We would like first to express Burkina Faso’s authorities’ appreciation for the quality of the policy dialogue with staff, and the technical and financial assistance that the Fund has provided over the past years. The authorities are particularly thankful for the constructive discussions held with staff and management during their missions in Ouagadougou and in Washington, for the second and third reviews of the ECF-supported program. They broadly share the assessment made by staff on the challenges facing the country and policies going forward.
Following the resignation of President Compaore, a new Transition Government was ushered in, led by President Michel Kafando with a mandate to organize elections within a year. The authorities are determined to achieve this goal and are thankful for the unwavering support of the international community to Burkina Faso in strengthening democratic institutions, as well as promoting pro-poor growth policies.
Burkina Faso’s economic and financial situation was adversely affected by a number of events and shocks since 2014: lower global prices for the country’s main exports (cotton and gold), a lack of rainfall which caused a fall in agricultural output, the impact of the Ebola crisis in the region, the appreciation of the dollar against the CFA, and the socio-political crisis. Even though the October uprising was brief, the political uncertainty and socio-political tensions in the run-up to these events led to a wait and see policy by economic agents which saw a significant decline in new capital investments.
Faced with these negative shocks, the authorities’ steadfastly implemented the ECF supported program, with the view to consolidating macroeconomic stability and realizing progress in poverty reduction in line with their medium term development strategy, SCADD. Although there was an abrupt change in government, the new authorities have the technical capacity and political will to implement difficult, but needed economic and financial reforms.
Notably, they adjusted to the shocks through sizeable fiscal consolidation efforts as detailed below. As a result, performance under the ECF-supported program remained on track. All the end-June and end-December 2014 performance criteria were met. All structural benchmarks and indicative targets were met, except a few. The revenue collection and poverty reducing expenditures targets that have not been met were impacted by the series of shocks mentioned above.
The authorities are requesting the conclusion of the second and third review of the ECF-supported program, and an augmentation of access in order to facilitate the adjustment to theses exogenous shocks, address partly the severe balance of payments needs, and consolidate macroeconomic stability without jeopardizing the development goals of the SCADD.
I. Recent Economic Developments
Real GDP decelerated to 4 percent from a growth rate of 6.6 percent in 2013. Imports declined, reflecting lower investments in imported capital goods and interruptions in the mining sector. The current account deficit stood at 6.1 percent of GDP in 2014, and is expected to worsen significantly, causing a sharp reduction in international reserves.
The series of shocks had a severe impact on fiscal policy. Revenue collected were 14 percent lower than anticipated in 2014, due to lower economic activity and imports. Economic agents and development partners’ wait-and-see policy drove aggregate demand further lower. Grants in particular declined by 21 percent.
Faced with this drastic reduction in revenues and with limited financing options, the authorities were forced to compress expenditures, in order to maintain macroeconomic stability and preserve some fiscal space for priority spending. Domestically financed capital expenditure were thus compressed, and efforts to reallocate spending to projects that were shovel ready and contributed the most towards achieving the goals of the national development strategy were intensified. With the view to improving further public expenditure efficiency, the Council of Ministers adopted a report, as well as an action plan, to improve the quality of investment spending.
Progress was also made in structural reforms. A periodic review of the homegrown accelerated development strategy, SCADD, found that about 30 percent of the planned measures had been implemented in 2014, a sharp decline compared to the 66.7 percent rate for 2013, reflecting the severe expenditure cuts and the difficult socio-political context. The performance indicators met in 2014 cover priority areas such as business climate improvements, and infrastructure investments. The authorities also focused on finalizing the public-private partnership for the Bagré growth pole project, and started consultation with stakeholders on a second growth pole project in the Sahel.
The authorities pursued efforts to improve the financial soundness of State-Owned Enterprises. An external audit of two key state-owned enterprises, the National Hydrocarbon Company (SONABHY) and National Electricity Company (SONABEL) were completed and recommendations were made towards improving their cost-efficiency.
In the mining sector, the new authorities are finalizing the new mining code after extensive consultation with stakeholders, and with the benefit of Fund and World Bank’s technical assistance. They reiterated their commitment to honor mining contracts and licenses signed by the previous government.
However, the difficult social environment and declining international commodities prices impacted activities in the key mining and cotton sectors. Tensions between a few mining companies and local communities turned into protests and lootings. The authorities reacted by deploying security services to protect the mining sites concerned. They also undertook to enforce commitments made to local communities, with the view to appeasing social tensions.
II. Policies for 2015 and Beyond
Economic activity is expected to decline in 2015 before gradually normalizing, and reach a growth rate of 6 percent in 2016, as economic agent’s confidence is restored, notably after an anticipated successful political transition and an easing of Ebola fears in the region.
The transition Government’s first priority is to restore democratic governance in a timely fashion. Preparations for elections are well advanced, with presidential and legislative elections planned for October 2015, and local elections for January 2016. The authorities are committed to ensuring the fairness of the upcoming elections, and are doing everything to ensure full transparency in the political and election process.
On the economic front, they are determined to pursue implementation of the national development strategy, mindful of macroeconomic stability consolidation goals in the short run.
Following the succession of exogenous shocks to revenues, the authorities had to amend the FY 2015 budget and adopted austerity measures in order to meet priority spending needs while preserving fiscal sustainability. The authorities are also committed to strengthening budget transparency and public financial management. Spending was reallocated to reflect the Government’s new mission, and provisions were made for the organization of upcoming elections and to improve the justice system. The government will also aim at protecting the most vulnerable households, and preserving hard achieved social gains in response to the shocks. Notably, they will pursue labor-intensive programs and implement their Ebola prevention strategy.
While improving spending allocation to priority sectors, they are determined to control non essential spending. In this vein, they have initiated a number of measures aimed at reducing public sector overhead, and at controlling the wage bill. On the latter, in particular, they plan to start by end May 2015 cash payment operations for all government employees to clean the payroll of ghost workers.
They will also strive to improve spending efficiency, notably by improving investment spending execution rate, and its quality. In addition to preparing a new guideline, they will continue initiatives underway to improve the management of the government expenditure chain such as plans for the computerization of the public expenditure chains, and efforts to monitor public expenditure execution.
On the revenue side, the authorities plan to intensify reforms aimed at improving revenue collection. Efforts will be made along two axes: i) broadening the tax base through a streamlining of tax exemptions and investigations aimed at uncovering enterprises that are improperly categorized in a preferential tax bracket; ii) improving efficiency of tax and customs administration, including through modernized equipment, such as scanners, satellite tracking system, and the launch of the SYLVIE system.
The authorities remain committed to implementing prudent debt policies and to continue improving debt management capabilities. They will continue to seek highly concessional financing, and would recourse to non-concessional financing only within the limits agreed upon with staff, for high growth impact priority projects, for which no concessional financing alternative is available. This limited recourse to non-concessional resources, and to regional markets will contribute to the diversification of the sources of financing and promote financial development.
On debt management capabilities, the authorities will focus on strengthening the monitoring of domestic spending commitments, with technical assistance from the IMF.
The authorities will intensify structural reform efforts to foster an inclusive and resilient growth path. Actions planned in the SCADD, notably the promotion of the Sahel growth pole, and critical infrastructure investment will be furthered.
Removing growth bottlenecks will also be a priority for the authorities. They will particularly focus on addressing energy sector difficulties. Indeed electricity shortages represent a major impediment to doing business in the region, in addition to creating unhelpful social tensions. The authorities plan to improve and diversify the supply of electricity, including through investment in geothermal generators, as well as new interconnections with neighboring countries grid.
They will also draw lessons from recently conducted audits to reform the state-owned-companies, with the aim of improving their efficiency and financial situation. Amongst the reforms of the SOE planned, are the preparation of performance contracts for SONABEL (the electricity utility company) and SONABHY (the national oil company) which will define the framework for cooperation between the State and these corporations. Measures are also planned to reduce fuel transport leakages, and to improve the storage and bottling of butane gas.
On the mining sector, the authorities will pursue efforts to modernize the mining sector’s regulatory framework with the adoption of a new mining code that is in line with international standards. They will also seek to make the most of the sector’s growth potential, including through the most efficient use of proceeds from this sector.
The transition government that stepped in following the October 2014 uprisings has been able to appease socio-political tensions, and restore stability within a short timeframe. It faced a particularly difficult economic situations marked by a succession of shocks. Against this background the authorities have steadfastly implemented the ECF-supported program, while addressing the other social and political challenges.
With external assistance, for which they are thankful, they have been able not only to prevent a deterioration of the economic and social situation, but also implemented measures which are helping to meet the program’s objectives. Our authorities are confident that the road map they have in pace will help Burkina Faso achieve its medium term goals of higher inclusive growth. On the basis of this strong track record, and in order to support their adjustment efforts while continuing progress in implementing their development agenda we call on Directors to give their support to the authorities’ requests.