Burkina Faso: Staff Report for the 2005 Article IV Consultation, Fourth Review Under the Poverty Reduction and Growth Facility Arrangement, and Request for Waiver of Performance Criterion

The staff report for the combined 2005 Article IV Consultation on Burkina Faso focuses on recent economic developments and performance. Burkina Faso has maintained an average real GDP growth rate of more than 6 percent annually, and inflation has been contained. Revenues performance is benefiting from the computerization of the major customs offices and the introduction of a new single taxpayer identification number. Continued implementation of pro-growth macroeconomic policies, diversification of the economy, and structural reforms will be necessary to establish the conditions for a resumption of robust economic growth.

Abstract

The staff report for the combined 2005 Article IV Consultation on Burkina Faso focuses on recent economic developments and performance. Burkina Faso has maintained an average real GDP growth rate of more than 6 percent annually, and inflation has been contained. Revenues performance is benefiting from the computerization of the major customs offices and the introduction of a new single taxpayer identification number. Continued implementation of pro-growth macroeconomic policies, diversification of the economy, and structural reforms will be necessary to establish the conditions for a resumption of robust economic growth.

I. Introduction and Background

1. Burkina Faso is among the world’s poorest countries. Nearly half the population lives on less than € 0.30 cents per day and the country is ranked 175th out of 177 countries in the UNDP’s Human Development Index.1 About four-fifths of the population live in rural areas and engage in largely rain-fed, unmechanized, subsistence agricultural or pastoral activities (including livestock, forestry and fishing), accounting for about 40 percent of GDP. Like other Sahelian countries, Burkina Faso suffers from drought and desertification, overgrazing, soil degradation, and deforestation.

Gross Domestic Product (GDP) per Capita and Human Development Index (HDI) in Burkina Faso and Other WAEMU Countries

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Sources: UN Human Development Report, 2004; and IMF.

Rank out of 177 countries.

Ranked 153rd out of 179 countries.

2. Despite these challenges, the economy has responded well to the government’s economic reform program. Real GDP growth has averaged over 6 percent per year since 1994, among the highest in Sub-Saharan Africa—reflecting broad-based growth, including strong growth in agriculture and livestock activities—and the exchange rate peg has contained inflation. Macroeconomic management has been strengthened and structural reforms have resulted in a more flexible, market-based economy. The poverty headcount based on household surveys declined by 8 percentage points between 1998 and 2003 (to about 45 percent) and the UN Human Development Index improved. Nonetheless, social indicators remain low and some of the Millennium Development Goals (MDGs) seem difficult to reach.

3. Increasing fiscal revenue has been a persistent challenge for the authorities. This problem was accentuated by the revenue loss arising from the adoption of the WAEMU common external tariff (CET) in 2000. Notwithstanding some progress since then, revenue remains low by regional standards. In combination with relatively high spending levels, this has resulted in sizable fiscal and external current account deficits.

Comparative Indicators for Burkina Faso, WAEMU, and Sub-Saharan Africa, 1995-2004 1/

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Source: African Department database (WETA) and Burkina country database, IMF.

WAEMU comprises Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo; SSA refers to sub-Saharan Africa, excluding Mauritania, Somalia and Djibouti.

Net foreign financing = grants+new borrowing-amortization+debt relief

4. The government has been successful in finding donor funding to cover most of its financing needs, but much of this has been in the form of loans, putting pressure on external debt dynamics. Large borrowing in the 1990s led to a debt overhang, which was eliminated when Burkina Faso reached the completion point under the enhanced HIPC Initiative in 2002. All debt sustainability indicators were below the policy-dependent indicative thresholds at end-2004. Nonetheless, assuring external debt sustainability in the future will remain a challenge (see below).

Burkina and Other HIPC Post-Completion Countries Compared, 2004

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Source: AFR database (WETA) and AFR Country Briefs, IMF.

Ratios are for fiscal year 2004/05.

5. Burkina Faso’s track record of implementing Fund policy advice has generally been positive. Burkina Faso has had five Fund arrangements since 1991, including four under the PRGF (Box 1). To date, all reviews under the PRGF arrangements have been completed, except for the first in 1993, and the authorities have implemented all structural reforms covered by Fund conditionality, albeit sometimes with delays.

6. Presidential elections are scheduled for November 2005. President Compaoré is running against 12 candidates from the opposition parties and multiple voting rounds are possible. Municipal elections are scheduled for February 2006. Regional security concerns continue to disrupt supply lines, raising transport costs and reducing access to a traditional export market.

Fund Relations

The last Article IV Consultation was concluded on June 11, 2003. Executive Directors commended the authorities for their sound economic policies and progress in structural reforms. They stressed the need to achieve a competitive economy, capable of delivering sustained economic growth and faster improvements in social indicators. Upon completion of the third PRGF review, Directors noted the challenge posed by the deterioration in the external terms of trade and the worsening external debt indicators. They welcomed the financing of the fiscal deficit in 2005 with net donor flows in the form of grants, debt relief and highly concessional borrowing, but encouraged the authorities to strengthen tax administration and resist additional spending pressures during an election year.

Burkina Faso has been receptive to the Fund’s policy advice, as demonstrated by satisfactory implementation of four successive PRGF-supported programs. The authorities’ policies have contributed to a strengthening of macroeconomic stability and sustained GDP growth over the past ten years, despite exogenous shocks. Notwithstanding some delays linked at times to limited administrative capacity, the authorities have made considerable progress in the area of structural reforms. Their reforms have been geared at liberalizing the country’s trade regime, removing price controls, and opening the economy to greater private sector participation, improving budget execution and monitoring, reforming the civil service, and strengthening the tax and revenue administrations. While the authorities have successfully reformed the cotton sector to increase its competitiveness, faster progress will be needed in the energy and telecommunications sectors, where high costs remain a key obstacle to economic diversification and competitiveness.

II. Recent Economic Developments and Program Performance

7. GDP growth is estimated to have slowed to 4.6 percent in 2004 following a year of exceptionally high growth linked to record crop production. Agricultural output fell, reflecting a sharp decline in cereal production from record levels, which more than offset the increase in cotton production. While cereal supplies are generally adequate to meet domestic demand, production fell to critically low levels in some northern provinces because of drought and locust infestation. The government is working closely with the World Food Program and the Food and Agriculture Organization to move supplies from surplus to deficit regions, and has indicated that the situation is under control.

Selected Macroeconomic Indicators, 2001-05

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Source: Burkinabe authorities.

After enhanced HIPC Initiative assistance, including topping up.

8. Following a period of deflation in the first half of 2004, inflation increased to 8.8 percent by June 2005 (12-month change), reflecting the rebound in food prices from the five-year low reached in 2004. Nonfood inflation has remained low, despite an increase in fuel costs. The real effective exchange rate depreciated moderately in 2004, as the decline in consumer prices during the year offset the appreciation of the euro, to which the CFA franc is tied.

Figure 1.
Figure 1.

Burkina Faso: CPI Inflation Rates, Monthly, 1998-2005

(Percent change from 12 months earlier)

Citation: IMF Staff Country Reports 2005, 354; 10.5089/9781451803853.002.A001

Source: Burkinabe authorities.
Figure 2.
Figure 2.

Burkina Faso: Selected Nominal and Real Exchange Rates, Monthly,

January 1992 -April 2005

(1990 = 100))

Citation: IMF Staff Country Reports 2005, 354; 10.5089/9781451803853.002.A001

Source: IMF (Information Notice System)

9. Monetary developments in 2004 were characterized by slow growth in money demand and a rapid expansion in domestic credit to the economy. Credit to the economy expanded by about 12 percent, primarily to finance investment projects in the cotton, hotel and energy sectors. Broad money growth rebounded sharply during the first quarter of 2005, but the pace of credit expansion increased as well, including for the financing of the cotton campaign. Consequently, net foreign assets of the banking system continued to decline. To stem the rate of credit expansion, the BCEAO raised reserve requirements in Burkina Faso from 3 to 7 percent in June 2005.2

Figure 3.
Figure 3.

Burkina Faso: Contribution to Money Growth, Quarterly, 1999-2005

(Y ear-on-year, in percent)

Citation: IMF Staff Country Reports 2005, 354; 10.5089/9781451803853.002.A001

Source: Burkinabe authorities, and Fund staff estimates.

10. The external current account deficit (excluding official transfers) shrank to 10.7 percent of GDP in 2004, as improvements in private sector savings offset the increase in the fiscal deficit. Cotton exports increased sharply due to both volume and price effects, as virtually all the cotton crop was sold before world cotton prices began to decline. This improvement was sufficient to offset the impact of higher world oil prices.

Figure 4.
Figure 4.

Burkina Faso: Exports, Imports and Current Account Balance, 1994-2008

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 354; 10.5089/9781451803853.002.A001

Source: Burkinabe authorities, and Fund staff estimates.

11. The external terms of trade began deteriorating sharply in the second half of 2004 and have reached a 25-year low. World cotton prices (measured in euros, to which the CFA franc is pegged) fell to a record low by end-2004. Although rebounding somewhat since then, they remain low by historical standards and world oil prices have continued to increase. While cotton prices are forecast to continue rising in the medium term, the average price for the 2006-08 period is projected to remain lower than in 2004,3 and well below the 30-year average.

Figure 5.
Figure 5.

Burkina Faso: Cotton and Oil Prices, Daily,

January 1, 1999-July 15, 2005

(In euros)

Citation: IMF Staff Country Reports 2005, 354; 10.5089/9781451803853.002.A001

Source: Thomson Datastream.
Figure 6.
Figure 6.

Burkina Faso: Terms of Trade, 1980–2008

(1990 = 100)

Citation: IMF Staff Country Reports 2005, 354; 10.5089/9781451803853.002.A001

Source: Thomson Datastream.

III. Report on the Discussions

12. The discussions focused on the three main macroeconomic challenges facing Burkina Faso: (i) establishing the conditions for the resumption of high rates of economic growth in the aftermath of the terms of trade shock; (ii) increasing public spending to implement the poverty reduction strategy without undermining debt sustainability; and (iii) enhancing external competitiveness in the context of the fixed exchange rate regime.

A. Economic Outlook and Growth Strategy

13. The staff and authorities agreed that the growth projection underpinning the 2005 program (3.5 percent) remained broadly appropriate, although their assessments of the risks differed. The mission noted that the terms of trade shock for 2005 was projected to be worse than envisaged earlier and that downside risks to economic growth had increased. The authorities were generally more optimistic, noting that cotton production was substantially larger than had been projected and that the economy had demonstrated its resilience to external shocks in the wake of the conflict in Cote d’Ivoire. Average inflation for 2005 is projected to rise to about 4 percent for the year, based on price developments through June and expectations of normal weather conditions for the remainder of the year.

14. The authorities’ medium-term growth strategy focuses on maintaining a stable macroeconomic environment and implementing policies to diversify the economy and increase productivity. Given the large number of people who live in rural areas, the authorities consider the development of rural infrastructure, agricultural diversification, and enhanced agricultural productivity as crucial to poverty reduction. The accompanying selected issues paper finds that there is considerable potential to diversify agricultural production, and that important measures have been implemented to exploit that potential; however, low mechanization, inadequate infrastructure, and the land tenure system are likely to remain significant challenges to diversification in the medium term. The authorities noted that their structural reform program attempts to address these concerns (see below). They emphasized that their diversification strategy would benefit from the elimination of agricultural subsidies in industrialized countries.

15. A review of long-term growth trends served as a benchmark for the discussions of near and medium-term growth prospects (Box 2). With a modest improvement in the terms of trade over the medium term, the continued implementation of structural reforms, and further improvements in infrastructure, real GDP growth could rise to about 6½ percent by 2008, in line with the 10-year trend. This would be somewhat higher than the 5 percent estimated by the World Bank to be necessary for the authorities to achieve their goal of reducing the incidence of poverty to about 30 percent by 2015.4

Burkina Faso: Economic Growth Prospects

Following a year of exceptionally high growth (8 percent) in 2003, real GDP growth slowed to 4.6 percent in 2004 as output moved towards trend levels. The output gap was positive but shrinking in 2004.

The adverse terms of trade shock dampens Burkina Faso’s medium-term growth prospects. Output is expected to fall below trend in 2005, as illustrated below for a projected growth rate of 3.5 percent.

Output is expected to return to trend in the long run. Growth is projected to increase from 5 percent in 2006 to 6½ percent in 2008. Trend growth averaged around 5.6 percent during last 25 years, but has picked up to 6 percent during the last decade. Projected growth rates would be nearly sufficient to eliminate the negative output gap by 2008 on the basis of the 10-year trend.

Higher trend growth rates could be achieved by the authorities’ strategy to enhance competitiveness and to diversify agricultural activities. Productivity growth, through investments in new equipment and in education, would improve competitiveness. Agricultural diversification would render Burkina Faso less vulnerable to fluctuations in cotton prices.

uA01fig05

GDP in Constant Prices, Actual and Projected, 1980-2010

(In billions of CFA)

Citation: IMF Staff Country Reports 2005, 354; 10.5089/9781451803853.002.A001

uA01fig06

GDP Output Gap, Actual and Projected, 1980-2010

(In percentages)

Citation: IMF Staff Country Reports 2005, 354; 10.5089/9781451803853.002.A001

Source: Burkinabe authorities; and Fund staff estimates.
1 Trend output was obtained by using a Hodrick-Prescott filter. The Epanechnikov kernel yields similar results

B. Fiscal Policy and Debt Sustainability

16. Fiscal policy was expansionary in 2004. The fiscal deficit, excluding grants, increased to 8.6 percent of GDP in 2004, which was smaller than programmed. Revenue was on target, rising by more than one-half percent of GDP, and expenditure was lower than targeted. The deficit was fully financed from external sources, including grants amounting to 4.4 percent of GDP, and all quantitative and structural indicative targets for end-December were observed.

Burkina Faso: Consolidated Operations of the Central Government, 2002-06

(In percent of GDP; unless otherwise specified)

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Sources: Burkinabe authorities; and Fund staff estimates and projections.

IMF Country Report No. 05/95, December 22, 2004.

17. The staff and the authorities agreed that the fiscal targets for 2005 remained appropriate. The fiscal stance was tighter than programmed in the first quarter, as both revenue and expenditure were lower than projected. Nonetheless, there was an overrun in domestic financing (see below). The authorities explained that revenue was weaker than anticipated because of the nonpayment of compensation by WAEMU related to the tariff reform of 2000 and delays in registering tax receipts following the computerization of procedures at the tax directorate.5 Revenue has subsequently picked up and performance through May indicates that the annual target of 13.3 percent of GDP remains attainable. Expenditure authorizations in the first quarter were lower than planned because of the delayed start of budgetary operations linked to the installation of new expenditure tracking software. This problem has been resolved. Expenditures will be slightly higher than envisaged earlier because of additional donor budget support (amounting to about 0.2 percent of GDP). The mission advised against using the additional resources on expenditures that would lock in future commitments. The authorities indicated that they would increase outlays on materials, equipment, rural roads, and other capital projects. The budget contains provisions for emergency food relief, which the authorities have been using to respond to food shortages in drought-affected regions. The mission encouraged the authorities to monitor the situation closely, in cooperation with external partners, and to ensure that additional resources be made available should the need arise. Concerning other expenditure areas, the authorities indicated that adequate provisions were made in the budget for the financing of the November presidential elections, and underscored their commitment to resist election-related spending pressures. The overall fiscal deficit excluding grants will rise to 9.6 percent of GDP, all of which is financed by net donor flows.

18. The authorities’ revenue strategy focuses on strengthening tax and customs administration and broadening the tax base to avoid increasing the fiscal burden on existing tax payers. No increase in tax rates is currently envisaged. Key measures undertaken in 2004 included the establishment of the large taxpayer division and the computerization of customs offices. In the first quarter of 2005, the authorities introduced a new single taxpayer identification number and centralized tax collection responsibilities. Future actions include the completion of a taxpayer census, the establishment of a joint tax-customs brigade to conduct comprehensive audits of tax payers, measures to reduce smuggling, and the introduction of an integrated revenue system. The mission and authorities agreed that on the basis of these reforms the revenue yield could continue to increase on the order of ½ percent of GDP per year on average, broadly in line with the experience since 2000. This would bring revenues in line with the WAEMU convergence criterion by 2015.

19. The authorities’ draft medium-term expenditure framework (MTEF) for 2006-08 envisages a leveling off of expenditures at about 24½ percent of GDP next year. The increase would be mostly for additional capital spending and, to a lesser extent, non-wage priority social outlays. About two-thirds of the draft capital budget is for rural feeder roads, education, health, and water management. The wage bill would remain at about 5 percent of GDP, sufficient to allow for further recruitments of teachers and health workers. The authorities were not willing to commit to a staff recommendation to decrease the fuel subsidy to SONABEL (the state-owned electricity utility) in 2006, which amounts to about 0.6 percent of GDP (roughly equal to external debt service). They noted that the tariff increase necessary to accomplish this in the context of current world oil prices could be overly disruptive to markets and household budgets, already badly affected by the surge in domestic fuel prices. Based on the revenue outlook, this MTEF would cause the fiscal deficit (excluding grants) to rise to 10½ percent of GDP in 2006 and then to gradually decline to 10 percent by 2008. The strategy envisages donors financing most of the deficit.

20. The increase in the fiscal deficit presents the authorities with two challenges. The first is to obtain the necessary external financing. Average external financing for the 2006-08 MTEF would need to be some 50 percent higher than the average of 2000-04. The authorities have identified sources covering most of the needs for 2006 (amounting to about 9½ percent of GDP). The second challenge is to obtain financing on terms compatible with external debt sustainability. On this count the indications are mixed. The authorities recognized the importance of ensuring external debt sustainability, but indicated that this needed to be weighed against the need to increase expenditures in support of the MDGs.

21. The baseline scenario of the DSA indicates that most debt indicators would remain below the policy-dependent indicative thresholds under the authorities’ draft MTEF (Fig 7).6 The various bound tests yield similar results. The ratio that breaches its indicative threshold is that of the net present value of debt to exports. While a source of some concern, it should be viewed in the context of Burkina Faso’s belonging to a currency union with access to a shared pool of international reserves. While all ratios would deteriorate moderately during the medium-term, they would begin improving before 2015. This is also the case for most of the bound tests. The accompanying selected economic issues paper analyzes the fiscal adjustment and grant-loan mix of external financing that would be required to achieve a more rapid reduction in debt indicators, and examines the relationship between world interest rates and debt sustainability.

Figure 7.
Figure 7.

Burkina Faso: Selected debt-sustainability Indicators, (Baseline Scenario),

2004-2025

(In percent)

Citation: IMF Staff Country Reports 2005, 354; 10.5089/9781451803853.002.A001

Source: Burkinabe authorities and IMF-World Bank staff estimates.

Macroeconomic Assumptions of Debt Sustainability Analysis

(In percent of GDP, unless otherwise indicated)

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22. The authorities are taking measures to increase absorptive capacity to help ensure that the proposed scaling up of expenditures would be effective. Donor procedures for releasing budget support have been harmonized, easing the administrative burden on the government. However, no such harmonization has been achieved for project financing. The capacity of the economy to meet the government’s demand for goods and services has occasionally been insufficient, leading to delays in project implementation. The authorities are addressing these constraints through programs to support small and medium-sized enterprises engaged in construction and other services, and reforms in the area of public procurement.

C. Cotton Sector Issues

23. Cotton is the dominant cash crop in Burkina Faso, accounting for 70 percent of merchandise exports and employing an estimated fifth of the population. The sector is largely private, with the government owning a minority share of the largest of three ginning companies, two of which were created in 2004 as part of the sector reform strategy. The producer price consists of two parts; a floor price of CFAF 175 per kilo, which is set in the context of the Interprofessional Agreement between growers and ginning companies, and a ristourne (or bonus), which is based on the profits of the previous year. The ristourne was set at 35 CFAF per kilo in mid-2004, before the world cotton price began to fall, resulting in a record high producer price. Cotton production in the 2004/05 campaign also reached record high and gross payments to cotton farmers increased by nearly 50 percent. Against the background of the decline in world cotton prices, farmers and ginning companies agreed that no ristourne will be paid in 2005/06, resulting in a 17 percent decline in the producer price.

24. While the outlook for ginning companies has improved recently, financial losses are still projected for 2005. At world prices and exchange rates of June 2005, and incorporating average prices for sales already made, the staff projects losses on the order of one-third percent of GDP, compared with one percent projected in the last staff report. However, the companies were more pessimistic regarding the price they would receive for their cotton, projecting losses at about one percent of GDP. The companies also noted that the impact of low world cotton price had been exacerbated by the appreciation of the euro, which they argued had eroded competitiveness.

25. The government reiterated its policy of allowing the cotton companies and farmers to find their own solution to low world prices without direct government financial support to cover losses. The government would continue to support the sector through donor-funded projects to improve infrastructure, enhance productivity, and undertake research. In addition, the 2005 budget contains a small amount (CFAF 3 billion) to help offset the impact of higher fertilizer prices on farmers’ costs arising from the disruption of supply routes through Cote d’Ivoire. The mission advised against raising the fertilizer subsidy in response to the rising world price, noting that the subsidy was meant to provide temporary relief while companies found alternative supply routes, and not to insulate farmers from changing world prices. Furthermore, the mission noted that with farmers’ record incomes from the 2004/05 campaign, it was difficult to justify additional income support, especially given the other demands on government resources. It was thus agreed to keep the subsidy at the current level.

D. Financial Sector Issues

26. Monetary policy is conducted at the regional level by the BCEAO with the objective of sustaining price stability through the exchange rate peg. Credit to the economy is projected to slow during the second half of 2005 in response to the increase in reserve requirements noted earlier. However, given the need for some domestic bank financing for fiscal operations, overall domestic credit would continue to expand and net foreign assets of the banking system are projected to decline in 2005. In the medium term, with a gradual reduction in domestic borrowing by the government, the banking system should be able to rebuild net foreign assets in the while providing for an adequate expansion of credit to the economy.

27. The monetary authorities indicated that the banking system is basically sound.All but one of the eight commercial banks met the minimum risk-weighted capital requirement at end-2004. After rising during 2004, the ratio of non-performing loans to total loans fell during the first quarter of 2005. Compliance with the other prudential ratios is mixed, notably those applying to loan concentration risk and portfolio quality. Concentration risk stems from the existence of a few relatively large borrowers, including in the cotton sector. Commercial banks hold some open positions vis-a-vis the cotton sector, as loans are secured by cotton inventories. However, with the recent rebound in world prices, and the other assets of the cotton companies, the banks indicated that the risk was manageable.

28. The authorities continue to push ahead with reforms to improve financial intermediation and strengthen credit services for small and medium-sized enterprises (SMEs). Bank representatives indicated that constraints for financial development, particularly for lending to SMEs, include insufficient long-term sources of funding, difficulties in obtaining and realizing guarantees, and the low quality of loan applications. The recently established Maison de I’Entreprise is helping SMEs with accounting and administrative procedures. However, the national strategy for microfinance continues to be subject to delays. The government intends to establish a housing bank as a minority shareholder in partnership with private sector participants. The staff recommended against the government’s proposal to take an initial 100 percent share in the bank, but to wait until all partners were ready to pay in their shares simultaneously.

E. External Policies and Regional Integration

29. The authorities continue to have difficulties obtaining debt relief from non-Paris Club bilateral creditors. Agreements were signed with Kuwait and Saudi Arabia, but none have been signed with Algeria, China, Cote d’Ivoire, Libya, or Taiwan Province of China, despite the authorities’ repeated efforts. The authorities indicated that the terms of the Kuwait agreement were comparable with those of Paris Club creditors at the time of the completion point, but that those of Saudi Arabia were not.

30. Trade reform in Burkina Faso is pursued in the context of the WAEMU. Tariff reform was largely completed with the adoption of the WAEMU CET and Burkina Faso has an unweighted average import duty of 14.6 percent that includes a 5 percent degressive protection tax (TDP).7 The mission encouraged the authorities to phase out the TDP by the end of 2005 as scheduled. They indicated that the issue would be taken up in the context of regional discussions that will take place by end-2005. The mission also recommended eliminating the special import authorization for sugar that requires government approval for importing a minimum quantity. The authorities indicated the approval was pro forma and since it did not set an upper limit on imports, it does not constitute a quantitative restriction, and indicated that its purpose was to curtail the smuggling of sugar. The mission encouraged the authorities to address concerns about smuggling through enhanced customs control and they agreed to review the practice before the 2006 budget is submitted to the National Assembly.

31. The authorities view regional trade integration as fundamental to export diversification and indicated their support for removing the remaining barriers to intra-regional trade. Other WAEMU countries are the principal markets for non-cotton exports, mostly livestock and food crops. While all WAEMU countries produce similar products, there is some scope for exploiting comparative advantage and Burkina Faso’s small size relative to the union as a whole indicates a potential for increasing its share of intra-regional trade.

Indicators of Potential Intra-regional Trade, 2004

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Source: African Department database (WETA), IMF.

Calculated as Burkina’s exports to WAEMU divided by

WAEMUs imports from each other.

F. Competitiveness, Structural Reforms, and Governance

32. The staff expressed concerns regarding competitiveness in light of the failure of the real exchange rate to depreciate in the face of the deterioration in the terms of trade. While there was agreement that the cotton sector is not competitive with the current constellation of world prices and exchange rates, the authorities were confident that the combination of a gradual increase in cotton prices and continued structural reforms would be adequate to address these concerns. The authorities are preparing the energy and telecommunications sectors for increased private sector participation and the National Assembly recently approved a law amending the legal and regulatory framework of the power sector, though more work with development partners is needed to make it operational. While the authorities recognized the need for cost-based tariffs in the power sector, they were not willing to accept the staffs recommendation to move toward an automatic electricity tariff mechanism. Competitiveness will also be enhanced through public investments in the rural road and irrigation systems. The latter would support agricultural diversification and help reduce dependence on rainfall, thereby reducing the volatility of income and prices (Box 3). A review of the land tenure system, which is currently based on traditional rights that inhibit land improvement and access to credit, is underway.

Volatility of Economic Growth

Real GDP growth in Burkina Faso is volatile, and much of the volatility can be explained by agricultural output. This volatility is of particular concern to populations in rural areas, which represent close to 90 percent of people living below the poverty threshold, and whose resources are barely sufficient to meet their basic consumption needs. Agricultural output constitutes between 20 and 25 percent of total output and is highly volatile because of its dependence on rainfall. The standard deviation of the growth rate of agricultural output is 14 percent. This volatility transmits to GDP, as can be seen from the high correlation coefficient of 0.7 in the table below. Volatility in output can to a much smaller extent be explained by volatility in non-agricultural output, even though it constitutes more than ¾ of aggregate output.

Correlation matrix of volatility, 1985-2004

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33. Fiscal transparency and combating corruption are key components of the government’s poverty reduction strategy. Members of the Finance Committee of the National Assembly expressed their broad satisfaction with the budget preparation and approval process, noting the high degree of cooperation with the Council of Ministers. The government has also improved the timeliness of the submission of audited accounts and the budget law to the National Assembly, which has strengthened the policy review process and the national debate on economic priorities. As detailed in the issues paper, the authorities are continuing to improve governance and further the fight against corruption. The government recently approved a national strategy for good governance, and the four most egregious cases of alleged corruption identified by the High Authority for the Coordination of the Fight against Corruption have been forwarded to the tribunals and are under investigation.

G. Statistical Issues

34. Economic and financial statistics are generally sufficient for purposes of program monitoring, but weaknesses inhibit the quality and timeliness of macroeconomic analysis and planning. The official national accounts have been finalized only through 1999. In addition, the lack of high-frequency data hinders the timely and accurate assessment of the effectiveness of policies and external debt data are subject to errors and revisions. The authorities are taking steps to address some of these problems. Staffing constraints at the National Institute of Statistics and Demographics will be eased with a near doubling of the number of statisticians by end 2006. They also intend to develop a plan to strengthen their capacity to monitor and analyze external debt statistics by end of 2005 in the context of a broader framework for monitoring external financing. Work will begin soon on the 2006 census and household survey, and the authorities intend to launch a village data collection program focusing on agricultural production, livestock, and social indicators. Coverage of the consumer price index, which is limited to Ouagadougou, will be extended nation-wide in 2006.

H. Program Issues

35. The authorities describe policy implementation under the program in 2005 and specify policies through 2006 in the attached Letter of Intent. The fiscal stance was tighter than programmed in the first quarter of 2005. The end-March 2005 performance criterion on domestic borrowing was missed because some expenditure authorizations made late in 2004 (consistent with the program) did not clear the payments system until early 2005. However, cumulative domestic borrowing from the beginning of 2004 through end-March 2005 was lower than programmed, and on this basis the authorities are requesting a waiver. Fiscal reforms are proceeding on schedule and all structural indicative targets and performance criteria for end-March 2005 were observed. The current program expires on August 15, 2006; the fifth review will be based on quantitative and structural performance criteria through end-September 2005, and the final review will be based on quantitative performance criteria through March 2006 and structural performance criteria through May 2006. The authorities wish to discuss the possibility of a new Fund-supported program in the context of discussions for the fifth program review. An ex-post assessment of prolonged engagement with the Fund will be required ahead of any successor PRGF arrangement.

IV. Macroeconomic and Program Risks

36. The macroeconomic outlook is subject to a number of risks. The main near-term risk stems from the weak terms of trade. Losses in the cotton sector may put companies under severe financial stress, leading to weaker investments in the sector, slowing improvements in productivity and undermining medium and long-term growth prospects. There is also a risk that spending pressures will rise in the run up to presidential elections in November 2005. In addition, the country remains vulnerable to drought and the locust infestation spread.

V. Staff Appraisal

37. Economic and policy performance were generally strong in 2004. The decline in economic growth reflected a return of agricultural production to more normal levels following record harvests. Inflation remained low and most program objectives were realized. The government made notable progress in strengthening tax and customs administration, which have been instrumental in improving revenue performance and sustaining macroeconomic stability. Fiscal transparency and accountability have also improved, strengthening the national debate on economic priorities and policies.

38. The Burkinabé authorities now face three major challenges. First, to establish the conditions for high rates of economic growth in the context of an unfavorable external environment. Second, to increase public expenditure in support of the poverty reduction strategy without undermining external debt sustainability. The solutions to these challenges are mutually supportive. Higher rates of economic growth would increase revenues and help limit the need for foreign borrowing, while increased spending on rural infrastructure, education and health, would enhance Burkina Faso’s economic growth prospects. Finally, the authorities need to accelerate the pace of structural reforms to restore high rates of economic growth.

39. The authorities’ fiscal targets for 2005 remain appropriate and achievable. The easing of fiscal policy to smooth the adjustment to the terms of trade shock is appropriate given the need to push ahead with poverty-reducing expenditures. The 2005 budget is entirely financed with donor grants and highly concessional loans, which are crucial to ensuring debt sustainability.

40. The draft medium-term expenditure framework, which reflects the authorities’ desire to make more rapid progress toward the MDGs, would pose a moderate risk to external debt sustainability. The staff considers the risk to be acceptable in light of the substantial expenditure needs facing the country and given that most indicators would remain below the policy-dependent indicative thresholds. However, the findings from the DSA underscore the need for the authorities to continue their efforts in improving debt-service capacity, notably by fostering the growth of exports. The staff urges the authorities to proceed with their expenditure plans only if adequate financing on appropriately concessional terms can be obtained, to ensure that the benefits of past debt relief are not unwound by new unsustainable borrowing. In the same vein, the staff urges the authorities to continue negotiating to obtain full HIPC debt relief from its non Paris Club creditors.

41. Fiscal reforms correctly include steps to raise revenue through improvements in tax and customs administration. The completion of the computerization of the major customs offices and the introduction of a new single taxpayer identification number were important achievements in this regard. The envisaged taxpayer census and the establishment of the joint tax-customs brigade will help to broaden the tax base and improve tax compliance.

42. Other structural reforms appropriately focus on enhancing economic competitiveness. Progress in this area is urgent given the sharp decline in the external terms of trade. Pushing ahead with utility reform is especially important, as this will establish the conditions for expanding and improving the quality of services, which will help reduce production costs elsewhere in the economy. The mission urges the authorities to work toward an automatic electricity tariff adjustment mechanism to ensure the financial viability of the sector while eliminating the need for budgetary support to cover sector losses.

43. The government has made notable progress regarding fiscal transparency and in combating corruption. The timeliness of submitting audited government accounts to the National Assembly has improved and the government has followed up on the report of the High Authority on the Coordination of the Fight against Corruption. The government’s approval of a national strategy for good governance should lay the groundwork for a comprehensive approach to improving economic governance and reducing corruption.

44. The government’s policy with respect to the cotton sector has served the sector and the economy well. The sector has grown rapidly during the past 10 years, has generally been profitable, and has shown substantial resilience to external shocks in the past. Financial prospects for the ginning companies have improved with the rebound in world cotton prices in the first half of 2005, but the possibility of losses remains.

45. The banking sector, based on available information, appears sound and adequately provisioned to withstand the recent price shocks. The recent decline in the ratio of non-performing loans to total loans is a welcome development. The staff urges the authorities to monitor banks closely as the 2004/05 cotton campaign comes to a close and the loans to the cotton companies fall due.

46. The timeliness and quality of economic and financial data need to be improved. Plans to strengthen the National Institute of Statistics and Demographics are welcome and the authorities are encouraged to provide adequate budgetary resources. The authorities should also take measures to improve the quality of external debt data to ensure that the debt implications of fiscal policy can be quickly and accurately assessed.

47. The authorities’ economic strategy adequately addresses the key risks to the economic outlook and PRGF-supported program. Donors have indicated their willingness to support structural reforms and other productivity-enhancing programs in the cotton sector. The government has demonstrated its commitment to responsible expenditure management and indicated that it will reallocate resources from non-priority programs should additional spending for the elections prove necessary. While droughts and (to a lesser extent) locusts contribute to highly volatile food production and prices, the economy has demonstrated the ability to rebound quickly from these shocks in the past.

48. Performance under the PRGF-supported program has been broadly satisfactory. The fiscal stance during the first quarter of 2005 was tighter than programmed and the nonobservance of the performance criterion pertaining to domestic borrowing by the government was minor and temporary. Against this background, and on the basis of policies set forth in the authorities’ Letter of Intent, the staff recommends that their request for a waiver be granted and that the fourth review under the PRGF arrangement be completed.

49. It is proposed that the next Article IV consultation take place in accordance with the July 15, 2002 Executive Board decision on consultation cycles.

Table 1.

Burkina Faso: Selected Economic and Financial Indicators, 2001-06

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Sources: Burkinabe authorities; and Fund staff estimates and projections.

IMF Country Report No. 05/95, December 22, 2004.

In percent of beginning-of-period broad money.

Table 2.

Burkina Faso: Consolidated Operations of the Central Government, 2001-08

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Sources: Burkinabe authorities; and Fund staff estimates and projections.

IMF Country Report No. 05/95, December 22, 2004.

Revenue includes taxes on goods and services paid during the execution of public investment projects using checks issued by the treasury.

On an authorization basis and including the tax component of the public investment projects, which is paid by the treasury.

Float during the year. Decline of stock of expenditure committed but not paid : (-).

Table 3.

Burkina Faso: Monetary Survey, 2001-06

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Sources: Burkinabe authorities; and Fund staff estimates and projections.

IMF Country Report No. 04/95, March 5, 2004

IMF Country Report No. 05/95, December 22, 2004