Journal Issue
Share
Article

Burkina Faso: Second and Third Reviews Under the Extended Credit Facility Arrangement, and Request for Augmentation of Access and Modification of Performance Criteria

Author(s):
International Monetary Fund. African Dept.
Published Date:
July 2015
Share
  • ShareShare
Show Summary Details

Recent Developments and Program Performance

A. Recent Developments

1. Following the resignation of President Compaoré and the departure of his government in late 2014, a transition government was quickly formed to stay in power until elections in October, 2015. Presidential and legislative elections have been scheduled for October, 2015, with local elections postponed until early 2016. Despite ongoing political tensions and strikes, most stakeholders share a strong common interest in holding elections this year, boding well for containing potential political turmoil and resulting public unrest. If successful, this will be the first democratic political transition in Burkina Faso’s history.

2. Economic activity hit the brakes over the course of 2014, due to multiple external shocks and political uncertainty (Figures 1 and 2). Real GDP growth is estimated to have been 4 percent in 2014 (down from 6.6 percent in 2013), against the backdrop of spillovers from the Ebola crisis elsewhere in the region (impacting tourism and services), stagnating gold production and a drop off in new exploration due to low international prices, a drop in grain production by 8 percent (due to erratic rains and excess stocks), and a slowdown in investment due to ongoing political uncertainty leading up to the events in October. This motivated an increasingly contractionary fiscal policy stance which exacerbated the situation, as did the popular uprising that led to the fall of the government in the 4th quarter. However, high-frequency indicators show a consistent slowdown through the year, indicating the 4th quarter events themselves had a marginal impact. Headline inflation was negative through most of the year, driven by lower food prices and reduced activity.

Figure 1.Burkina Faso: Recent Economic Developments

Sources: Burkinabè authorities and IMF staff calculations.

Figure 2.Burkina Faso: Real and External Developments, 2006–14

Sources: Burkinabè authorities and IMF staff calculations.

3. Low revenues and delayed budget support compelled a pro-cyclical reduction in public spending, mainly affecting investment spending (Figure 3). In sharp contrast with recent years, revenues were 86 percent of target, and a large budget support disbursement from the World Bank was delayed.1 Lower revenues were a function of the aforementioned growth factors, as well as disruptions in Q4 collections due to the fall of the government. Together, these forced large spending compression. Concurrently, a large hike in the public wage bill, agreed by the previous government in the first half of the year, forced re-composition of spending within the reduced envelope. Domestically-financed investment spending took the largest hit. Taken together with substantially lower-than-expected execution of externally-financed investment spending, the resulting estimated fiscal deficit was 1.8 percent of GDP, roughly half of the previous year.

Figure 3.Burkina Faso: Fiscal Developments, 2009–14

Sources: Burkinabè authorities and IMF staff calculations.

4. The current account deficit is estimated to have narrowed modestly in 2014 due to spending adjustment, but lower financing led to sharply lower imputed reserves.2 Estimated current account improvement was due to substantially lower imports related to reduced public investment spending, as well as lower international fuel prices (administered prices muted demand effects). Gold exports earnings dropped from the previous year, based on lower prices. Cotton exports increased despite falling prices, with a strong harvest and a large share of the crop pre-sold. Services exports are estimated to have dropped sharply due to foregone tourism revenues (including cancellation of 2-3 large African-wide events) but imports are estimated to have adjusted similarly. In the absence of strong public spending adjustment, the current account balance would have worsened considerably (Text Table 1).

Text Table 1.Impact of Commodity Price Shocks, Offset by Import Compression(Difference between 2nd/3rd Review and 1st Review, CFA billions)
20142015
Exports of Goods−42.7−70.3
Gold Price Shock (US$ price and volume effect, excl. CFA depreciation)−69.0−218.4
Cotton Price Shock (US$ price and volume effect, excl. CFA depreciation)−0.9−47.9
CFA Depreciation (all exports)30.0254.4
of which: Gold23.6175.3
of which: Cotton1.638.3
Other−2.8−58.4
Imports of Goods−169.0−77.8
Fuel Price Shock (US$ price and volume effect, excl. CFA depreciation)−32.3−150.5
CFA Depreciation (all imports)27.7183.3
of which: Fuel12.560.8
Import Compression due to spending adjustment−171.2−143.1
Other6.832.4
Trade Balance126.37.5
Excluding Import Compression−44.9−135.6
Source: BCEAO and IMF staff projections.
Source: BCEAO and IMF staff projections.

B. Program Performance

5. In December, the transition authorities expressed their strong preference to continue the existing ECF-supported program. Staff’s assessment is that the transition authorities possess both the capacity and ownership to continue implementation of an upper credit tranche arrangement. Although widespread changes were made at the Ministerial and Director General levels, the new officials have extensive technical experience and the government’s plans to strengthen PFM will be supported by technical assistance, which together make the case that an upper credit tranche program can be implemented. Also, the authorities demonstrated commitment to sound macro policies through rapid submission of a 2015 budget and a 2014 supplemental budget consistent with discussions, completion of already-initiated audits of the public energy enterprises (benchmark) and voluntary implementation of recommendations from a study (benchmark) to improve the financial viability of the cotton stabilization fund.

6. Program performance on quantitative objectives for the 2nd and 3rd ECF reviews was satisfactory, particularly considering the various shocks. Quantitative targets on net domestic financing and the fiscal deficit were met for end-June and end-December, the latter due primarily to spending compression (Table 5). Indicative floors for revenue collection were not met by a large margin due to the growth slowdown. The indicative floor for poverty reducing spending was not met at end-June and end-December, the latter due to political events. The continuous performance criteria on accumulation of non-concessional external debt and external arrears were met. Based on estimates, the indicative target on zero accumulation of domestic arrears was not met at end-December. Given that domestic arrears arose in late 2014, the authorities and staff propose to revise relevant program monitoring to make it more effective (¶36).

Table 1.Burkina Faso: Selected Economic and Financial Indicators, 2013–16
2013201420152016
1st reviewEst.1st reviewProj.Proj.
(Annual percentage change, unless otherwise indicated)
GDP and prices
GDP at constant prices6.66.74.06.85.06.0
GDP deflator−0.81.1−1.61.91.31.9
Consumer prices (annual average)0.51.5−0.32.00.71.8
Consumer prices (end of period)0.12.0−0.12.01.61.8
Money and credit
Net domestic assets (banking system) 119.615.416.415.018.116.7
Credit to the government (banking system) 15.34.04.92.35.21.4
Credit to the private sector26.315.116.516.415.116.8
Broad money (M3)11.314.313.014.914.315.0
External sector
Exports (f.o.b.; valued in CFA francs)−3.3−0.9−4.34.42.32.0
Imports (f.o.b.; valued in CFA francs)5.62.5−9.23.410.95.0
Terms of trade−13.7−4.0−4.61.2−3.4−3.3
Real effective exchange rate1.8
(Percent of GDP, unless otherwise indicated)
Central government finances
Current revenue18.519.317.319.317.317.9
Of which: tax revenue16.517.315.217.215.716.1
Total expenditure and net lending27.427.823.227.724.825.6
Of which: current expenditure13.614.714.414.714.714.1
Overall fiscal balance, excl. grants (commitments)−8.9−8.4−6.0−8.4−7.5−7.7
Overall fiscal balance, incl. grants (commitments)−3.5−3.1−1.8−3.1−2.5−3.0
NPV of external debt14.015.015.215.415.515.8
Memorandum items:
Nominal GDP (CFAF billion)6,0266,4136,1716,9836,5617,085
CFAF/US$ (annual average)494479494
Euro/US$ (annual average)1.331.371.33
Gold price (USD/KG)45,40042,68140,74043,21937,95237,931
Cotton price (USD/ton)1,7721,8521,7791,7301,3451,393
Petroleum spot price (USD/ton)783784724737438494
Sources: Burkinabè authorities; and IMF staff estimates and projections.

Percent of beginning-of-period broad money.

Sources: Burkinabè authorities; and IMF staff estimates and projections.

Percent of beginning-of-period broad money.

Table 2a.Burkina Faso: Consolidated Operations of the Central Government, 2013–16
20132014201520152016
Act.1st ReviewEst.1st ReviewProj.Proj.
(CFAF billions)
Total revenue and grants1441.71582.01321.11717.21462.81603.4
Total revenue1117.41238.31064.71347.11137.21270.4
Tax revenue 1992.61106.3940.71203.11032.51142.4
Of which: Gold Mining CIT49.470.250.075.151.153.0
Nontax revenue 2124.8132.0124.0144.0104.8128.0
Of which: Royalties from gold33.641.432.044.431.732.9
Grants324.4343.7256.4370.1325.6333.0
Project205.2216.8157.5244.4181.6198.4
Program119.1126.998.9125.7143.9134.6
Expenditure and net lending31652.61779.71434.51934.71626.51812.9
Current expenditure818.9942.9886.71023.9965.71001.1
Wages and salaries355.5441.4437.3469.2456.7488.8
Goods and services118.6118.4102.4139.7110.1116.2
Interest payments34.728.944.037.939.741.8
Domestic21.916.929.317.824.024.7
External12.812.014.720.215.717.1
Current transfers310.1354.2303.0377.1359.2354.2
Investment expenditure858.4823.7554.1900.8663.7814.7
Domestically financed592.7509.5338.4558.6424.4510.1
Externally financed265.7314.2215.7342.2239.3304.6
Net lending−24.813.1−6.210.0−2.9−2.9
Overall balance3−210.8−197.7−113.4−217.5−163.7−209.5
Cash basis adjustment50.80.075.90.0−60.00.0
Overall balance (cash basis)−160.0−197.7−37.5−217.5−223.7−209.5
Financing162.5190.742.0175.4193.3148.5
Foreign financing34.4123.451.495.474.4103.5
Drawings60.5150.782.2139.7117.2141.7
Project loans60.597.458.297.857.7106.3
Program loans0.053.324.041.959.535.4
Amortization (excl. IMF)−26.0−27.3−30.8−44.3−42.7−38.1
Domestic financing128.167.4−9.480.0118.945.0
Bank financing92.477.9−34.750.0114.135.0
Central bank75.855.3−58.510.0114.135.0
Commercial banks16.722.623.840.00.00.0
Nonbank financing35.7−10.525.330.04.810.0
Errors and Omissions−2.5−4.5
Financing gap0.07.00.042.130.361.0
Of which: IMF future disbursements0.07.00.07.010.67.0
Of which: IMF potential augmentation19.7
Memorandum items:
Gold mining revenue183.1188.9149.4193.1155.7163.1
Overall Balance excl. gold mining revenue−343.1−386.7−262.8−410.5−319.4−372.6

2015 projection includes measures for: satellite tracking, scanners, facture normalise, new thresholds for companies to pay VAT.

2014 includes several one-offs such as large dividend payments and fines.

Commitment (“engagement”) basis.

2015 projection includes measures for: satellite tracking, scanners, facture normalise, new thresholds for companies to pay VAT.

2014 includes several one-offs such as large dividend payments and fines.

Commitment (“engagement”) basis.

Table 2b.Burkina Faso: Consolidated Operations of the Central Government, 2013–16
2013201420152016
Act.1st ReviewEst.1st ReviewProj.Proj.
(In percent of GDP)
Total revenue and grants23.924.721.424.622.322.6
Total revenue18.519.317.319.317.317.9
Tax revenue16.517.315.217.215.716.1
Of which: Gold Mining CIT0.81.10.81.10.80.7
Nontax revenue12.12.12.02.11.61.8
Of which: Royalties from gold0.60.60.50.60.50.5
Grants5.45.44.25.35.04.7
Project3.43.42.63.52.82.8
Program2.02.01.61.82.21.9
Expenditure and net lending227.427.823.227.724.825.6
Current expenditure13.614.714.414.714.714.1
Wages and salaries5.96.97.16.77.06.9
Goods and services2.01.81.72.01.71.6
Interest payments0.60.50.70.50.60.6
Domestic0.40.30.50.30.40.3
External0.20.20.20.30.20.2
Current transfers5.15.54.95.45.55.0
Investment expenditure14.212.89.012.910.111.5
Domestically financed9.87.95.58.06.57.2
Externally financed4.44.93.54.93.64.3
Net lending−0.40.2−0.10.10.00.0
Overall balance2−3.5−3.1−1.8−3.1−2.5−3.0
Cash basis adjustment0.81.20.0−0.90.0
Overall balance (cash basis)−2.7−3.1−0.6−3.1−3.4−3.0
Financing2.73.00.72.52.92.1
Foreign financing0.61.90.81.41.11.5
Drawings1.02.31.32.01.82.0
Project loans1.01.50.91.40.91.5
Program loans0.00.80.40.60.90.5
Amortization (excl. IMF)−0.4−0.4−0.5−0.6−0.7−0.5
Domestic financing2.11.1−0.21.11.80.6
Bank financing1.51.2−0.60.71.80.5
Central bank1.30.9−0.90.11.70.5
Commercial banks0.30.40.40.60.00.0
Nonbank financing0.6−0.20.40.40.10.1
Errors and Omissions0.00.0−0.10.00.00.0
Financing gap0.00.10.00.60.50.9
Of which: IMF future disbursements0.00.10.00.10.20.1
Of which: IMF potential augmentation0.3
Memorandum items:
Gold Mining Revenue3.02.92.42.82.42.3
Overall Balance excl. gold mining revenue−5.7−6.0−4.3−5.9−4.9−5.3
Nominal GDP (CFAF billions)6,0266,4136,1716,9836,5617,085

2014 includes several one-offs such as large dividend payments and fines.

Commitment (“engagement”) basis.

2014 includes several one-offs such as large dividend payments and fines.

Commitment (“engagement”) basis.

Table 3.Burkina Faso: Monetary Survey, 2013–16
2013201420152016
1st ReviewEst.1st ReviewProj.Proj.
(CFAF Billions)
Net foreign assets534.9512.7468.4509.7386.0344.2
BCEAO45.222.9−36.620.0−118.9−160.7
Assets297.7271.6163.1254.5138.184.2
Liabilities252.5248.7268.6234.5257.0244.9
Commercial banks489.7489.7504.9489.7504.9504.9
Net domestic assets1402.31701.41720.72033.82116.22533.2
Net domestic credit1540.51839.61809.12171.92254.52626.6
Net credit to government44.2122.0139.0172.0253.1288.1
Treasury79.8157.745.1207.7159.2194.2
BCEAO79.2134.520.7144.5134.8169.8
Commercial banks0.623.224.563.224.524.5
− of which CNE accrued interest135.9
Other central government−35.7−35.793.8−35.793.893.8
Credit to the economy1492.31717.61739.01999.92001.42338.5
Other items (net)−138.1−138.1−88.4−138.1−138.4−93.4
Broad money1937.22214.12189.12543.52502.22877.4
(Annual % change, unless otherwise indicated)
Memorandum items:
Net foreign assets−21.2−4.2−12.4−0.6−17.6−10.8
Net domestic assets 219.615.416.415.018.116.7
Net credit to government 25.34.04.92.35.21.4
Credit to the private sector26.315.116.516.415.116.8
Money supply11.314.313.014.914.315.0
Sources: Burkinabè authorities; and IMF staff estimates and projections.

Accrued interest over past years was booked in 2014 on the accounts at the CNE (National Saving Agency).

Annual change as a percentage of broad money from 12 months earlier.

Sources: Burkinabè authorities; and IMF staff estimates and projections.

Accrued interest over past years was booked in 2014 on the accounts at the CNE (National Saving Agency).

Annual change as a percentage of broad money from 12 months earlier.

Table 4.Burkina Faso: Balance of Payments, 2013–16
2013201420152016
1st reviewEst.1st reviewProj.Proj.
(CFAF billions)
Current account−398.4−462.5−378.9−489.0−500.6−551.8
Trade balance−197.8−246.1−119.8−242.3−234.8−282.9
Exports of goods1234.51223.51180.81278.01207.71232.2
Of which: cotton217.0236.4237.1236.7227.2225.3
gold872.7827.9782.6864.8821.7820.4
Imports of goods−1432.4−1469.6−1300.7−1520.3−1442.5−1515.0
Of which: oil−450.7−452.9−433.2−443.7−354.1−387.1
Of which: food−129.7−120.9−114.0−115.3−144.5−147.6
Of which: public investment−610.3−626.6−436.0−672.6−524.9−623.8
Services, net−401.7−433.6−436.8−463.5−502.0−470.0
Income, net−33.9−29.1−30.8−34.4−40.0−41.1
Current transfers235.1246.3208.6251.3276.2242.1
Of which: Official transfers, net157.7167.3129.6170.7178.6162.0
Capital account231.4243.0183.7270.6209.6226.4
Project grants205.2216.8157.5244.4181.6198.4
Financial account39.4190.3128.7173.3178.3222.6
Direct investment78.384.480.281.9109.5130.1
Portfolio investment10.010.05.010.010.74.0
Other investment−48.995.943.481.458.088.5
Long-term investment−53.990.938.476.453.083.5
Project loans60.597.458.297.857.7106.3
Program loans0.053.324.041.959.535.4
Amortization of public loans (excl. IMF)−27.5−27.3−30.8−44.3−42.7−38.1
Other private−86.9−32.5−13.0−18.9−21.4−20.0
Short-term investment5.05.05.05.05.05.0
Errors and omissions−16.40.00.00.00.00.0
Overall balance−144.0−29.2−66.5−45.1−112.7−102.8
Financing144.022.266.52.982.341.8
Net change in foreign assets of the central bank188.722.281.72.982.341.8
Of which: gross official reserves211.532.883.323.693.953.9
IMF net financing1.0−10.6−1.6−20.7−11.6−12.1
Disbursements4.80.03.80.00.00.0
Repayments (excluding charges)−3.8−10.6−5.4−20.7−11.6−12.1
Net foreign assets of commercial banks−44.80.0−15.20.00.00.0
Financing Gap0.07.00.042.130.361.0
Of which: IMF future disbursements0.07.00.07.010.67.0
Of which: IMF potential augmentation19.7
Memorandum items:(Percent of GDP)
Current account (− = deficit)−6.6−7.2−6.1−7.0−7.6−7.8
Imputed Country Reserves (in percent of Broad Mone15.512.39.99.54.92.3
Imputed Reserves (in billions of USD)0.61.60.40.20.20.1
GDP at current prices (CFAF billions)6,0266,4136,1716,9836,5617,085
Table 5.Burkina Faso: Quantitative Performance Criteria and Indicative Targets June 2014–March 2015(CFAF billion, cumulative from beginning of year; unless otherwise indicated)
20142015
Jun.Sept. 6Dec.Mar. 6
Adj. Prog.Act.Adj. Prog.Act.Adj. Prog.Act.Prog.Est.
Quantitative Performance Criteria
Ceiling on net domestic financing of government1, 284.465.2Met66.368.7Not met100.684.3Met55.0n.a.
Ceiling on the amount of new nonconcessional external debt
contracted or guaranteed by government 3, 4150.083.2Met150.083.2Met150.0121.2Met150.0n.a.
Accumulation of external arrears 30.00.0Met0.00.0Met0.00.0Met0.0n.a.
Indicative targets
Ceiling on the overall fiscal deficit including grants148.066.8Met157.3103.2Met155.5113.4Met79.4n.a.
Floor on Government revenue593.8537.4Not met884.3820.8Not met1238.31064.7Not met276.8n.a.
Floor on Poverty-reducing social expenditures5244.7219.5Not met367.1371.2Met489.5445.3Not met117.5n.a.
Accumulation of new domestic arrears0.0n.a.n.a.0.0n.a.n.a.0.0n.a.n.a.0.0n.a.
Sources: Burkinabè authorities; and IMF staff estimates and projections.

Including on-lending of prospective IMF disbursements.

Past year accumulated interest at the CNE account in 2014 is not included (in accordance with 1986 GFS and TMU).

To be observed continuously.

The limit is not tied to specific projects.

Includes identified financing only.

Indicative Target, except for continuous performance criteria.

Sources: Burkinabè authorities; and IMF staff estimates and projections.

Including on-lending of prospective IMF disbursements.

Past year accumulated interest at the CNE account in 2014 is not included (in accordance with 1986 GFS and TMU).

To be observed continuously.

The limit is not tied to specific projects.

Includes identified financing only.

Indicative Target, except for continuous performance criteria.

Table 6.Structural Benchmarks for the Second and Third Reviews of the ECF Arrangement
MeasuresDateStatus
Submit to the Cabinet a report with recommendations to improve the quality of investment expenditureSep-14Met
Conduct a study to identify options for strengthening the price smoothing fund (fonds de lissage) and putting it on a financially sustainable basisSep-14Met
Have the Board of Directors adopt an action plan to implement the option selected for improving the quality of financial services provided by SONAPOSTDec-14Not met
Update SOFITEX’s business plan by taking into account all the new assumptions, and submit the update to the Board of Directors for approvalDec-14Met
Conduct a study on the viability of production and import options to take into account new developments in the energy sector at the national and subregional levelDec-14Not met
Implement a satellite tracking system for goods in transitDec-14Implemented with delay
Initiate the process to update the base year used by the INSD for the production of national accountsDec-14Met
Conduct an external audit of SONABHY and SONABEL, under the supervision of the higher authority for government supervisionNov-14Implemented with delay

7. Most structural benchmarks were implemented, despite the change in government (Table 7). Importantly, external audits of the state-owned oil importer, SONABHY, and the electricity company, SONABEL were implemented, with a delay due to the change in government, as was satellite tracking for customs goods in transit. Four other benchmarks were met on time, and two benchmarks were not met. Of these, one, a study on production and import options for energy, has been reprogrammed for early 2016, in order to take into account new performance contracts (¶25). The second has been reprogrammed for early 2016 and reformulated, to improve accountability, by requiring that SONAPOST adopt recommendations of a feasibility study on decentralized financial services, to improve access to basic cost-affordable financial services in rural areas.

Table 7.Burkina Faso: Schedule of Disbursements Under ECF Arrangement 2014-16, Including Proposed Augmentation
AmountDate availableConditions for disbursement 1
SDR 2.55 millionDecember 27, 2013Following Executive Board Approval of successor ECF arrangement
SDR 2.55 millionMay 15, 2014Observance of the performance criteria for end-December 2013, and completion of the first review under the arrangement
SDR 4.11 millionDecember 1, 2014Obervance of the performance criteria for end-June 2014, and completion of the second review under the arrangement
SDR 18.92 millionMay 15, 2015Observance of the performance criteria for end-December 2014, and completion of the third review under the arrangement
SDR 14.10 millionDecember 1, 2015Observance of the performance criteria for end-June 2015, and completion of the fourth review under the arrangement
SDR 4.47 millionMay 16, 2016Observance of the performance criteria for end-December 2015, and completion of the fifth review under the arrangement
SDR 4.47 millionDecember 1, 2016Observance of the performance criteria for end-June 2016, and completion of the sixth review under the arrangement

In addition to the generally applicable conditions under the Extended Credit Facility

In addition to the generally applicable conditions under the Extended Credit Facility

Policy Discussions

8. Growth projections for 2015 have been revised downward, with an improvement forecast for 2016. For 2015, growth projections have been lowered to 5 percent, based on a continuation of trends observed in 2014. Mining production is expected to decrease by 4 percent, partly in light of international gold price projections. Other factors include recent vandalization of certain gold mines, suspension of a new production license for a large manganese mine pending reconsideration of the contract, termination of activity of some mines, and delays in the start of production of some new mines. Cotton production is expected to drop dramatically over 2015–2016, due to a projected 25 percent drop in international prices and a resulting reduction in cultivated area by a similar amount. Cotton is the main income source in rural areas where poverty is concentrated, so the consequences outweigh the macroeconomic impact. Depreciation of the CFAF against the US dollar, through the CFAF peg to the euro, will offset only part of these losses. The impact of the depreciation will be immediately felt, however, with a higher import bill. Growth should recover back towards historical trends in 2016, assuming improvement of the political situation, abatement of Ebola in the region, commodity price stabilization, and continued investment in the country’s “growth poles” (MEFP, ¶16).

9. The current account deficit is set to widen, as evidenced by movements in the trade balance. Weak international gold and cotton prices are only partly offset by depreciation of the CFAF against the US dollar, leading to a fall in exports of goods of CFAF 70.3 billion relative to 1st review projections (Text Table 1 and Table 4). While the large fall in international fuel prices reduces the value of oil imports, this is more than offset by the impact of depreciation of the CFAF against the US dollar on the entire import bill. Overall, without spending compression, the external shocks affecting Burkina Faso would lead to a significant deterioration in 2015 trade balance projections relative to the 1st review, by CFAF 135.6 billion, or 2.1 percentage points of GDP. However, public investment spending compression will reduce the import bill, leaving balances in CFAF terms roughly in line with 1st review projections. Relative to 2014 (and as a percent of a lower GDP denominator), the overall current account balance will worsen significantly, causing a large projected reduction in imputed international reserves (of CFAF 93.9 billion or 1.4 percent of GDP). The reduction would have been much higher in the absence of sharp fiscal adjustment and new financing commitments by development partners. These figures assume the requested augmentation of access under the ECF arrangement, without which the reduction would be larger still.

A. Fiscal Policy for 2015

10. Groundwork for the fiscal policy discussions was laid during a December staff visit, with projections for severe fiscal and external imbalances for 2015. In December, preliminary 2014 results pointed to significantly lower tax receipts, a marked slowdown in growth, and delayed external assistance. For 2015, using nominal spending assumptions from the first review would have implied a fiscal deficit of 8.1 percent of GDP, and a remaining financing gap of 7.8 percent of GDP (Text Table 2). (Similar to shock scenarios considered by staff in the context of the 1st review.) To close the gaps, the authorities devised an “austerity budget” reflecting large expenditure compression. On this basis, staff prepared an assessment letter at the request of development partners in early 2015.

Text Table 2.Overview of Changes to the 2015 Fiscal Framework(percent of GDP)
1st review1st review revised GDPDecember 201412nd/3rd review
Revenue and Grants24.626.221.422.3
Revenue19.320.517.317.3
Grants5.35.64.15.0
of which: Program1.81.91.32.2
Expenditure and net lending27.729.529.524.8
Overall fiscal balance−3.1−3.3−8.1−2.5
Financing2.52.70.32.9
Foreign financing1.41.50.81.1
− of which: Program0.60.60.20.9
Net domestic financing1.11.2−0.51.8
Financing gap0.60.67.80.5
− of which: IMF disb./aug.0.10.10.20.5
Memo: nominal GDP (CFA billions)6,9836,5616,5616,561

Excluding expenditure compression and new budget support.

Excluding expenditure compression and new budget support.

11. Even taking into account new measures, 2015 revenues are now expected to be 3.2 percentage points of (revised) GDP lower than 1st review projections. The authorities and staff agreed on measures to help mitigate the reduction in the resource envelope, including standard invoicing to reduce VAT fraud, an exhaustive census of medium-sized enterprises aimed at expanding the tax base, establishment of a new unit for audit and fraud prevention, satellite tracking and scanning systems to boost customs revenue mobilization, and more use of integrated internal revenue and customs databases (MEFP, ¶23, Table 2). The improvement in tax revenues related to these measures is as 0.3 percent of GDP in 2015, with another 0.2 percent of GDP gained from the assumed impact of 4th quarter political events in 2014.

12. Development partners plan to increase and/or accelerate budget support in 2015, merely restoring budget support to average historical levels. For reasons related to donor cycles, budget support would have declined in 2015, but new budget support commitments from principal donors will restore historical levels (Text Table 3). The authorities are still seeking additional financing, including for elections (MEFP, ¶22). The requested IMF augmentation is broadly equivalent to additional budget support commitments by the AfDB, and less than half of additional commitments by the World Bank and the EU.

Text Table 3.2015 Budget Support Commitments(CFA Billions)
December 2014New Commitments1Total 2nd-3rd reviews
Budget Support83.3120.1203.4
World Bank35.052.087.0
EU11.646.458.0
AfDB16.019.135.1
Germany1.52.64.1
Others19.20.019.2

Pledged in December and since.

Pledged in December and since.

13. Limited regional market absorptive capacity and the high level of debt falling due in 2015 constrain the scope for new domestic financing. As regards commercial bank financing, with significant amortization payments falling due, it is assumed that existing financing will effectively be rolled over. Nonbank financing is projected to be small in 2015 as amortization falls due on public enterprise bond. Around 1.1 percent of GDP that is already counted in the Treasury single account (TSA) system is being repatriated to the BCEAO from diverse accounts of the TSA system, with the government aiming for the maximum possible without unduly impacting commercial bank balance sheets. These amounts will be used to help finance spending, as well as reduce the “float” (spending commitments pending payment) which increased last year in response to financing pressures.

14. Expenditure compression will mainly affect investment, but savings on current spending are also being realized. The transition government is delaying implementation of part of a public wage bill increase in 2014, scaling back the Ebola prevention program with abatement of the crisis, and containing elections costs.3 To avert the most negative effects of the spending cuts, the authorities announced a package amounting to 0.4 percent of GDP for health and education spending and job creation for youth and women, financed by cuts of all but critical travel. Taken together, spending adjustment is 4.5 percentage points of GDP compared to the 1st review (Text Table 4). Commitments under the program should produce additional savings and spending efficiency, albeit unquantified. These include measures to contain wage spending, automation of expenditure approvals, setting minimum thresholds for control procedures, and monthly budget execution reviews (MEFP, ¶25, ¶29). To better ration scarce resources for investment spending, the authorities are introducing new controls to identify highest priority investment spending (MEFP, ¶24).

Text Table 4.2015 Budget Spending Adjustments(CFA billions, unless otherwise indicated)
1st Review2nd/3rd ReviewsDifference
CFA billions% of GDP
Total (excl. net lending)1924.71629.4−295.3−4.50
Current Spending1023.9965.7−58.2−0.89
Wages and Salaries469.2456.7−12.5−0.19
Goods and Services139.7110.1−29.6−0.45
Transfers377.1359.2−17.9−0.27
of which: Elections025.025.00.38
of which: SONABEL27.327.30.00.00
of which: SONABHY4.30−4.3−0.07
Interest Payments37.939.71.80.03
Investment Spending900.8663.7−237.1−3.61
Domestically Financed558.6424.4−134.2−2.05
Externally Financed342.2239.3−102.9−1.57

15. In sum, the deficit (commitment basis) reflects a contractionary stance in 2015 relative to the pre-shock era, but less so than in 2014. The fiscal deficit will be contained at 2.5 percent of GDP (commitment basis), relative to 1.8 percent of GDP in 2014. The deficit on a cash basis will be higher (3.4 percent of GDP) based on paying down the “float” (including arrears).

B. Fiscal Policy for the Medium Term

16. Tax and spending policy measures should have their main impact in 2016, bringing tax revenues back toward recent historical averages, despite cotton and gold production remaining muted. This should enable an expansion of investment spending more in line with the objectives of the Strategy for Growth and Durable Development (SCADD). The program framework sets fiscal policy goals consistent with the WAEMU convergence criteria. A forthcoming FAD mission on revenue administration in the early fall should provide additional recommendations, and the authorities will request TA on tax policy. A financing gap of 0.9 percent of GDP is based on current grant and concessional financing commitments; should development partners make commitments to bring these back to historical levels, the remaining gap can be met. Otherwise, the authorities will need to consider a combination of additional domestic financing and spending adjustment to fill the gap.

C. Strengthening Budget Transparency and Public Financial Management

17. The transition government took immediate steps to improve the transparency of budget execution and Treasury cash management. In December, the transition authorities and staff discussed concerns that cash rationing had been used as a principal cash management tool in the second half of 2014. The “float” (spending commitments pending payment) was 1.7 percent of GDP at end October 2014 and had risen to 2.4 percent of GDP by end-December, given the difficult cash situation following the political events of Q4. The transition government began repatriating funds into the treasury single account (TSA) from disparate accounts in order to reduce the float, lowering it to 1.1 percent of GDP by end-February 2015, with a forward-looking plan to reduce it further. Moreover, the transition parliament passed a retroactive supplemental budget for 2014 to authorize higher wage bill spending that had been effected throughout the previous year: the former government submitted a 2014 supplemental budget twice to the former National Assembly but it was never passed.

18. The transition authorities were concerned that the growing “float” in the second half of 2014 could potentially mask domestic arrears and requested an urgent FAD TA mission. Distinguishing what portion of the “float” was payment arrears was not straightforward since the latter had not been recorded separately. The TA mission estimated that there were payment arrears as of end-2014, of around 0.9 percent of GDP, but follow-up TA is needed for a full stock-taking. Recording problems did not exist in previous years, and probably arose only late in 2014 as a result of the difficult Treasury situation. About one-third of arrears were VAT reimbursements, which came about as a result of increasing reimbursement claims by mining companies that could not be met by the fixed amounts allocated for this purpose. The authorities are considering how to revise VAT reimbursement system in the coming months, drawing from the TA recommendations.

19. The authorities are now tracking the “float” and payment arrears more closely, and will benefit from the help of additional TA to strengthen procedures. In addition to implementing recommendations immediately to prevent the risk of additional accumulation of arrears, the authorities agreed with staff’s recommendation to replace, for the time being, the current indicative quantitative target on non-accumulation of domestic arrears with two structural benchmarks. That is, from June 2015, the ministry of finance will begin comprehensive quarterly monitoring of outstanding payments and potential arrears. Starting in early 2016, the quarterly reports will be audited annually by the Burkinabe independent audit agency (ASCE), the financial court, and the government independent auditor. The transition authorities remain concerned about general government and “informal” arrears, liabilities for which payment orders do not exist, and have also requested follow up TA to design an approach for identifying, tracking and setting a repayment plan for these obligations.

20. The transition authorities are also strengthening treasury cash management to ensure better planning for cash needs and to improve the functioning of the TSA. The TA mission provided recommendations to improve treasury cash forecasting and management instruments. Moreover, the authorities are seeking to improve the functioning of the TSA system, which encompasses numerous accounts across different regions, including deposits of some 2.7 percent of GDP at commercial banks that are in the process of being repatriated (¶17).

D. Reducing Subsidies to Public Energy Companies

21. Remaining windfalls from lower fuel prices after depreciation of the CFAF against the US dollar have been partly passed to consumers through lower retail prices. The fall in international oil prices in late 2014 and early 2015 began to reverse some of the accrued financial losses of the state-owned oil importing company SONABHY, resulting from fixed retail prices and an elevated cost structure. However, depreciation of the CFAF against the US dollar in the first quarter of the year and two modest retail price reductions reduced SONABHY’s projected monthly profits (Text Figure 1 shows part of the reduction, but does not contain a full month’s data following the retail price reduction.) Staff advised the authorities that further reductions of retail fuel prices could risk triggering renewed losses for SONABHY if exchange rate trends continued and/or fuel price trends reversed. The authorities committed to avoiding further reductions in retail prices before the elections (MEFP, ¶33). SONABHY’s accrued losses in 2014 were not covered by the government, so the profits realized for 2014 through mid-March this year are a modest CFAF 3.9 billion.

Text Figure 1.SONABHY: Monthly Profit and Loss, Jan. 2012–Mar. 2015

(CFA billions)

22. If current trends and policies remain unchanged, preliminary staff analysis suggests that the projected windfall for 2015 as whole would be shared mainly by SONABHY and consumers. Relative to the 1st review forecast for 2015, staff forecasts the fuel import bill to be CFAF 89.6 billion lower (Text Table 5). Tentative analysis suggests that retail price reductions will pass roughly 40 percent of that gain to consumers, with a small amount realized by the government through foregone subsidies (offset by reduced VAT intake), and the remainder to SONABHY. The public electricity company, SONABEL, and mining companies have special purchasing contracts, for which no price reductions have been made so far.

Text Table 5.Fuel windfall in 2nd/3rd Review vs. 1st Review Projections(CFA billions)
Central GovernmentSONABHYRetail ConsumersMines and SONABELTotal
A. Reduction in import bill0.089.60.00.089.6
B. Reduction in retail fuel prices−16.3−20.236.60.00.0
of which: change in VAT Revenue−16.30.016.30.00.0
− of which: change in SONABHY Profit0.0−20.220.20.00.0
C. Reduction in subsidies to cover losses20.0−20.00.00.00.0
Total change vs 1st Review Proj. (A+B+C)3.749.436.60.089.6
Source: IMF staff estimates, based on SONABHY data.
Source: IMF staff estimates, based on SONABHY data.

23. Given the uncertainty of the situation, staff encouraged the authorities to track SONABHY’s monthly situation closely and, if warranted, consider redistribution options. If SONABHY’s profits continue, the government could consider redistribution via a temporary increase in the per liter excise tax on fuel and/or through reducing prices for special contract users. Staff did not push for a specific option, but urged the authorities to track the situation closely and consider the options. The authorities indicated that should the gains continue, they would seriously consider increasing the per liter excise tax on fuel.

24. The authorities and staff also discussed that inter-connected payments and arrears between SONABEL, SONABHY and the central government have become an increasing burden for the transparency and efficiency of the energy sector in Burkina Faso (Box 1). SONABEL has not benefitted from a reduction in prices charged by SONABHY, thus continues to make losses and incur arrears with SONABHY. Recent audits of the two companies’ financial situation, carried out as program conditionality, reveal difficulties in the underlying cost structures, complicated and inappropriate pricing regulations, high debt levels and tight cash situations, as well as weak management structures, all of which contribute to the fiscal burden for the government and weaken investment in the energy sector.

25. Drawing from the audits, the transition government proposes to include in program conditionality fundamental reforms that can help address these issues over the medium term. For both SONABHY and SONABEL, performance contracts will be signed between the state and the entity (MEFP, ¶34-35), drawing on the model of the successful public water utility, ONEA. The performance contracts will draw from recommendations in the audits as well as expert advice from development partners, and will serve three main purposes: regularize financial subsidies brought about by the government’s decision not to adjust retail prices; clarify financial inter-linkages between the two companies; and improve management and reduce underlying costs. The authorities also agreed to more immediate measures. For example, SONABHY’s transporters are charged for fuel loss during the process of transport. This is currently charged at the port of arrival price (substantially below prices of selling illegally en route), but the penalties will be charged at delivery prices as of end-June (MEFP, ¶35)

Box 1.Financial Inter-Linkages in the Energy Sector

Tariffs for electricity and retail fuel prices are effectively both administered in Burkina Faso, with ad-hoc adjustments when losses become too high. Until this year, electricity tariffs and retail fuel prices had remained unchanged since 2008 and 2012, respectively. The fixed price structure and high operating costs left both SONABEL and SONABHY with consistent operational losses, relying government subsidies for support. The government provides three main types of subsidies: (1) investment subsidies, relevant for SONABEL, for infrastructure projects; (2) market-oriented subsidies, depending on sales volume of SONABHY to SONABEL and gas butane distributors, to cover under-market prices charged; and (3) recurrent subsidies, intended to cover operating losses by both entities, paid an ex-post and ad-hoc basis.

SONABHYCentral GovernmentSONABEL
(CFA billions)
Net Transfers to the State Owned Enterprises 2014492−24,12223,630
In percent of government expenditure0.03%1.65%
Explicit subsidies10,892−34,52223,630
Recurrent subsidies000
Market oriented (Oil and Gas)10,892−34,52223,630
InvestmentN/AN/A
Government Revenue collection−10,40010,400
Income taxes and others−4,5004,500N/A
Dividends−5,9005,900N/A
Sources: Government financial accounts, company documents, meeting minutes
Sources: Government financial accounts, company documents, meeting minutes

In recent years, transfers to the energy sector have been an increasing burden. As noted in the 1st ECF review, in 2013 net transfers totaled close to 10 percent of government expenditure (including to address past years’ losses). In 2014, the government did not pay any recurrent subsidies and delayed payment of some market-oriented subsidies. Outstanding subsidy obligations to both companies therefore rose to around CFAF 38 billion by end-2014. As its financial situation worsened, SONABEL accrued arrears to SONABHY of around CFAF 42 billion. Meanwhile, SONABHY’s overdrafts with commercial banks totaled some CFAF 93 billion at end-2014, generating large interest costs.

SONABHYCentral GovernmentSONABEL
(CFA billions)
Intra-Fuel Sector Debts as of end-201472,316−41,871−30,445
Fuel and Electricity Bills42,345−3,900−38,445
Unpaid Subsidies29,971−37,9718,000
Sources: Government financial accounts, company documents, meeting minutes
Sources: Government financial accounts, company documents, meeting minutes

E. Financial Sector Stability

26. Financial indicators suggest commercial banks remain in a relatively sound position (Text Table 6). Although the regulatory risk weighted asset ratio just reaches the WAEMU minimum of 8 percent and is below the average, the ratio is weighed down by two banks that are undercapitalized but pose no social or systemic risks. Burkinabe banks have the lowest NPL ratios in WAEMU, but also the second-highest concentration ratios, signaling the sector’s concentration around a limited number of highly solvent clients, many of whom are fully or partly owned government entities.

Text Table 6.Selected Financial Soundness Indicators
Dec-11Dec-12Mar-13Dec-13Mar-14Jun-14
Burkina Faso
Reg. capital to risk-weighted assets10.49.310.17.38.18.0
Gross NPLs / Total loans13.510.310.49.99.99.4
5 largest clients / equity106.7185.4122.4167.2196.9216.5
Liquid assets / total assets34.034.834.334.735.135.1
WAEMU
Reg. capital to risk-weighted assets10.710.710.710.110.69.3
Gross NPLs / Total loans15.916.017.015.416.415.7
5 largest clients / equity105.1106.999.597.8109.6130.1
Liquid assets / total assets33.632.531.932.230.231.2

F. Other Policy Discussions

27. The authorities have changed the reference price and formula to put the cotton sector stabilization fund on a more financially-sustainable basis. Drawing from analysis done as a part of program conditionality in 2014, the cotton sector association has changed the reference price used and the pricing formula for producers to make it less pro-cyclical (MEFP, ¶13). However, the stabilization fund will already be overdrawn this year, by CFAF 5 billion, and the ginning companies will provide loans to carry the fund through the current ginning season. Thereafter, the authorities will look into budget-neutral short-term options to repay the ginning companies. A more permanent solution for recapitalizing the fund will need to be found next year.

28. The national statistical agency (INSD) will re-initiate an informal sector survey needed to update the base year for the national accounts. It is not expected that the rebasing will result in large adjustments. INSD had hoped to conduct a new informal sector survey in late 2014, but was unable to do so due to political developments. INSD hopes to launch the survey in 2015, and also plan to devise a methodology for a specific survey on informal gold mining activity. The authorities have committed to publish, by June 2015, a new series of quarterly national accounts statistics, in constant prices (MEFP, ¶36).

29. The draft mining code submitted to the National Assembly in 2014 was never passed, but has now been resubmitted to the transition parliament. Staff was informed that previous fiscal provisions were maintained in the draft, except that a 10 percentage point reduction in the corporate income tax rate was removed, rendering the code less generous to mining companies. This change would keep the current draft code broadly in line with those of peer countries in the sub-region, moving it from one of the most generous to investors to broadly average.

30. The annual review of SCADD implementation is scheduled for late April. Due to the difficult sociopolitical context and expenditure cuts in 2014, only about 30 percent of the planned measures were implemented, in contrast to previous years’ performance of around 60 percent. Nonetheless, 23 out of 50 performance indicators for 2014 were met. Some examples where progress was achieved include: improving access to agricultural inputs, equipment and technology; setting up microfinance lending for cattle and dairy activities; creating infrastructure for hydro-agriculture; increasing the energy supply by 90 MW; implementation of a special program to create jobs for women and youth in agriculture; progress on universal health insurance plan; progress on expanding school lunches; and passage of the anti-corruption law.

Program Risks

31. The security situation and political stability hinges on the transition government orchestrating a peaceful transfer of power and elections. The transition government has been recognized internationally, and its plan for October elections has broad support. However, the political situation remains a central risk. There have been frequent strikes, wage and fuel price reduction demands from trade unions, as well as rifts within different factions of the military and among political parties. The tight budgetary situation also poses risks to the success of the transition. Still, stakeholders share a strong common interest in supporting the transition government until elections, and several sociopolitical problems that initially appeared serious have been resolved quickly and without violence.

32. The risk posed by external shocks is largely unchanged, although regional security issues are an increasing concern. Burkina Faso consistently faces risks of weather shocks, commodity price changes, and more recently, the impact of the regional Ebola crisis. On the security side, extremist activities are on the rise in neighboring countries. Burkina Faso has been widely seen as a moderating influence in the region, including through preventing extremist activities within its own borders, mediating security disputes elsewhere, providing military resources, and hosting refugees. Current political uncertainties make it more vulnerable.

Program Modalities

33. The authorities have requested an augmentation of access under the ECF arrangement by SDR 24.08 million (40 percent of quota). The augmentation would be used to meet balance of payments needs arising from price shocks to the country’s two leading commodity exports (mitigated only partly by the positive shock to oil prices), as well as the various other aforementioned shocks. In the absence of this augmentation, additional spending reduction beyond what is already programmed would otherwise be needed. The size of augmentation is modest, due to the small size of the Burkina Faso’s quota and its access already outstanding. 60 percent of this amount (SDR 14.45 million) would be disbursed with completion of the 2nd and 3rd reviews, and the remainder would be disbursed with completion of the 4th review. Together with the phased augmentation, completion of the 2nd and 3rd reviews would unlock SDR 23.03 million.

34. The authorities are also requesting an increase in the limit on external non-concessional debt by CFAF 50 billion. This increase would bring the ceiling to CFAF 200 billion (or 3 percent of GDP). Although the limit is untied, the authorities have stated that financing would be used for projects to expand drinking water supplies and sanitation, higher education infrastructure, and a road project.

35. A new joint Fund-Bank DSA indicates an unchanged moderate risk of debt distress (Annex 1). In the new DSA, a worse macroeconomic outlook is offset by recent fiscal tightening and US$ strengthening, leaving results broadly consistent with the 2014 DSA. Inclusion of the proposed augmentation and an increase in non-concessional debt does not change the results.

36. The authorities and staff agreed to propose a change in program monitoring of accumulation of domestic arrears. The indicative target for a continuous zero ceiling on domestic arrears accumulation should be removed in favor of ongoing structural benchmarks for quarterly reporting and annual audits of pending payments and arrears. FAD experts have advised that the zero ceiling is unrealistic, and effective monitoring as a continuous target is also unrealistic. The two proposed structural benchmarks will be more effective in developing systems to identify and reduce payment arrears (MEFP, ¶12).

37. Another proposed change is the scope of the performance criterion on net domestic financing, based on advice from FAD and STA experts. Given prospective changes to the coverage of the TSA and since fiscal accounts currently only cover central government spending and revenues, staff and the authorities propose that, going forward, the performance criterion on net domestic financing should be limited to central government financing (measured by the net position of the Treasury vis-à-vis the banking system and non-banks). An indicative target is proposed to be kept on “other government financing,” which has historically been small, but increased sharply in 2014 due to accounting anomalies, e.g. inclusion in liabilities of several years of accrued interest in the National Savings Bank. Continuing to track “other government financing” is important, however, both for program purposes, as well as eventual migration to fiscal accounting according to GFS 2001. Proposed changes are included in the technical memorandum of understanding.

Staff Appraisal

38. The transition authorities inherited a very difficult macroeconomic situation, which they are handling well. Large fiscal and external imbalances resulting from multiple shocks are being addressed mainly via spending reduction, with some additional support from development partners. The spending cuts are unavoidably pro-cyclical and do affect investment spending the most, but there are few financing options. The authorities are making genuine efforts to seek savings in current spending and rebalance the composition of spending more towards priority social spending and investment. Further, they are seeking to allocate scarce resources for investment spending more wisely to ensure that what is spent has the maximum impact for economic and social objectives.

39. The transition authorities’ new commitments to address long-standing structural problems are particularly welcomed. Broad ranging program commitments include: addressing PFM issues, containing the wage bill, increasing revenues through policy and administrative measures, and containing subsidies to state-owned enterprises. For the latter, program commitments were drawn from the audit recommendations, and should make a significant difference in regularizing financial relationships and reducing underlying costs, providing more scope for the forthcoming elected government to seek better cost-recovery through more flexible fuel prices and more progressive electricity tariffs.

40. The authorities are strongly encouraged to closely monitor monthly SONABHY profits to ensure transparent decisions about how the fuel windfall should be shared. The authorities have committed not to reduce retail fuel prices further before the elections. The modest profits currently being realized by SONABHY provide some insurance against the risk that additional US$ strengthening and/or increases in international fuel prices could renew a loss-making situation. However, depending on how the situation evolves, these profits could also be recuperated for the budget to finance other high-priority spending, such as elections or job creation programs.

41. Finally, the authorities’ immediate attention to transparency in budget execution, and better cash management is welcomed. Their efforts underway to reduce the spending “float,” better identify and pay arrears, and improve Treasury cash forecasting will render a long term payoff for spending efficiency. Staff welcomes the authorities’ efforts to finalize a mining code that balances attractiveness to international investors with the need to ensure adequate rent-sharing so that natural resource assets can help finance development and can be invested in the country’s future. Mining companies’ current concerns about physical security and input pricing are legitimate, but should not influence discussions about the fiscal regime.

42. In sum, the transition authorities have agreed to a robust set of reforms that preserve macroeconomic stability and position the forthcoming new government well to continue program engagement should it choose to do so. The transition appointees, drawing from their extensive technical experience, have demonstrated good capacity to implement reforms and willingness to consider IMF policy advice. Staff encourages the transition authorities to continue the challenging task of managing the difficult situation in the short term, while initiating more fundamental reforms to improve fiscal sustainability over the medium term.

43. Staff supports completion of the 2nd and 3rd reviews, and the authorities’ request for augmented program access in the amount of SDR 24.08 million. The request for augmentation is justified to avoid further investment spending reduction/import compression needed to eliminate fiscal and external imbalances, thus further undermining investment objectives of the SCADD and the ECF-supported program.

Table 8.Burkina Faso: Indicators of Capacity to Repay the Fund, 2013–25
2014201520162017201820192020202120222023202420252026
ActualProjections
Fund obligations based on existing and prospective credit
(in millions of SDRs)
Principal7.214.114.517.824.223.619.022.618.311.510.06.91.3
Charges and interest0.00.00.00.00.00.30.20.20.10.10.00.00.0
Total obligations based on existing and prospective credit
In millions of SDRs7.214.114.517.824.223.919.222.718.411.610.06.91.4
In billions of CFAF5.411.511.814.519.619.315.418.214.89.38.05.61.1
In percent of government revenue0.51.00.91.01.31.10.80.90.70.40.30.20.0
In percent of exports of goods and services0.40.80.80.91.21.00.80.80.60.40.30.20.0
In percent of debt service25.310.210.010.812.511.28.69.36.94.13.11.90.3
In percent of GDP0.10.20.20.20.20.20.20.20.10.10.10.00.0
In percent of quota11.923.424.029.640.139.732.037.830.519.316.611.52.2
Outstanding IMF credit
In millions of SDRs137.7160.7155.2137.4113.389.670.648.029.818.28.31.30.0
In billions of CFAF103.3131.4127.1112.292.072.556.738.523.914.66.61.10.0
In percent of government revenue9.711.610.07.95.94.23.01.91.10.60.30.00.0
In percent of exports of goods and services7.79.48.77.25.43.92.81.71.00.60.20.00.0
In percent of debt service2102.5116.5107.383.158.541.931.619.611.26.42.60.40.0
In percent of GDP1.72.01.81.51.10.80.60.40.20.10.00.00.0
In percent of quota228.8267.0257.8228.3188.1148.9117.379.849.430.313.72.20.0
Net use of IMF credit (millions of SDRs)−2.123.0−5.5−17.8−24.2−23.6−19.0−22.6−18.3−11.5−10.0−6.9−1.3
Disbursements5.137.18.90.00.00.00.00.00.00.00.00.00.0
Repayments and repurchases7.214.114.517.824.223.619.022.618.311.510.06.91.3
Memorandum items:
Nominal GDP (in billions of CFAF)6170.66561.17084.67699.48371.79102.69897.310758.011686.512685.113768.014932.916201.3
Exports of goods and services (in billions of CFAF)1349.11391.71466.21560.61705.31872.42038.82227.52414.62484.92683.82865.43047.0
Government revenue (in billions of CFAF)1064.71137.21270.41425.01565.51720.41870.62033.32208.72359.42519.52665.52835.2
Debt service (in billions of CFAF)23100.8112.8118.5135.0157.2173.2179.6196.3213.5228.0257.5293.0343.8
CFAF/SDR (period average)750.0817.9819.0816.3812.2808.6802.5802.5802.5802.5802.5802.5802.5
Sources: IMF staff estimates and projections.

Includes the proposed augmentation of access.

Total debt service includes IMF repurchases and repayments.

Includes state-owned enterprises debt.

Sources: IMF staff estimates and projections.

Includes the proposed augmentation of access.

Total debt service includes IMF repurchases and repayments.

Includes state-owned enterprises debt.

Appendix I. Letter of Intent

Ouagadougou, May 13, 2015

MINISTRY OF ECONOMY AND FINANCE

---------------------------

GENERAL SECRETARIAT

---------------------------

DIRECTORATE GENERAL OF COOPERATION

N°2015/......../MEF/SG/DGCOOP

Madame Christine Lagarde,

Managing Director

International Monetary Fund

700 19th Street NW

Washington, DC 20431 (USA)

Subject: Letter of Intent and Memorandum of Economic and Financial Policies

Madame Managing Director,

The government of Burkina Faso has continued to implement the measures established in its three-year economic program supported by the arrangement under the Extended Credit Facility (ECF) of the International Monetary Fund (IMF) for the period 2013-2016. Also, the transition government established following the popular uprising on October 30-31, 2014 reaffirms its determination to continue the implementation of sound economic and financial policies, and to organize free and transparent elections in October 2015.

The transition government will maintain efforts geared towards consolidation of public finances and strengthening social policy. It will carry on the implementation of reforms needed to accelerate the pace of growth and poverty reduction, in a context of budgetary austerity. The government is aware that the implementation of the program in 2015 will take place in an unusual and difficult context, still characterized by the negative effects of exogenous shocks related to the price decline of major export goods (gold and cotton) and by the sociopolitical crisis of end-2014. In order to alleviate the impact on the most vulnerable sectors of the population, the government, despite a context of budget austerity, adopted an emergency social program, amounting to CFAF 25 billion (0.4 percent of GDP), which will be financed by current spending cuts and trimming public sector wage costs. This social program focuses on supporting employment for youth and women, and strengthening education and health infrastructure. Furthermore, the government intends to implement medium term measures to increase revenue mobilization and streamline current expenditure. Similarly, it will continue reforms aimed at improving the business climate, to bolster private investment and external financial inflows that can improve the fundamentals for sustainable growth. Furthermore, the government will continue its efforts to restore a calm sociopolitical environment, and maintain its prevention program against the Ebola virus and new spending to eradicate bird flu.

The attached Memorandum of Economic and Financial Policies (MEFP) examines program performance in 2014, presents the policies that the government intends to pursue in 2015, and sets program targets and reforms for 2015-16. It explains the country’s balance of payments needs and outlines the government’s efforts to preserve macroeconomic stability, and strengthen the foundation for sustained and inclusive growth in line with the objectives of the Strategy for Accelerated Growth and Sustainable Development (SCADD).

Performance under the program supported by the ECF is satisfactory. Indeed, the end-December performance criteria on the ceiling on net domestic financing, the ceiling on new non-concessional loans contracted or guaranteed by the State, as well as on external arrears accumulation, were all met. While the indicative target for the overall deficit on a commitment basis has been met, the other targets relating to overall revenue collection, the level of implementation of social spending to reduce poverty and the accumulation of domestic arrears were not achieved due to the aforementioned shocks.

Regarding structural benchmarks, six (6) out of eight (8) benchmarks for 2014 were completed. The two benchmarks to be achieved by SONAPOST and SONABEL have been reformulated and reprogrammed to be completed in early 2016.

In light of our commitment to preserving macroeconomic stability and based on the policies set out in the attached MEFP, we request that the IMF conclude the second and third reviews under the ECF arrangement. To this end, we request disbursements in the amounts of SDR 4.11 million, and SDR 4.47 million, respectively, under the second and third reviews of the ECF arrangement. In order to facilitate adjustment to the aforementioned exogenous shocks and address significant additional financing needs without jeopardizing the objectives of the national development strategy, the government also requests increased access under the ECF arrangement in an amount equivalent to SDR 24.08 million. Furthermore, we request an increase of the ceiling on the continuous performance criterion on nonconcessional external debt from CFAF 150 billion to CFAF 200 billion and a modification of the definition of the net domestic financing performance criterion.

The government believes that the policies set forth in the attached MEFP are adequate to achieve the economic and social objectives of its program, but it will take any further measures that may become appropriate for this purpose, including ensuring the program is fully financed. The government will consult with the IMF on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with applicable IMF policies on such consultation. The government will provide the IMF with information on implementation of the agreed measures and program execution, as provided in the attached revised Technical Memorandum of Understanding or at the request of the IMF.

As in the past, the government agrees to publication of this letter, the attachments hereto, and the related IMF staff report upon approval by the IMF Executive Board.

Sincerely,

/s/

Jean-Gustave Sanon

Attachments: - Memorandum of Economic and Financial Policies

− Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies 2015–2016

Introduction

1. Burkina Faso’s economic and financial program for the period 2014-2016, supported by the International Monetary Fund (IMF) under the Extended Credit Facility (ECF), aims to preserve macroeconomic stability and strengthen the basis for sustained and inclusive growth in line with the objectives of the Strategy for Accelerated Growth and Sustainable Development (SCADD). This Memorandum of Economic and Financial Policies (MEFP) presents the economic situation at end-June and end-December 2014. It also reviews the quantitative criteria and structural benchmarks at these same dates and sets out program objectives for 2015 and 2016.

Economic Developments in 2014

2. In 2014, Burkina Faso’s economic and financial position was affected by several concurrent shocks to the economy: unsatisfactory rainfall, the fall in cotton and gold prices (main exports) the impact of the Ebola crisis in the region and the appreciation of the dollar against the CFA franc. This was compounded by the impact of the domestic sociopolitical crisis and the popular insurrection of October 30 and 31, 2014 which culminated in a sweeping change in the leadership of the country. Lower oil prices helped to mitigate partly the combined adverse effects of the other shocks.

3. These various factors led economic agents to adopt a wait-and-see attitude. This, as well as the postponement of several international events that were to be held in Burkina Faso, resulted in significant losses for the service sector and a slowdown in growth. Thus, real GDP growth, which had initially been projected at 6.7 percent at end-June 2014, and revised downwards to 5.0 percent in October, was estimated at 4.0 percent at end-December 2014 compared to 6.6 percent in 2013. The deceleration of 2.6 points of GDP growth is attributable to a decline in all sectors, most pointedly in the tertiary sector (hotels and tourism sector output fell by 1.4 percentage points). The primary sector grew by only 2.7 percent, reflecting a decline in grain production by 8.2 percent as well as other food crops (24 percent), offset by the strong growth of production of cash crops (23 percent). Growth in the secondary sector declined by 4.5 percentage points to 4 percent, mainly due to the slowdown in activity in the construction sector and in manufacturing, resulting from the effects of the socio-political situation.

4. With respect to consumer prices, the annual average inflation rate stood at -0.3 percent at end-December 2014 compared to 0.5 percent at end-December 2013. The decline in global food prices, the relative sufficiency of farmer inventories, and government measures implemented to contain the rising cost of living (sale of grain at subsidized prices in areas with shortages and establishment of special retail outlets with controlled prices for food staples) all helped to limit inflation.

5. Imports are expected to have dropped by 9.1 percent year on year, owing mainly to the shrinkage of imports of capital goods (-21.1 percent) and intermediate goods (-9.3 percent). This compression of imports is in fact a reflection of the marked reduction in government spending as well as interruption of new investments in the mining sector. Exports are expected to have been 4.8 percent lower in 2014 than in 2013, based on lower cotton and gold prices and unchanged gold volumes. Exports of services are likely to show a steep decline weighed down by the impact of the Ebola crisis on hotel and tourism services. The trade balance is expected to be -1.9 percent of GDP in 2014 (compared to -3.3 percent in 2013), and the current account balance is expected to move from -6.6 percent of GDP in 2013 to -6.1 percent in 2014.

6. In 2014, the monetary aggregates were impacted by a steep, year-on-year decline of 12.4 percent in net foreign assets, weighed down by an increase in payments abroad, in particular for services and capital income, resulting from high levels of foreign investment in large national enterprises. This coincided with an increase in domestic credit of 17.4 percent, including a 16.5 percent increase in credit directed to the private sector.

7. On the fiscal front, the simultaneous occurrence of the aforementioned series of shocks took a severe toll on economic activity with a strong adverse knock-on effect on revenue collection related, in particular, to imports of goods, tourism, and government investment spending. As of end-December 2014, revenue collection for the year amounted to 86.0 percent of anticipations, that is, 17.3 percent of GDP, compared to 18.5 percent in 2013. With regard to grants, 74.6 percent of the forecast amount forecast was disbursed. Compared to 2013, grants declined by 21.0 percent.

8. Execution of total expenditure and net lending at end-December 2014 stood at 80.6 percent of initial projections. Current expenditure execution was 94.0 percent of target. The reductions in spending were mainly in the area of domestically-financed capital expenditure, of which 66.4 percent of target was executed, that is, 5.5 percent of GDP, versus 9.8 percent in 2013. Expenditure compression was necessary in order to balance the fiscal accounts. Externally-financed capital expenditure was executed at 68.7 percent of the targeted amount.

9. The overall fiscal deficit (commitment basis), stood at 1.8 percent of GDP as of end-December 2014, compared to projections of 3.1 percent. In turn, the overall balance on a cash basis posted a deficit of 0.6 percent of GDP, which was financed mostly by net external flows amounting to 0.8 percent of GDP while net domestic financing was -0.2 percent of GDP.

A. Performance Under the Program

10. All the performance criteria, consisting of the ceiling on net domestic financing at end-June 2014 and at end-December 2014, the ceiling on new nonconcessional debt contracted or guaranteed by the government, and the accumulation of external arrears (both continuous), were met. Net domestic financing totaled CFAF 65.2 billion at end-June and CFAF 84.3 billion at end-December 2014, against adjusted ceilings of CFAF 84.4 billion and CFAF 100.6 billion, respectively. As for new non-concessional borrowing, this amounted to CFAF 83.2 billion at end June and end December 2014. However at end February 2015 it reached CFAF 121,2 billion against a program ceiling of CFAF 150.0 billion.

11. Looking at indicative targets, the overall deficit (commitment basis) stood at CFAF 66.8 billion and CFAF 113.4 billion against adjusted program ceilings of CFAF 148 billion and CFAF 155.5 billion for end-June and end-December, respectively. However, targets related to revenue collection and execution of poverty-reducing expenditures were not met. Revenue collection amounted to CFAF 537 billion and CFAF 1,065 billion against adjusted program floors of CFAF 594 billion and CFAF 1,238 billion at end-June and end-December, respectively. Poverty-reducing social expenditures reached CFAF 219.5 billion and CFAF 445.3 billion against adjusted program floors of CFAF244.7 billion and CFAF 489.5 billion at end-June and end-December, respectively.

12. Domestic arrears amounting to 0.9 percent of GDP were accumulated by end-December 2014, breaching the program ceiling of zero. A redefinition of the criterion has been proposed to improve program monitoring: (i) a quarterly report will be produced for monitoring pending payments; and (ii) the quarterly reports will be audited by the ASCE on an annual basis.

13. The two structural measures with a target date set for end-September 2014 were implemented. A study to identify options for putting the cotton price stabilization fund on a more financially sustainable basis recommended a review of the fund’s operational parameters and recapitalization. As regards the second measure, a report on improving the quality of investment spending was adopted by the Council of Ministers at its meeting of October 1, 2014 along with an action plan for its implementation.

14. A measure set for end-November 2014 regarding the conduct of external audits of SONABHY (National Hydrocarbon Company) and SONABEL (National Electricity Company) under the supervision of the national external control agency (ASCE) was implemented. The audit reports were submitted in December 2014 with numerous recommendations for lowering the costs of the two state-owned companies.

15. Of the five measures that were to be observed at end-December 2014, two were met on time and one was implemented with a delay. The first two measures related to the adoption of an updated business plan by the cotton company SOFITEX and initiation of the process to update the base year for the national accounts. The third measure, concerning implementation of a satellite tracking system for goods in customs transit was completed with a delay, the official launch having taken place on February 16, 2015. Two measures were not implemented. In the case of adoption of an action plan by the Board of Directors of SONAPOST to improve the quality of financial services provided, the difficulty lay in finding suitable providers. The new proposal is to replace this measure with a more efficient one aimed at improving access to banking services. Regarding the conduct of the SONABEL study on the viability of production and import options, the deadline for implementing this measure has been changed to March 2016 to take into account the new performance contract with the government.

B. Implementation and Outlook for the Strategy for Accelerated Growth and Sustained Development (SCADD)

16. Over the course of 2014, the government continued the process of promoting the growth poles. Implementation of the “Bagré growth pole” pilot project continued through a public-private partnership. Further, national conferences on the “Sahel growth pole” were held to reinforce project preparation.

17. In line with the monitoring and evaluation mechanism of the SCADD, in 2014, the Burkinabè government conducted a review of implementation at end-2013 to measure performance, identify constraints, and make adjustments as needed for future years. The evaluation report stated that 66.7 percent of the measures in the performance matrix had been implemented and 58.7 percent of the targets had been met.

18. The results of the evaluation showed that major progress has been made towards meeting certain Millennium Development Goals (MDGs), such as the prevalence of underweight children under five years of age, the infant mortality rate, the proportion of children aged 12-23 months immunized against measles, and the ratio of girls to boys in primary enrollment. Other targets such as improving maternal health and access to potable water in urban areas can potentially be met in 2015. Nevertheless, Burkina Faso will not be able to achieve all the MDGs targeted for 2015, due to slow progress with respect to the objectives on universal primary education and environmental sustainability. The evaluation also identified factors that could undermine the sustainability of the results achieved, namely social and political crises, frequent institutional changes associated with the structure of ministerial departments, and the high dependence on external funding of several bodies involved in implementing the SCADD.

Economic Policies for the Period 2015-2016

A. Macroeconomic Framework

19. Economic activity will pick up pace slightly in 2015, with real GDP growth reaching 5 percent, as a result of a small improvement across all sectors. This forecast for 2015 is based on the assumption of a peaceful political transition, coupled with an abatement of the Ebola crisis in the region. For the medium term, a gradual recovery in economic activity is expected to begin in 2016 with a growth rate at around 6.0 percent. Assuming favorable rainfall and the continuation of government measures to contain the cost of living as well as favorable oil-price trends, average annual inflation should reach 0.7 percent in 2015 and 1.8 percent in 2016.

20. A deterioration of the current account deficit is expected in 2015, to 7.6 percent of GDP. This change is due mainly to the rising price of imports following the appreciation of the dollar, coupled with only a slight upturn in exports. Cotton exports are set to fall by 4.2 percent, pushed down by the drop in international prices, partially offset by the appreciation of the dollar. Gold production is expected to dip by 4 percent, as production in certain mines will soon come to a halt. In value terms, gold exports will increase by 5 percent reflecting the appreciation of the dollar. For 2016, the current account is expected to settle at -7.8 percent of GDP. The money supply is expected to increase by 14.3 percent at end-December 2015 compared to end-December 2014, despite a forecast reduction of 17.6 percent in net foreign assets.

B. Fiscal Policy

21. The 2015 budget was prepared against the backdrop of a popular uprising on October 30 and 31, 2014 that culminated in the drawing up of a transition charter and the formation of a transition government. As a result of the external shocks faced by Burkina Faso and their impact on government revenues, an austerity budget needed to be prepared. Thus, the priorities set in the context of the preparation of the 2015 budget before the popular uprising were reviewed to take account of both the new mission assigned to the transition government and the new, more difficult socio-political and economic environment. Consequently, the transition government, while continuing to take action to reduce poverty by stepping up growth and wealth creation for inclusive development, will put greater emphasis on:

  • improving justice by taking strong measures to restore the confidence of the people in the judiciary and the justice system in general;

  • restoring governance through the construction and normalization of new jurisdictions, courts, and penitentiaries, the humanization of conditions in penitentiaries, increasing support for oversight structures, and publication and outreach activities with respect to the law on preventing and combating corruption in Burkina Faso. Particular attention will be paid to the organization of presidential and legislative elections for which an allocation of CFAF 25 billion (0.4 percent of GDP) has been included in the initial budget law for 2015. The total cost of elections is estimated at CFAF 54 billion (0.8 percent of GDP), resulting in a financing gap of CFAF 29 billion for which funding requests have been made to technical and financial partners. The government will make the necessary adjustments to the 2015 budget to ensure that the elections budget is fully funded once it has a clear picture of the level of contributions from partners;

  • consolidating social gains through high labor-intensity programs (HIMO), enhancing the capacity of the education system, preparing a response plan to deal with epidemics, including the Ebola virus; and

  • strengthening internal security and national defense.

22. In 2015, domestic revenues are expected to amount to 17.3 percent of GDP, program grants to 1.9 percent of GDP, and total expenditure to 24.8 percent of GDP. The overall fiscal deficit (commitment basis) is expected to be 2.5 percent of GDP which will be covered by both external (budget support) financing and domestic bond issuances. The 2015 government budget execution program has identified several reforms and support measures pertaining both to revenue collection and to the programming and execution of capital spending.

23. Significant measures have recently been implemented to strengthen the efficiency of revenue collection, including interconnection of the DGI and DGD (GERIF) databases, which has made it possible to detect more than 250 cases of fraud. Additional measures will build on these achievements and will focus particularly on: (i) putting in place an efficient system for managing and monitoring exemptions to improve tax revenue collection; (ii) improving the inspection mechanism for mining sector operations with the preparation of the standard protocol for installation of customs posts at mining sites; (iii) strengthening arrangements for collection of value-added-tax (VAT) with the introduction of a standardized invoice; (iv) an exhaustive survey of medium-sized enterprises for better monitoring and efficient control of the new classification of enterprises in order to increase the number of taxpayers; (v) launching the Virtual Liaison System for Import and Export operations (SYLVIE) to ensure transparent, reliable, and rapid production and delivery of the documents required for customs clearance operations; (vi) using the satellite tracking system for vehicles in transit to improve the control of merchandise in transit, which would make it possible to redeploy at least 120 agents previously deployed to carry out physical escorts; (vii) the introduction of scanners in customs offices to improve efficiency in combating fraudulent shipments and tracing hidden compartments; (viii) the creation of an Investigations and Intelligence Directorate with a view to increasing the number of audits by 10 percent.

24. To improve investment spending quality and execution, a planning procedures guide/manual will be prepared to put in place a formal programming process as well as an operational mechanism for decision-making on priority investment spending commitments. Furthermore, hearings with ministries and institutions will be reintroduced to ensure a more realistic public investment program.

25. Significant progress has been made on managing the government expenditure chain, notably the time frame for verification, which was reduced to 17 days in December 2014 from 35 days in 2013 following the implementation of reforms within the framework of procedures and responsibilities of participants in the public expenditure chain. It has been decided to continue these reforms which will include (i) implementing the action plan on the computerization of the public expenditure chain; (ii) strengthening the activities of the committee responsible for monitoring expenditures on development projects and programs for more effective execution of capital spending; (iii) putting in place a sectoral committee to monitor public expenditure execution for a monthly review of budget execution; (iv) easing ex ante control by prioritizing invoices above a certain threshold; (v) giving project and program coordinators greater responsibility for the execution of funds released by delegation of signature.

C. Debt Policy

26. The government intends to continue implementing the debt policy adopted in 2008 and to update the medium-term debt management strategy. This will imply maintaining the current strategy of using highly concessional resources to finance the needs of the economy. Further, external financing denominated in euros will be given preference in view of the low risk involved. Through its participation in the regional financial market, the government plans to diversify its financing sources, reduce its dependence on external financing, and contribute to the development of the financial market.

27. Financing needs in 2015 have been estimated at 2.9 percent of GDP, broken down as follows: 1.1 percent of GDP in net external financing; and net domestic financing of 1.8 percent of GDP, including the use of amounts held in the Treasury Single Account. This leaves a remaining financing gap of 0.5 percent of GDP. Approval of the second and third reviews under the ECF arrangement should result in the disbursement of SDR 8.58 million with SDR 4.47 million programmed for disbursement under the fourth review later in 2015. To bridge the outstanding financing gap, the government requests an augmentation of access under the ECF arrangement of SDR 24.08. For 2016, a financing gap is estimated at CFAF 54 billion (0.9 percent of GDP). The government will seek new external concessional financing to close this gap, and stands ready to adjust its policies as needed to ensure that its 2016 budget is fully-financed.

28. For the current program, the government is proposing an increase in the ceiling of nonconcessional financing from CFAF 150.0 billion to 200.0 billion to finance road, hydroagricultural, and market infrastructure projects that have already been identified. These consist of the drinking water supply project for Ouagadougou from the Ziga dam, the University campus project for Bobo Dioulasso, the road paving project Guiba-Garango, and the sanitation project for peripheral zones of Ouagadougou.

Other Structural Reforms 2015 and 2016

A. Public Finance Reforms

29. Wage bill and administrative management reform for state employees through measures including: (i) boosting the system for redeploying personnel from areas with a high concentration of workers to underserved areas so as to minimize the need for additional staff recruitment; (ii) the implementation in 2015 of cash payment operations for all government employees to monitor staffing and streamline the components of remuneration to supplement the biometric operation conducted in 2012 that made it possible to identify 1,235 persons in irregular status and stop their salaries from January 2014; (iii) adoption of regulations, making it compulsory to state the identity and identification number of incoming and outgoing officials on appointment documents to facilitate automatic updating of the salary status.

30. The reform of public debt management that will focus on the following four broad areas: (i) issuance of domestic debt, cash-flow forecasting, and management of cash balances; (ii) institutional arrangements, including the coordination of public debt procurement and external and internal audit procedures; (iii) debt and risk management strategies, including the issuance of guarantees; and (iv) operational risk management. A study is underway, the conclusions of which will feed into an action plan.

B. Mining Sector Reforms

31. Following the withdrawal of the draft mining code, there have been ongoing discussions on the points of disagreement between the government and the various actors in the mining sector. These exchanges resulted in a consensus on a draft code that was adopted by the Council of Ministers and which took on board most of the concerns of technical and financial partners. The draft was adopted by the government on February 18, 2015 and sent to the National Transition Committee (CNT) on February 23, 2015.

32. With a view to creating a conducive environment for better facilitating artisanal mining operations and generating additional revenues for the country, a number of measures are being envisaged. They include: (i) bringing on stream the National Support Agency for Artisanal and Semi-mechanized Artisanal Mining Operations; (ii) revising the inter-ministerial order of February 3, 2009, establishing the licensing requirements and specifications for the purchase, sale, and export of gold in Burkina Faso particularly with respect to taxes and royalties; (iii) revisit the antifraud law with respect to the marketing of gold to strengthen the operations of the National Anti Gold-Fraud Brigade; (iv) setting up the National Board for Securing Mining Sites; (v) strengthen the operating capacities of the Directorate responsible for Artisanal and Semi-mechanized Artisanal Mining Operations to better equip it to monitor artisanal mining activities; and (v) develop a methodology and action plan for an in-depth study on traditional gold prospecting (orpaillage) sector, to better gauge the importance of this sector for the Burkinabè economy.

C. Energy Sector Reforms

33. Conditions in the energy sector in Burkina remain difficult. Insufficient electricity supply is one of the major constraints for growth, and the financial situation of the national oil company (SONABHY) and the electricity utility (SONABEL) remains tight after years of losses. SONABHY’s financial performance improved at end-2014 as it benefited from lower petroleum product prices in the international market, which generated a financial surplus. This trend continued through to February 2015, thus boosting SONABHY’s weak financial situation and cash position. However, the depreciation of the CFA franc against the US dollar and the reduction of pump prices in January and February 2015 by the government in response to pressure from trade unions reduced these gains. Taking this into account, the Government committed not to further decrease pump prices ahead of the elections in October.

34. With a view to meeting the objectives of strengthening the infrastructure of the public service electricity utility and improving the quality of service to customers, a performance contract between the government and SONABEL will be prepared for the period 2015-2019 to establish the modalities for cooperation and support from the state for the efforts of SONABEL. This should allow SONABEL, inter alia, to optimize its fuel consumption costs and improve its financial balance through better cost control, regularize its financial relations with the government, enhance its technical performance and distribution to customers and improve the continuity and quality of supply. Regarding investments, SONABEL is seeking to diversify its sources of production, by pursuing the building of new thermal and solar power plants and interconnections with neighboring countries. Over the 2015-2016 period, the principal new investment projects will be targeted towards: (i) the increase of thermal production capacity; (ii) establishment of the interconnections including the one with Ghana planned for 2017; (iii) the development of renewable energies; (iv) the development of independent electricity production; and (v) improving access to electricity. Thus, in the context of improving its financial situation and based on the recommendations of the audit of its expenses, SONABEL has developed a program to optimize its cost management over the period 2015-2017. A study on the rate structure is also envisaged to take into account certain parameters identified in the conclusions of the audit.

35. In order to reduce the cost burdens of SONABHY and improve its financial situation, the Government is committed to implement the recommendations of the cost audit carried out in 2014. Also, a performance contract will be prepared to define the cooperation framework between SONABHY and the state, as part of its investment plan to increase its capacities for storage and bottling of butane gas to overcome shortages. In addition, important measures will be taken in the context of implementing the findings of the expenditure audit conducted in December 2014. A key focus will involve streamlining the transport sector. To reduce the incentive for haulers to commit fraud, there are plans to redraft regulations to penalize leakages of hydrocarbons. To this end, it is planned to begin invoicing haulers at market prices for any transport leakages.

D. Reforms to Improve Macroeconomic Monitoring

36. Several reforms are envisaged to improve macroeconomic monitoring and strengthen the analysis of structural trends, in order to identify the most efficient sectors for promoting growth and creating jobs. To achieve this, the National Statistics and Demographic Institute intends to publish by June 2015, quarterly national accounts on an output basis at constant prices. In addition, the updating work on the new base year for the national accounts should be continued, with the completion of the informal sector survey and other specific studies.

Program Modalities

37. The government intends to take all the necessary measures to achieve the objectives and criteria, as presented in Tables 1 and 2 of this Memorandum of Understanding. The program will be examined in keeping with the Technical Memorandum of Understanding that defines the quantitative performance criteria and requirements regarding data reporting to Fund staff. The 4th, 5th and 6th program reviews are expected to take place on or after December 1, 2015, May 16, 2016 and December 1, 2016, respectively.

Table 1.Burkina Faso: Quantitative Performance Criteria and Indicative Targets for ECF Arrangement, June 2015-June 2016(CFAF billions, cumulative from beginning of year; unless otherwise indicated)
20152016
Jun.Sept.6Dec.Mar. 6Jun.
Proj.Proj.Proj.Proj.Proj.
Quantitative Performance Criteria
Ceiling on net domestic financing of central government197.3150.7149.256.396.0
Ceiling on the amount of new nonconcessional external debt contracted or
guaranteed by government 23200200200200200
Accumulation of external arrears 20.00.00.00.00.0
Indicative targets
Ceiling on domestic financing outside central government41422291522
Ceiling on the overall fiscal deficit including grants110.7179.5163.782.4164.8
Floor on Government revenue5568001137268585
Floor on Poverty-reducing social expenditures5218327436118237
Sources: Burkinabè authorities; and IMF staff estimates and projections.

Defined in the TMU, and including on-lending of prospective IMF disbursements.

To be observed continuously.

The limit is not tied to specific projects.

Defined in the TMU.

90 percent of budget amount.

Indicative Target, except for continuous performance criteria.

Sources: Burkinabè authorities; and IMF staff estimates and projections.

Defined in the TMU, and including on-lending of prospective IMF disbursements.

To be observed continuously.

The limit is not tied to specific projects.

Defined in the TMU.

90 percent of budget amount.

Indicative Target, except for continuous performance criteria.

Table 2.Structural Benchmarks for end-June 2015 to end-March 2016
MeasureExplanationCompletion date1
Sign a performance contract between the government and SONABEL to increase its efficiency and put it on a stable footing for medium-term development. (SONABEL)Strengthen control of the government’s contingent liabilities and ensure the viability of public enterprisesJune 2015
Completion of an exhaustive survey of medium-sized enterprises for proper monitoring and efficient control of the new classification of enterprises. (DGI)Optimize revenue collection through increasing revenue baseJune 2015
Draft regulations ensuring that invoicing is based on delivery prices instead of import prices to penalize losses above the specified norms during the transport of petroleum products from the ports to SONABHY. (SONABHY)Lower the costs of public enterprises through reducing fraudJune 2015
Publish a quarterly report on pending payments to avoid the accumulation of arrears. (DGTCP, DGB, DGD)Improve cash management and budget executionQuarterly, starting in June 2015
Adopt an action plan for implementing suggestions contained in the SONABHY audit report. (SONABHY)Improve the efficiency of public enterprisesAugust 2015
Adopt regulations making it compulsory to state the identity and identification number on appointment authorizations to facilitate automatic updating of the salary status of incoming and outgoing officials.(DGB)Safeguard the sustainability of the government wage billAugust 2015
Install and operate of scanners with a view to improving and expediting customs controls. (DGD)Improve revenue collectionSept 2015
Implement ad-hoc cash payment operations of the salaries of all government employees to monitor staffing and to streamline the components of remuneration. (DGB)Safeguard the sustainability of the government wage billSept 2015
Sign a performance contract between the government and SONABHY to increase its efficiency and put it on a stable footing for medium-term development. (SONABHY)Strengthen control of the government’s contingent liabilities and ensure the viability of public enterprisesSept 2015
Begin operations of the Virtual Liaison System for Import and Export operations (SYLVIE) to ensure transparent, reliable, and rapid production and delivery of the documents required for customs clearance operations. (DGD)Improve the efficiency of the customs system and combat fraudDec 2015
Implement regulations requiring large enterprises to use the standardized invoice by end-July 2015 and medium-sized enterprises by end-January 2016, to improve the traceability of transactions carried out by taxpayers with respect to VAT. (DGI)Improve revenue collectionJan 2016
Finalize a study on the viability of production and import options, to take account of changes in the energy sector at both the national and sub-regional level. (SONABEL)Improve the reliability and efficiency of electricity supplyMarch 2016
Conduct an annual audit of pending payments and arrears. (ASCE)Improve cash management and budget executionMarch 2016
Establish an Investigations and Intelligence Directorate. (DGI)Improve revenue collection through increasing the number of tax auditsMarch 2016
Adoption by Board of Directors of SONAPOST the recommendations of a feasibility study on the provision of decentralized financial services. (SONAPOST)Improve access to decentralized financial servicesJan 2016

End of the month.

End of the month.

Attachment II. Technical Memorandum of Understanding

This Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria, indicative targets, and structural benchmarks that will serve to assess performance under the program supported by the Extended Credit Facility (ECF) from 2015 to 2016. It also sets the framework and deadlines for the submission of data to IMF staff for assessment of program implementation.

Conditionality

1. The quantitative performance criteria and indicative targets for the period between end-May 2015, and end-June 2016 are provided in Table 1 of the MEFP. The structural benchmarks set forth in the program are presented in Table 2 of the MEFP.

Table 1.Projected External Program Assistance(Cumulative, CFAF Billions)
End-June 2015End-September 2015End-December 2015
Grants and loans88.8167.4203.4

Definitions

2. Government. Unless otherwise indicated, the term “government” means the central administration of Burkina Faso and does not include local administrations, the central bank, or any other public or government-owned entity with autonomous legal status not included in the table detailing the financial operations of the state (TOFE).

3. Definition of debt. Definition of debt. For the purposes of the relevant performance criteria, the definition of debt is set out in IMF Executive Board Decision No.6230-(79/140), Point 9, as amended by Executive Board Decision No. 14416-(09/91), as published on the IMF website.

4. Debt guarantees. For the purposes of the relevant performance criteria, a government debt guarantee means an explicit legal obligation to service a debt in the event of nonpayment by the borrower (through payment in cash or in kind).

5. Debt concessionality. For the purposes of the relevant performance criteria, a debt is considered concessional if it includes a grant element of at least 35 percent. The present value (PV) of debt at the time it is contracted is calculated by discounting the borrower’s future debt service payments on the debt. The discount rates used is 5.0 percent.

6. External debt. For the purposes of the relevant performance criteria, external debt is defined as debt contracted or serviced in a currency other than the CFA franc. This definition also applies to debt among WAEMU countries. The relevant performance criteria apply to the external debt of the government, public enterprises that receive government transfers, and other public entities in which the government holds more than 50 percent of the capital, and any private debt for which the government has extended guarantees that constitute a contingent liability for the government.

Quantitative Performance Criteria

7. The revised quantitative performance criteria proposed for 2015 are as follows: (i) a ceiling on net domestic financing of the Treasury defined below in paragraph 10; (ii) a ceiling on the contracting or guarantee of nonconcessional external debt by the government, as defined in paragraphs 4 to 7, and (iii) a ceiling on the non-accumulation of payment arrears on external debt service.

A. Net Domestic Financing of the Treasury

8. For the purposes of the relevant performance criteria, net domestic financing is defined as the sum of (i) net bank credit to the Treasury, including net bank credit to the Treasury as defined below vis-à-vis the national banking institutions (claims associated with IMF disbursements are included); (ii) the stock of unredeemed Treasury bills and bonds held outside national commercial banks; (iii) privatization receipts and other Treasury claims and debts vis-à-vis national nonbank institutions. Net bank credit to the Treasury is the balance of the Treasury’s claims and debts vis-à-vis national banking institutions. Treasury claims include the cash holdings of the Burkinabè Treasury, deposits with the central bank, deposits with commercial banks, and secured obligations, and Treasury deposits in postal checking accounts (CCP). Treasury debt to the banking system includes funding from the central bank (including statutory advances, consolidated advances, IMF financing, and refinancing of secured obligations), Treasury securities held by the central bank, and funding from commercial banks (including Treasury securities held by commercial banks). Net bank credit to the Treasury is calculated based on information provided by the Central Bank of West African States (BCEAO), whose figures are deemed valid for program purposes. The foregoing items are calculated based on the Treasury budget execution report presented each month in the Treasury flow-of-funds table prepared by the Ministry of Economy and Finance.

Adjustment

9. The cumulative ceiling on net domestic financing will be adjusted upward in the amount by which external program support to central government, excluding project grants and project loans, falls short of the amount projected, in the event the external program assistance is lower than programmed, up to a maximum of CFAF 65 billion. The shortfall will be calculated in reference to the projections in Table 1 below. The ceiling will not be adjusted downward in the event the external program assistance is higher than programmed. In the event prospective IMF financing is delayed, the cumulative ceiling on net domestic financing will not be reduced by a concomitant amount.

10. The Ministry of the Economy and Finance will forward data on net domestic financing to the IMF within six weeks after the end of each quarter.

B. Nonconcessional External Debt Contracted or Guaranteed by the Government

Performance criterion

11. The government undertakes not to contract or guarantee any nonconcessional external debt beyond the ceiling indicated in MEFP Table 1. This performance criterion applies to external debt as defined in paragraph 7 of this memorandum. It utilizes the concept of concessionality as defined in paragraph 6 of this memorandum. This performance criterion also applies to any private debt guaranteed by the government that constitutes a contingent government debt as defined in paragraphs 4 to 7 of this memorandum. In addition, this criterion applies to public enterprises that receive government transfers, local governments, and other public sector entities (including public administrative, professional, scientific and technical agencies) unless excluded in MEFP Table 1. However, this performance criterion will not apply to Treasury bills and bonds issued in CFA francs on the WAEMU regional market, to suppliers’ normal short-term credits, or to IMF loans. This commitment is a performance criterion to be observed continuously. It is measured on a cumulative basis from the IMF Executive Board’s approval of the ECF, and no adjustment factor will apply.

Reporting deadlines

12. Details on any loan (terms and creditors) contracted by the government must be reported within four weeks of the end of each month. The same requirement applies to guarantees extended by the government.

C. Non-accumulation of New External Payment Arrears

Performance criterion

13. External payment arrears are external payments due but unpaid. Under the program the government agrees not to accumulate external payment arrears on its debt, except arrears arising from obligations being renegotiated with external creditors, including bilateral non-Paris Club creditors. Nonaccumulation of new external arrears by the government is a performance criterion, to be observed continuously.

Reporting deadlines

14. Data on outstanding balances, accumulation, and repayment of external arrears will be forwarded within six weeks after the end of each month.

Other Quantitative Indicative Targets

15. The program also includes indicative targets for the ceiling on net domestic financing beyond the Treasury, the overall deficit (commitment basis, grants included) as defined in paragraph 19 below; total government revenue; poverty-reducing social expenditures.

A. Ceiling on Net Domestic Financing beyond the Treasury

16. For the purposes of the indicative target, net domestic financing beyond the Treasury is defined as the sum of (i) net bank credit to public bodies beyond the Treasury, including net bank credit to these bodies as defined below vis-à-vis the national banking institutions (claims associated with IMF disbursements are included); (ii) the stock of unredeemed bills and bonds held outside national commercial banks; (iii) privatization receipts and other claims and debts of public bodies beyond the Treasury vis-à-vis national nonbank institutions. Net bank credit to the public bodies beyond the Treasury is the balance of the claims and debts of the bodies concerned vis-à-vis national banking institutions. These include (i) deposits of public bodies (beyond the Treasury) at the BCEAO, (ii) deposits of public bodies (beyond the Treasury) at the commercial banks, (iii) commercial liabilities of public bodies beyond the Treasury, (iv) commercial bank liabilities of the postal savings bank (CCP), (v) remaining Treasury deposits in postal checking accounts (CCP), (vi) Treasury deposits at the CNE, (vii) other net liabilities of the State (Secured obligations). Debt to the banking system includes funding from the central bank (including statutory advances, consolidated advances, IMF financing, and refinancing of secured obligations), government securities held by the central bank, and funding from commercial banks (including any government securities held by commercial banks). Net bank credit to public bodies beyond the Treasury is calculated based on information provided by the Central Bank of West African States (BCEAO), whose figures are deemed valid for program purposes.

B. Overall Deficit Including Grants

Definition

17. For the program, the overall deficit including grants is valued on a commitment basis. It is defined as the sum of the government’s net foreign and domestic financing, measured from the financing side, plus a cash basis adjustment. Net foreign financing is the sum of new foreign borrowing less amortization. Government net domestic financing is defined in paragraphs 10-11 above. The cash basis adjustment is defined as the sum of: (i) the total change in unauthorized expenditure commitments, (ii) the change in pending bills, and (iii) the change in Treasury deposits.

Adjustment

18. The ceiling on the overall fiscal deficit, including grants, will be adjusted upward in the amount by which external program support, excluding grants and project loans, falls short of the projected amount, in the event the actual figures are lower than projected, up to a maximum of CFAF 65 billion. The shortfall will be calculated in reference to the projections in Table 2 above. The ceiling will not be adjusted downward in the event that actual external program assistance is higher than projected.

19. The ceiling on the overall fiscal deficit, including grants, will be adjusted downward in the amount equivalent to the difference between projected and actual project loans in the event the actual figures are lower than projected. The overall fiscal deficit, including grants, will be adjusted upward in the amount equivalent to the difference between projected and actual project loans in the event the actual figures are higher than projected. The difference in the amount will be calculated in reference to the projections in Table 3 below.

Table 3.Projected External Program Grants and Project Loans(Cumulative, CFAF billions)
End-June 2015End-September 2015End-December 2015
Grants43.9122.4143.9
Project loans32.455.257.7

C. Total Government Revenue

Definition

20. Total government revenue is valued on a cash basis. It includes all tax and nontax revenue collected by the Directorate General of Taxation, the Directorate General of Customs, the Burkinabè Treasury, and revenue collection units at ministries and institutions. It also includes revenue from treasury checks.

D. Poverty-Reducing Social Expenditures Definition

21. Poverty-reducing social expenditures are defined as the expenditures of sectors sponsoring the priority programs identified in the Strategy for Accelerated Growth and Sustainable Development (SCADD) to accelerate the achievement of poverty reduction objectives. Such expenditures cover all spending categories for the following ministries: Promotion of Women and Gender Issues; Health; Social Action and National Solidarity; National Education and Literacy; Agriculture and Food Security; Animal Resources; Environment and Sustainable Development; Youth, Professional Training and Employment including the labor and social security components of Civil Service, Labor, and Social Security; Water, Hydraulic Improvements, and Sanitation. They also cover rural roads and Heavily Indebted Poor Countries (HIPC) initiative (Category 5) for Infrastructure, Integration, and Transport; and HIPC expenditures only for Communication; Justice and Human Rights; Economy and Finance; and Mines, Quarries, and Energy. Added to this is the allocation under section 98 “transfers to subnational governments” from Health, Agriculture and Food Security as well as National Education and Literacy. These expenditures are monitored directly through the budget, and the indicative threshold for the program will be 90 percent of the amount established by the budget authority.

Non-accumulation of Domestic Payment Arrears

22. The government will not accumulate payment arrears on domestic obligations during the program period. This is a structural benchmark. Under the program, domestic payment arrears arise when actual payment is made more than 90 days after liability is incurred for an undisputed debt to a third party, except in cases where the terms and conditions of the transaction stipulate a longer period. In the case of debt service, arrears arise 30 days after the due date. Payments are deemed to be in arrears in keeping with the following definition:

  • Debt unpaid for more than 30 days after the due date stipulated in the agreement between the parties (creditor/debtor).

  • Wages or pensions unpaid 90 days after their due date.

  • Payments for services rendered received more than 90 days after processing of the supporting documents submitted by suppliers.

Additional Information for Program Monitoring

23. To enable IMF staff to assess program performance, the government agrees to submit the following data to them in paper format and/or MSC Excel electronic files, with the frequencies and deadlines specified below.

Table 4.Summary of Data Reporting Requirements
InformationInstitution ResponsibleData FrequencyReporting Frequency
Public Finance
The government flow-of-funds table (TOFE) and the customary appendix tables; (if data on actual investment financed by external grants and loans are not available in time, a linear estimate of execution based on the annual projections will be used)MEFMonthly6 weeks
Domestic budgetary financing (net bank credit to the government and stock of unredeemed treasury bonds and bills)MEF/BCEAOMonthly6 weeks
Data on implementation of the public investment program, including details on financing sourcesMEFQuarterly6 weeks
The stock of external debt, external debt service, external debt contracted, and external debt repaymentMEFQuarterly6 weeks
Social poverty-reducing expenditures in table formatMEFMonthly6 weeks
Petroleum product prices, consumption and taxes, including: (i) the price structure for the month concerned;; (ii) detailed calculation of the price structure, from the f.o.b-MED price to the retail price; (iii) volumes purchased and distributed for consumption by the petroleum distributor (SONABHY); with a distinction made between retail and industry sales; and (iv) a breakdown of tax revenue from petroleum products — customs duties, tax on petroleum products (TPP) and value-added tax (VAT) — and subsidies unpaidMEFMonthly4 weeks
A monthly statement of the accounts with the treasury, broken out by major category (administrative services, state enterprises, joint public-private enterprises, public administrative enterprises, international organizations, private depositors, and others)MEFMonthly6 weeks
The consolidated balance sheet of monetary institutions
The consolidated balance sheet of monetary institutionsNDs of the BCEAOMonthly6 weeks
The monetary survey: provisional dataBCEAOMonthly6 weeks
The monetary survey: final dataBCEAOMonthly10 weeks
The lending and borrowing interest ratesBCEAOMonthly6 weeks
The standard bank supervision indicators for banks and nonbank financial institutionsBCEAOMonthly6 weeks
Balance of Payments
Preliminary annual balance of payments dataBCEAOAnnual9 months
Foreign trade statisticsINSD/BCEAOMonthly3 months
Any revision of balance of payments data (including services, private transfers, official transfers, and capital transactions)BCEAOAs they occur2 weeks
Real Sector
Provisional national accounts; and any revision of the national accountsMEFAnnual2 weeks
Disaggregated monthly consumer price indicesMEFMonthly2 weeks
Structural Reforms and Other Data
Any study or official report on Burkina Faso’s economy, on the date published, or the date of entry into force.MEF2 weeks
Any decision, order, law, decree, ordinance, or circular having economic or financial implications, on the date published, or the date of entry into force.MEF2 weeks

Due to delayed legislation relating to the mining code and anti-corruption.

WAEMU international reserves are pooled, with imputed allocations to each country.

Election costs are estimated at CFAF 61 billion (0.9 percent of GDP), for which CFAF 25 billion was included in the budget. Donors have committed another CFAF 17 billion, leaving a gap of CFAF 19 billion. Thanks to a series of pledges not yet formalized, it is likely that the final amount (to be covered in a supplemental budget in the summer) will be minor.

Other Resources Citing This Publication