Back Matter

ANNEX I: The Role, Reform, and Future of the Cocoa and Coffee Sectors

Côte d’Ivoire is the world’s largest producer of cocoa, annually providing roughly one third of the overall cocoa production. It is among the 10 leading coffee exporting countries in the world, with a market share of some 4 percent, and the world’s third largest exporter of robusta coffee (behind Indonesia and Brazil), with a market share of around 14 percent. In 1994, cocoa and coffee contributed some 6 ½ percent to Côte d’Ivoire’s GDP and accounted for about 40 percent of its exports.

International cocoa and coffee prices, which have been very volatile over the last 25 years, more than quadrupled from 1970 to the mid-1980s. From the second half of the 1980s through 1992, however, prices collapsed, reflecting stagnant world demand and persistent oversupply, partially caused by the market entry of new producers and the breakdown of market sharing and export quota systems. From 1985 to 1992, the average price for cocoa beans gradually fell from 102.27 cents/lb to 49.87 cents/lb. Coffee prices reached a low of 63.66 cents/lb in 1992, down from 192.74 cents/lb in 1986. This decline in world market prices contributed to the downturn of the Ivoirien economy and led to a substantial reduction in production, a deterioration of quality, an abandonment and neglect of plantations, and large financial imbalances of the Price Stabilization Fund (Caisse de Stabilisation, or CAISTAB). The problems were particularly profound in the coffee sector, which even during the boom years had been at a comparative disadvantage vis-à-vis the cocoa sector, owing to the authorities’ policy of offering the same producer price guarantee for cocoa and coffee, irrespective of the more costly and work-intensive coffee production process.

In the following sections, the developments in each sector during the last few years will be analyzed and the major problem areas identified; the severity of the difficulties in the coffee sector warrants an especially careful examination of this sector. This overview will be complemented by an illustration of the functioning of the price stabilization scheme under the previous system (up to the 1994/95 campaign 1/) and the new system introduced with the beginning of the 1995/96 campaign in the context of the World Bank’s Agricultural Sector Adjustment Credit (ASAC); and by an evaluation of the method of export taxation applied since early 1994.

1. Cocoa

Ivoirien cocoa has traditionally been of high quality and at times enjoyed a premium of some 10 percent over the average world market prices. Cocoa is planted both in large-scale plantations and by individual farmers on artisanal plots, covering some 1.5 million hectares. The population in the forestry cocoa-growing areas is close to 5 million. The average cocoa plantation provides a yield of 500 to 600 kg/ha, but the plantings of the late 1980s, which are coming to maturity now, can achieve up to 1,000 kg/ha, thus promising the potential for good crops in the near future.

According to statistics of the International Cocoa Association (ICCO), Côte d’Ivoire’s production volume, which was at 580,000 tons during the 1985/86 campaign (29.4 percent share of world market), peaked during the 1988/89 campaign with almost 850,000 tons (34.4 percent), before contracting again to less than 700,000 tons in 1992/93 (29.2 percent), mainly as a result of falling world market prices. To counter this decline, the Ivoirien authorities resorted to a partial retention of Ivoirien cocoa from the world market in April and May 1988. This attempt was rapidly abandoned in view of capacity constraints for storage and severe financial imbalances caused by the measure. In spite of the drop in world market prices, the Ivoirien authorities resisted passing through this decline to producers and intermediaries until the 1988/89 campaign: at that time, the guaranteed producer price was reduced from 400 CFAF/kg to 250 CFAF/kg and finally to 200 CFAF/kg for the 1989/90 campaign, with domestic marketing costs also being cut drastically.

In 1994, world prices recovered to 65-70 cents/lb and have hovered around this range since then. Also, the 50 percent devaluation in foreign currency terms of the CFA franc resulted in a commensurate increase in export prices when expressed in local currency. As a result, the authorities were in a position to raise the indicative producer price by 58 percent to 315 CFAF/kg. This induced a positive supply response, and the production recovered to 850,000 metric tons during the 1994/95 campaign.

2. Coffee

As in the case of cocoa, the production of coffee was negatively affected by the rapid decline of world market prices, which by 1992 had dropped to one third of their 1986 level. Because the authorities had resisted adjusting the producer price until 1990, coffee production in Côte d’Ivoire reached a peak of 284,000 tons in 1990. In that year, a 50 percent cut in the producer price from 400 CFAF/kg to 200 CFAF/kg sharply reduced production and plantation maintenance incentives to farmers and made the adequate use of fertilizers too costly and the less work-intensive production of cocoa even more attractive. During the following campaigns, the comparative advantage of producing cocoa improved even more, as the producer price for coffee gradually decreased further to a low of 100 CFAF/kg while the price for cocoa was kept at 200 CFAF/kg. Consequently, by 1994, production had fallen to some 126,000 tons, which caused some bottlenecks in the supply to regular customers. At the same time, the quality of Ivoirien coffee deteriorated noticeably. As a consequence, Côte d’Ivoire’s world market share in coffee production dropped significantly, as other countries expanded their production.

Furthermore, the decline in production incentives was aggravated by the age and poor condition of the coffee plants—50 percent of the coffee plants are more than 30 years old—which over the 20 years from 1970 to 1990 had led to a deterioration of the coffee yield per hectare from 338 kg/ha to only 185 kg/ha. All these factors resulted in a widespread abandonment and neglect of plantations, leaving behind irreparable damage to many plants, which even under conditions of rising prices would not allow an immediate and profound recovery of production to the level of the 1980s.

Against this background, Côte d’Ivoire embarked in October 1994 upon a widespread rehabilitation program for the coffee sector, with the objective of increasing coffee production to 350,000 tons by 2005. The intended measures include, inter alia, a large-scale investment program to replace old plants by new plants, a cleaning up and phytochemical treatment of still productive plantations, and an adequate provision of fertilizers. Reflecting the comprehensive preparatory work to be undertaken and the growth cycle of coffee, the major part of the targeted production increase will not be realized until the turn of the century.

Nonetheless, the short-term potential of the rehabilitation program was boosted by the recent surge in world coffee prices as well as by the devaluation of the CFA franc in January 1994. These factors have enabled the authorities to gradually raise the indicative producer price for coffee from 100 CFAF/kg at the beginning of the 1992/93 campaign to 695 CFAF/kg for the 1995/96 campaign, thus providing sufficient income and production incentives to farmers for the first time since the mid-1980s and reducing the comparative advantage of cocoa production over coffee production. 1/ As a consequence, coffee production has improved significantly, with a crop of about 170,000 tons expected for the 1995/96 campaign. However, a substantial short-term decline of world coffee prices could be detrimental to a full rehabilitation of Côte d’Ivoire’s coffee sector.

On top of the dramatic decline of production and quality during the last few years, Côte d’Ivoire’s coffee sector has also been confronted with two other major obstacles: the declining importance of direct purchasing contracts in the forward market between exporting countries and roasters in consumer countries; and the financial risks embedded in the price stabilization scheme. The worldwide overproduction of coffee in the late 1980s led to a large buildup of world stocks, which made it more advantageous for roasters to buy from these stocks in the spot market rather than to engage in direct forward purchases with individual producer countries, thus taking advantage of the increasing homogeneity of robusta coffee and the progress made in mixing techniques, as well as avoiding country-specific availability and delivery risks; contrary to the past, the origin of the coffee seems to have become more and more irrelevant to roasters. In addition, in the specific case of Côte d’Ivoire, the roasters’ previous loyalty toward Ivoirien robusta was lost, owing to the deterioration of quality and the unreliability of delivery as a result of the decline in production. Even the large price volatility over the last two years has not induced market participants to abandon their preference for spot market purchases. 1/ In addition, newcomers in the market like Vietnam, but also more traditional suppliers like Indonesia, are willing to sell their products—often in the form of “robusta equivalents” with slightly inferior quality—with a considerable rebate, whereas countries like Côte d’Ivoire tend to refuse to engage in such practices. As a consequence, the recently improved demand for robusta coffee in the major consumer market (Europe) has benefited Asian countries for the most part.

As a result of the declining importance of forward sales in the coffee market in an environment of very volatile spot market prices, Côte d’Ivoire’s coffee price stabilization scheme may impose a large risk for the financial equilibrium of the campaign. 2/ This risk is aggravated by the fact that the harvesting and exporting of coffee usually begins three to four months after the official opening of the campaign, which usually is in October. Both factors taken together provide a very weak basis for the determination of the export reference price that is the anchor of the stabilization scheme. This price risk is inversely proportional to the amount of forward sales engaged in, and increases with the volatility of the market. If world coffee prices were to drop dramatically, CAISTAB could be forced to pay the exporters the difference between the actual market price and the export reference price until the export reference price is adjusted accordingly; the losses would be covered by the stabilization reserve, which, however, in the case of very volatile market movements, may not be sufficient to capture all the losses incurred. 3/

3. CAISTAB’s stabilization operations

Cocoa and coffee marketing in Côte d’Ivoire is handled through a conglomeration of individuals and private companies—exporters, traders, farmers, and, more recently, farmers’ cooperatives—within a predetermined indicative price structure and a system of controls and regulations managed by CAISTAB. The CAISTAB’s major objective is to stabilize the intra-annual producer prices for both crops. Supported by the World Bank’s Agricultural Sector Adjustment Credit (ASAC), which was approved in late September 1995, Côte d’Ivoire has implemented some important steps toward a liberalization of the domestic and external marketing of cocoa and coffee, without, however, giving up the stabilization objective; the new system, which took effect with the beginning of the 1995/96 campaign, is intended to (a) reduce the role of CAISTAB in domestic and external marketing, thus improving production incentives to farmers and providing a framework for private sector competition for other participants in the campaign; (b) increase the transparency of CAISTAB’s operations; (c) cut CAISTAB’s operating expenses; and (d) decrease the taxation of cocoa and coffee exports. 1/

Apart from stabilizing prices in both crops, CAISTAB is also in charge of the quality control of exports; licensing exporters; and granting export rights to them; before the ASAC reform, these rights were allocated through a sometimes opaque and seemingly arbitrary system, whereas the new system consists of a regular computer-supported auctioning of these rights to interested companies. Finally, under the old system, CAISTAB was also integrally involved in the provision of some services, such as the distribution of bags, the operation of purchasing centers, and the organization and administration of the transportation of the crops; in the context of the ASAC reform, these tasks were awarded to the private sector, and the purchasing centers were closed.

Under the stabilization scheme, CAISTAB establishes at the beginning of each campaign a cost and price structure (barème), which comprises the entire marketing chain from the point of purchase from the farmer to the actual export of the product; it is CAISTAB’s objective to achieve an ex ante financial equilibrium of the barème. Accordingly, CAISTAB sets two key prices in the marketing chain: the indicative producer price and the export reference price; under the old system, it also stipulated a price ex-factory (loco-magasin). 2/ The export reference price represents the anchor of the system and is the result of CAISTAB’s assessment of world prices for the coming year, which is largely based on the average price of forward sales (PVAM) entered into either by exporters or, to a lesser extent, by CAISTAB itself. 1/ After setting the export reference price, CAISTAB derives the costs for the different stages of the marketing chain, based on expenditure and return assumptions for each group of participants in the campaign, and also depending on each group’s bargaining power; this process often appears arbitrary and deprives campaign participants of production and efficiency incentives. The barème also includes the level of the export tax (DUS) and CAISTAB’s own operating costs, the so-called DELTA. The DELTA represents a levy by CAISTAB intended to cover its administrative costs, financial charges (including debt service), investment expenditure, allocations to the technical stabilization reserves, and charges directly related to CAISTAB’s commercial activities, such as expenses for transportation, bags, storage of cocoa and coffee, and compensation to factories and exporters for the processing and export of low-quality products. In line with the reduction in CAISTAB’s role in domestic marketing, the recent ASAC reform achieved a substantial reduction of the DELTA factor, from 111 CFAF/kg at the beginning of the 1994/95 campaign to 62 CFAF/kg at the beginning of the 1995/96 campaign.

The export reference price is the key to the stabilization system: under the new auction system established through the ASAC reform, exporters have to forward to CAISTAB any positive difference between the auction price and the export reference price, whereas an auction price below the reference price is offset by a balancing payment by CAISTAB. 2/ In the first case, net exceptional income accrues to CAISTAB, which is either used to augment the stabilization reserves or, if the stabilization reserves are already at an adequate level, is transferred to the Treasury or to the next campaign; in the second case, losses would occur, which would have to be covered by drawing on the stabilization reserves. The ASAC reform linked the PVAM system with the outcome of the auctioning of export rights. Consequently, newly entered contracts after the beginning of the campaign automatically alter the export reference price via the PVAM system; this ensures that the export reference price follows the direction of the market; however, given the theoretically large volume of forward sales in the cocoa sector, the new prices only have a limited impact on influencing the export reference price.

4. Taxation

Following the devaluation of the CFA franc in January 1994, a unitary export tax on coffee and cocoa (droit unique de sortie, or DUS) was reintroduced, 1/ in order to provide sufficient government revenue in the aftermath of the devaluation, absorb some of the windfall profits accrued by the sharp recovery of world commodity prices, and introduce some form of taxation on farmers’ income and complement the insufficient present system of taxation of exporters’ benefits. 2/ The tax was initially set at 177 CFAF/kg for cocoa beans and 189 CFAF/kg for coffee beans, with a further differentiation for certain transformed cocoa products. In March 1994, the DUS for coffee was reduced to 138 CFAF/kg. At the beginning of the 1994/95 campaign, the basic DUS rates for both coffee and cocoa beans were raised to a uniform rate of 200 CFAF/kg, with a parallel increase for transformed cocoa products as well. The DUS contributed some CFAF 126 billion (15 percent) and an estimated CFAF 161 billion (16 percent), respectively, to government revenue in 1994 and 1995.

While the temporary benefits of the DUS on government revenue and the simplicity of its application are undeniable, such a high level of export tax has some negative implications. First, it prevents a full pass-through of increasing world market prices to producers and other campaign participants, thus reducing incentives for increased production and improved quality. Second, as a cost element to the campaign, it aggravates the stabilization risk, especially in its current form as a unitary tax; any drop in world market prices would, ceteris paribus, be amplified by the rigid tax and squeeze the stabilization fund’s reserves, making it ultimately impossible for CAISTAB to follow its stabilization obligations and endangering the respective campaign’s financial equilibrium; this holds true particularly for the coffee sector, where forward sales play a subordinate role in determining the export reference price. 3/ Finally, it makes government revenue vulnerable to fluctuations in world market prices for coffee and cocoa, which may call for adequate adaptations of the DUS rates from time to time.

There is an understanding between the Government, the campaign participants, and donors that the current level of export taxation is inefficient and can only be relied upon temporarily in the context of the special circumstances of the devaluation and until agricultural activities can be taxed in a more efficient way. In addition, the Government’s recently launched efforts to increase its tax base, reduce tax exemptions, and improve tax administration should, over the medium term, provide some room for reducing the reliance on export taxation without compromising the Government’s revenue needs. Consequently, the Government has committed itself to gradually reducing the DUS for cocoa and coffee to around 20 percent and 7 percent, respectively, of the export price by 1997, reflecting—according to World Bank calculations based on the trade theory of distortions—an appropriate level of taxation in view of Côte d’Ivoire’s market share in the respective world market. 1/ This reduction in the DUS rates would also bring the taxation of the agricultural sector closer to the average level of taxation in the rest of the economy. Consequently, beginning with the 1995/96 campaign, the DUS rates for cocoa and coffee have been scaled down to 160 and 110 CFAF/kg, respectively, representing 21.7 percent and 10 percent of the export reference price.

ANNEX II: The Energy Sector

The main sources of energy in Côte d’Ivoire are hydroelectricity and fossil fuels (oil and natural gas). To develop a level of energy supply consistent with domestic demand, the authorities have relied on the strengthening of the institutional framework; a reduced involvement of the State at the various stages of energy production and commercialization; and efforts to encourage oil and gas exploration. This strategy has already produced significant results: the management of production, transportation, and distribution of electricity has been privatized; the State is in the process of selling part of its minority shares in the refinery company SIR (Société Ivoirienne de Raffinage) and in the national oil company PETROCI; and oil and gas explorations were successful in 1994-95.

1. Oil and natural gas

a. Supply and demand

The production of oil and natural gas, which had practically vanished by 1993, resumed in 1995 following the coming on stream of two new fields (Lion and Panthère). Based on present discoveries, oil production (light crude) will represent some 450,000 tons in 1995 (3.6 million barrels) and reach its peak in 1996 with 928,000 tons (7.4 million barrels), when it will exceed local consumption by about 10 percent. Production will decline thereafter at an annual rate of 20 percent. Most of the oil production will be exported, as the local refinery can only process a limited quantity of light crude. The production of natural gas, which has been negligible in 1995, is expected to reach 680 million cubic meters (the equivalent of 4.2 million oil barrels) in 1996 and is expected to last for at least 18 years. Most of the gas is used for electricity production, or flared. Direct exports to neighboring countries are also envisaged. In terms of oil-barrel-equivalent, the production of oil and natural gas will amount to about 4.6 million barrels in 1995 and peak at 11.6 million barrels in 1996.

In terms of value added, oil and gas production are expected to represent 0.6 percent of GDP in 1995 and 1.6 percent in 1996. The net improvement in the external current account resulting from oil exports, reduced imports of energy, and payments of dividends to foreign oil companies will amount to about CFAF 50 billion, or 0.9 percentage point of GDP, at the peak of production of the new fields in 1996-97.

It is worth stressing that present efforts to encourage exploration could lead to additional gas and oil discoveries. During 1995, there has been a significant intensification of exploration, all of it offshore. Preparations are under way for renewed extraction from an oil field (Espoir) that was previously exploited by Phillips Petroleum, with proven reserves of 300 million barrels. There is also exploration on newly allotted concessions. Furthermore, there are promising prospects for oil reserves in deep water, but these have yet to be explored. Another large gas field (Foxtrott) has been developed but will not start production until use has been found for the gas.

b. Institutional framework

The sharing of profits between the Ivoirien State and the consortia of oil and gas companies—the profits are paid in the form of oil or gas—is based on the following formula: the State receives 60 percent of oil/gas revenue after deduction of oil/gas costs. The latter are limited to 40 percent of total output at the beginning of exploitation. As a consequence, the State is guaranteed a minimum of 36 percent of oil/gas output at all times. 1/ The State is using PETROCI, the national oil company, as an agent to market the profit oil. PETROCI participates as a commercial partner in all exploration and extraction activities of the consortia in Côte d’Ivoire, with a minimum share of 10 percent and a maximum share of 50 percent.

The Government has decided to swap part of its share in the profit oil—that is, oil/gas proceeds less oil/gas cost—for part of the consortium’s share of gas. The quantity swapped is a function of the quantity of gas needed by CIPREL (Compagnie Ivoirienne de Production d’Electricité) to produce thermal electricity, which in turn depends on the quantity of hydroelectricity that is being produced. The terms of exchange for this swap are a fixed price for the gas (US$1.57/million BTU) converted into barrels of petroleum at the prevailing international market price for crude at the moment of exchange. The gas thus acquired by the Government is transferred to the FNEE (Fonds National pour l’Energie Electrique), which should reimburse the Government for the cost of the gas; however, an agreement to that effect between the State and FNEE has not yet been signed. FNEE in turn transfers the gas to CIPREL, which sells the electricity to the CIE (Compagnie Ivoirienne d’Electricité). The Government’s share of profit oil that is not being swapped is sold by PETROCI in the international markets on behalf of the Government.

The State’s share of the profit gas is likewise sold to the FNEE; the payment contract has not yet been signed. PETROCI’s share of the profit gas (as one of the members of the gas consortium) is also sold to FNEE and paid for (a specific contract was signed to that effect).

2. Oil products and butane gas distribution

a. Oil products

SIR purchases the imported heavy crude and some light crude from PETROCI for refining into six different oil products. The products are sold to distributors at a price that is linked to the quotations for the respective refined product in international markets, as published by Platt’s, augmented by various taxes and some other intermediate costs, 1/ as shown in Table 7. The distributors sell the products at administered retail prices, uniform throughout the country. The buffer between the all-in costs, including the administered margins granted to distributors, and the retail price is used to repay the consolidated debt of the petroleum sector, the Amortissement de la Dette du Secteur Pétrolier (ADSP). The ADSP is normally positive on gasoline and automotive diesel, but negative for the others (fuel oil, distillated diesel oil, and kerosene) that are being subsidized. The ADSP structure is set up to generate about CFAF 3.5-4 billion annually. This consolidated debt should normally be fully repaid at the end of 1996.

The Government has agreed to adopt, as of January 1, 1996, a flexible retail price structure that varies with the international price of crude. Under this new mechanism, the ADSP would become a fixed levy; hence, a system of predetermined cross-subsidizations would have to be adopted. The Ministry of Mining is studying the modalities to be adopted, but has not yet reached any conclusions.

Sales of ship and jet fuel are administered differently. The retail prices are very close to the world prices for these commodities and include only a very small specific tax. As a result, a significant share of fuel sold under this regime to fishing boats is diverted elsewhere.

b. Butane gas

SIR is producing about 30,000 to 40,000 tons of butane gas as a byproduct of its refining activities. About 40 percent is reinjected in other refining processes, and the remainder is sold to wholesalers and bottlers of butane gas. 2/ The cost structure differs from that of oil products and includes an administered margin with a rate broadly twice as large as for oil products. Butane has a negative ADSP equivalent to about 35 percent of the final administered retail price. The cost of this subsidy amounts to about CFAF 2.3-2.5 billion annually; the subsidy is intended to encourage an increasing substitution between wood and butane for environmental reasons.

3. Electricity

a. Supply and demand

Côte d’Ivoire has an installed electric production capacity of about 3,000 GWh. In 1994, reflecting Côte d’Ivoire’s economic recovery, output increased by 5.1 percent compared with the previous year, reaching 2,367 GWh, of which 1,175 GWh were produced by hydroelectricity and 1,180 GWh by thermal energy (steam and gas). Domestic demand was 17 percent lower than output, allowing Côte d’Ivoire to export electricity to neighboring countries. In 1995, evidence from the first half of the year suggests that production will increase by about 10 percent, reflecting increases in domestic demand and exports by 6.5 percent and 30 percent, respectively, as compared with 1994.

Over the medium term, domestic demand is expected to expand at a strong pace. Residential electricity use is forecast to grow by about 8 percent a year. Industrial use is projected to grow somewhat faster (about 10 percent), essentially because many saw mills that are now generating their own electricity are gradually being hooked up to the network.

To boost its exports, Côte d’Ivoire has already concluded long-term contracts with three neighboring countries—Ghana, Togo, and Benin. The contract with Ghana, which was signed in March 1995, retains for 1995 a sales price which is based on the generating cost using heavy fuel, that is, U.S.cents 7.5 per kwh, for a total supply of 50 MWh. Ghana’s demand above this quantity during peak hours is satisfied at twice this price; however, in the event of excess supply, Côte d’Ivoire can sell possible surpluses to Ghana at half this price. Moreover, Ghana has the option to reduce its imports if it were to produce more hydroelectricity than scheduled. With the coming on stream of the gas firing, the price for 1996 will be reviewed, most probably downward. Export contracts with Togo and Benin were signed in January 1995. Because of favorable rainfall in those countries—allowing more hydroelectricity production—exports were interrupted in July, but are expected to start again in November. In a spirit of solidarity, the export price is the same for both countries. In early 1996, Côte d’Ivoire will also start supplying electricity to the southern region of Burkina Faso (the Bobodioulasso area), substituting for the local thermal production. A contract with Mali is under study: Côte d’Ivoire would deliver about 100 GWh a year until 2002, when a new dam will have been constructed, and it is planned to interconnect both networks. In the long term, the interconnection of the whole sub-region, including Nigeria, is envisaged. There would be a uniform price and the most efficient generating source at any given time would be used by all the participants.

b. Institutional framework

The umbrella organization for the electricity sector in Côte d’Ivoire is the Fonds National pour l’Energie Electrique (FNEE). It reviews the overall financing and makes sure that the whole system is self-sustained. It is in charge of strategic decisions concerning the price setting and uses in the sector, including the long-term investment strategy. The production, transportation, and distribution of hydroelectricity is directly managed by a private company, the Companie Ivoirienne d’Electricité (CIE). CIE also transports and distributes electricity originating from three other sources:

  • (a) direct purchases of electricity: CIE purchases electricity from the producer CIPREL (paid partly in domestic currency and partly in foreign exchange), from the SIR (excess steam used for the cracking process is used to generate some electricity), and a small quantity from SODESUCRE (generated from biomass);

  • (b) production of electricity using heavy fuels: CIE purchases the fuel from two private distributors (Elf and Mobil), which themselves purchase it from the SIR; and

  • (c) production of electricity from gas: this process started on October 25, 1995, with the thermal plant in Vridy switching to gas firing. This is the result of the swap agreement between PETROCI and the consortia (see above).

Out of a total of about CFAF 130 billion in revenues, representing the proceeds of domestic and export sales of electricity, the CIE keeps about CFAF 40-45 billion to cover its operating costs (including the maintenance of the hydroelectric power plants). The combined cost of the electricity, fuel, and gas purchases amounts to another CFAF 35-45 billion a year. The balance (approximately CFAF 45 billion annually) is transferred to the FNEE to pay for new investments and service the foreign and domestic debt (the latter amounts to about CFAF 10 billion annually, including debts of the old electricity company EECI).

The price structure used to be reviewed every four years and was based on the long-term marginal cost of production. Present prices are as follows (in CFAF/kwh):

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In years with a large hydroproduction, significant (ex post) profits were generated, which were used to accelerate the electrification of the country and debt repayment. In low rainfall years, the reverse held. Since July 1995, the tariffs have fluctuated with variations in all-in costs (the agreed formula includes trigger mechanisms that automatically raise or reduce prices).

ANNEX III: Trade Effects of the Uruguay Round

This annex analyzes the likely effects of the Uruguay Round Agreement on Côte d’Ivoire’s international trade relations. It focuses on four main issues:

  • the impact of Côte d’Ivoire’s own commitments;

  • the impact of the erosion of preferential treatment by industrial countries;

  • the implications of the Uruguay Round Agreement on Côte d’Ivoire’s food import bill; and

  • the effects on exports, resulting from higher demand in Côte d’Ivoire’s main export markets and increased market access for Côte d’Ivoire in some countries.

The conclusion of this analysis is that the net impact of the Round on the trade balance will be small: the value of higher export growth due to increased export opportunities will likely exceed somewhat the modest losses related to the erosion of preferences. The impact of higher food prices on the value of food imports will be negligible, and Côte d’Ivoire’s own commitments under the Round will result in a very limited widening of market access.

1. Structure of international trade

Côte d’Ivoire is the world’s largest producer of cocoa and a major producer of robusta coffee. In 1994, these two groups of commodities (including transformed products) made up 40 percent of total merchandise exports (Annex Table 1). Other agricultural commodities and raw materials, notably logs and sawn woods, fish, tropical fruits, palm oil, cotton, and natural rubber contribute some 30 percent to export earnings. Côte d’Ivoire’s industrial export activity (excluding processed coffee and cocoa) is centered on petroleum products, cotton fabrics, and cement.

Table 1.

Côte d’Ivoire: Exports, 1992-1994

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As shown in Table 41 of the main part, the European Union (EU) is Côte d’Ivoire’s most important trading partner, with 55.3 percent of total exports (1994). Within the EU, the largest markets are France, Germany, and the Netherlands, the latter because of its traditionally large processing industry in the coffee and cocoa sectors. With a total share of 29.8 percent of exports, Africa is the second largest export market, with Burkina Faso and Mali as main trading partners. The relatively large volume of exports to Mali is related to that country’s role as a center of transit trade in West Africa.. The share of the rest of the world in total exports is remarkably small, with 5.1 percent of exports going to the United States and only 0.4 percent to Japan.

A closer look at the commodity composition of exports to different regions reveals that the lion’s share of exports to the EU consists of agricultural commodities (including cocoa butter and paste) and raw materials. The same holds for exports to the United States (see Annex Table 2). By implication, the bulk of Côte d’Ivoire’s exports of industrial products (including petroleum products) find their way to the African continent.

Table 2A.

Côte d’Ivoire: Exports to the EU, 1991-1993

(In percent of total)

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The geographical composition of imports is roughly similar to that of exports. The EU (in particular France) is the most important supplier of mainly industrial products with 46 percent of total imports (1994). Africa is second (37.3 percent of imports), with the emphasis on oil (Nigeria) and raw materials. The structure of African trade reflects Côte d’Ivoire’s role as a regional supplier of processed products. Imports from the rest of the world represent about 16.7 percent of total imports, with the United States as the main supplier in that group (Table 43 of the main part).

2. The trade regime

a. Restrictions imposed by trading partners

Given the geographical structure of Côte d’Ivoire’s exports, the export opportunities of the country are mainly determined by the trade policies of the EU and African countries (notably members of the WAEMU), and, to a lesser extent, the United States. For the purposes of this analysis, it seems therefore justified to focus on the implications of the Uruguay Round agreement for trade with these countries.

Trade relations between Côte d’Ivoire and the European Union are governed by the provisions of the fourth Lomé Convention, which became effective in 1990 for a ten-year period. 1/ The Convention provides for cooperation between the EU and African, Caribbean, and Pacific (ACP) states in the area of development aid, technical assistance, and foreign trade. Under the Convention, the EU grants to ACP countries unrestricted market access at zero duties for all products, with the exception of products covered by the Common Agricultural Policy. In the case of Côte d’Ivoire, the latter restriction has implications for two of its main export commodities, notably bananas and fish products, which are subject to annual tariff quotas.

The trade regime applicable to most of Côte d’Ivoire’s exports to African neighbors has been subject to unforeseen changes since the signing of the treaty establishing the West African Economic and Monetary Union (WAEMU) in January 1994. Owing to the simultaneous termination of trade arrangements under the West African Economic Community (WAEC), and in the absence of a new preferential tariff scheme for the WAEMU, the preferential tariffs previously applicable to intra-regional trade became ineffective. The countries involved started to apply MFN tariffs to their trade, pending the negotiations for a new common internal and external tariff scheme. Other countries within the WAEMU currently apply MFN tariffs on trade with Côte d’Ivoire, ranging from minimum rates of zero to 6 percent, to maximum rates of 36 percent to 81.5 percent. It is the objective of Côte d’Ivoire to arrive at a common external tariff of 5 percent to 25 percent over the medium term, with considerable preferences for intra-regional trade.

Imports into the United States originating from Côte d’Ivoire are eligible for treatment under the Generalized System of Preferences. The bulk of Ivoirien exports to the United States consists of coffee and cocoa, which enter the U.S. market duty free (see Annex Tables 2B and 3). Côte d’Ivoire does not have access to the U.S. market for chocolate and other food preparations based on cocoa.

Table 2B.

Côte d’Ivoire: Exports to the U.S., 1991-1993

(In percent of total)

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Table 3.

MFN Tariff Concessions of the United States

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Ad valorem, unless indicated otherwise.

With some exceptions.

b. Côte d’Ivoire’s restrictions on imports

Since 1991, Côte d’Ivoire’s trade regime has been subject to far-reaching liberalization and simplification in the context of a number of World Bank programs. In January 1994, the complicated and highly protective regime of tariffs and duties was transformed into a six-rate tariff structure with rates between 10 percent and 35 percent. The average weighted tariff on taxable imports declined from 32 percent in 1989 to 24 percent in 1992 to 19 percent in 1994. Moreover, the Government has reduced the high incidence of nontariff barriers (NTBs) in the trade regime. While progress was slow prior to 1994, a number of barriers were lifted in May 1994, and again on January 1, 1995, and the Government’s objective is to eliminate most of the remaining barriers by January 1996. The NTBs applicable to several major agricultural products—such as rice, sugar, and flour—will be eliminated before the end of 1996. Thus, from January 1997 onward, NTBs will be limited to a list of products for which protection is deemed necessary for reasons of national security, environmental protection, and public health.

3. Trade concessions under the Uruguay Round

a. Trade concessions made by major trading partners

Given the fact that Côte d’Ivoire has duty-free and largely unrestricted market access to the European Union, the EU’s concessions under the Round will not have a direct impact on its export opportunities. The MFN tariff cuts may, however, reduce the value of preferential treatment. The EU’s concessions for Côte d’Ivoire’s main export products are summarized in Annex Table 4. In the cocoa sector, tariffs on unprocessed beans/shells will be cut from 3 percent to zero over a six-year period, whereas the relatively high tariffs on transformed products will be cut from, on average, 13.8 percent to 8.6 percent. Tariffs on unprocessed coffee will be cut from 5 percent to zero. Transformed coffee will receive tariff cuts broadly similar to those on cocoa. As a result of these reductions, effective protection for processing industries in the EU will be reduced, although the rate of protection will remain quite considerable even after full implementation of the Round.

Table 4.

Tariff Concessions by the European Union

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As discussed above, most of Côte d’Ivoire’s exports to African countries receive or will receive preferential treatment in the context of the WAEMU. Preferential tariffs and common external tariffs are currently subject to negotiation. Given that the planned tariff reductions in the WAEMU go well beyond commitments on MFN tariff cuts, it is not expected that the Round will have a visible impact on regional trade.

b. Trade concessions made by Côte d’Ivoire

Only a small part of Ivoirien merchandise imports are covered by tariff concessions under the Round. Customs duties on agricultural products covered by Annex I of the Uruguay Round agreement are in general bound at a level of 15 percent. A limited number of food products, mainly dairy, flour, and beer, receive tariff cuts of about 1 point, bringing down statutory tariffs to 4-6 percent. Tariffs on some industrial products, notably tires, auto parts, and transportation equipment, will be reduced by 5 to 20 points to a statutory average of some 10 percent. At the same time, Côte d’Ivoire bound “other duties and charges” on the above-mentioned products at a level of 200 percent to 250 percent. At present, these duties are not applied, but they allow the authorities to avoid any meaningful widening of market access under the Round.

4. The effects of the Uruguay Round

a. Preference erosion

As a result of the reduction of MFN tariffs by the EU, Côte d’Ivoire will face an erosion of the value of its preferences in European markets. Given the limited MFN trade liberalization under the Round by most African countries, preference erosion in African markets is bound to be very small, if not negligible.

The value of preference erosion for a certain product in the European markets will be dependent on the following factors:

  • the value of imports from Côte d’Ivoire;

  • the value of imports from other countries with preferential market access to the EU;

  • the value of imports from MFN sources;

  • the current and reduced EU MFN tariff on the product involved;

  • the extent to which Côte d’Ivoire’s exports are substitutes for exports from nonpreferred sources (Cross price elasticity of demand). 1/

The following factors should also be taken into account:

MFN tariffs on the bulk of Côte d’Ivoire’s exports to the EU are already relatively low, with the exception of transformed cocoa, cotton, bananas, and fish products. The latter two groups of products are subject to tariff quotas, which continue to protect Ivoirien market shares against imports from MFN sources. It seems unlikely that the modest tariff cuts on these products will have significant effects on export volumes or prices for Ivoirien exports.

Further, it should be noted that the level of statutory MFN tariffs on EU imports of unprocessed coffee and cocoa may overstate the value of preferential treatment for Lomé countries. The reason is that the import duty drawback system applicable to exports of processed coffee or cocoa allows processing industries within the EU to claim any duties paid on imports from MFN sources. In practice, it is hardly feasible for the customs authorities to check the origin of the unprocessed beans used for exports of transformed products, which leaves ample room for tax evasion by EU firms.

Annex Table 5 summarizes the relevant data for Côte d’Ivoire’s main export products. The calculations show that the total loss due to the erosion of preferences will remain rather small—less than $52 million over a six-year period, or 1 percent of projected merchandise exports.

Table 5.

Côte d’Ivoire: Calculation of preference erosion in the EU market 1/

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Sources: staff estimates.

Based on 1993 import values.

b. Food price increases

It is expected that reductions in domestic support to the agricultural sector in industrial countries and lower export subsidies will lead to price increases for some temperate zone products. As a result, net importers of temperate zone products may be faced with terms of trade losses that reduce the benefits of the Uruguay Round. In 1994, agricultural commodities and food products constituted about 15 percent of total imports in Côte d’Ivoire (see Table 42 of the main part), with fish and rice as the most important components.

In contrast to earlier calculations, however, the most recent estimate of the effects of the Round, which is based on the actual commitments made by industrial countries, suggests that price increases will remain very limited. 1/ Also, in the case of rice and some other foodstuffs, the Round will result in price decreases, owing to substitution effects.

Annex Table 6 shows that the cumulative price increase for wheat over the period 1995-2002 is estimated at less than 4 percent; rice prices are expected to fall by almost 1 percent as a result of the Round. These price changes are well below annual fluctuations due to other factors, such as weather conditions and shifts in demand. This cannot be better illustrated than by the world market price increases in 1995, which exceeded by a wide margin any price increase to be expected from the Uruguay Round.

Table 6.

Change in World Agricultural Prices

(Percent deviations from benchmark levels in 2002)

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Source: Ian Goldin and Dominique van der Mensbrugghe, The Uruguay Round: An Assessment of Economywide and Agricultural Reforms, World Bank/OECD Development Center, 1995.

The terms of trade effects for Côte d’Ivoire are shown in Annex Table 7. The calculation is based on the composition of imports in 1994 and the baseline projection for the period 1995-2002. The table shows that the unfavorable effect of higher import prices for dairy and wheat will be compensated by lower prices for rice, and that the overall impact on Côte d’Ivoire’s import bill will be negligible.

Table 7.

Côte d’Ivoire: Impact of Food Price Changes, 1993–2002

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Source: staff estimates.
c. The effects on exports

Besides preference erosion in the EU market, the Uruguay Round will have other effects on Côte d’Ivoire’s export opportunities. Although difficult to quantify, they are likely to be positive on balance. First, the higher growth in world income may be reflected in higher demand for Ivoirien products. In its latest study on the results of the Uruguay Round, the WTO Secretariat has indicated that annual world income gains due to trade liberalization under the Round could reach $510 billion by 2005 (1990 dollars), or 1.4 percent of world income. The total effect of higher world income on demand for Ivoirien products will likely exceed any losses related to the erosion of preferences in the EU market, even if a modest income elasticity of demand for Côte d’Ivoire’s main export commodities is assumed.

ANNEX IV: Côte d’Ivoire: Summary of the Ivoirien Tax System, June 1995

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1/

For a detailed overview of the structure of the Ivoirien economy, see the 1992 paper on recent economic developments (SM/92/224).

1/

The analysis presented in this section and the related tables are based on new national accounts estimates for the period 1986-93 prepared by the Institut National de la Statistique (INS). Estimates of the 1994 national accounts on this new basis were prepared by the forecasting department of the Ministry of the Economy, Finance and Planning, and are still provisional. These series differ somewhat from those used in the staff report which relies on the old national accounts.

1/

It should be noted that in the context of the monetary union and the fixed peg with the French franc, national authorities have no control on money supply—barring capital controls. See “CFA Franc Countries: Recent Experience and Policy Issues,” SM/95/261 (10/10/95), Appendix III.

2/

The official minimum wages in industry and agriculture were increased by 10 percent as of February 1, 1994.

1/

By end-August 1995, the number of goods and services subject to price controls had been reduced to 18 from a maximum of 34 during the first half of 1994.

1/

The operations of the Equalization Price Fund were phased out in early 1995.

1/

The reintroduction of the export tax was subject to some adjustments later in the year, however. First, concerned by the building up of stocks by producers and the emergence of export tax fraud, the Government decided to reduce the level of export taxes on coffee. Second, concerned by the impact on local industries, the Government also reduced the taxation on partly processed cocoa, and eliminated the export tax on fully processed cocoa and coffee.

2/

The excise and VAT taxes were both cut by 20 percent, while the parafiscal levy (ADSP: a levy earmarked to amortize the debt due to the oil sector) on regular and premium gasoline was more than doubled. All in all, revenue from petroleum products increased by 11 percent in 1994 compared with the previous year.

1/

In 1994 and 1995, wage increases amounted to 23 percent and 15 percent, respectively, for low wage earners; they were limited to 5 percent and 3 percent, for high wage earners.

1/

In the institutional context of the West African Monetary Union, governments’ borrowing at the central bank is limited to 20 percent of their fiscal revenue in the previous year. However, the Central Bank (BCEAO) advances to Cote d’Ivoire exceeded the statutory advances by almost CFAF 93 billion at end-1993.

1/

For a discussion on the monetary policy framework in the WAEMU, as well as an overview on the BCEAO’s monetary policy instruments, see Appendix III in “CFA Franc Countries - Recent Adjustment Experience and Policy Issues” (SM/95/261). In addition, the latest paper on recent economic developments on Côte d’Ivoire (SM/92/224) provides a description of the previous system of monetary control and the beginning of the reform process.

2/

The PASFI entailed, inter alia, the settlement of government arrears, the recapitalization of banks, the adequate provisioning for nonperforming loans, the liquidation of five development banks, a restructuring of the nonbank financial sector (insurance companies, Abidjan stock exchange), and the initiation of a reform of the judicial framework for banking activities. For details on the reform see the 1992 paper on recent economic developments (SM/92/224).

1/

The prudential ratios currently in force are: (a) a risk-weighted capital assets ratio of 4 percent, which in the future is to be raised gradually to the international standard of 8 percent; (b) a maximum ratio of 100 percent of fixed assets and participation relative to the capital base; (c) a maximum ratio of 100 percent of loans and commitments to a single borrower relative to the capital base; (d) a minimum liquidity ratio of 60 percent, defined as liquid assets in relation to short-term liabilities; (e) a maximum rate of 20 percent of the capital base for loans and commitments to a bank’s staff and management; (f) a minimum ratio of long-term bank resources to long-term credit of 75 percent, intended to prevent maturity mismatching; and (g) a ratio measuring the structure and quality of a bank’s credit portfolio, defined as the quotient of credits admissible to central bank refinancing to total credit, to be at least 60 percent.

2/

The monetary tables in the Appendix reflect a reclassification of certain assets and liabilities between the Government and the private sector at the end of 1993, and statistical adjustments stemming from the bank restructuring operations in 1991-92.

1/

The consolidated claims are on WAEMU member governments; they arose from the restructuring operations of the national banking systems in the late 1980s. The claims, carrying an original maturity of 15 years and an interest rate of 3 percent, totaled some CFAF 440 billion, including CFAF 186 billion from Côte d’Ivoire. The bonds were offered with a tax-free interest rate of 5 percent; the BCEAO pays the difference between this rate and the nominal interest rate.

2/

In September 1994, the BCEAO increased the bonds’ attractiveness by guaranteeing that the bonds could be redeemed at par at the BCEAO at the purchaser’s own initiative and used in the fulfillment of minimum reserve requirements.

3/

However, it should be taken into consideration that this improvement has been positively affected by valuation gains in the context of the devaluation, whereas valuation losses have not yet fully been accounted for.

1/

Significantly higher gross provisioning occurred in the early 1990s in the immediate aftermath of the banking crisis.

1/

Transactions at the Abidjan stock exchange are carried out exclusively by official dealers, which are banks admitted for trading by the Minister of Finance. Banks receive their orders either through their branch network or through the intermediation of independent professionals (apporteurs d’affaires en bourse), which also need to be officially licensed. Transactions take place Tuesday through Friday from 9 a.m. to noon, and settlement occurs once weekly, on Monday afternoon. Trading for stocks is done by the open outcry system, while for bonds it is computerbased.

1/

For example, 96 percent of the stocks issued in the context of the 1994 privatizations were purchased by private investors acquiring fewer than 100 shares.

2/

Logistical problems may delay the scheduled opening date.

1/

Including proceeds of about CFAF 2 billion from privatizations in earlier years.

1/

For a detailed discussion of the structure of international trade, see Annex III.

1/

For a detailed discussion of the problems of the coffee sector, see Annex I.

1/

In March 1994, all pre-cutoff-date debt service obligations were rescheduled on London terms, including arrears on pre-cutoff-date debt. Arrears on post-cutoff-date debt were to be repaid over a period extending to end-1996.

2/

Economic Community of West African States (ECOWAS), West African Development Bank (BOAD), and International Fund for Agricultural Development (IFAD).

1/

The campaign year runs from October through September.

1/

In relative terms, the indicative producer price relative to the average export price rose from 35 percent following the devaluation during the 1993/94 campaign to 46 percent during the 1994/95 campaign; after an increase in the producer price from CFAF 650 to CFAF 695, the ex ante calculations for the 1995/96 campaign envisage a ratio of 63 percent.

1/

However, world stocks have been declining owing to the roasters’ practice of relying on purchases from stocks. From end-1992 to June 1995, stocks in consumer countries dropped from 22.2 million bags to 11.9 million bags, and stocks in producer countries fell from 46.6 million bags to 36.8 million bags.

2/

The price stabilization scheme is described in full detail below.

3/

Market volatility is less of a problem in the cocoa sector, where the setting of the export reference price at the beginning of the campaign is solidly based on forward sales, which usually amount to about 75 percent of the entire crop.

1/

The ASAC’s predecessor, the 1989 Agricultural Structural Adjustment Loan (ASAL), provided mixed results; although some domestic marketing activities were liberalized and government intervention was somewhat reduced, the program failed to substantially increase the transparency, accountability, and efficiency of CAISTAB’s operations. In addition, the unfavorable international environment—with sharply declining world commodity prices—was detrimental to the reform’s success.

2/

Contrary to practice in other countries, there is no price differentiation on the basis of quality at any stage in the marketing chain, which may have contributed to the perception of declining quality of Ivoirien products.

1/

The ASAC reform limits the direct sales by CAISTAB to a maximum of 15 percent, whereas in the past CAISTAB accounted for up to one third of all sales.

2/

If the exporter succeeds in negotiating with his international business partner a transaction price above the auction price, this surplus accrues to the exporter.

1/

Cocoa and coffee exports have been taxed in Côte d’Ivoire during the last 30 years, except in 1989-93.

2/

The need for appropriately taxing farmers and exporters’ income was stressed by the June 1995 FAD technical assistance mission. It concluded that despite the deficiencies of the current system of export taxation, the DUS should, for the time being, be maintained, but with some minor operational modifications, until a more efficient way of taxing agricultural income has been developed.

3/

In order to minimize the potentially negative impact of the DUS on the stabilization scheme, the possibility is being evaluated of replacing the current unitary DUS by an ad valorem export tax; in the event of declining export prices, an ad valorem tax would lead to a proportionately declining tax burden on the respective campaign and allow for a lower level of stabilization reserves needed to protect the financial equilibrium of the campaign. On the other hand, government revenue would be subject to more uncertainty.

1/

The trade theory of distortions argues that a country with market power in a particular commodity that does not have an export tax may experience a reduction in its welfare. This would be the case if the expansion of exports beyond a certain point led to a reduction in world prices so that the marginal revenues from expanding exports would be less than the marginal costs incurred.

1/

The Government also receives a signature bonus each time a new extraction contract is signed.

1/

Costs for maintaining a security stock of refined oil products, equalization of transport costs so that a uniform retail price can be maintained throughout the country, some parafiscal levies linked with port charges, and the like.

2/

In the past, there was an occasional shortfall in butane owing to large reinjection needs, and up to 2,000-3,000 tons per year of butane had to be imported. In the future, these shortfalls should not reappear, as SIR has decided to use associated gas for reinjection so that much more butane will be available for the retail business; the Government has even started a campaign promoting the use of butane.

1/

Negotiations in the context of the midterm review of the financial protocol were concluded in November 1995.

1/

Estimates of the Cross price elasticity of demand in industrial country markets for Côte d’Ivoire’s main export commodities are subject to a high degree of uncertainty. Studies on the U.S. market have shown that elasticities for agricultural commodities and food products are relatively low, in general between zero and 1. These studies do not give detailed results for most of the main export products of Côte d’Ivoire, and they are probably distorted by the high incidence of nontariff barriers to trade in agricultural products. It therefore seems safe to assume that substitution elasticities for the unrestricted products are much higher than suggested in the above-mentioned studies, say, around 2.5. Taking into account the large share of Ivoirien cocoa exports in world exports, and the relatively high level of quality (in terms of taste and processing yield) of West African beans, it seems reasonable to assume a somewhat lower elasticity for cocoa, say, 2.0.

1/

See Ian Goldin and Dominique van der Mensbrugghe, The Uruguay Round: An Assessment of Economywide and Agricultural Reforms, World Bank/OECD Development Center, 1995. It is useful to draw a distinction between the effects of the Uruguay Round and other factors that affect the world market prices of agricultural products. The recent price rises for certain commodities such as wheat and rice are not attributable to the effects of the Uruguay Round on the level of agricultural subsidization in industrialized countries.