUCTION STRATEGY
Cote d'Ivoire Takes Big Step Toward Economic Recovery
By Alexei Kireyev and Jean-Baptiste Le Hen
IMF African Department
May 6, 2009
- Ivorian economy has shown remarkable resilience to global economic downturn
- Domestic economy runs below potential, leaving scope for post-conflict rebound
- Many past obstacles must be overcome to spur growth, advance structural reforms
After several years of civil conflict and flawed economic management, Cote d’Ivoire is set for a comeback.
The authorities’ new economic program provides the platform for strengthening the economic recovery and establishing the foundation for robust growth and higher living standards for the West African country’s 19 million people, the IMF said.
The Ivorian economy has so far shown remarkable resilience to the global economic downturn, yet there are risks. On the downside, unprecedented high cocoa prices may fall and lower exports, farm income and government revenue. The global crisis may deter or delay anticipated foreign direct investment. On the upside, the domestic economy is operating at well below its potential and there is scope for some domestically driven post-conflict rebound.
The authorities’ new program (see Box 1) aims to push forward the goals of the country’s newly adopted poverty reduction strategy. In March 2009 the IMF’s Executive Board approved a $566 million loan to Cote d’Ivoire under the Poverty Reduction and Growth Facility to support the authorities’ push toward establishing sustainable growth, reducing poverty, and advancing the country’s economic reform agenda.
Space for Growth, Spending
The government’s 2009–11 macroeconomic program framework aims at
• Annual real GDP growth of about 4.2 percent on average
• Reducing inflation to 3 percent, in line with West African Economic and Monetary Union targets
• An overall budget deficit of about 2 percent of GDP, consistent with debt sustainability after prospective debt relief. The structural program focuses on meeting debt relief triggers under the Heavily Indebted Poor Countries Initiative.
Medium-term policies include
• Public finance reforms: further fiscal consolidation to stabilize fiscal revenue, with strong tax administration efforts offsetting declines in oil and cocoa revenue; giving priority to pro-poor and crisis-exit spending and restraining the wage bill; rehabilitation of basic infrastructure; structural reforms of public finances to improve governance and transparency.
• Structural reforms: Restructuring of public financial institutions and strengthening banking supervision; enhancing supply and quality in the cocoa and coffee sectors through lower taxation; re-establish the financial viability of the electricity sector.
For almost two decades after independence in 1960, Cote d’Ivoire was an exemplary economic performer among low-income countries. Real growth exceeded 11 percent in the 1960s and 7 percent in the 1970s, and the country was set to emerge as the first developed country in sub-Saharan Africa. High prices for key traditional exports and the ensuing investment boom helped establish its agro, textile and chemical industries and the foundation of its industrial sector.
End of the boom
A turnaround in commodity prices in the early 1980s, paired with relaxed external borrowing policies, put an end to the boom, while the government maintained a high level of expenditures resulting in an unsustainable level of public debt. Although the decline in growth was reversed with the 1994 devaluation of the CFA franc, economic revival was cut short by a coup in 1999 and the start of a civil war in 2002 that triggered a political crisis and polarized the country. After successive international mediation efforts, the security and political situation gradually stabilized.
A new transition government took office in April 2007, and was faced by the enormous challenge to achieve political stabilization and arrest the economic downturn and the associated social strain, in what still remained a difficult socio-political environment. There was a need to restructure government spending toward poverty reduction.
At the same time, the government was facing competing needs to finance the post-conflict programs related to demobilization and reunification, as well as to the preparation of presidential elections. Structural reforms aimed at improving the working of the cocoa, coffee, energy, and financial sectors―as well as reestablishing financial discipline in the public sector, notably through greater transparency and accountability.
However, almost two decades of political instability had created bad habits and a disregard for normal procedures, and vested interests sought to maintain the status quo. The government also sought to reengage with the international community to get support, including financial, for its recovery program.
Measure of transparency
The IMF provided crucial support from two Emergency Post-Conflict Assistance (EPCA) credits, in 2007 and 2008. Under the EPCA-supported programs the authorities kept public finances in check, restored a measure of transparency, reestablished relations with multilateral donors, and started a range of structural reforms together with some consensus building for deeper reform.
Creating fiscal space to increase resources for poverty reduction is a key objective under the 2009–11 program.
• Identification. The government identified 32 specific expenditure categories that have the biggest impact on the poor. These include certain types of expenditure on education, health, rural roads and highways, community-based water supply, rural electrification, rice farming, and security.
• Targets. Pro-poor spending is targeted to grow from 6.9 percent of GDP in 2008 to 8.3 percent of GDP in 2011.The authorities will use excess revenues from petroleum and gas extraction for pro-poor spending or to offset other revenue shortfalls.
• Monitoring. The government will monitor pro-poor expenditure. The PRGF-supported program includes an indicative floor on the level of pro-poor spending.
In less than two years, the government achieved modest primary basic surpluses, which permitted the payment of arrears to multilateral partners and domestic suppliers, giving a boost the business sector. Tax administration reforms mobilized greater resources for pro-poor spending and crisis-exit programs, both essential for political stability. The authorities restored a normal budget cycle and improved the transparency and monitoring of budget execution, for example by limiting the use of treasury advances.
Diagnostic studies and audits in the energy, cocoa, and coffee sectors provided the basis for deeper reforms, greater transparency, and accountability on the use of the resources generated. The government also adopted automatic petroleum pricing in line with world prices and took steps to restore the viability of the electricity sector. They also cleared their arrears and resumed debt service payment to the World Bank and African Development Bank, unlocking their financial assistance.
Private sector development
The authorities’ 2009–11 program is ambitious and rests on four pillars.
• The 2009-15 poverty reduction strategy (PRS), which aims to transform Côte d’Ivoire into an emerging economy. Following the rise in the poverty rate from 10 percent in 1985 to almost 49 percent today, a key task will be to lower poverty significantly.
• Prudent fiscal policy that supports macroeconomic stability, reestablishes a sustainable debt position, and aligns spending with the PRS. The focus is on pro-growth and pro-poor spending, the rehabilitation of basic infrastructure, and restoring government administration in the whole country (see Box 2). Strengthened tax administration would help mobilize revenue, and, nonpriority current spending is to be limited.
• Reforms in public financial management to ensure the efficient use of public resources and underpin growth in key sectors. Thus, the program aims to make further improvements in governance, transparency, and accountability in government operations, the civil service, and the energy and cocoa and coffee sectors. In addition, measures to improve the business climate, and strengthen and improve access to financing would promote private sector development.
• Cooperation and engagement with development partners. In the face of large post-conflict needs and a high debt service bill, the financing gap over the next three years (some 31 percent of GDP) dwarfs available domestic resources. Donor support for debt restructuring (including large arrears) and program and project financing will be crucial. Securing interim debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative will help pave the way for further debt reduction.
To secure an early return to higher growth many past obstacles must be overcome to advance structural reforms and to embrace discipline and transparency in public resource management. As creditors and donors await evidence of improvements in these areas, the scaling up of donor project support and the delivery of debt relief will take time. Popular expectations are high, and an active public debate can help allocate scarce public resources among competing priorities and promote structural reforms.
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