Public Information Notice No. 99/54

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

June 28, 1999

On May 21, 1999, the Executive Board concluded the Article IV consultation with Burkina Faso¹.

Background

Burkina Faso’s sustained adjustment effort was 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. 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, under which external debt will be reduced by April 2000 by about 15 percent to the equivalent of 205 percent of exports in net present value terms.

Macroeconomic performance was satisfactory in 1998. Real GDP grew by 6.2 percent with strong growth in agriculture, as cereal production recovered after the 1997 drought and cottonseed production continued to expand, and as manufacturing activity was boosted by the buoyant cotton ginning activity. Activity in services, construction, and public works was also sustained, reflecting the impact of the organization of the final round of the soccer African Cup of Nations (CAN) and the summit of the Organization of African Unity (OAU). Inflation, as measured by the CPI, rose during the first nine months of 1998 as food prices increased, but fell rapidly when the new harvest arrived on the market, dropping on a year-on-year basis to 1 percent in December 1998.

Gross investment stayed at around 25 percent of GDP in 1998, due to the CAN induced increases in private and public construction activity; domestic saving rose by an estimated 2 percentage points of GDP, owing to significant profits in the cotton sector. Reflecting these developments, the external current account position narrowed from 13.9 percent of GDP in 1997 to 12.2 percent of GDP in 1998; cotton exports volumes grew rapidly, by 45 percent, in line with higher production. However, there were some delays in collecting cotton export proceeds, as the Asian crisis caused postponements in cotton shipments over the course of the year.

The main objectives of the program for 1998 in the fiscal area were to achieve a revenue level of 13 percent, as in 1997, and a primary surplus of 0.8 percent ( excluding foreign financed investment expenditure). These targets took into account the revenue loss caused by the reduction on July 1, 1998 of the maximum custom tariff rate from 31 percent to 25 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 will take place on January 1, 2000, together with the reduction of the statistical tax from 4 to 1 percent. The 1998 revenue objective was slightly exceeded, 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 exceeded, as current primary expenditure was lower than expected. However, the domestic contribution to investment was higher than planned, so that the primary surplus was lower than expected (0.5 percent of GDP). The target concerning the reduction of net bank credit to government during 1998 was met with some margin.

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 1998 by 10 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 1998, which was reversed in early 1999.

In 1998 and early 1999, the Burkinabè authorities strengthened the implementation of structural reforms in a number of areas. They nearly completed the first two phases of the program to restructure and privatize public enterprises, and made significant progress in starting the third phase which focuses on the public utility services and the cotton sectors. In particular, the law liberalizing the telecommunications services was adopted in December 1998, paving the way for the privatization of the telecommunications company in 1999. The sale of 30 percent of the shares of the cotton ginning and marketing company to producers’ associations was approved in June 1998, and will be finalized by mid-1999. In the area of civil service reform, following wide discussion with trade unions and the adoption of the related legislation by the National Assembly in April 1998, a merit-based promotion system was introduced on January 1, 1999; this is accompanied by a broader range of pay levels, to stimulate productivity, and a larger recourse to contractual workers, to increase flexibility in the allocation of staff.

It is expected that in 1999 GDP will increase by 5.5 percent, spurred by a further expansion in cotton production, a high level of public investment and rising direct foreign investment. Inflation is expected to remain low. As a result of the sharp drop in the international price of cotton, the external account deficit is expected to deteriorate by 0.8 percentage points 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 prudent wage policy; the planning and the execution of the investment program will be strengthened in a medium-term framework.

Executive Board Assessment

Executive Directors noted that in 1998 and early 1999 economic performance continued to be favorable: growth has been sustained, inflation has declined further, the main budgetary targets have been met, and significant progress has been made in the area of structural reform. Directors also welcomed the marked increase in the volume of cotton production and exports in recent years, which had contributed to raising the incomes of the rural population.

Directors observed, however, that despite the progress achieved in recent years, Burkina Faso’s economy remains vulnerable to fluctuations in world market prices for cotton, and the authorities are likely to continue to face difficult challenges in raising growth rates to levels sufficient to improve social indicators and to reduce poverty. They therefore urged the authorities to persist in their efforts to improve their fiscal position in order to provide adequate resources for the social sectors, and to pursue vigorously the diversification of the economy.

Directors commended the authorities for their determined action to widen the tax base and strengthen tax administration. They stressed that these actions will be crucial to offset the decline in customs revenue resulting from the phased introduction of the common external tariff. Directors regretted the delays in introducing the withholding tax for operators in the informal sector, and recommended that the authorities implement this legislation expeditiously. They also stressed the importance of improving the monitoring of the largest taxpayers. On the expenditure side, Directors noted the efforts under way to strengthen expenditure monitoring, and to finalize the revolving public expenditure program. They also underscored the need to give higher priority to the timely and adequate allocation of budgetary resources to key social sectors—especially health and education—so as to meet the targets for social indicators established in connection with the HIPC Initiative.

Directors welcomed the authorities’ commitment to a wide-ranging civil service reform, including the introduction of a merit-based promotion system.

Directors were pleased with the steps taken in recent months to extend the scope of the privatization program to cover the public utility sector, with the telecommunications company now slated for privatization in 1999. They welcomed the sale of one third of the cotton ginning and marketing company to farmers’ cooperatives, and the new provisions concerning profit distribution to farmers, as these actions will improve farmers’ income and their involvement in themanagement of the cotton sector. More generally, Directors encouraged the authorities to continue efforts to broaden private sector activity.

Directors noted that the banking system has been strengthened in recent years, and that compliance with prudential ratios has improved. They encouraged the authorities to monitor closely loan concentration, and to further strengthen the mutual savings institutions, which play a key role in financing the small-scale private initiatives.

Directors welcomed the authorities’ decision to publish the letter of intent, so as to enhance the transparency of their economic policy and to stress program ownership. They encouraged the authorities to make further efforts to improve the coverage and currentness of key economic statistics, notably the national accounts, agriculture, and industrial production data.