Press Release No. 05/121

Press Release: Declaration by Participants at the Benin Cotton Conference

May 23, 2005

Following the regional conference on cotton-sector issues in Cotonou (Benin) on May 18, 2005, ministers from Benin, Burkina Faso, Chad, and Mali; representatives from the governments of France, Japan and the United States; selected cotton sector stakeholders from the region; as well as the European Commission, the World Bank, the World Trade Organization, and the Managing Director of the International Monetary Fund, Mr. Rodrigo de Rato, issued the following policy declaration:

Background

The growth of the cotton sector in West and Central Africa over the past four decades has been one of the major export success stories of sub-Saharan Africa: no more so than in Benin, Burkina Faso, Chad, and Mali where the performance of the sector affects overall economic performance.

The viability of the sector is under pressure as farmers and ginners are facing declining world cotton prices, exacerbated by euro-dollar exchange rate movements (accounting for a 20 percent drop of local currency cotton prices); distortions in global agricultural trade including producer subsidies in some major cotton producing countries; a surge in output from other developing countries including China, Brazil, India and Pakistan; and, slow productivity gains in cotton producing African countries.

These developments in the cotton sector could have adverse macroeconomic effects in the region: reducing growth; weakening the fiscal and external position; and, straining efforts to reduce poverty. However, we recognize that the economic implications depend to an important extent on policy responses-and this was the focus of the conference discussions.

Policy Responses So Far

The governments of Benin, Burkina Faso, Chad, and Mali have implemented to varying degrees sector reform strategies during the past few years. Reforms have aimed in particular at increasing producer's involvement in cotton sector management, reducing the cost structure of ginning companies through privatization and opening up competition in the ginning sector. However, implementation has been uneven and the results of these reforms, so far, have been mixed.

At the same time, the governments have sought the removal of industrial country subsidies in the context of the Doha round world trade negotiations. This, amongst other issues, is being taken forward by the WTO Cotton Sub-Committee that addresses both the trade and developmental aspects of cotton, including with wide-ranging discussions at a seminar in Cotonou one year ago. Trade ministers from Benin, Burkina Faso, Chad and Mali recently issued a declaration stressing the need for quick progress in the negotiations.

The World Bank and International Monetary Fund have strongly supported structural reform in the cotton sector in the affected countries as well as the liberalization of international trade through the removal of trade-distorting subsidies in industrial countries.

But more needs to be done to ensure continuing macroeconomic and fiscal stability in the context of low cotton prices, in order to safeguard economic prosperity and progress toward the Millennium Development Goals. Additional steps are needed, by both West and Central African exporting countries and the industrialized countries.

Looking Ahead-Policy Requirements

Conference participants recognized the serious challenges facing the West and Central African cotton sector with cotton prices unlikely to rise significantly in the period ahead. Participants reached a consensus that a multi-pronged response is necessary. The key points of this response are:

– Maintaining macroeconomic and fiscal stability in the region.

• Domestic prices need to reflect developments in world market prices in order to preserve fiscal stability and ensure the efficient allocation of economic resources, both of which are essential to poverty reduction and achieving the Millennium Development Goals.

• Where the private sector already sets prices a return to government set prices should be avoided, relying instead on competitive market forces supported by the use of hedging instruments.

• Where government ownership in the sector remains, price-setting mechanisms need to link changes in world prices to domestic prices.

• The potential adverse impact of the decline in prices on poverty should be addressed by well-targeted and temporary measures to protect the poor rather than price supports.

– Raising efficiency is key to the long-term viability of the sector and boosting farmer incomes, and will also strengthen the ability to cope with external shocks.

• The improvement of cotton seed, including the adoption of high yielding genetically modified cotton, could offer a promising avenue to boost competitiveness.

• We recognize that the progressive development of cross-border trade in cotton, in the regions concerned, would increase competition and reduce costs, and we are considering actions in this area. This should also help in promoting the development of textile companies in the cotton producing countries. The development of a regional cotton exchange would contribute to these efforts.

• In some countries, strengthened producer associations could facilitate their participation in the capital of ginning companies and in contract farming arrangements, and to improve input supply and technical services.

• Exploit additional room for cost reductions, especially at the ginning level.

– Tackling trade distorting policies affecting the cotton sector within the framework of the multilateral trade negotiations.

• The July 2004 Framework Agreement of the Doha Round calls for addressing the trade-related problems in the cotton sector "ambitiously, expeditiously and specifically" in all three pillars of the agriculture negotiations (market access, export competition, and domestic support).

• Further progress at the WTO sixth ministerial meeting in Hong Kong would provide impetus to an ambitious, pro-development outcome to the overall negotiations, which should be concluded in 2006.

• The elimination of cotton subsidies and other price-distorting factors would lead to higher cotton prices in the short run and spur production in non-subsidizing countries- and we see this as an important part of an ongoing effort to further liberalize world trade.

• The WTO appellate body recently issued a ruling on the application of certain cotton subsidies, and the parties involved have informed the WTO that they intend to implement the decision.

– Mobilizing development partner support to strengthen the supply side and to preserve poverty reduction objectives.

• The impact of low cotton prices on macroeconomic management in cotton-dependent countries, could be mitigated through development partner support for supply side reforms, in particular to strengthen productivity, to promote economic opportunity and diversification and to strengthen institutions.

• Development partners should also consider well-targeted support in order to help the most vulnerable segments of the population cope with the impact of exceptional price volatility.

• Development partners need to strengthen coordination in delivering such support in the context of a regional strategy for cotton, including intra-regional cotton trade. It remains critical that such support does not interfere with or set back the development of market-based mechanisms in the cotton sector.

• Efforts to address the development aspects of cotton have been undertaken by development partners and will continue to be reported in the context of the WTO framework.

• The IMF stands ready to augment arrangements under the Poverty Reduction and Growth Facility (PRGF) if there is an external financing requirement resulting from terms of trade shocks.