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Burkina Faso: Third Review Under the Extended Credit Facility Arrangement—Debt Sustainability Analysis

Author(s):
International Monetary Fund. African Dept.
Published Date:
December 2019
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Background on Debt

1. Burkina Faso’s public debt levels have increased in the last few years following consecutive years of widening fiscal deficits (Text Table 1). The nominal stock of public debt as of end-2018 stood at 43.2 percent of GDP. This sizable increase in 2018 has been driven to a large extent by an elevated budget deficit, the domestic securitization of the off-budget government subsidies to the national oil company SONABHY accumulated in 2017 and the first half of 2018, and the large cash adjustment in 2018, driven by the payment of the committed expenditures without payments (DENO) accumulated in 2017. As in previous DSAs, the composition of debt has continued to shift towards domestic debt, as the regional market has traditionally been willing to finance the fiscal deficit at competitive rates. External debt comprised 57.0 percent of the total debt stock at end-2018, down from 77.1 percent at end-2014.

Text Table 1.Burkina Faso: Public Debt Stock, 2014–18(percent of GDP)
20142015201620172018
Public Debt29.935.639.238.443.2
External Debt23.026.327.924.124.6
share (in percent to total debt)77.173.971.162.8570
Domestic Debt6.89.311.314.318.6
share (in percent to total debt)22.926.128.937.243.0
Memorandum items:
Overall fiscal balance-1.9-2.2-3.5-7.8-4.9
GDP growth (in percent)4.33.95.96.36.8
Sources: Burkinabé authorities; and IMF staff estimates.
Sources: Burkinabé authorities; and IMF staff estimates.

2. The country’s coverage of public debt currently includes external and domestic obligations of the central government yet excludes guarantees and non-guaranteed SOE debt (Text Table 2). The authorities expressed willingness to exert efforts to extend the coverage of debt to include guarantees to the public and private sectors for the next vintage. According to information provided by the authorities, the two main state-owned enterprises that are majority owned by the public sector do not borrow externally.2 Domestic debt is defined as debt denominated in the regional currency, the FCAF. The choice of coverage is based on currency, rather than residency, and that is due to the difficulty of monitoring the residency of creditors for debt traded in the WAEMU regional market.

Text Table 2.Burkina Faso: Coverage of Public Sector Debt
Subsectors of the public sectorSub-sectors covered
1Central governmentX
2State and local government
3Other elements in the general government
4o/w: Social security fund
5o/w: Extra budgetary funds (EBFs)
6Guarantees (to other entities in the public and private sector, including to SOEs)
7Central bank (borrowed on behalf of the government)X
8Non-guaranteed SOE debt

Background on Macro Forecasts

3. Text Table 3 summarize the main differences in macroeconomic assumptions between the previous DSA (January 2019) and the current DSA.3 Burkina Faso’s current and future budget deficits are expected to abide by the WAEMU convergence criterion and are consistent with the authorities’ commitment under their ECF-supported program. The current account has been revised sizably upwards to account for artisanal gold exports and a more favorable external sector conditions going forward. On one hand, gold price forecasts are sizably larger than projections during the previous DSA; they maintain an upward path amid continued robust expansion in the domestic gold sector. On the other hand, Burkina Faso’s other main commodity export, cotton, is hit by lower future price projections relative to the previous DSA, yet there remain favorable prospects for improved production and quality.

Text Table 3.Burkina Faso: Changes in Assumptions for Current DSA Compared with January–2019 DSA
2018 est.20192020202120252028
Gold (USD/ounce)
Current DSA1,2691,4001,5311,5581,6191,619
Oct-2018 DSA1,2611,2181,2551,3041,3821,382
Cotton Prices (cts/lb)
Current DSA917776808181
Oct-2018 DSA93918783S383
Exports of goods (% of GDP)
Current DSA28.026.427.326.121.919.1
Oct-2018 DSA23.523.122.121.416.214.4
Real GDP Growth (y/y)
Current DSA6.86.06.06.06.06.0
Oct-2018 DSA6.06.06.06.06.06.0
Current Account (% of GDP)
Current DSA-4.7-5.2-4.0-4.3-5.7-6.7
Oct-2018 DSA-8.1-8.3-7.0-7.3-9.5-10.6
Overall Fiscal Balance (% of GDP)
Current DSA-4.9-3.0-3.0-3.0-3.0-3.0
Oct-2018 DSA-4.7-3.0-3.0-3.0-3.0-3.0
Sources: IMF staff estimates and World Economic Outlook projections.
Sources: IMF staff estimates and World Economic Outlook projections.

Box 1.Macroeconomic Revisions and Assumptions Underlying this DSA Vintage

Gold prices have been revised upwards throughout the projection period, while the outlook for cotton prices have slightly deteriorated. WEO gold price projections have been significantly raised since the last DSA, driven by increased world demand due to a worsening outlook for world growth. On the other hand, WEO cotton price projections have marginally worsened since the previous DSA.

Gold production is expected to rise moderately over the medium term, as new mines complete the development stage and begin to export, while the challenging security situation is weighing down on the ability to reach the sector’s full potential in the medium to long-run. The coming on stream of new industrial gold mines along with the revised accounting of artisanal gold anchor the outlook for the sector, but the security situation could hamper exploration and limit prospective mining.

GDP growth in 2018 was higher than the baseline forecast of the last DSA. For the projection period, growth is projected to remain at 6 percent in 2019 onwards, reflecting resilience in the face of external shocks. Yet, significant risks to the downside remain due to the intensification of security challenges and increased vulnerabilities to commodity price shocks.

The overall fiscal deficit is expected to moderate in 2019 driven mostly by an increase of windfall nontax revenues and a decrease in domestically-financed public investment as witnessed in the first three quarters of 2019. Authorities have reiterated their commitment to the WAEMU convergence criteria and place importance on meeting the fiscal deficit and debt criteria. This DSA, like the previous one, assumes the authorities are successful in reaching the 3 percent fiscal deficit target by 2019 and maintaining it at that level thereafter.

Domestic debt is assumed to continue to increase consistently throughout the forecast horizon, reflecting the authorities’ financing needs over the medium-term, as well as efforts to deepen the domestic financial market, especially the regional debt market. In 2019, domestic debt is expected to increase by 0.3 percentage points of GDP be around 18.9 percent of GDP. This increase risks to be larger if the government is in need of increased cash flow requirements and if a public investment project for which the government has provided prefinancing guarantees in September 2018 is financed off-budget.4 In the medium term, the composition of domestic debt is assumed to be similar to that in 2019 with a 45 percent of T- bills with an average interest rate of 5 percent, 30 percent of 3 to 5-year bonds with an average interest rate of around 6¼ percent, and 25 percent of 8-year bonds with an average interest rate of 6.5 percent. The remainder of the deficit (around 20 percent) is assumed to be financed via external debt, but on gradually less generous terms to reflect additional non-concessional financing and conservative assumptions about the availability of concessional financing in future years.

The current account deficit is estimated to reach 5.2 percent of GDP in 2019 but is then projected to drop at around 4.0 percent of GDP in 2020 as new gold mines begin to export and the external price conditions become more favorable. Upside and downside risks to the current account include: volatility in key exports (e.g. gold, cotton) and imports (e.g. oil, fuel, machinery), increased imbalances in the trade of services, and a further escalation of the security environment in the Sahel region.

4. This DSA update is consistent with the macroeconomic framework underlying the Staff Report prepared for the third review of the three-year ECF program (Box 1). The macro framework projects growth to stabilize at 6 percent in 2019 and over the medium term, with the government meeting its fiscal targets consistent with Burkina Faso’s WAEMU membership commitment to a 3 percent budget deficit in 2019 onwards. Moreover, authorities are now providing provisions for the subsidies to the national oil company and are limiting cash adjustments, hence containing the off-budget debt creating flows.

5. The realism tools suggest that the baseline scenario is credible when compared to cross-country experiences and to Burkina Faso’s own historical experience (Figures 1 and 2).

  • a. Figure 1 shows that the contributions of past external debt creating flows remain relatively the same for the projection period, however the magnitudes are projected to shrink in the future, consistently with a current account adjustment. Unexpected changes in external debt are near the median of the distribution across low-income countries. Total public debt projections are in contrast with Burkina Faso’s historical experience, mostly due to a projected fiscal adjustment to 3 percent of GDP beginning from 2019 as opposed to the unusually large fiscal deficits in the previous 5 years, especially in 2016 and 2017.
  • b. Figure 2 shows the country’s planned fiscal adjustment for the next 3-years at around 2 percent of GDP. Again, this reflects the historically unusually high fiscal deficit of 7.8 percent of GDP in 2017, and 4.9 percent of GDP in 2018. Although the anticipated fiscal adjustment is not negligible: (i) it lies in the middle of the distribution of the past adjustments of primary deficits; (ii) fiscal adjustment has already started since 2018 and was satisfactory in the first half of 2019 and (iii) it reflects the authorities’ commitment to meet the WAEMU fiscal deficit convergence criterion of 3 percent of GDP from 2019 onward.”
  • c. Figure 2 also shows the potential impact of the projected fiscal adjustment on the possible growth path assuming a range of fiscal multipliers. While the fiscal deficit is expected to adjust to 3 percent of GDP by 2019, growth performance is expected to stabilize at 6 percent, which looks strongly realistic given a range of plausible fiscal multipliers. Moreover, the contribution of government capital to real GDP growth is projected in line with the historical magnitude.

Figure 1.Burkina Faso: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–2029

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.

2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.

Figure 2.Burkina Faso: Indicators of Public External Debt under Alternative Scenarios, 2019–2029

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test {with a one-off breach) would be presented.

6. This DSA assumes an increase of non-concessional financing over the forecast horizon. Text Table 4 and Text Table 5 list the projects for which the authorities have been seeking external loans in 2018 and 2019. The actual amount of new loans contracted, particularly non-concessional loans, will fall well short of the targeted amounts. Previous experience has shown that the borrowing plan has an aspirational element in it. The DSA includes both already-contracted and anticipated borrowing on a disbursement basis. The authorities debt strategy favors exhausting all options for concessional financing before exploring more expensive non-concessional options, including commercial ones. Nevertheless, since financing needs exceed the amount of expected available concessional financing, this DSA assumes that non-concessional borrowing will expand to an average of around 20 percent of total external borrowing but at a growing share over time starting from 2020 and through the DSA horizon. Consistent with this and the assumption of a shrinking concessional financing to total external financing ratio going forward, the grant element of new borrowing is assumed to decrease gradually over the forecast horizon.

Text Table 4.Burkina Faso: Debt Carrying Capacity and Relevant Indicative Thresholds
Debt Carrying CapacityMedium
FinalClassification based on current vintageClassification based on the previous vintageClassification based on the two previous vintages
MediumMedium

3.02
Medium

3.04
Strong

3.05
Note: The current vintage is based on the WEO October 2019, the previous vintage is based on WEO April 2019 and the classification based on two previous vintages is based on the WEO October 2018. All classifications also use the available CPIA at the time of the vintage.
EXTERNAL debt burden thresholdsWeakMediumStrong
PV of debt in % of
Exports140180240
GDP304055
Debt service in % of
Exports101521
Revenue141823
TOTAL public debt benchmarkWeakMediumStrong
PV of total public debt in percent of GDP355570
Text Table 5.Burkina Faso: Combined Contingent Liability Shock
1The country’s coverage of public debtThe central government, central bank
DefaultUsed for the analysisReasons for deviations from the default settings
2Other elements of the general government not captured in 1.0 percent of GDP1.5Guarantees to private sector
3SoE’s debt (guaranteed and not guaranteed by the government) 1/2 percent of GDP2.0
4PPP35 percent of PPP stock0.0
5Financial market (the default value of 5 percent of GDP is the minimum value)5 percent of GDP5.0
Total (2+3+4+5) (in percent of GDP)8.5

The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.)and risks associated with SoE’s debt not guaranteed by The government is assessed to be negligible, a country team may reduce this to 0%.

The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.)and risks associated with SoE’s debt not guaranteed by The government is assessed to be negligible, a country team may reduce this to 0%.

Country Classification and Determination of Stress Tests

A. Country Classification

7. Burkina Faso’s current debt-carrying capacity is consistent with a classification of ‘medium’ (Text Table 4). The country’s Composite Indicator (CI) index, calculated based on the October 2019 WEO and the 2018 CPIA score, is 3.02, that is below the threshold of 3.05, hence the ‘medium’ classification. Moreover, the classification based on the previous vintage of April 2019 WEO had been also ‘medium’, triggering a change in the final debt carrying capacity to ‘medium’. 5 This deterioration of the classification is for the most part driven by a less positive outlook for world economic growth, lower remittances in percent of GDP, and less positive outlook over the import coverage of WAEMU reserves. The relevant indicative thresholds for this ‘medium’ category are: 40 percent for the PV of debt-to-GDP ratio, 180 percent for the PV of debt-to-exports ratio, 15 percent for the debt service-to-exports ratio, and 18 percent for the debt service-to-revenue ratio. These thresholds are applicable to public and publicly guaranteed external debt. The benchmark for the PV of total public debt for medium debt carrying capacity is 55 percent of GDP.

B. Determination of Scenario Stress Tests

8. Given the limited coverage of the country’s public debt, a stress test for a combined contingent liability shock of 8.5 percent of GDP was conducted (Text Table 5). A 1.5 percent of GDP shock is included as a contingent liability to account for the guarantees to the private sector. In the absence of SOE’s external debt, a standard SOE’s debt of 2 percent of GDP is included as additional contingent liability to reflect potential guaranteed and unguaranteed domestic debt of public companies (e.g. SONABHY, SONABEL, SOFITEX). Authorities have also initiated the procedures for auditing the national oil company SONABHY. No shock is used to account for PPPs, as the stock is still less than 1 percent of GDP. The default value of 5 percent of GDP is retained, representing the average cost to the government of a financial crisis.

9. A tailored stress test for commodity price shocks was also conducted given that commodities constitute around 80 percent of total exports in Burkina Faso. This shock is applied to all countries where commodities constitute more than 50 percent of total exports of goods and services over the previous three-year period. The scenario captures the impact of a sudden one standard deviation decline in the export prices of gold, grains, and cotton in 2020, corresponding to a decline in prices by 12 percent, 15 percent, and 11 percent, respectively.

Debt Sustainability

A. External Debt Sustainability Analysis

10. Under the baseline scenario, all external public and publicly-guaranteed (PPG) debt indicators remain below the policy-relevant thresholds for the next ten years (Table 1 and Figure 1). Having a 40 percent threshold, the PV of external debt-to-GDP ratio is expected to remain at or below 17 percent over the projection horizon, decreasing from 16.7 percent in 2019 to 14.9 in 2029 reflecting the effects of the consolidation of the current account deficit in percentage of GDP relative to historical levels, along with effects of persistent real GDP growth.6 The PV of debt-to-exports ratio is expected to grow gradually from 55.2 percent in 2019 to 68.7 percent in 2029 yet remains well below the 180 percent threshold reflecting a moderate projected growth of exports in the long-run. Neither of the debt service indicators causes any breach of their respective thresholds under the baseline scenario. The debt service-to-exports ratio remains at around 4 percent for most of the next 10 years, reaching 4.8 percent in 2029; while the debt service-to-revenue ratio declines gradually from 6.9 percent in 2019 to 4.8 percent in 2029.

Table 1.Burkina Faso: External Debt Sustainability Framework, Baseline Scenario, 2016–2039(In percent of GDP, unless otherwise indicated)
Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r-g-ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valution adjustments, for projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r-g-ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valution adjustments, for projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

11. The standardized stress tests show that an export shock has the largest negative impact on the debt trajectory, triggering minor breaches to two of the external PPG debt indicators (Table 2). The PV of debt-to-exports ratio and the debt service-to-exports ratio are significantly increased by the export shock driven mostly by a high historical volatility in receipts in US dollar terms. The former reaches 181.7 percent in 2021, and it remains above the threshold of 180 percent for the remainder of the projection period. The latter reaches the threshold only in 2027 through the DSA horizon in 2029. The test highlights the need for a sustained effort to improve the economy’s potential in exporting goods and services. Other shocks, including to real GDP growth, the primary balance, a one-time 30 percent depreciation and the tailored tests (for contingent liabilities and commodity prices) do not lead to any breach of the debt thresholds (Table 3).

Table 2.Burkina Faso: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–2039(In percent of GDP, unless otherwise indicated)
Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt; The central government, central bank. Definition of external debt is Currency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of difference depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt; The central government, central bank. Definition of external debt is Currency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of difference depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.Burkina Faso: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–2029(In percent)
Projections1/
20192020202120222023202420252026202720282029
PV of debt-to GDP ratio
Baseline1716161515151515151515
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019-2029 2/1718192122232324242424
B. Bound Tests
B1. Real GDP growth1717161616161616161616
B2. Primary balance1717171616161616171717
B3. Exports1723333231302928272626
B4. Other Hows 3/1713191915181818171717
B5. Depreciation1721171616161616161717
B6. Combination of B1-B51721212020191919191818
C. Tailored Tests
Cl. Combined contingent liabilities1717171717171717171718
С2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
C3. Commodity price1717171717161616161615
C4. Market Financingn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.па. n.a. n.a.
Threshold4040404040404040404040
PV of Debt-to-Revenue Ratio
Baseline5553535355565860636569
A. Alternative Scenarios
A1. Key variables at the» historical averages in 2019-2029 2/5559657279659197101105109
B. Bound Tests
B1. Real GDP growth5553535355565860636569
B2. Primary balance5554565860626567707477
B3. Exports5594182183185186190192192193194
B4. Other Hows 3/5559656667697173747679
B5. Depreciation5553454647465052555662
B6. Combination of B1-B555756486878991939699102
C. Tailored Tests
Cl. Combined contingent liabilities5557575961646770737781
С2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
C3. Commodity price5558606162636465676971
C4. Market Financingn.a.n.a_n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Threshold180180180180180180180180180180180
Debt service-to-exports ratio
Baseline54444444555
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019-2029 2/54444556778
B. Bound Tests
B1. Real GDP growth54444444555
B2. Primary balance54444445555
B3. Exports5589991012151515
B4. Other flows 3/54444445666
B5. Depreciation54433344444
B6. Combination of B1-B554555567777
C. Tailored Tests
Cl. Combined contingent liabilities54444445555
С2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
C3. Commodity price54444445555
C4. Market Financingn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Threshold1515151515151515151515
Debt service-to-revenue ratio
Baseline76555555555
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019-2029 2/76666667788
B. Bound Tests
B1. Real GDP growth76655555555
B2. Primary balance76655555555
B3. Exports767877781099
B4. Other flows 3/76655556666
B5. Depreciation77766566555
B6. Combination of B1-B576766566666
C. Tailored Tests
C1. Combined contingent liabilities76655555555
C2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.п.а.n.a.n.a.n.a.
C3. Commodity price76665555555
C4. Market Financingn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Threshold1818181818181818181818
Sources: Country authorities; and staff estimates and projections.

A Bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Sources: Country authorities; and staff estimates and projections.

A Bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

B. Public Sector Debt Sustainability Analysis

12. The baseline scenario projects a downward trend of PPG public debt following a peak of 43.5 percent of GDP projected for end 2019 (Figure 2). A small increase of public debt is projected in 2019 – driven by domestic debt, to finance a consolidated budget. External debt to GDP is projected to get contained gradually, and at a faster rate.

13. Under the baseline scenario, the PV of public debt-to-GDP ratio does not breach the 55 percent benchmark (Table 3 and Figure 2). The ratio remains around 36 percent over the projection horizon reflecting the long-term effects of fiscal consolidation in line with WAEMU commitments and the limiting of off-budget debt creating operations. The PV of debt-to-revenue ratio is expected to peak in 2021 at 155 percent and then gradually decrease to 150 percent by 2029. Debt service-to-revenue and grant ratio escalates rapidly from 30 percent in 2019 to 42½ percent by 2021, given the short maturity of domestic financing. The latter raises concerns over the medium to long term liquidity risks to the service of total public debt.

14. The standardized sensitivity analysis shows that the two most extreme shocks leading to the highest debt figures in the projection period are a shock to exports, a shock to commodity prices and the contingent liability shock, yet the public debt benchmark is not breached (Figure 2, Table 4). The PV of debt-to-GDP ratio would peak at 51 percent of GDP in 2029 under the stress test of a commodity price shock—the most extreme shock, just below the threshold of 55 percent. This commodity price shock highlights Burkina Faso’s susceptibility to terms of trade shocks given the price volatility of its major export commodities—gold, cotton, and agricultural products. A negative shock to gold prices also affects the fiscal position as lower gold revenues would put pressure on the deficit. It is closely followed by the exports shock, which is also the most extreme shock affecting the PV of debt to revenue ratio. The tailored test for the combined contingent liability shock also causes a deterioration in debt sustainability, featuring as the most extreme shock affecting debt service to revenue ratio.

Table 4.Burkina Faso: Sensitivity Analysis for Key Indicators of Public Debt, 2018–2028(In percent)
Projections1/
20192020202120222023202420252026202720282029
PV of Debt-to-GDP Ratio
Baseline3636363636363636363636
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019-2029 2/3637384041424445474950
B. Bound Tests
B1. Real GDP growth3637404142434445464748
B2. Primary balance3639424342414141414141
B3. Exports3641505049494848474645
B4. Other flows 3/3638404039393939393939
B5. Depreciation3638363534323130292827
B6. Combination of B1-B53637383736363535353535
C. Tailored Tests
Cl. Combined contingent liabilities3644444343434343424242
С2. Natural disastern..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.
C3. Commodity price3637404244464748495051
C4. Market Financingn..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.
TOTAL public debt benchmark5555555555555555555555
PV of Debt-to-Revenue Ratio
Baseline147148155154153152152150149150150
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019-2029 2/147153166169174179184188193200206
B. Bound Tests
B1. Real GDP growth147153171174177181184186189194198
B2. Primary balance147160182179177175174171169169169
B3. Exports147170218213210206203198193189186
B4. Other flows 3/147155172169168166165163161160160
B5. Depreciation147159159151145138132126120115111
B6. Combination of B1-B5147154163157154151149147146145145
C. Tailored Tests
Cl. Combined contingent liabilities147181189185184181179177175174174
C2. Natural disastern..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.
C3. Commodity price1471601791871931%199199202206210
C4. Market financingn..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.
Debt Service-to-Revenue Ratio
Baseline3036434141414139393939
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019-2029 2/3036434242434444475052
B. Bound Tests
B1. Real GDP growth3037464647485049505153
B2. Primary balance3036485048484946454545
B3. Exports3036434343424241434342
B4. Other flows 3/3036434241414139404040
B5. Depreciation3035413839383836363636
B6. Combination of B1-B53035424442414140403939
C. Tailored Tests
C1. Combined contingent liabilities3036565150515147464645
C2. Natural disastern..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.
C3. Commodity price3038464750515352535556
C4. Market financingn..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.n..a.
Sources: Country authorities; and staff estimates and projections.

A Bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Sources: Country authorities; and staff estimates and projections.

A Bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Risks and Vulnerabilities

15. Fiscal risks are substantial. The baseline scenario assumes Burkina Faso achieves the planned fiscal consolidation to WAEMU fiscal deficit convergence criteria of 3 percent of GDP in 2019 and then maintains the deficit at this level over the medium-term (see Staff Report). Although this target might seem achievable in 2019 – largely due to significant windfall revenues of around 1.4 percent of GDP in the first half of the year, it looks more challenging on the medium run. The projected fiscal adjustment is realistically ambitious in historical comparison, standing at around the 75th percentile (figure 4). However, the absence of comparable windfall revenues in 2020, along with the increased public expenditures associated with a potentially deteriorating security situation, in the context of a year of elections, are likely to present increased pressures on fiscal discipline in 2020, and to a lesser extent onwards. Also, exports and overall GDP may develop less favorably than projected under the baseline in view of the vulnerability of primary exports (namely cotton and gold) to commodity price shocks, and a potential deterioration in the security conditions, as highlighted in Box 1 which could undermine growth.

16. Burkina Faso would benefit from a more diversified export base of goods and services. Under all the external debt indicators, the most extreme shock was an export shock. This highlights the importance of diversifying exports of goods, which currently consist mainly of gold and agricultural products. Moreover, this underlies the importance of strengthening the services export sector to address the imbalances in the trade of services. Staff stressed that diversification is a long-term policy objective that could only be reached through sustainable and efficient public investment in infrastructure and education. Burkina Faso has a high risk of debt shocks arising from (present and future) contingent liabilities associated with various off-budget activities, including debt of state-owned enterprises, fuel subsidies, pre-financing of public investment projects and other potential PPPs. The materialization of these fiscal costs could lead to a deviation from the baseline path. Authorities’ plans to audit the national oil company – SONABHY, to proceed with the operationalization of the fuel price adjustment mechanism, to include future fuel subsidies in the budget, and to develop a database of sovereign guarantees and PPPs. All are crucial steps for building capacity to analyze and mitigate these risks.

17. The regional market seems more willing to absorb a higher amount of debt issued by Burkina Faso, as large WAEMU economies are increasingly seeking external financing through Eurobond issuance. This is also leaving more room for Burkina Faso to issue more bonds on the regional market, with longer average maturity, which would allow Burkina Faso to gradually decrease the average interest rate on its sovereign bonds, and ease rollover risks. Authorities are in parallel studying alternative external financing sources that could be semi-concessional and help meet Burkina Faso’s increasing gross financing needs.

Conclusion

18. According to staff’s assessment, Burkina Faso’s risk of external debt distress remains moderate. The baseline scenario shows no breach of debt distress thresholds for any of the debt and debt service indicators. However, under a standard stress test of a shock to exports aimed at illustrating the potential impact of external risks, two thresholds of external PPG debt sustainability are breached. Consequently, Burkina Faso’s risk of external debt distress is assessed to be ‘moderate’. The granularity in the risk rating (Figure 5) suggests that there is substantial space to absorb shocks without risk of downgrading to a ‘high’ risk of debt distress.

Figure 3.Burkina Faso: Drivers of Debt Dynamics – Baseline Scenario

1/ Difference between anticipated and actual contributions on debt ratios.

2/ Distribution across LICs for which LIC DSAs were produced.

3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.

Figure 4.Burkina Faso: Realism Tools

Figure 5.Burkina Faso: Qualification of the Moderate Category, 2019–2029 1/

Sources: Country authorities, and staff estimates and projections

1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.

19. The DSA suggests that overall risk of public debt distress remains moderate. While there are no breaches for overall public debt, the risk of overall debt distress remains moderate as the risk of external debt distress is moderate. To avoid a deterioration of the risk of debt distress rating, several risks and vulnerabilities need to be addressed, particularly: (i) pressures to deviate from the agreed fiscal consolidation, (ii) a non-diversified export base and a weak services exporting sector, (iii), fiscal costs arising from contingent liabilities associated with various off-budget activities, including potential future PPP arrangements, and (iv) rollover risk related to domestic financing.

Authorities’ View

20. The authorities concurred with the results of the current DSA. They agreed that export diversification is important to limit the risk of debt distress but expressed difficulty in addressing this policy objective; they also noted the lack of capacity building and support in this respect. In view of the increasing debt service of domestic debt, the authorities are considering expanding their external financing while giving priority to concessional financing, with a readiness to consider semi-concessional financing sources with conditions that would be evidently more favorable than the conditions on the domestic market.7 In this context, authorities reiterated their commitment to maintain prudent overall debt levels with a view to enhancing its composition while maintaining their assessed risk of debt distress at a ‘moderate’ rating.

1

Based on the current vintage drawing from October 2019 WEO and the 2018 CPIA, as well as the last two vintages.

2

The two public enterprises are SONABHY, the state-owned oil-importing company, and SONABEL, the national electricity company.

3

IMF Country Report No. 19/15 of January 2019.

4

Refer to Staff Report of the first review under the ECF Arrangement published in January 2019 for information on the pre-financing of a public investment project (https://www.imf.org/en/Publications/CR/Issues/2019/01/22/Burkina-Faso-2018-Article-IV-Consultation-First-Review-Under-the-Extended-Credit-Facility-46533).

5

Based on the revised “Guidance Note on the Bank-Fund Debt Sustainability Framework for Low-income Countries” (http://www.imf.org/en/Publications/Policy-Papers/Issues/2018/02/14/pp122617guidance-note-on-lic-dsf).

6

External debt dynamics are highly driven by non-identified debt-creating flows (as illustrated by residuals in table 1). These residuals are persistent and consistent with historical dynamics, and they are largely due to the definition of external debt on the currency-basis, in misalignment to the current account which is conducted on the residency-basis.

7

Concessional loans are defined as loans with a grant element above 35 percent. By semi-concessional loans, we refer to loans that have a material positive grant element but that is lower than 35 percent.

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