Abstract
This paper assesses the link between public investment and economic growth in Burkina Faso. It also evaluates Burkina Faso's external competitiveness by using a comparison of REER to its equilibrium levels and a survey-based assessment of overall competitiveness. The report attempts to quantify the impact of rainfall and terms-of-trade shocks on the Burkinabe economy and draws policy measures to lessen external shocks. The report assesses that industrial mining has become a source of foreign exchange and government revenue, which requires transparent management and accountability.
II. Assessing Competitiveness in Burkina Faso20
A. Introduction
38. This paper evaluates Burkina Faso’s external competitiveness by using a comparison of the real effective exchange rate (REER) to its equilibrium levels, and a survey-based assessment of overall competitiveness. Some indicators suggest that Burkina Faso’ real exchange rate is overvalued. These include some estimates of the equilibrium REER (although the results are quite ambiguous); large and persistent current account deficits; sluggish export performance; and low ratings for structural competitiveness. Also, recent losses in the cotton sector, which stem partly from the appreciation of the euro, could indicate that the REER is overvalued. While there are indications of a real overvaluation, Burkina Faso’s membership in the WAEMU—whose REER was deemed in line with fundamentals at the last Article IV consultation—gives it ready access to foreign exchange. Moreover, Burkina Faso’s fiscal policies have generally been sound.
39. The paper follows the fundamental equilibrium exchange rate (FEER) in assessing whether the REER is aligned with economic fundamentals in Burkina Faso. The fundamentals approach is particularly appropriate in assessing whether a movement of the REER represents a misalignment or whether the REER itself has shifted because of changes in the economic fundamentals. We also look at the sustainability of the external current account and employ survey-based measures of competitiveness such as the World Economic Forum’s Global Competitiveness Index and the World Bank’s Doing Business Indicators to analyze competitiveness more broadly over the long term.
40. The recent appreciation of the CFA franc against the U.S. dollar has raised some concerns about the competitiveness of the cotton sector and the sustainability of growth. The 30 percent depreciation of the dollar against the euro since 2003 is estimated to have reduced the profits of ginning firms by some CFAF 45 billion, about 1½ percent of GDP (Figure II.1). The largest ginning company, SOFITEX, became insolvent. Although the crisis was averted after a large capital injection and credit guarantee by the government, cotton output and exports are expected to decline significantly in 2007. Thus, the issue of the appropriateness of the real exchange rate in Burkina Faso is particularly relevant for the cotton sector.
Burkina Faso: Terms of Trade and Selected Real and Nominal Exchange Rates, 1980–2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.Burkina Faso: Terms of Trade and Selected Real and Nominal Exchange Rates, 1980–2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.Burkina Faso: Terms of Trade and Selected Real and Nominal Exchange Rates, 1980–2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.41. Regression results do not give much support to the proposition that the REER is misaligned. Fundamentals are seen to account for most of the fluctuations of the REER. In particular, movements in the terms of trade, trade openness, productivity and government consumption can explain most of the long run behavior of the real effective exchange rate. On the basis of these fundamentals, the REER at the end of 2006 was found to be very close to its estimated equilibrium level. The results also suggest that, in the absence of further shocks about half of the deviations from the equilibrium path are eliminated within 16 months.
42. Analysis of the survey-based indicators of competitiveness suggests the need for continued structural reforms to improve competitiveness. The major indicators rank Burkina Faso among the least competitive countries in the world. Its competitiveness has been limited by poor infrastructure, limited access to finance, and low quality institutions. The survey-based indicators suggest that action is urgent, particularly where the government interfaces with the business Community. In particular, boosting basic and advanced education and training, improving infrastructure, improving regulation, making labor market more flexible, and improving security should be priorities.
43. The remainder of the paper is organized as follows. The next section reviews the literature on external competitiveness and the REER with a view to selecting a model to be estimated. Section C describes the data and discusses the empirical model to be estimated. The results of the regression are presented in section D. Section E discusses alternative approaches for assessing external sustainability. Section F analyzes Burkina Faso’s overall competitiveness using survey-based indicators. Section G concludes the paper.
B. Assessing External Competitiveness: The Literature
44. There are two main approaches to assessing external competitiveness. The first uses measures of the REER based on CPI, PPI, and unit labor cost, and the ratio of tradable to nontradable prices. The second, based on current account flows, relies on both traditional and non traditional competitiveness indicators. The traditional indicators are export growth, market shares, and overall current account position. Increasingly, nontraditional competitiveness indicators, which aim at assessing the quality of the business climate and hence the country’s attractiveness to international investors, are also used to assess competitiveness.
Modeling the REER
45. This paper follows the FEER approach as pioneered by Edwards (1989) in assessing whether the REER is aligned with economic fundamentals in Burkina Faso. Conceptually, the equilibrium real effective exchange rate (EREER) is defined as the exchange rate that is compatible with the economy at both internal and external equilibrium. However, operationally it is very difficult to define precisely what constitutes internal and external equilibrium. For example, Edwards (1989) considers internal equilibrium to have been achieved when the market for non-tradable goods clears in present and future; most others regard it as being attained when there is no output gap or persistent structural employment in the economy.
46. Studies by IMF authors using panel data methods find that Burkina Faso’s real exchange rate is either close to its equilibrium level or is undervalued. Roudet et al (2007) used a panel of eight WAEMU countries and find some undervaluation of the REER. They find that single-country estimators and the panel estimators give different results for Burkina Faso. For example, the single country results find evidence of an overvaluation of 6 to 15 percent before the devaluation in 1994. Moreover, both the Johansen and the autoregressive distributed lag (ARDL) model indicate that the EREER continued to depreciate later, to the extent that the overvaluation caused by the devaluation is no longer a problem. However, they find that the REER may have been overvalued by about 9 percent in 2006. This is in sharp contrast with the results obtained using the panel estimators, which suggest an undervaluation ranging from 1 to 24 percent.
47. Chudik and Mongardini (2007) used a panel of non-oil exporting countries in Africa, and find that the REER was undervalued by about 20 percent in 2002. They find that the devaluation resulted in an undervaluation that persisted until 2003. They acknowledge, however, that the difference between their results and other studies may be due to an inadequate intercept for Burkina Faso resulting from their panel estimation, which could bias the results toward undervaluation. As Roudet et al (2007) point out, because the panel results are an average of the individual cointegrating vectors, some countries could differ significantly from the average.21 Moreover, the Chudik and Mongardini (2007) panel may suffer from the heterogeneity problem because these countries may differ in important respects. The Roudet et al (2007) panel could suffer from the problem of a small panel.
C. Methodology
The model
48. The REER is assumed to be a function of macroeconomic fundamentals:
where REER is the real effective exchange rate, TOT is the terms of trade, OPEN is trade relative to GDP, GCON is government consumption relative to GDP, and PROD is productivity relative to other countries.
The data
49. This paper uses the following variables to explain the behavior of REER in Burkina Faso—terms of trade, trade openness, investment, government consumption, and productivity (Figure II.2).22 The dataset consists of annual observations from 1980 to 2006.23 REER is from the IMF Information Notice System (INS). Openness, investment, and government consumption are computed with data from the Burkinabè authorities. Productivity was computed by the authors using the real per capita GDP in US dollars for Burkina Faso relative to its trading partners. The trade weights from the trading partners were derived from the IMF’s Effective Exchange Rate Facility. The REER is an index with 2000=100 and TOT is an index with 1999=100.
Burkina Faso: Data Patterns, 1980–2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.Burkina Faso: Data Patterns, 1980–2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.Burkina Faso: Data Patterns, 1980–2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.50. The terms of trade is defined as the ratio of the price of exports to the price of imports. This “external” definition affects the REER through the wealth effect. A positive terms of trade shock induces an increase in the domestic demand, hence an increase in the relative price of non-tradable goods, which leads the REER to appreciate.24 An alternative “internal” concept of the terms of trade is the ratio of tradable to nontradable prices. An increase in the internal terms of trade leads to an increase in real wages in the export sector and a trade surplus. To restore external balance the REER must appreciate. Thus, both external and internal concepts of the terms of trade suggest a positive relationship between the terms of trade and the REER.
51. Openness to trade is proxied by total trade of goods and services as a share of GDP. More openness is typically associated with real exchange rate depreciation because increased exposure to international markets is expected to lower domestic prices. However, if changes in openness are dictated by changes in exports, more openness may capture positive effects of the improved trade balance or increased domestic activity, which would lead the REER to appreciate.
52. Investments in developing countries tend to have high import content and thus a direct negative impact on the trade balance. An increase in the investment as a share of GDP could shift spending toward tradable goods and thus lead the REER to depreciate.
53. An increase in government consumption as a share of GDP that is biased toward nontradables creates higher demand for them relative to tradables. This would raise the relative prices of nontradable goods, causing the REER to appreciate. On the other hand, if the increase in government consumption is biased toward the tradable sector, increased spending will cause the REER to depreciate.
54. Productivity is often proxied by real per capita GDP relative to the country’s trading partners. This captures the well-known Balassa-Samuelson effect. Countries with higher productivity growth in the tradable sector can sustain an REER appreciation without losing competitiveness. An increase in the productivity of the tradable versus the nontradable sector raises its relative wages. This increases the relative price of nontradables to tradables causing REER appreciation.25
Estimating techniques
55. The relatively short sample period presents challenges to estimating the EREER. The cointegration relationship cannot be reliably estimated unless it is limited to at most four potential EREER determinants. The short sample period of 27 years makes the variables’ order of integration uncertain, as it is well known that unit root tests for short samples perform very poorly. Thus, less independent variables should be used for reliable statistical inference.
56. To address the problem of short time series, this paper applies the bound testing approach and an Autoregressive Distributed Lag (ARDL) technique to estimate the regression model. The bound testing approach developed by Pesaran, Shin and Smith (1999) is used to estimate the long-run relationship between the fundamentals and the real effective exchange rate. As Chudik and Mongardini (2007) point out, this methodology is independent of whether the variables are stationary, integrated of order one, or a mixture of the two. Furthermore, small sample performance of the bound testing approach has been shown to be superior to the conventional Johansen cointegration approach.
57. The ARDL approach is used to estimate the long-run elasticities. This methodology has superior small sample performance and provides correct inference regardless of the order of cointegration of the variables (Pesaran and Shin, 1999). The ARDL approach is relatively simple compared with the Johansen cointegration technique. Once the existence of cointegration relationship has been established and the appropriate number of lags determined, the model can be estimated with OLS. The underlying model is a single equation ARDL, rather than a VAR as in the Johansen methodology, thus reducing the number of parameters to be estimated and improving efficiency in small samples (Pesaran, Shin and Smith, 2001).
D. Regression Results
58. In testing level relationships and estimating coefficients, we used five variables that have been documented as influencing the REER in the WAEMU region (terms of trade, trade openness, investment, government consumption, and productivity, all expressed in logs). We set the maximum lags to two for all of them. Using four regressors at a time regressions were estimated for all possible combinations.26 For each specification, the optimal lag structure is also determined through a search procedure. The best model consists of four fundamental variables: terms of trade, openness, government consumption, and productivity.
59. The result of the FEER model shows that fundamentals account for most of the fluctuation of the REER. In particular, movements in the terms of trade, trade openness, productivity and government consumption can explain most of the long run behavior of the REER. Thus, the REER at the end of 2006 was found to be very close to its estimated equilibrium level.27
60. The results are consistent with the predictions from economic theory and with earlier analysis except the sign of government consumption (Text Table II.1). The results suggest that the terms of trade are positively correlated with the REER indicating that an improvement in terms of trade would cause the long-run EREER to appreciate. In particular, a 1 percent increase in the terms of trade raises the EREER by 1 percentage point. Openness also has a positive effect on the EREER. Government consumption has a negative impact on the EREER suggesting that most government spending is directed towards imports—a somewhat counterintuitive result. Productivity is positively correlated with the EREER confirming the hypothesis that the EREER would appreciate with an improvement in productivity. A 1 percent increase in productivity raises the EREER by 0.6 percentage points. Overall, movements in the EREER have largely been driven by changes in the terms of trade, trade openness, the share of the government consumption in GDP, and productivity.
Burkina Faso: Estimated Coefficients, ARDL Approach, Best Model
(Dependent Variable: REER 1)
All variables in logarithms. Asterisks (**) denote statistically significant.
This approach tests for the existence of a level relationship using the F-test.
Burkina Faso: Estimated Coefficients, ARDL Approach, Best Model
(Dependent Variable: REER 1)
| Coefficient | Standard deviation | T-ratio | |
|---|---|---|---|
| Terms of trade | 1.016 | 0.23 | 4.45** |
| Openess | 0.255 | 0.11 | 2.25** |
| Government consumption | −0.447 | 0.14 | −3.26** |
| Productivity | 0.559 | 0.19 | 3.02** |
| Error correction coefficient | −0.518 | 0.08 | −6.17** |
| Half life (months) | 16.06 | … | … |
| F-statistics 2 | 10.96 | … | … |
All variables in logarithms. Asterisks (**) denote statistically significant.
This approach tests for the existence of a level relationship using the F-test.
Burkina Faso: Estimated Coefficients, ARDL Approach, Best Model
(Dependent Variable: REER 1)
| Coefficient | Standard deviation | T-ratio | |
|---|---|---|---|
| Terms of trade | 1.016 | 0.23 | 4.45** |
| Openess | 0.255 | 0.11 | 2.25** |
| Government consumption | −0.447 | 0.14 | −3.26** |
| Productivity | 0.559 | 0.19 | 3.02** |
| Error correction coefficient | −0.518 | 0.08 | −6.17** |
| Half life (months) | 16.06 | … | … |
| F-statistics 2 | 10.96 | … | … |
All variables in logarithms. Asterisks (**) denote statistically significant.
This approach tests for the existence of a level relationship using the F-test.
Burkina Faso: Long Run Estimates from Alternative Specifications of Lags
Burkina Faso: Long Run Estimates from Alternative Specifications of Lags
| ARDL model | Selection criteria | ARDL | Long-run coefficients and t-statistics (computed using delta method): | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| AIC | SBC | Rbar2 | specification | OPEN | GC | TOT | PROC | Error-Correction | |||||||
| Coef. | t-statistic | Coef. | t-statistic | Coef. | t-statistic | Coef. | t-statistic | Coef. | t-statistic | ||||||
| Best model according to AIC | |||||||||||||||
| 1 (best) | −1.93 | −1.55 | 0.97 | (1,0,0,1,1) | 0.26 | 2.25 | −0.45 | −3.26 | 1.02 | 4.45 | 0.56 | 3.02 | −0.52 | −6.17 | |
| 2 | −1.92 | −1.49 | 0.97 | (1,1,0,1,1) | 0.18 | 1.19 | −0.57 | −2.88 | 1.10 | 4.04 | 0.72 | 2.60 | −0.49 | −6.61 | |
| 3 | −1.89 | −1.46 | 0.97 | (2,0,0,1,1) | 0.23 | 2.10 | −0.47 | −3.54 | 1.07 | 4.54 | 0.52 | 2.79 | −0.59 | −6.66 | |
| 4 | −1.86 | −1.43 | 0.97 | (1,0,1,1,1) | 0.26 | 2.14 | −0.45 | −2.87 | 1.01 | 4.04 | 0.56 | 2.76 | −0.49 | −6.13 | |
| Best model according to SBC | |||||||||||||||
| 1 (best) | −1.93 | −1.55 | 0.97 | (1,0,0,1,1) | 0.26 | 2.25 | −0.45 | −3.26 | 1.02 | 4.45 | 0.56 | 3.02 | −0.52 | −6.17 | |
| 2 | −1.92 | −1.49 | 0.97 | (1,1,0,1,1) | 0.18 | 1.19 | −0.57 | −2.88 | 1.10 | 4.04 | 0.72 | 2.60 | −0.49 | −6.61 | |
| 3 | −1.85 | −1.47 | 0.96 | (1,1,0,1,0) | 0.02 | 0.10 | −0.77 | −3.48 | 1.28 | 3.83 | 0.83 | 2.40 | −0.42 | −5.54 | |
| 4 | −1.80 | −1.46 | 0.96 | (1,0,0,1,0) | 0.13 | 1.04 | −0.57 | −3.75 | 1.16 | 4.12 | 0.55 | 2.46 | −0.49 | −5.92 | |
| Best model according to Rbar2 | |||||||||||||||
| 1 (best) | −1.89 | −1.46 | 0.97 | (2,0,0,1,1) | 0.23 | 2.10 | −0.47 | −3.54 | 1.07 | 4.54 | 0.52 | 2.79 | −0.59 | −6.66 | |
| 2 | −1.92 | −1.49 | 0.97 | (1,1,0,1,1) | 0.18 | 1.19 | −0.57 | −2.88 | 1.10 | 4.04 | 0.72 | 2.60 | −0.49 | −6.61 | |
| 3 | −1.93 | −1.55 | 0.97 | (1,0,0,1,1) | 0.26 | 2.25 | −0.45 | −3.26 | 1.02 | 4.45 | 0.56 | 3.02 | −0.52 | −6.17 | |
| 4 | −1.84 | −1.36 | 0.97 | (2,1,0,1,1) | 0.18 | 1.20 | −0.56 | −2.75 | 1.09 | 4.19 | 0.62 | 2.32 | −0.56 | −6.54 | |
Burkina Faso: Long Run Estimates from Alternative Specifications of Lags
| ARDL model | Selection criteria | ARDL | Long-run coefficients and t-statistics (computed using delta method): | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| AIC | SBC | Rbar2 | specification | OPEN | GC | TOT | PROC | Error-Correction | |||||||
| Coef. | t-statistic | Coef. | t-statistic | Coef. | t-statistic | Coef. | t-statistic | Coef. | t-statistic | ||||||
| Best model according to AIC | |||||||||||||||
| 1 (best) | −1.93 | −1.55 | 0.97 | (1,0,0,1,1) | 0.26 | 2.25 | −0.45 | −3.26 | 1.02 | 4.45 | 0.56 | 3.02 | −0.52 | −6.17 | |
| 2 | −1.92 | −1.49 | 0.97 | (1,1,0,1,1) | 0.18 | 1.19 | −0.57 | −2.88 | 1.10 | 4.04 | 0.72 | 2.60 | −0.49 | −6.61 | |
| 3 | −1.89 | −1.46 | 0.97 | (2,0,0,1,1) | 0.23 | 2.10 | −0.47 | −3.54 | 1.07 | 4.54 | 0.52 | 2.79 | −0.59 | −6.66 | |
| 4 | −1.86 | −1.43 | 0.97 | (1,0,1,1,1) | 0.26 | 2.14 | −0.45 | −2.87 | 1.01 | 4.04 | 0.56 | 2.76 | −0.49 | −6.13 | |
| Best model according to SBC | |||||||||||||||
| 1 (best) | −1.93 | −1.55 | 0.97 | (1,0,0,1,1) | 0.26 | 2.25 | −0.45 | −3.26 | 1.02 | 4.45 | 0.56 | 3.02 | −0.52 | −6.17 | |
| 2 | −1.92 | −1.49 | 0.97 | (1,1,0,1,1) | 0.18 | 1.19 | −0.57 | −2.88 | 1.10 | 4.04 | 0.72 | 2.60 | −0.49 | −6.61 | |
| 3 | −1.85 | −1.47 | 0.96 | (1,1,0,1,0) | 0.02 | 0.10 | −0.77 | −3.48 | 1.28 | 3.83 | 0.83 | 2.40 | −0.42 | −5.54 | |
| 4 | −1.80 | −1.46 | 0.96 | (1,0,0,1,0) | 0.13 | 1.04 | −0.57 | −3.75 | 1.16 | 4.12 | 0.55 | 2.46 | −0.49 | −5.92 | |
| Best model according to Rbar2 | |||||||||||||||
| 1 (best) | −1.89 | −1.46 | 0.97 | (2,0,0,1,1) | 0.23 | 2.10 | −0.47 | −3.54 | 1.07 | 4.54 | 0.52 | 2.79 | −0.59 | −6.66 | |
| 2 | −1.92 | −1.49 | 0.97 | (1,1,0,1,1) | 0.18 | 1.19 | −0.57 | −2.88 | 1.10 | 4.04 | 0.72 | 2.60 | −0.49 | −6.61 | |
| 3 | −1.93 | −1.55 | 0.97 | (1,0,0,1,1) | 0.26 | 2.25 | −0.45 | −3.26 | 1.02 | 4.45 | 0.56 | 3.02 | −0.52 | −6.17 | |
| 4 | −1.84 | −1.36 | 0.97 | (2,1,0,1,1) | 0.18 | 1.20 | −0.56 | −2.75 | 1.09 | 4.19 | 0.62 | 2.32 | −0.56 | −6.54 | |
61. The estimated long-run relationship between the REER and its determinants allows us to derive estimates of the EREER from the best model. In principle, this involves applying the long-run elasticities to the actual values of the macroeconomic fundamentals in a given period to obtain a consistent long-run equilibrium value for the REER. However, the explanatory variables may exhibit a substantial degree of short-term response to business cycle fluctuations, whereas the long-run equilibrium REER should not do so. Thus, some amount of smoothing may seem appropriate. We present the actual and smoothed EREER in Figure II.3.
Burkina Faso: REER and EREER Estimates, 1980–2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.Burkina Faso: REER and EREER Estimates, 1980–2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.Burkina Faso: REER and EREER Estimates, 1980–2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.62. We estimate that at the end of 2006 the REER was close to its equilibrium level. Its appreciation in the 1980 led to an overvaluation of the exchange rate until 1988. The REER, according to our analysis was slightly undervalued before the CFA devaluation in 1994. Most analysts believe, however, that the REER was overvalued before the 1994 devaluation. According to our analysis, the devaluation led to an undervaluation which persisted until 1998. The recent appreciation of the REER can be seen as a move toward its long-run equilibrium value.
63. In the absence of further shocks, about half of any given deviations from the equilibrium path are eliminated within one year and four months. When there is a deviation from the long-run equilibrium the variables respond together to move the system back to equilibrium (Figure II.4). The error-correction coefficient is negative and statistically significant suggesting that the error-correction mechanism is stable.
Burkina Faso: Misalignment Estimates, 1980-2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.Burkina Faso: Misalignment Estimates, 1980-2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.Burkina Faso: Misalignment Estimates, 1980-2006
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.64. To test the robustness of our estimated results we apply the Johansen cointegration approach on the best model. The results also suggest that the long-run behavior of the REER can be explained by fundamentals—terms of trade, trade openness, government consumption, and productivity. The feedback coefficient for the cointegrating vectors for the Johansen method, though negative, is not significantly different from zero, suggesting that the error-correction mechanism is unstable. The Johansen cointegration approach suggest a slight overvaluation of the REER of about 3 percent in 2006, but the instability of the error-correction mechanism cast doubts on the reliability of this result, which in any case is not significantly different from the ARDL approach.
65. Estimates for the equilibrium REER for Burkina Faso are not absolute, but are subject to statistical uncertainty and conditioned on the estimated regression model. Small deviations from the estimated equilibrium values may well be statistically insignificant. Furthermore, estimation of alternative equilibrium REER models may lead to different conclusions about the evolution of the REER relative to its equilibrium values. This calls for caution when using the results from this study in choosing policies and underlines the need for further research. However, it does appear that Burkina Faso has lost competitiveness after 2003, a period when the EREER was depreciating, whereas the REER was appreciating. The developments of the REER during 2007 linked to the appreciation of the euro suggest that this tendency might have continued recently.
E. Other Approaches to Assessing External Sustainability
66. External equilibrium could also be considered attained when the current account balance is judged sustainable. Conceptually, the EREER is defined as the exchange rate that is compatible with the economy simultaneously at internal and external equilibrium. Operationally it is very difficult to define precisely what constitutes internal and external equilibrium. In this section, external equilibrium is defined as being attained when the current account balance is considered sustainable.28
67. Two approaches are normally used to determine what constitutes a sustainable current account balance. The macroeconomic balance approach considers external sustainability to be a current account balance norm that is consistent with economic fundamentals. This approach first determines a current account balance norm for each country as a function of its medium-term fundamentals. Then the norm is compared to the current account balance in the country, and the adjustment of REER that is necessary to align the current account balance to its norm is calculated.29 The external sustainability approach considers external stability to be the current account balance that can stabilize net foreign assets at some benchmark value. This approach look at the inter-temporal budget constraint linking the current account balance with net foreign assets, the economic growth rate, and the rate of return on external assets.
68. The large current account deficits in past years may point to an external imbalance, but the evidence is ambiguous. The economy seems to be suffering from a chronic external imbalance: the current account deficit as a share of GDP has been widening in recent years (Figure II.5). This reflects a narrow export base and an increase in the savings-investment gap. The current account deficit including official transfers averaged 10 percent of GDP for 2002-06. If that deficit were maintained over the long term and financed entirely through borrowing, the net present value (NPV) of debt-to-exports ratio would exceed 600 percent by 2025. That would clearly be unsustainable.
Burkina Faso: Current Account Balance (Including Grants), 1990-2006
(Percent of GDP)
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.Burkina Faso: Current Account Balance (Including Grants), 1990-2006
(Percent of GDP)
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.Burkina Faso: Current Account Balance (Including Grants), 1990-2006
(Percent of GDP)
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: IMF staff estimates.69. However, the current account deficit of the past five years was only partially financed through borrowing. Only about 3.5 percent of GDP of the 10 percentage point deficit was financed using borrowing. This amount does not particularly threaten debt sustainability, and is consistent with baseline borrowing projections. Still, with more conservative assumptions about private sector inflows, annual net borrowing of 5.5 percent of GDP would be necessary to keep the current account deficit at 10 percent of GDP. That is too high to stabilize the NPV of debt-to-exports ratio at a reasonable level. To do so the current account deficit should probably be not much larger than 7.5 percent of GDP—using conservative assumptions for private sector inflows—and would require further adjustment.
70. The reduction in the current account deficit required to meet this norm of external balance over time could result from tighter fiscal policy and/or private-sector adjustment.30 Assuming that fiscal policies shrink the current account deficit by 1 percent of GDP, the required private-sector contribution to reducing the current account deficit would be approximately 1.5 percent of GDP. If this were to be achieved through a change in the real exchange rate, a real depreciation of about 15 percent may be necessary because of Burkina Faso’s relatively low openness and its dependence on commodity exports.
F. Survey Based Indicators of Overall Competitiveness
71. For a comprehensive picture of a country’s general competitiveness, it is important to consider the long-term aspects of structural competitiveness. To complement the analysis of the REER we employ survey-based indicators of structural competitiveness: the Global Competitiveness Index and the Doing Business Indicators. We complement these with indicators of governance quality and an investment climate assessment.31
The Global Competitiveness Index
72. Burkina Faso is ranked among the least competitive countries in the world. The World Economic Forum assessment shows that Burkina Faso did improve its ranking from 116 out of 122 in 2006 to 112 out of 131 in the 2007 Global Competitiveness Index (Text Table II.2). But it compares poorly even with other WAEMU countries; only Mali did worse in the 2007 rankings. Burkina Faso also ranks poorly in the basic requirements sub-index (112 out of 131), which attempts to measure the fundamentals for achieving sustained growth in factor-driven economies. However, relative to its overall rank, Burkina Faso does well on macroeconomic stability (68); institutions (74); and market efficiency (89).
Burkina Faso: Indicators of Non-Price Competitiveness, 2006-07
Burkina Faso: Indicators of Non-Price Competitiveness, 2006-07
| Doing Business 2006 | Indicators 2007 | Global Competitiveness 2006 | Index 2007 | ||
|---|---|---|---|---|---|
| Overall ranking | 163 | 161 | Overall ranking | 116 | 112 |
| Starting a business | 130 | 105 | Health and primary education | 124 | 125 |
| Dealing with licenses | 169 | 161 | Higher education and training | 116 | 125 |
| Employing workers | 151 | 152 | Macroeconomy | 116 | 68 |
| Registering property | 170 | 170 | Infrastructure | 110 | 111 |
| Getting credits | 111 | 115 | Technological readiness | 103 | 116 |
| Protecting investors | 139 | 138 | Business sophistication | 98 | 100 |
| Paying taxes | 131 | 133 | Market efficiency | 87 | 89 |
| Trading across borders | 167 | 170 | Innovation | 69 | 90 |
| Enforcing contracts | 114 | 109 | Institutions | 62 | 74 |
| Closing a business | 90 | 91 | |||
| Number of countries | 175 | 178 | 128 | 131 |
Burkina Faso: Indicators of Non-Price Competitiveness, 2006-07
| Doing Business 2006 | Indicators 2007 | Global Competitiveness 2006 | Index 2007 | ||
|---|---|---|---|---|---|
| Overall ranking | 163 | 161 | Overall ranking | 116 | 112 |
| Starting a business | 130 | 105 | Health and primary education | 124 | 125 |
| Dealing with licenses | 169 | 161 | Higher education and training | 116 | 125 |
| Employing workers | 151 | 152 | Macroeconomy | 116 | 68 |
| Registering property | 170 | 170 | Infrastructure | 110 | 111 |
| Getting credits | 111 | 115 | Technological readiness | 103 | 116 |
| Protecting investors | 139 | 138 | Business sophistication | 98 | 100 |
| Paying taxes | 131 | 133 | Market efficiency | 87 | 89 |
| Trading across borders | 167 | 170 | Innovation | 69 | 90 |
| Enforcing contracts | 114 | 109 | Institutions | 62 | 74 |
| Closing a business | 90 | 91 | |||
| Number of countries | 175 | 178 | 128 | 131 |
The Doing Business Indicators
73. On the World Bank’s Doing Business Indicators Burkina Faso improved its rankings from 154 out of 154 in 2005 to 161 out of 178 economies in 2007. Burkina Faso was one of the countries in Sub-Saharan Africa to have implemented three or more reforms in 2007. The country implemented three reforms making it easier for entrepreneurs and businesses to operate:
It introduced specialized commercial chambers in the general courts and lowered the cost of enforcing a judgment by cutting the related registration tax from 4 to 2 percent of the judgment amount.
It reduced the cost of property registration to 12.2 percent of the property value.
A one-stop shop for company registration cut the time for business start-up to 18 days.
74. Other areas in particular need of improvements to improve competitiveness and stimulate economic growth are the costs and delays in opening a business, dealing with licenses, protecting investors, registering property, and labor market restrictions (Figure II.6).
Burkina Faso: Doing Business Indicators, 2007
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: World Bank, Doing Business Indicators, 2007.Burkina Faso: Doing Business Indicators, 2007
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: World Bank, Doing Business Indicators, 2007.Burkina Faso: Doing Business Indicators, 2007
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Source: World Bank, Doing Business Indicators, 2007.Indicators of governance quality
75. Burkina Faso ranks relatively well on many indicators of the quality of governance and corruption even though it has seen its rankings fall recently. In the 2007 edition of Transparency International’s Corruption Perception Index (CPI), Burkina Faso dropped 26 places from 79 out of 163 in 2006 to 105 out of 179 countries in 2007 (Figure II.7). Its score declined from 3.2 in 2006 to 2.9 in 2007. Nevertheless, Burkina Faso is currently ranked the same as Argentina and Egypt and higher than most African countries (17 out of 52). Like most other countries in Africa, it scored below 5—commonly seen as the threshold for serious corruption. Still, caution is needed in interpreting the decline in the CPI score because it may partly be due to technical factors like the inclusion of a new survey. Also, the confidence interval for the 2007 score is relatively wide, ranging from 2.6 to 3.4, which encompasses the better 2006 score.
Burkina Faso: Governance Indicators
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Sources: World Bank, Transparency International, PRS Group, Heritage Foundation.Burkina Faso: Governance Indicators
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Sources: World Bank, Transparency International, PRS Group, Heritage Foundation.Burkina Faso: Governance Indicators
Citation: IMF Staff Country Reports 2008, 169; 10.5089/9781451803952.002.A002
Sources: World Bank, Transparency International, PRS Group, Heritage Foundation.
76. Burkina Faso compares favorably with other WAEMU countries on the World Bank’s Governance Indicators. On the broad-based World Bank governance indicators—these cover government effectiveness, corruption, voice and accountability, and more—Burkina Faso ranks above the average for WAEMU, Sub-Saharan Africa as a whole, and other low-income countries. It does relatively well on the rule of law, regulatory quality, and control of corruption. Regarding the control of corruption, Burkina Faso’s good Performance is confirmed by multiple sources. Nevertheless, improvement in most indicators has been limited in recent years and there has even been some slippage with respect to control of corruption.
Investment climate assessment
77. A World Bank survey of enterprises shows that from an international perspective the investment climate in Burkina is not favorable to the private sector, which is subject to many constraints. The most striking are linked to corruption (perceived as high), inconsistency in the application of regulations; an inefficient judiciary, poor infrastructure, a relatively heavy tax burden, and problems with access to and the costs of finance.
78. Corruption is a major concern for private sector development. It is a major concern for almost 57 percent of the entrepreneurs in the formal sector and is perceived as a binding constraint to operations for mangers of firms surveyed in other sectors of the economy.
79. Deficiencies in infrastructure are a significant burden on the private sector. Problems linked to the supply of electricity and to transportation are major issues for 62 percent of firms surveyed. They have a heavy impact on firm performance; almost 5 percent of manufacturing firm annual turnover is lost due to electricity shortages.
80. The investment climate assessment found weaknesses in factor markets. Serious constraints in the formal labor market are a poorly educated workforce, inadequate professional training programs, and losses from absenteeism due to ill health. The financial system is characterized by limited access to and a high cost of finance. Many companies particularly among the smallest, do not even try to obtain formal financing, which is mainly determined by the size of the company, the use of auditor to certify accounts, the ownership structure, and access to export markets.
81. Regulation is poor. Managers have little confidence in the consistency of regulation and in the court system. Almost 63 percent of the managers of manufacturing firms surveyed consider the courts to be unfair, biased, and corrupted. Moreover, managers in some sectors must spend nearly 10 percent of their time dealing with administrative issues.
G. Summary and Conclusions
82. This paper has evaluated Burkina Faso’s competitiveness using the REER and survey-based assessment of competitiveness. The paper followed the FEER approach in assessing whether the REER is aligned with economic fundamentals in Burkina Faso. It also assesses external balance by looking at a sustainable current account position. In addition, we used survey-based measures of competitiveness to analyze competitiveness more broadly over the long term.
83. Regression results do not provide any significant evidence of misalignment. Using the ARDL approach to cointegration, we find that hat fundamentals account for most of the fluctuation of the REER. In particular, much of the long-run behavior of the REER can be explained by fluctuations in the terms of trade, government consumption, productivity, and openness. On the basis of these fundamentals, the REER at the end of 2006 was found to be close to its estimated equilibrium level. The results also suggest that in the absence of further shocks about half of the deviations from the equilibrium path are eliminated within 16 months. The recent real appreciation of the CFA exchange rate could be seen as a move toward aligning the exchange rate with its underlying long-run equilibrium value. However, the fact that the equilibrium REER depreciated after 2003, while the actual REER appreciated suggests a loss of competitiveness, which probably continued in 2007.
84. The sustainability of the external current account position provides some evidence of real overvaluation. The present size of the current account deficit appears to large to be sustained over the longer run, and a real depreciation of the exchange rate could contribute to reducing the current account deficit to a more sustainable level. Burkina Faso’s membership in WAEMU implies that there is ample access to foreign exchange to finance its balance-of-payment needs.
85. The analysis of the survey-based indicators of competitiveness suggests the need for continued structural reforms to improve competitiveness. The major indexes rank Burkina Faso among the least competitive countries in the world, even though it has improved its ranking. Firm level surveys identified corruption, inadequate access to finance, poor infrastructure, inadequate educated workforce, and weak regulation as the major constraints to private sector development.
86. The government is aware of these challenges and there are a number of efforts underway to address them. Investments in utilities and infrastructure are planned. There are ongoing reforms to improve tax administration and increase revenue performance. The government has created a new institution for oversight and control of corruption. The newly formed Autorité Supérieure de Contrôle d’État (ASCE) will investigate government agencies and monitor the work of audit offices. The authorities are also working with the World Bank to improve private sector competitiveness. It is clear from our analysis that it is particularly urgent to improve the government’s interface with the business community. Boosting basic and advanced education and training, improving infrastructure, improving regulation, and increasing labor market flexibility should be high on the agenda.
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Prepared by Charles Amo Yartey, Jian Guang Shen, and Jan Gottschalk.
The averaging problem is also relevant for the single country estimators. This methodology implicitly assumes that the EREER was equal to the actual REER during the sample period, which might not be the case.
Other variables such as aid inflows, workers remittances, and capital inflows have been documented as influencing the EREER. We do not include them in analysis due to data limitation and the short time series.
We limit the period of analysis to 1980-2006 because the quality of pre-1980 data for Burkina Faso is poor.
Following the IMF convention, an increase in the REER is defined as an appreciation.
The variable could suffer from measurement problems for a number of reasons. First, the proxy is a rather different concept from the original variable that captures the Balassa-Samuelson effect. Second, the proxy is sensitive to exchange rate movement and thus prone to endogeneity problems. Third, the variable is sensitive to the selection of trade partners and the year on which the weights were based.
This significantly increases the reliability of our choice of the best model. Regressions were estimated with the help of an econometric template developed by Chudik and Mongardini (2007).
Many analysts believe that the 1994 CFA devaluation should be considered a structural break. There is, however, no consensus in the literature about how to correct for structural breaks.
The evolution of exports as a share of world exports is an alternative measure for assessing external imbalances. In Burkina Faso, this ratio has been relatively stable over the past 10 years; however, this might not be a reliable indicator because cotton production was shielded from the movements in the RER.
Under this approach, it is vital to calculate the export and import elasticity with regards to REER. The elasticity of current account balance to REER also reflects the degree of openness.
The present level of the current account deficit does not pose a significant problem, because Burkina Faso’s membership in the WAEMU currency union implies ample access to foreign exchange to finance its balance-of-payment needs.
There are substantial caveats related to the methodology of the survey-based indicators of competitiveness. These studies ignore differences in the level of development among countries. Developed countries by nature have superior institutions, infrastructures and innovative capability than developing countries and are likely to be ranked higher than developing countries. The Global Competitiveness Index is closely correlated with GDP per capita.
