Burkina Faso: Ex Post Assessment of Longer-Term Program Engagement
Author: International Monetary Fund
Publication Date:
19 Oct 2006
eISBN:
9781451803907
Language:
English
Keywords:
ISCR; CR; government; PRGF loan; PRGF arrangement; terms-of-trade shock; exchange rate; private sector; fiscal policy; economic activity; AIDS initiative
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Performance under the Poverty Reduction and Growth Facility-supported program has been good. All quantitative performance criteria have been met. The economy has coped well with unfavorable external price developments. A substantial reform of the mechanism for determining cotton producer prices is under way. The proposed new producer price mechanism for cotton is an improvement over the previous system. The maintenance of the fuel pricing mechanism, which ensures full pass-through of changes in world oil prices, and steps to privatize the state-owned telecommunication company are major accomplishments.

Abstract

Performance under the Poverty Reduction and Growth Facility-supported program has been good. All quantitative performance criteria have been met. The economy has coped well with unfavorable external price developments. A substantial reform of the mechanism for determining cotton producer prices is under way. The proposed new producer price mechanism for cotton is an improvement over the previous system. The maintenance of the fuel pricing mechanism, which ensures full pass-through of changes in world oil prices, and steps to privatize the state-owned telecommunication company are major accomplishments.

I. Introduction

1. Burkina Faso ranks among the world’s poorest countries, with a real GDP per capita of about US$275 in 2005, and confronts serious developmental constraints. The country, located in the Sahel, is landlocked and its climate is characterized by large rainfall variations. Most of the population lives in rural areas, where poverty and reliance on subsistence agriculture are widespread. Like other Sahelian countries, Burkina Faso suffers from drought and desertification, overgrazing, soil degradation, and deforestation. In addition, political instability in neighboring countries has strong repercussions on economic activity through remittances, and access to ports and markets.

2. Burkina Faso’s engagement with the Fund is relatively recent but has been continuous. Following almost a decade of inward-looking policies, the government embarked on its first Fund-supported program under a Structural Adjustment Facility (SAF) in 1991 (Table 1). Despite strong government commitment to reforms at the start of the SAF, internal politics intervened during a transition period to a representative democratic regime, throwing the program off track in 1992. The adjustment program resumed in earnest in 1993 when the SAF was replaced with an Enhanced Structural Adjustment Facility (ESAF), and was further strengthened following the 1994 CFA franc devaluation.

Table 1.

Lending Arrangements with the Fund, 1991-2006

(as of March 31, 2006)

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Burkina Faso’s quota increased from SDR 31.6 million in 1984 to SDR 44.2 million in 1992 and to SDR 60.2 million in 1999.

3. The stable political climate during the period under consideration contributed to a firm commitment from the authorities, resulting in a strong track record of policy implementation. Despite occasional internal tensions, the political environment remained fairly stable, allowing for a smooth program implementation. A strong track record of policy implementation allowed Burkina Faso to reach the decision point under the HIPC initiative in September 1997 as the second country after Uganda, and to receive irrevocable HIPC debt relief in 2000 under the original framework and in 2002 under the enhanced framework. Burkina Faso qualified for the Multilateral Debt Relief Initiative (MDRI) from the Fund, followed by the International Development Association and the African Development Fund.

4. This ex-post assessment of longer-term engagement (EPA) covers the post-devaluation period, 1994-2005. The report is organized as follows: Section II examines Fund involvement in Burkina Faso by, first, reviewing the objectives of Fund-supported programs and policy instruments used to achieve them, and, second, evaluating the achievements and shortcomings of policy implementation during the period under consideration. Section III draws lessons from the program design and implementation issues, and Section IV lays out some considerations for medium-term priorities and for future Fund involvement.

II. Assessment of Fund Involvement

A. Objectives of Fund-Supported Programs

5. As with all WAEMU countries, the 1994 annual ESAF-supported program was based on the 50 percent devaluation of the CFA franc which restored much eroded competitiveness. The devaluation provided a welcome momentum to boost the reforms that were running out of steam under ESAF I. The devaluation of the CFA franc was accompanied by tight macroeconomic policies and a deepening of structural reforms aimed at accelerating the rate of growth and ensuring a viable external position in the medium-term.

6. Poverty reduction was a key objective in all Fund-supported programs, but particularly so under the PRGFs. Policy Framework Papers (PFPs) and later Poverty Reduction Strategy Papers (PRSPs) included measures to address poverty issues. In the long run, poverty was to be tackled through sustaining high growth and employment, particularly in rural areas, where the majority of the poor live. Under PRGF-supported programs, the focus was on achieving the Millennium Development Goals (MDGs) through the monitoring of targets on poverty-reducing social expenditure.2 The number of targets increased considerably, in line with the PRSP, which has become the vehicle for coordinating poverty reduction. Structural conditionality on social spending related more to the public financial management (PFM) area and tracking of pro-poor spending.

7. The main goals of Fund-supported programs were to achieve macroeconomic stability and lay out the conditions for sustainable growth. To these ends, the programs aimed at fostering the development of human resources and productive potential, increasing tax mobilization, deepening financial intermediation and private sector participation. The macroeconomic objectives in the four successive programs did not change substantially (Table 2), but the focus of structural reforms shifted from privatization, liberalization, and arrears reduction to fiscal structural reforms, regulatory framework, and social spending. As Burkina Faso is a member of the West African Economic and Monetary Union (WAEMU), exchange rate, monetary and trade policy were largely set collectively by member states. Regional agreements also set important markers for the legal environment and for the country’s business climate. A full assessment of the benefits of monetary union membership for Burkina Faso is beyond the scope of this paper. However, there are strong indications that the regional framework provided an appropriate monetary environment, supported financial discipline, helped in accelerating trade reform, and allowed for closer economic linkages with neighboring countries (Box 1).

Table 2.

Stated Medium-term Macroeconomic Objectives of the Fund-Supported Programs)

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8. With monetary and exchange rate policy mostly conducted at the regional level, fiscal policy was the key policy instrument aimed at supporting macroeconomic stability and the pegged exchange rate system.3 Immediately following the devaluation, fiscal policy aimed at containing aggregate demand while promoting the expansion of bank credit to the private sector. Wage policy, in particular, aimed at safeguarding the competitiveness gains achieved following the devaluation. Later on, in the context of the HIPC initiative, fiscal policy focused more on scaling up growth-enhancing, poverty-reducing spending without endangering debt sustainability or crowding out the private sector.

9. Fiscal conditionality focused on the following main quantitative targets:4

  • The main fiscal target monitored by the program was net credit to government, replaced in 2002 by net domestic financing. The shift to a broader measure of government domestic financing was to allow a better surveillance over the overall deficit and domestic debt.

  • Given the low tax-to-GDP ratio, floors on revenue were set to improve domestic tax collection and reduce reliance on external assistance.

Burkina Faso: Economic Impact of Regional Waemu Integration

This box summarizes Burkina Faso’s experience with WAEMU integration.

Adherence to the thresholds of the convergence criteria have not been explicitly incorporated in Burkina Faso’s programs supported by the Fund. Nonetheless, the objectives of the convergence criteria and of Fund-supported programs intersect, notably with respect to keeping inflation low and improving fiscal soundness by avoiding arrears, raising revenues, containing the wage bill, and public debt. Burkina Faso met four out of eight convergence criteria in 2004, called for by the WAEMU’s Regional Convergence, Stability, Growth, and Solidarity Pact which was adopted in 1999.

Waemu: Performance on Convergence Criteria by Country, 2004 1/

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Source: WAEMU.

Bolded numbers show that the convergence criteria were respected.

Efforts at increasing regional integration have had important impact on trade, legal harmonization and structural policies:

  • An important achievement was the phased introduction of the Common External Tariff (CET) during 1998-2000. The current system has four categories of goods that have tariff rates of 0, 5, 10, and 20 percent respectively, plus a statistical tax of 1 percent.

  • Burkina Faso benefited from labor mobility in WAEMU with (pre-crisis) large movements of workers to Cote d’Ivoire.

  • Tax harmonization moved forward with the implementation of a common regulation on VAT, and tariff rates on imports of goods originating from WAEMU were gradually reduced and fully eliminated by 2000.

  • Banking and financial sector regulation are common through the zone, and business law was harmonized in line with the OHADA Treaty of 1993.

  • Burkina Faso has been a leader in adopting five directives aimed at harmonizing budget laws and government accounts, including regulations for public accounting, a new budget nomenclature and a summary table of fiscal operations (TOFE).

  • The basic balance (i.e., revenue minus current spending and domestically financed capital spending) became an indicator under the second PRGF-supported program as of 2003, to measure the domestic fiscal effort.

  • Debt sustainability was mainly controlled through a zero target on the contracting or guaranteeing of non-concessional debt.5

  • Programs also aimed at eliminating external and domestic payments arrears in the early stages, then focused on the non-accumulation of payment arrears, once the existing stocks were eliminated. From 2003, expenditure committed but without payment orders were monitored under an indicative target.

  • Conditionality also focused on the composition of expenditure. The share of nonpriority spending was to be reduced through the application of quantitative benchmarks or indicators on cumulative expenditure on government wages and salaries (which was also key to lessen the early inflationary pressures), on primary expenditure commitment basis, excluding foreign-financed investment (1997-2000), and current expenditure (as of 2000).

10. Structural reform aimed at sustaining growth and developing an economy more resilient to adverse external shocks. Program structural conditionality included measures mainly to improve public financial management, boost revenue, enhance the competitiveness and efficiency of the economy, and provide incentives for private sector activity. In particular, programs focused on civil service reform, price and trade liberalization, divestiture from financial and nonfinancial public enterprises and improvement of the legal and regulatory frameworks. Structural measures covered broad areas through PRGF I to strengthen the macroeconomic environment and liberalize the economy, but increased the focus on tax and public financial management under PRGF II (Appendix Table 1).

B. Achievements and Shortcomings

Macroeconomic performance

11. Macroeconomic performance has been generally good, but there remain vulnerabilities. Burkina Faso has succeeded in sustaining high growth rates and containing inflation, strongly supported by the policy discipline imposed by the WAEMU membership (Table 3, and Appendix Table 2). Following the devaluation—also a regional policy— competitiveness improved markedly, before eroding somewhat over time. There has been limited progress, however, in meeting some key objectives of the Fund-supported programs— most importantly, in increasing domestic revenue and diversifying the economy.

Table 3.

Key Macroeconomic Indicators for Burkina Faso, Waemu, and Sub-Saharan Africa, 1984-2004

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Source: IMF African Department database, May 2006.

12. Burkina Faso has experienced higher economic growth and lower inflation in the last 20 years than the average in the WAEMU and Sub-Saharan African (SSA) countries. Real per capita income nearly doubled in the last 20 years (Figures 1 and 2), rising from US$140 to US$275 between 1984 and 2005. In contrast, real per capita GDP in the WAEMU and SSA countries stayed roughly constant on average—although at a higher level of around US$350 and US$540 for WAEMU and SSA countries, respectively. Except for a short-lived spike following the devaluation, average inflation remained below 3 percent since 1995.

Figure 1.
Figure 1.

Real Per-Capita GDP in 2000 U.S. Dollars (1984 =100), 1984-2005

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF African Department.
Figure 2.
Figure 2.

Real Per-Capita GDP in 2000 U.S. Dollars, 1984-2005

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF African Department.

13. Burkina Faso’s exceptionally high growth was broad-based. Real GDP growth accelerated in 1994-98 to 6¾ percent on average before slowing to pre-devaluation period levels of 5½ percent. The country remains largely an agrarian economy, with the primary sector representing about 40 percent of GDP (Table 4). The services sector, at 43 percent of GDP, mainly relates to trade and transport which are also closely linked to developments in the agriculture sector. The growth in the secondary sector was driven by construction, both private and public—mostly infrastructure related to social spending (e.g., construction of schools) as well as roads.

Table 4.

Selected GDP Figures, 1985-2004

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Source: IMF desk database.

Sectoral growth rates refer to 1986-93.

External sector

14. There has been a gradual appreciation of the real exchange rate since the 1994 devaluation but exchange rate based competitiveness gains are still largely preserved (Figure 3). Despite a deterioration in terms of trade due to high oil prices and weak world cotton prices, the real effective exchange rate (REER) has recently appreciated, reflecting mainly the nominal appreciation of the euro against the U.S. dollar.6 From the CFA franc zone perspective, however, the cumulative REER appreciation in Burkina Faso from January 1994 to March 2006 is lower than the average of the zone. Prudent wage policies, have allowed the REER to remain more than 30 percent below its pre-devaluation level, in March 2006.7 Average export volume growth of 12 percent a year, over 1994-2005, was four times higher than during the pre-devaluation period. In addition, export volume growth remained strong, averaging 13 percent in the 2000-05 period, despite the nominal appreciation since 2000.

Figure 3.
Figure 3.

Selected Nominal and Real Exchange Rates, Monthly, January 1992-March 2006 (2000 =100)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF (Information Notice System)

15. Despite the boost of the devaluation, economic diversification has been elusive and trade openness remains low. Cotton exports benefited by far the most from the devaluation and its share in total exports doubled between 1994 and 2005 (Figure 4) rendering the export base more concentrated—as a result, Burkina Faso appears to have the strongest export concentration among the WAEMU countries at end-2005, making it highly vulnerable to terms-of-trade shocks.8 The failure in achieving export diversification reflects structural bottlenecks such as high transportation costs in a landlocked country and high labor market restrictions.9 The introduction of the Common External Tariff (CET) in 2000 has reduced the unweighted average tariff rate from about 19 percent in 1997 to 12 percent. However, the degree of trade openness remains modest, and the broad measure of trade openness, defined as the sum of exports and imports, increased from 34 percent of GDP in 1994 to 37.5 percent in 1998, and decreased subsequently to 30.7 percent of GDP in 2005, mostly reflecting falling cotton prices. Because most of the export growth was driven by cotton exports, which are exported to European and Asian markets, the relative share of exports to WAEMU countries decreased by 30 percent between 1994 and 2003.

Figure 4.
Figure 4.

Decomposition of Main Exports, 1994-2005

(In percent of total exports of goods)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF desk database.

16. Burkina Faso’s economy has had, over the last decade, a large current account deficit reflecting high aid flows. The trade balance has been highly sensitive to imports related to foreign-financed investment required for the full implementation of the public investment program. Combined with weak performance in noncotton exports and declining current transfers,10 this led to a widening of the current account balance (excluding official transfers) from 7.9 percent of GDP in 1994 to 12.2 percent in 2005 (Figure 5).

Figure 5.
Figure 5.

Current Account Balance, 1994-2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF African Department.

Fiscal developments

17. Large fiscal deficits were sustained mainly thanks to foreign grants. The fiscal deficit, including grants, averaged 2 percent of GDP during 1994-1999, and widened to an average of about 4 percent of GDP after 1999, reflecting HIPC-related spending (Figure 6). Excluding grants, the deficit remained high at 9 percent of GDP on average in 1994-2005, partly reflecting an increase in social spending, and a loss of revenue stemming from the implementation of the WAEMU customs tariff reform. While grants allowed the deficits to be financed without unduly undermining debt sustainability, the latter remains vulnerable to changes in the availability of foreign financing.

Figure 6.
Figure 6.

Revenue, Grants, and Expenditure, 1994-2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF African Department.

18. The revenue-to-GDP ratio remains very low by regional and international standards, despite revenue-enhancing reform efforts. During 1999-2004, government revenue in Burkina amounted to only 12 percent of GDP, well below the average for the WAEMU and sub-Saharan countries.11 Revenue collection was sustained until 1999, when total revenue reached a peak of 13 percent of GDP. However, the adoption of the CET during 1998-2000 entailed a cumulative revenue loss of more than 2 percent of GDP. VAT collections have been on the rise, but improvements in VAT productivity have been limited. The consumption-based “C-efficiency” ratio12 rose from 23 percent in 1997 to only 30 percent in 2005, half of Senegal’s and well below the average for mature stabilizers low-income countries (about 40 percent).13 The weak revenue reflects tax exemptions and weaknesses in tax administration (see below). Unlike Mali and Senegal, Burkina Faso did not manage to achieve significant strides in revenue collection on a sustained basis (Figure 7).

Figure 7.
Figure 7.

Comparative Tax Ratios in Burkina, Mali, and Senegal 1995-2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF African Department database.

19. Efforts were made to increase priority spending while containing total outlays. Nonpriority current spending was cut to accommodate increases in domestically financed investment and poverty-reducing social expenditure. Budgetary resources allocated to poverty-reducing programs were raised in the aftermath of the qualification for HIPC assistance in 1997 (see below). At the same time, other current outlays, including the wage bill and military expenditure, were reduced considerably:

  • The total wage bill declined from about 6 percent of GDP in 1993 to 4¾ percent in 2005, despite the increased use of HIPC resources for the payment of workers in the health and education sectors. This was made possible thanks to the limited general wage increases, and to a civil service reform during 1994-99 (see below).

  • Since 1993, the share of military spending in current expenditure declined by 10 percentage points to 12 percent in 2004.

  • Price liberalization also resulted in the reduction of subsidies.

Financing and aid effectiveness

20. Fiscal deficits were largely financed externally.14 Burkina Faso’s net aid inflows included mainly grants and concessional loans (Table 5). External borrowing, which has been contracted on concessional terms, remained stable while grants have been on a declining trend since 2002. The loss in grants has partly been compensated by increased debt relief freed up under the HIPC Initiative, which has averaged 1 percent of GDP. HIPC debt relief did not thus translate into additional aid flows. Burkina Faso has achieved a moderate debt burden, mostly thanks to grants and debt relief (Box 2). The external debt-to-GDP ratio was nearly halved from 64 percent in 1994 to 33 percen in 2005.

Table 5.

Decomposition and Management of Aid Flows

(In percent of GDP)

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Source: Fund staff estimates.

Excluding interest on external public debt.

Defined as total expenditure less domestic revenue.

Debt Decomposition

Decomposing the factors that contributed to the decline in debt shows that the largest contributor to the decline in debt has been grants, accounting for 66 percentage points of GDP to the decline (see Figure). This was more than offset by the primary balance contribution, which has increased by 91 percentage points of GDP. Real growth was also a strong factor in reducing debt, accounting for 30 percentage points. The large residual (other) mainly reflects coverage issues as this includes publicly-guaranteed—off-budget debt. These results show that while prospect for external viability has improved, over the 1994-2005 period, this was mostly on account of the authorities’ ability to mobilize grants. While this has allowed to increase priority spending without undermining debt sustainability, it also points to vulnerabilities, and therefore the need to keep debt under scrutiny.

A02ufig09

Contributions to the Change in Public Debt Stock 1994-2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF country reports, and staff estimates and calculations.

21. As net aid flows remained broadly stable, the country did not have to deal with the macroeconomic consequences of exceptional aid surge. The synchronization of the trends in the nonaid current account balances and fiscal deficits net of aid indicates that aid was both spent and absorbed.15

Fiscal structural reforms

22. Burkina Faso followed a two-pronged approach aimed at supporting fiscal consolidation through structural measures on the revenue (Box 3) and expenditure sides.16

  • On the tax policy side, the objectives were to expand the tax base, through improved taxation of the informal sector and reduced exemptions, and to compensate customs revenue shortfall through increased indirect taxation, and the reform of petroleum product pricing— successfully introducing an automatic adjustment formula (Box 5).

  • Regarding revenue administration, main achievements were the introduction of a taxpayer identification number and of a large taxpayer unit (DGE), as well as various computerization programs.

23. Despite some progress, the poor revenue performance reflects widespread exemptions and the reluctance of the authorities to fully implement the necessary reforms.

  • Exemptions are still pervasive, hampering any marked increase in revenue collection. The VAT base excludes a large number of consumption goods, as well as the agricultural sector and the mining sector. There are also large exemptions granted by the investment code. Moreover, there have been instances of reform backtrack, such as the reintroduction of VAT exemptions on certain food items in 2003, and the contraction of the base for the income tax on wages and salaries (IUTS) in 2002.

  • There were significant delays in the implementation of tax and customs administrative measures, notably in the establishment of the DGE (which became operational only in mid-2005), and the computerization of tax and customs administrations. Moreover, some of these reform measures were not fully implemented.17 The monitoring and auditing of tax payers has improved in 2005, but they are still not up to speed, nor is collection enforcement.

Main Revenue Reforms

Key tax policy reforms included mainly:

  • The unification of VAT rates at 15 percent in 1994, subsequently raised to 18 percent in 1998;

  • the introduction of a single excise tax on petroleum products in 1994 (TUPP, changed into TPP in 2001);

  • the implementation of a single system of taxation of the informal sector and of small- and medium-size enterprises since 1994;

  • the elimination of exemptions of VAT on cement in 1994 and of the TUPP on petroleum products related to foreign-financed public investment projects in 1996;

  • the expansion of the base for the single tax on wage and salaries (IUTS) in 1995;

  • the rationalization of excise tax rates on tobacco and nonalcoholic beverages in 1996;

  • a tightening of benefits under the investment code since 1999;

  • the reduction in the corporate income tax (CIT) rate from 45 in 1996 to 40 percent in 1997, and 35 percent in 2000;

  • a tightening of benefits under the investment code since 1999;

  • the introduction of withholding taxes on rental property, wholesales and at customs to bring the informal sector in the tax net since 2000;

  • a reform of the presumptive taxation for VAT and the income tax was carried out in 2002; and

  • the progressive reduction in the maximum WAEMU common external tariff from 37 percent in 1998 to 25 percent in 2000.

Revenue administration reforms included mainly:

  • The computerization of tax assessments and collections since 1999;

  • the extension of the tax identification number (TIN) to all tax payers since 2002 (strengthened in 2005);

  • the establishment of a large taxpayer unit (DGE) in Ouagadougou in 2004;

  • improved follow-up of tax payers,

  • the application of VAT to all public contracts and the tightening of procedures for tax payments under foreign-financed projects since 1999;

  • a better valuation of imports at customs, including the elimination of most tariff lines subject to administratively set customs values, and a reduction of payment delays since 1997; and

  • the computerization of customs, with the progressive establishment of ASYCUDA ++ during 2004-05.

The Role of Fiscal Technical Assistance

Extensive FAD TA was provided to accompany the authorities’ fiscal adjustment effort. It encompassed a wide range of activities, in line with the program objectives of raising government revenue, strengthening budgetary management, and allocating resources to poverty reduction.

During 1993-95, FAD TA focused mainly on the implementation of the tax reforms introduced in 1993, essentially the administration of the VAT. A long-term advisor in tax policy and administration was in the field.

During 1997-99, FAD TA helped in assessing the fiscal impact of the reform of the WAEMU common external tariff (CET) and in identifying and implementing compensating measures. The latter included the strengthening of the tax and customs administration and the extension of the tax base, through computerizing tax and customs activities; controlling tax exemptions on investments and foreign-financed investment projects; and the introduction of withholding taxes. FAD also organized follow-up revenue administration missions in 2001, 2003, and 2006, and several short-term expert visits in Ouagadougou through the regional technical assistance center (AFRITAC-West) since 2004, to review the status implementation of previous FAD recommendations in the areas of tax and customs administration. In particular, FAD helped in setting up the large tax payers unit (DGE) and the medium taxpayers units, strengthening tax controls, training in tax audit, reforming the corporate registry, improving customs controls and valuation, and computerizing customs (ASYCUDA).

Fund assistance in the area of public expenditure management was limited to fielding a long-term advisor in budget planning and control in 1994. A fiscal ROSC took place in 2001. Recent FAD TA also focused on improving public financial management and the tracking of the use of HIPC resources. More recently, assistance through AFRITAC consisted of short-term missions to follow-up on the recommendations of the 2001 missions for the fiscal ROSC and the assessment of the capacity to track poverty-reducing expenditures.

24. A comprehensive civil service reform was carried out since 1994 in two phases. The first phase of the reform was more “quantitative” (focusing on a civil service census, the removal of irregular workers from the payroll, and limiting recruitments to social sectors). The reform also identified retrenchment programs, in a context of liberalization and privatization programs. The second phase of civil service reform was more “qualitative” with a move towards a performance-based compensation system, a reform of the salary scale, and a strengthening of the contractual staff stream. The reform also aimed at a decentralization of recruitment decisions for social sectors. The second phase of the reform was prepared in 1996, but faced stiff political opposition and its implementation started only in 1999.18 The civil service reform has been partially successful. The wage bill has been contained, and the foundations for the reform are in place; but some aspects have yet to be fully implemented.19

Petroleum Product Pricing

Since 2001, domestic fuel prices reflect market prices through an automatic price adjustment mechanism. Faced with high oil prices in 2000 and increasing cost of fuel subsidies, Burkina Faso decided to abandon the 1995 price setting system under which fuel prices had not been adjusted frequently enough and fuel subsidies were not well targeted, as most of the subsidies went to higher-income households. In February 2001, a monthly automatic pricing mechanism for petroleum products was established to adjust, in a transparent manner, domestic retail prices in line with international prices. To mitigate the adverse effects on poor and vulnerable households, fuel subsidies were targeted to a limited number of products for social reasons, and shown in the budget as an expenditure item. Fuel subsidies were limited to fuel deliveries for electricity generation to promote investments (recorded in the budget under transfers) as well as butane gas and cooking oil, for social and environment protection reasons (recorded under social safety net). The subsidy rate per product is clearly indicated in the monthly price structure for petroleum products set by the instruction of the minister of commerce. At the same time, the taxation of petroleum products was simplified, including: (i) the replacement of the import duty (based on notional values) by the common external tariff (CET) based on transaction values, in line with the WAEMU guidelines; (ii) the setting of a specific tax on petroleum products (TPP); and (iii) application of the standard VAT rate. These taxes are shown in the price structure, with TPP rates varying in favor of “social” products.

Burkina Faso played a pioneer role within the WAEMU in introducing an automatic mechanism for fuel price adjustment. The longevity and success of the mechanism is a clear indication of the authorities’ commitment to the reform. This mechanism, which has insulated the fuel price determination from political interference, was made possible by:

  • The authorities’ commitment to the mechanism (no interruption or suspension) as defined by the Ministerial Decree of May 10, 2001;

  • the authorities’ determination to allocate efficiently resources in face of competing demands for limited resources (there were clear efforts to reduce nonpriority spending and to improve budget management);

  • the authorities’ policy to reorient resources to poverty reduction (the reform was introduced at the time when poverty-reducing social spending was on the rise);

  • the authorities’ awareness of the need to mitigate the negative (direct and indirect) impact of fuel price adjustments on poor households, by targeting and budgeting in a transparent manner fuel subsidies for a limited number of petroleum products;

  • the PRSP consultation process provided an opportune forum to explain the rationale for government policies; and

  • the political support for the reform. Although subsidies to fuel deliveries for electricity generation benefited mainly better-off households, they helped garner political support for the reform.

The government has adhered to the monthly adjustment in all but one month (October 2004) when it was “temporarily suspended in order to take stock of the potential impact of what would have been an unusually sharp increase in prices.”

Going forward, the current unprecedented price spike poses two challenges. First, there is the standard issue of high prices at the pump, and how far these can go before creating domestic problems. Second, the potentially open-ended subsidy to SONABEL (the electricity producer), which receives oil at a fixed price, needs to be contained. As world prices continue to rise, the gap between the world price and the delivery price widens, while the current program has capped this subsidy at CFAF 18 billion.

25. Burkina Faso made important strides in the area of public financial management. The early introduction of economic and functional budget classification and of an integrated financial and management information system (IFMIS), as well as a medium-term expenditure framework (MTEF) facilitated the follow up, monitoring, and assessment of performance of actions in sectoral policies. A program budgeting system was introduced in 1999 for a number of ministries. This system, together with the regular conduct of public expenditure reviews (PER), allowed a better focus in the allocation and efficiency of budgetary resources through regular reassessment of government expenditure priorities. Joint IMF/World Bank Country Assessment and Action Plan for HIPCs (AAP) missions in 2001 and 2004 found that Burkina Faso’s tracking capacity was generally advanced in comparison with other countries in the sub-region.20 Recommendations for upgrading the tracking system were implemented starting from 2002, in the context of the budget management action improvement plan (PRGB). Starting from the early 2000s, however, there has been a tendency to under-execute committed expenditure, thus creating a backlog of expenditure committed but awaiting payment orders (dépenses engagées non-mandatées (DENMs)). The persistence of DENMs reflects weaknesses both in cash management and in absorption capacity (see below).

26. Governance has improved but a strategy to fight corruption still needs to be fully defined. The establishment of the Auditor General Office (Cour des Comptes) and the High Authority of Coordination of the Fight against Corruption in 2002 were important steps to improve governance. The High Authority assists the government in preventing and detecting corruption. It has prepared a national action plan to fight corruption, and its annual reports identified several cases of alleged illegal practices that led to the initiation of judicial actions. The national plan needs to be adopted and implemented and the Auditor General’s function needs to be reinforced, including by some reforms of the legislation.

Social policies

27. Domestically financed investment and poverty-reducing social expenditure increased considerably over the period covered by the program. Social spending increased from 2 percent of GDP in 1994 to almost 6 percent in 2005, mirroring in part an increase in domestically financed investment from less than 1 percent of GDP in 1993-94 to 4½ percent in 2005 (Table 6). These investments were oriented mostly to the development of infrastructure, including the construction of schools, health centers and feeder roads in rural areas, where most poor live.

Table 6.

Poverty-Reducing Social Expenditure, 1994-2005

(In percent of GDP)

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Sources: Burkinabe authorities; and staff estimates and projections.

28. Sustained high growth contributed to reducing poverty markedly. According to a 2005 World Bank report, the poverty rate declined by about 8 percentage points between 1998 and 2003, but remains high at about 46 percent of the population. The decline in poverty appears to have resulted from sustained strong growth in agricultural output (cereal and cotton production). Growth has been pro-poor since consumption per capita increased both for the poor and the rich. Poverty in Burkina Faso also continues to be concentrated in rural areas and among women. The 2003 household survey points to the fact that inequality increased in rural areas and declined slightly in urban areas (due to more informal activities). The World Bank, however, considers that the trade-off between growth and inequality is insignificant in Burkina Faso.

29. Most of Burkina Faso’s social indicators remain low by regional and international standards, and reaching the MDGs by 2015 constitutes a big challenge. The most recent data show that improvements in health indicators since 1990 have been slow (Appendix Table 3). While the incidence of tuberculosis and HIV prevalence remains below the average for WAEMU and SSA countries, maternal mortality rate remains high, and the incidence of tuberculosis has been on the rise.21 In the education sector, although the net primary enrollment ratio has improved, it remains very low by regional standards, and far below the universal education MDG goal for 2015. There are ongoing policies to target the 20 provinces with lowest schooling, providing them with significant subsidies to lower education costs. The MDG on access to potable water seems on track.

30. One reason for the slow progress in social indicators is that access to social services continues to be skewed in favor of high-income, educated, urban households. In 2005, the World Bank estimated that the total education sector subsidy is unquestionably pro-rich.22 Moreover, even though achieving universal primary education remains one of the main objectives of the government, per-student government spending is considerably higher in the secondary and higher education than in primary education.

Monetary and financial sector reforms

31. The financial and banking sectors reforms aimed at addressing the financial difficulties of financial institutions and improving access to credit.23

32. A protracted banking restructuring process succeeded in gradually restoring the health of the banking sector by the second half of the 1990s. Banking sector development had been stunted by severe government interference, weak risk management capabilities that resulted in a build-up of nonperforming loans (particularly to public companies), and difficult loan recovery. The restructuring strategy focused on reducing government participation in the sector, the recapitalization, consolidation or closure of troubled banks (notably the National Development Bank), the creation of a loan recovery bureau, and freeing up the funds borrowed by the treasury from the postal bank (CNE/CCP). Since 1998 a number of new private banks and financial institutions have opened for business.

33. Credit to the private sector has grown steadily following the devaluation and the efforts to restore banking sector health, but financial intermediation remains low. Total credit as a percentage of GDP has nearly tripled to about 15 percent by end-2005, a major improvement from the lows reached in 1994-95 (Figure 8). The bulk of commercial bank lending consists of short term loans, notably cyclical cotton crop credit, and the share of short-term credit has hovered around 70 percent of total credit. The government also believes that expanding the microfinance sector is crucial in the fight against poverty, and a national strategy for microfinance was adopted in 2005.

Figure 8.
Figure 8.

Credit to Private Sector by Maturity, 1985-2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF staff.

34. Despite significant progress, the financial sector is still underdeveloped. Bankers’ representatives have noted that access to credit, particularly to small- and medium-sized enterprises, is hampered because of difficulties in securing and realizing guarantees, insufficient sources of long-term funding, and the often poor quality of loan applications. Money market activity is very low, in part because banks typically have excess liquidity, and the treasury and bond markets are shallow.

Private sector involvement

35. From 1991 onwards the government has pursued an ambitious agenda to increase private sector participation in the economy. This included privatization, breaking government monopolies, liberalizing prices and reducing external trade restrictions. Early successes included the elimination of price controls on most locally produced goods, of profit margin regulations on most imported goods, and of most export and import monopolies (with the notable exceptions of imports of rice, sugar, wheat and petroleum products). There were key achievements in the area of privatization and in government devolvement from the cotton sector (Box 6). Some 47 public enterprises, which represented 80 percent of the government initial portfolio, were liquidated or sold.24

36. The two areas where reforms were sluggish are the deregulation of utilities and the telecommunication sector.

  • Progress in energy sector reform has been mixed. The reform strategy agreed with the World Bank envisaged additional tariff increases and the elimination of the fuel subsidy over the medium term. In addition, the Fund has urged the authorities to work towards an automatic electricity tariff adjustment mechanism. The plans for privatization of or increased private sector involvement in the electricity company and the oil importing monopoly, embodied in the 2000 letter of development policy, have not yet been finalized.

  • Reforms in the telecommunication sector are coming to an end, but with long delays. After stalling for a long period, privatization of the telecommunication company envisaged in 2003, is now expected to be completed by end-2006.

The Cotton Sector—A Successful Reform

Cotton is the dominant cash crop in Burkina Faso, accounting for an estimated two thirds of export revenues in 2005. After declining steadily through the 1993/94 season to 117 thousand tons, production of seed cotton has since increased sixfold to reach more than 700 thousand tons in the 2005/06 season. There is evidence that income generated in the agricultural tradable sector has a growth multiplier effect of 1.88 in the nontradable sector, and cotton production has had a measurable positive impact on poverty incidence.

The strong performance of the cotton sector was achieved by boosting the area under cultivation and by improving yields. The initial decline in production was due to farmers’ responses to decreasing producer prices and to payment delays by SOFITEX, the then public cotton ginning and marketing monopoly. The subsequent improvements can be attributed to a number of factors, including the devaluation in 1994 which improved the competitiveness of SOFITEX and allowed for an increase in the producer price, as well as timely payments, increased use of fertilizers and pesticides, the extension of credit, and the increasing professionalization of cotton producers.

The government recognized the role of appropriate incentives and pursued a strategy of opening up the sector to private sector participation and involving all the stakeholders in the decision making process. In early-1999, 30 percent of the capital of SOFITEX was transferred to producers’ associations, leaving the government as a minority shareholder, and an inter-professional agreement was signed. This agreement included rules for setting minimum producer prices and profit sharing, the operation of a support fund, and the creation of a sectoral management committee. The monopoly of SOFITEX was ended in September 2004 with the sale of concessions and assets concessions in two cotton regions to private operators, and a new inter-professional agreement was signed to reflect the new sector structure.

The Fund has supported the government’s commitment to liberalize the cotton sector and allow the various private stakeholders find their own solutions to problems, even in the wake of the recent drop of the world cotton prices and resulting losses of the 2004/05 campaign. The Fund has recognized the importance of the cotton sector for growth and poverty reduction, but has cautioned about concentration risk for the banking sector of lending to finance the cotton campaign. Furthermore, risk sharing among cotton sector stakeholders could be improved, notably through increased flexibility in the arrangement for the floor price that is paid to producers, which had been fixed at CFAF 175 until the 2007/08 campaign.

uA02ufig12

Cotton Production, 1990/91-2005/06

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: Burkinabe authorities.

37. In spite of the various reforms, the investment and business climates remain unattractive. As a result of the delays in fully liberalizing and privatizing the utility companies, factor costs remain high, thereby hampering long-term competitiveness.25 Foreign direct investment has remained modest, partly because of the country’s landlocked situation, high costs of production, and a lack of natural resources to exploit. While the authorities and the staff concurred that sustained higher growth can only be achieved through greater private sector involvement, Burkina Faso still ranks low in the quality of its business climate. Based on evidence such as the 2005 Doing Business survey, Burkina Faso needs to reduce the administrative burden to open or close a business, ease hiring and firing restrictions, and improve contract enforcement. Several indicators are worse than the WAEMU and/or SSA average. The authorities are working closely with the World Bank in these areas and have taken actions such as reducing the number of formalities to open a business, establishing a one-stop window for registering a business, and reconsidering the labor code.

III. Program Design and Implementation Lessons

A. Program Implementation

38. Compliance towards the quantitative performance criteria was exemplary.26 The compliance rate was 90 percent over the four program periods (Table 7).27 The performance criteria with lowest compliance was net credit to government/net domestic financing. Compliance with indicative targets was weaker (64 percent), mainly due to difficulties in meeting revenue floors and expenditure-related indicators (notably wages and current spending). Large revisions to the national accounts could partly explain the deviations between projections and outturn (see below, and Box 7 on program projections).

Table 7.

Quantitative Performance Criteria and Indicators under the ESAF and PRGF Arrangements, 1994-2005 1/

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Source: IMF Staff reports and MONA (PDR).

M = Met NM = Not Met W = Waived.

For Jun-94, this condition applied to the whole banking system.

For PRGF II, the nonbank financing part of this criterion includes only the unredeemed stock of government bills and bonds held outside national commercial banks. For PRGF I (Jun-02), nonbank financing includes other financing instruments as well, such as the proceeds from asset sales by the government.

Continuous criterion.

For PRGF I, current revenue only i.e. excludes revenue from treasury checks.

Including HIPC Initiative expenditure.

Revenue (excl grants) minus expenditure, excluding foreign-financed investment outlays and net lending. Including HIPC Initiative expenditure.

Program Targets and Outcome

Projections for key macroeconomic objectives did not show an overall systematic upward or downward bias. While the current account deficit (including official transfers) and the fiscal deficit (including grants) were often programmed higher than the actual realizations (both 8 out of 11 times), inflation and real GDP projections were balanced. Overall, the projections did not show a systematic bias. This assessment is supported by computing the deviation between the outcome as reported in staff reports and the revised targets. The mean error did not prove to be statistically significant. The same holds true for the mean of the deviation between the revised targets and the original program estimates.

Burkina Faso: Original Program Targets, Revised Projections, and Outcome

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Source: IMF staff reports and staff estimates.
uA02ufig15

Selected Macroeconomic Indicators, Projected and Actual, 1994-2004

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF Staff reports 1994-2004.

39. The track record in the implementation of structural reforms was also relatively strong. More than three-quarters of the measures were met on time, with the remainder split equally between “met with delay” and “not met” (including those waived) (Table 8).

Table 8.

Structural Conditionality by Criteria and Completion Status, 1994-2006 1/

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Source: IMF Staff reports and MONA database (PDR).

M = Met, MD = Met with Delay, NM = Not Met, W = Waived.

B. Lessons from Policy and Program Design

Policy design

40. Fund-supported programs have adequately backed the regionally set key economic policies, notably the devaluation of the CFA franc, thus achieving low inflation and strengthening competitiveness. The use of the exchange rate as a nominal anchor and the implementation of Fund-supported programs helped to induce policy discipline, engender confidence in the currency, bring down inflation and boost economic growth. The monetary anchor, however, limited policy flexibility in terms of competitiveness and export growth, and therefore Fund-supported programs envisaged supporting structural policies. A number of efficiency gains were realized including liberalizing the cotton sector, privatizing key public companies, and, more recently, adopting a new legal and regulatory framework for the electricity sector.

41. Bold reforms were accompanied by substantial social programs for vulnerable groups, thus helping achieve broad consensus. Following the 1994 devaluation, the program included a series of measures to alleviate the negative effects of the devaluation to vulnerable groups. In addition, training was provided to the unemployed, and public work programs in road maintenance and construction were expanded with World Bank assistance. In the context of privatizations, social programs were established to retain workers, and when necessary, severance packages were provided. A social safety net associated to butane gas and cooking oil was explicitly incorporated in the budget starting from 2001. A large share of the consumption by the poor is VAT-exempt.

42. The anticipated growth in noncotton exports was perhaps not backed by enough supporting policies. Early Fund-supported programs did not address fully existing constraints to the development of nontraditional activities, including weak human capital resources, and an inadequate regulatory framework. Rather, they focused on privatization, bank restructuring, and tackled private sector participation through the reduction in profit tax rates, and streamlining customs procedures. Bold structural reforms aimed at establishing a friendly environment for private sector development only started under the third three-year program, in coordination with the World Bank’s CAS for 2001-05.28

43. In addition, the programs may have underestimated the difficulties that Burkina Faso would face to diversify its economy. While the strong performance of the cotton sector has been a welcome boost to the economy, further diversification would have reduced vulnerabilities. However, programs may have overlooked some fundamental problems related to the geographic situation of the country, being landlocked, with limited access to markets because of lack of adequate infrastructure and high (exogenous) transportation costs, and exposure to political instability in neighboring countries. In addition, widespread poverty and limited improvements in literacy and health indicators might have put some limits on the speed of a potential diversification.

44. Although the design and sequencing of policies across the programs appear broadly adequate, greater attention could have been given to tax collection to compensate for the revenue losses arising from the introduction of the CET. One could question whether trade liberalization, which was dictated by the regional integration policy agenda, should not have been accompanied by stricter conditionality on the tax policy side to offset revenue losses—in particular, a reduction in exemptions.

45. Recent programs pointed out the limited absorption capacity of Burkina Faso which hinders the full absorption of freed resources and reduces benefits from reforms. Weak absorptive capacity resulted from institutional constraints and poor infrastructure that hampered access to remote rural areas. In 2002, to ease institutional constraints following the experience with the limited absorption of resources freed by debt relief under the HIPC, the government launched a comprehensive decentralization program to strengthen the absorptive capacity.29 The program aimed at improving the efficiency and targeting of social spending. While there was progress in the education sector, the health sector has been marred with implementation issues.

Program conditionality

46. There appears to have been an abundance of fiscal quantitative indicators, especially as the programs moved on. The number of indicative targets increased from about 3 in 1994 to 5 during 2003-05. Such profusion points in some cases to overlapping and redundant indicators. For example, PRGF II had indicative targets on the revenue floor, ceiling on wages and salaries, current spending, and the basic balance—in addition to the performance criterion on domestic financing. A more selective approach would have been more desirable.

47. At the same time, given concerns regarding public debt sustainability, the absence of indicators to monitor total deficit financing is noticeable. The switch of the performance criterion from net credit to government to net domestic financing in 2002 (with adjustors for external financing) could be seen as a way to keep public debt in check, but this could have been dealt with better by targeting the overall deficit including grants.30

48. The number of structural conditions declined during the second and third arrangements, but increased substantially over the latest arrangement.31 The composition of measures, however, shifted somewhat, with fiscal structural measures (PFM, and especially the tax area) dominating PRGF II (Figure 9). This reflects (i) an increased effort to tackle the persistently high fiscal deficit level; and (ii) the Fund’s switch towards “core” conditionality. Given the explicit objective of removing structural impediments to growth and promoting poverty reduction, structural conditionality continued to appear prominent even after the publication of the 2000 Interim Guidance Note and the 2002 Conditionality Guideline.

Figure 9.
Figure 9.

Evolution of Structural Conditionality Under Various IMF Programs, 1994-2005

(Number of measures in specific area)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF staff reports.

C. Data Issues

49. Program implementation was characterized by important gaps in the coverage and timeliness of the data. National accounts are finalized with a few years lag, with actuals turning out to be quite different from the original estimates. For example, at present, national accounts have not been finalized after 1999, no measure of industrial production exists after 1999, and the availability of high-frequency measures of economic activity is limited. The consumer price index is available on a monthly frequency, but its coverage has been limited to Ouagadougou and the basket needs revision. Also, even though the authorities have been participating in the GDDS since 2001, metadata for statistical practices and plans for improvement have yet to be updated. Finally, the analysis of competitiveness could be enhanced by developing better indications, in particular those based on relative wages.

50. National accounts revisions bear a significant impact on projections of policy variables such as revenue and expenditure. Figures 10 and 11 show the difference between the “preliminary” actual and the final outturn for nominal GDP and real growth rates. From 1994 to 1999, nominal GDP and the growth rate were under-estimated by important margins in the preliminary data. Large revisions also affect the base year for projections, thus impeding smooth program projections.

Figure 10.
Figure 10.

Nominal GDP, 1993-2004

(In billions of CFA)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF Staff Reports and current database.
Figure 11.
Figure 11.

Real GDP Growth, 1994-2004

(In percent)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF Staff Reports and current database.

51. Projections for growth also pose challenges, given Burkina Faso’s vulnerability to exogenous shocks, notably the weather. Across the programs, growth was projected on the account of prospects in the diversification of the economy and development of noncotton exports. However, growth was sustained as the result of a surge in cotton production. Therefore, staff appears to have been, on average, pessimistic in projecting growth in cotton and overly optimistic in anticipating growth in noncotton sectors. Such forecasts, which are discussed with a unit in the ministry of economy, could be improved by expanding the scope, frequency and timeliness of data.

D. Issues in Debt and Financing Constraints

52. The policy behind debt path projections under various Debt Sustainability Analyses (DSAs) has changed remarkably over the different programs. The first DSA in 1995 was very ambitious, projecting a debt-to-GDP ratio of 10 percent for 2015 under the baseline scenario (Figure 12).32 The following DSAs also projected a very ambitious decline in debt. However, the most recent debt projections forecast an increasing debt ratio (following the MDRI relief), recognizing that a more ambitious downward trajectory might have required an unnecessarily restrictive fiscal policy in light of pressing expenditure needs in priority sectors and in light of constraints in revenue collection. This also reflects the international community’s shift during the period considered from a strong focus on debt reduction to recognizing the trade-off between reaching the MDGs and achieving low debt ratios. The debt-to-GDP ratio is projected to be cut in half to 16 percent of GDP by end-2006 under the MDRI, before reverting to its 2005 level in 2015.

Figure 12.
Figure 12.

External Debt, Actuals and Projections, 1993-2025

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Source: IMF staff reports, and current staff projections.1/ The debt stock is seldomly reported in staff reports and there is no reliable historic series available today.2/ Nominal GDP from today’s perspective is used to compute historic debt-to-GDP ratios so that revisions to GDP do not distort the analysis.

53. Until recently, discussions on public debt sustainability and the appropriate debt path had not featured prominently in programs. Given the high debt burden and the substantial development needs, a discussion around the right mix of expansionary fiscal policy and debt reduction would have provided useful insights.33 Apart from the necessary external DSA required periodically, there is an absence of information and analysis on public debt, and primary balances do not appear in tables. While this could be explained by the low level of domestic debt, this should have not precluded a discussion of public debt and its sustainable path. Since 2004, however, staff reports emphasize the need for fiscal policy to strike a balance between debt sustainability and additional spending to achieve the MDGs.

E. Ownership and Relations with Other Donors

54. In general, there was strong ownership of the Fund-supported programs. Perhaps because Fund engagement has been relatively recent, the authorities were more motivated than in similar countries that had experienced program “fatigue” and weakened ownership. In addition, the relative stability of the government may have resulted in a consistent strategic view of reforms that avoided stop-and-go approaches experienced elsewhere. Also, Burkina Faso’s tradition of consultation helped in setting reform priorities, notably in the context of the PRSP. The overall satisfactory rates of compliance can also be explained by the fact that most of the conditionality was the outcome of a broad process of negotiation.34

55. One area where government commitment should have been stronger is in tax administration reform. A number of the measures recommended by successive FAD technical assistance (TA) missions kept coming back due to lack of implementation. The latest TA report in tax administration indicates that a stronger commitment by the minister of finance and the heads of tax and customs administration would be needed to advance reforms in a credible way.

56. There has been a strong interaction with civil society on the PRSPs, also improving over time. From the start, the government HIV/AIDS initiatives appear to have been undertaken in close collaboration with donors and civil society. More recently there has been more active involvement of these groups through informal exchanges on all levels comprising the PRSP. However, to gain broader public support, the PRSP discussion should be linked more closely to the MTEF and the budget session in parliament. This should help to integrate expenditure foreseen in the PRSP with a macroeconomic strategy that takes into account debt sustainability.

57. Cooperation with the World Bank has been close. There has been a good division of labor, where the Bank has focused more on areas such as governance, decentralization, health and education, infrastructure, and recently, investment climate reform and labor code. The Fund and the Bank collaborate closely in monitoring developments in the cotton and energy sectors and both have supported the authorities’ efforts to improve public sector management, statistical capacity and promotion of private sector activity through technical assistance and through program activity and lending.

58. Burkina Faso’s relations with its development partners have been fruitful. The net flow of aid from donors has been relatively stable, pointing to a strong relationship of trust and appreciation for the strong macroeconomic performance. Donors have established a program pilot of joint conditionality in Burkina Faso since 1997. In 2002, six major donors strengthened their coordination through a joint budget support group aimed at improving the disbursement and predictability of budgetary assistance to Burkina Faso. The group was expanded in 2005 to include the World Bank and the African Development Bank, and it meets frequently and regularly, keeping track of committed and disbursed aid. As a result, aid predictability improved somewhat in recent years (Box 8).

Aid Predictability

Under the leadership of the European Union (EU), main donors agreed to pilot a program of joint conditionality in 1997 to improve program monitoring. Furthermore, Burkina Faso signed with its major donors a memorandum of understanding to set out the procedures and objectives of donors’ budgetary assistance in 2002, whereby no additional conditionality will be required for the disbursement, except from the EU.

A02ufig17

Deviation Between the Projections and the Outcome of Grants and Loans

(as a percent of GDP)

Citation: IMF Staff Country Reports 2006, 359; 10.5089/9781451803907.002.A002

Thanks to all these efforts, there are signs of better aid predictability over time; deviations between projections and outcome of foreign loans and grants were reduced, on average, from 0.4 to 0.2 percent of GDP (equivalent to FCFA 3.3 billion) between 1994-96 and 1997-2005. If 2003 is excluded, the average deviation during 1997-2004 is close to zero. When the same analysis is carried on budget loans and grants only, the average deviation is even lower and declined from -1.1 percent of GDP during 1993-99 to close to zero during 2000-04.1/

1/ Oya Celasun and Jan Walliser, Predictability of Budget Aid: Recent Experiences in: Budget Support as More Effective Aid, Recent Experiences, and Emerging Lessons, World Bank, 2006.

IV. Strategy for Future Fund Involvement

A. Main Priorities

59. Although Burkina Faso made important strides to reach higher growth levels and reduce poverty, social indicators remain weak. There are important policy challenges to sustain growth and to finance priority areas to reach the MDGs. The next phase of Burkina Faso’s economic policies will be set in a post-MDRI context. Gains achieved on the debt sustainability front and the freeing of resources should be preserved, while striving to meet the MDGs. The main priorities would be to:

  • Increase the domestic revenue effort. There should be stronger commitment from the authorities to improve revenue administration. After MDRI relief, there is a need to ensure that the country does not scale back its efforts to generate resources for poverty reduction to create more room for spending and reduce vulnerabilities. It is therefore urgent to accelerate the review under way of the investment and customs codes and to show more resolve in implementing TA recommendations such as the computerization of tax administration and the effective use of ASYCUDA at customs.

  • Strengthen institutions. A stronger absorptive capacity should be developed along with progress in the PFM system. While embarking in administrative decentralization, resources should be made available at local levels, while care has to be taken in terms of increasing expenditure and weakening control systems.

  • Increase private sector participation. Future programs should focus on collaboration with other donors to remove structural bottlenecks that hamper stronger private sector participation and export diversification. The next program should require the full liberalization of the utility sector in order to increase efficiency and ultimately lower the current high production costs.

60. Future Fund-supported programs should focus more closely on the link between the annual fiscal stance and debt sustainability. Instead of a top-down approach, resources needed to reach the MDGs have to be taken into account when designing the fiscal program, in the context of a sustainable MTEF and in line with the PRSP. Once this is assessed, programs need to focus on the available financing, the absorptive capacity, and appropriate PFM and debt management framework. Given that the debt ratio is projected to increase even after the MDRI relief, the debt dynamics will need to be closely monitored.

61. The next program should also focus on improving data. Specific areas for improvement of Burkina Faso’s statistical system include the human, technical and financial resources at the National Institute of Statistics and Demography (INSD), the technical support to the National Statistics Coordination Council (CNCS), and data dissemination to the public at large.35 Data on public debt should also be closely monitored, especially as debt management becomes an important policy tool. In the area of poverty indicators, the JSAs point out that the authorities need to establish comparable annual social statistics not only to ensure reliable poverty data, but also to secure prompt disbursements of donor support that is linked to specific outcomes.

62. The WAEMU convergence criteria and policy harmonization did not feature prominently in the discussion. Given that Burkina Faso is a member of the Union, and has to abide by its harmonized policy, it would be useful for future Fund-supported programs to integrate these policies into the discussion and, if relevant, into program design.36 This would strengthen the Fund’s role in regional surveillance, while at the same time avoid for the authorities the need to juggle between several commitments that may not be consistent or well-sequenced. At the same time, Fund’s regional surveillance would be a good forum to discuss the appropriate policies for union members.

B. How Can the Fund Be Involved?

63. Given Burkina Faso’s strong resolve and ownership for reform, and its compelling development needs, the Fund should continue to be engaged. While macro-stability has been broadly achieved, the reform agenda remains unfinished. Some key areas for reform are not necessarily under the Fund’s core mandate, and it will be important to involve the World Bank and other development partners. But Fund involvement will be necessary to catalyze donor financing, especially with the recent switch of donor financing from project to program support. In addition, sources of pressure are emerging that could weaken the fiscal stance: a possibly too generous investment code, pressure to increase indebtedness too fast, social groups demanding lower petroleum taxes, higher wages, all making the government reluctant to adjust energy prices. Continued Fund involvement would be seen as key to strengthen government’s policies.

64. There are two options for future Fund engagement available to the authorities: a successor PRGF arrangement with low access or a Policy Support Instrument (PSI). Both would provide the Fund’s seal of approval, enhance ownership, and support broader-based reform. A PSI could give a strong signal of satisfactory economic performance to the donors’ community, thereby engaging them to provide higher levels of aid. However, given the possibility of mounting domestic pressures, some of the requirements under the PSIs such as a fixed review schedule may appear too cumbersome for Burkina Faso. A low access PRGF would perhaps provide stronger incentives for reforms, and the additional financial support could be useful. The authorities should weigh the costs and benefits of each option and choose what they view as more appropriate.

65. There are some risks to future Fund engagement. The relatively comfortable macroeconomic conditions may result in a relaxation of the reform effort. The authorities could start to suffer from “program fatigue.” If domestic revenue does not pick up or if external assistance declines, the poverty reduction program could derail. Given that a number of the remaining reform challenges are outside the Fund’s core mandate, strong coordination with other development partners (through the PRSP process) will continue to be essential.

Appendix Table 1.

Burkina Faso: Performance of Key Indicators Under the ESAF/PRGF-Supported Programs, 1994-2006

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Source: IMF staff reports.

Original program targets for 1994-95 are based on the request for arrangements under the Enhanced Structural Adjustment Facility (ESAF I).

Original program targets for 1996-98 are based on the request for arrangements under the Enhanced Structural Adjustment Facility (ESAF II).

Original program targets for 1999-2002 are based on the request for arrangements under ESAF later under the Poverty Reduction and Growth Facility (PRGF I).

Original program targets for 2003-2006 are based on the request for a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF II).

Revised targets for 1994 are based on the midterm review of the second annual arrangement under ESAF I.

Revised targets for 1995 are based on the request for the third annual arrangement under ESAF I.

Revised targets for 1997 are based on the request for the second annual arrangement under ESAF II.

Revised targets for 1998 are based on the midterm review of the second annual arrangement under ESAF II.

Revised targets for 2000 are based on the first review under the PRGF I.

Revised targets for 2001 are based on the third review under the PRGF I.

Revised targets for 2002 are based on the fifth review under the PRGF I.

Revised targets for 2004 are based on the first review under the PRGF II.

Revised targets for 2005 are based on the fourth review under the PRGF II.

Revised targets for 2006 are based on the fifth review under the PRGF II.

First actual data presented in staff reports. For 2003 and 2004, some of the figures are still classified as estimates.

From current desk database. Changes reflect revisions to the nominal GDP series.

There is a break in the series. While from 1994-1998, offical transfers refer to total official transfers and no distinction is made between current and capital official transfers, from 1999-2006, the series only refer to current official transfers.

Figure for 2006 reflects MDRI relief.