Burkina Faso
Staff Report for 2009 Article IV Consultation, Fifth Review Under the Poverty Reduction and Growth Facility, and Requests for Augmentation of Access and Modification of Performance Criteria

In 2008–09, economic activity in Burkina Faso was negatively affected by the increase in global food and fuel prices, the global economic and financial crisis, and heavy flooding in Ouagadougou in September 2009. These shocks are estimated to have contributed to a deterioration in poverty indicators. Spending on emergency and humanitarian needs rose after the 2009 flooding. Fiscal stimulus measures were also adopted to support economic activity. Executive Directors have welcomed the authorities’ resolve to enhance revenue performance and expenditure management while unwinding exceptional expenditure generated by adverse exogenous shocks.

Abstract

In 2008–09, economic activity in Burkina Faso was negatively affected by the increase in global food and fuel prices, the global economic and financial crisis, and heavy flooding in Ouagadougou in September 2009. These shocks are estimated to have contributed to a deterioration in poverty indicators. Spending on emergency and humanitarian needs rose after the 2009 flooding. Fiscal stimulus measures were also adopted to support economic activity. Executive Directors have welcomed the authorities’ resolve to enhance revenue performance and expenditure management while unwinding exceptional expenditure generated by adverse exogenous shocks.

I. Introduction

1. The Executive Board approved Burkina Faso’s PRGF-supported program on April 23, 2007, in an amount of SDR 6.02 million, equivalent to 10 percent of quota. On January 9, 2008, the Board approved an access augmentation of 15 percent of quota, to help Burkina Faso address the impact of exogenous shocks in 2007–08. Reform and policy implementation have been solid, despite some delays in structural reforms; and all reviews have been completed as scheduled.

2. The policy dialogue between Fund staff and the authorities is excellent. The authorities have generally agreed with Fund advice and responded favorably to technical assistance recommendations. Progress in implementing the Fund’s 2007 surveillance advice was generally satisfactory (Box 1).

3. Despite a difficult environment in 2009, the authorities implemented the program consistently with the objectives. All quantitative benchmarks and performance criteria at end-June were observed, and all structural benchmarks through September were met except for one that was delayed to mid-October.

4. In the attached Letter of Intent, the authorities are requesting the completion of the fifth PRGF review, and an augmentation of access equivalent to 55 percent of quota to cope with the impact of exogenous shocks that affected the economy in 2008–09. They are also seeking a modification of the performance criterion on the overall deficit for December 2009.

II. Background

5. Economic activity slowed in 2009, mainly reflecting the impact of the global economic downturn, particularly on the cotton sector and related activities. A sustained output level in agriculture and the expected doubling of gold production would support growth, forecast at 3.1 percent (Table 1, Figure 1).

Figure 1.
Figure 1.

Recent Economic Developments, 2004-09

Citation: IMF Staff Country Reports 2010, 007; 10.5089/9781451804010.002.A001

Sources: Burkinabè authorities and IMF staff estimates.
Table 1.

Burkina Faso: Selected Economic and Financial Indicators, 2007−11

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Sources: Burkinaè authorities, and IMF staff estimates.

IMF Country Report 09/222.

Percent of beginning-of-period broad money.

6. The increase in global food and fuel prices, the global economic and financial crisis, and heavy flooding in September 2009 affected the population’s welfare. In particular, the flooding left many households homeless, and made their living conditions more precarious (Box 2). The World Bank estimated that because of the food and energy crisis of 2008, the incidence of poverty rose from 42 percent in 2006 to over 46 percent in 2008. The impact of the global crisis on the cotton sector affected several portions of the population whose livelihood depends on cotton production.

7. The political and social situation is calm. The next presidential election is scheduled for late 2010.

Burkina Faso: Status of Policy Recommendations From the 2007 Article IV Consultation

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Impact of Flooding in Ouagadougou

On September 1, 2009, there was exceptionally heavy rainfall in the capital city of Ouagadougou that caused flooding, casualties, and left some 180,000 people homeless. The impact on infrastructure was significant:

  • Twelve bridges were damaged, and several roads were partially destroyed.

  • The main hospital was flooded, destroying expensive and critical bio-medical equipment.

  • Government buildings were damaged, office equipment was lost, and an important storage facility for agriculture seeds was destroyed.

  • Some 24,000 private houses were destroyed, and about 1,360 small agricultural producers lost their crops and reserves.

Macroeconomic impact

The impact on growth should be limited because agricultural production and the road network outside Ouagadougou were unaffected. However, the fiscal impact is substantial because of higher expenditure to cover the cost of temporary housing and basic necessities and the rapid restoration of key infrastructure.

Costing and financing

The impact of the flooding is estimated at some CFAF 82 billion (2 percent of GDP). The authorities have allocated CFAF 26 billion in the 2009 Supplementary Budget and CFAF 18 billion in the 2010 Budget to address humanitarian, relocation, and reconstruction needs. A thorough costing will be carried out in the next few weeks, with assistance from the World Bank. The authorities hope to mobilize financing from donors, which has been limited so far.

8. Inflation declined in 2009 mostly because of a good harvest, and the decline in global food and fuel prices, easing pressure on the real effective exchange rate (REER). The average 12-month inflation rate stood at 5.3 percent in September, compared to 8.5 percent in 2008. In recent months price developments also benefited from the freeze in fuel retail prices. Inflation is expected to slow to less than 3 percent by year-end. This would reduce pressure on the REER, which appreciated in 2008 because Burkina Faso’s inflation was high compared to its trading partners and the Euro appreciated against the US Dollar (Figure 2). Although quantitative analysis indicates that the REER is broadly in line with fundamentals, non-price factors continue to weigh on Burkina Faso’s competitiveness, underlining the need for continued structural reforms (Box 3).

Figure 2.
Figure 2.

Competitiveness and Real Effective Exchange Rate

Citation: IMF Staff Country Reports 2010, 007; 10.5089/9781451804010.002.A001

Sources: Burkinabè authorities and IMF staff estimates.

9. The external position deteriorated in 2008 mostly because of the rise in global oil and food prices. The current account deficit widened to almost 12 percent of GDP as imports surged and terms of trade deteriorated. Estimates for 2009 point to an improvement supported by the decline in oil prices for the major part of the year, and a significant rise in gold exports. The current account deficit would decline to 9 percent, which is still above the pre-crisis level of about 8 percent. Terms of trade should improve in 2009, as gold prices continue to be strong and cotton prices recover (Table 2).

Table 2.

Burkina Faso: Balance of Payments, 2008–14

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Sources: Burkinaè authorities and IMF staff estimates.

IMF Country Report 09/222.

To be covered by PRGF and other disbursements.

Competitiveness and Real Effective Exchange Rate Assessment

A quantitative assessment of the REER using the Equilibrium Real Exchange Rate and the External Sustainability methodologies found the REER to be broadly in line with fundamentals. This is consistent with the most recent assessment for WAEMU. Nonetheless, other indicators show that non-price factors hamper competitiveness, suggesting the need for structural reforms to support private sector development.

Equilibrium Real Exchange Rate Approach: The equilibrium REER was modeled as a function of a set of fundamental factors: terms of trade, trade openness, government consumption and productivity. The bound testing approach and an Autoregressive Distributed Lag technique were used with data for 1980–2009 to estimate the equilibrium REER (EREER). The results show that 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. Based on these fundamentals, the REER was found to be close to equilibrium, with an overvaluation in the range of 0-4 percent.

External Sustainability Approach: This approach, which estimates the current account balance that can stabilize net foreign assets at a given benchmark level found that the “stabilizing” current account deficit is between 6.5 and 8.6 percent of GDP. The current account deficit including official transfers averaged 10 percent of GDP for 2003–08, which would indicate that the REER is not significantly misaligned.

Business Climate: Assessments of competitiveness compiled by the World Economic Forum suggest that Burkina Faso dropped a few places from 112 in 2008 to 127 out of 134 in 2009 under the Global Competitiveness Index. Firm level surveys identify inadequate access to finance, poor infrastructure, an unskilled workforce, and weak regulation as major constraints to private sector development. Compared to Burkina Faso’s good performance on the Doing Business indicators, these results underline the need for further progress to create a business-friendly environment.

10. Fiscal performance in the first half of 2009 was mixed. Revenue was below target because tax revenue was negatively affected by the economic slowdown. Current expenditure was slightly above target, mostly because of higher wages and transfer payments. However, capital expenditure was lower than anticipated due to administrative delays linked to the strengthening of public procurement procedures. The overall budget deficit (excluding grants) stood at 3.8 percent of GDP through June 2009, compared to a full-year deficit of 5.1 percent in the program (Table 3).

Table 3.

Burkina Faso: Consolidated Operations of the Central Government, 2008–14

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Sources: Burkinabè authorities, and IMF staff estimates.

IMF Country Report 09/222

Commitment (“engagement”) basis

To be covered by PRGF and other disbursements.

11. Money supply accelerated in the first half of the year as net foreign assets increased. The government position in the banking system stabilized, partly reflecting the increased use of the regional market to finance the budget. Credit to the economy slowed, in line with low economic activity. In the second quarter of 2009, total credit to the economy declined because of the reclassification of doubtful loans as nonperforming, following the takeover of a commercial bank. This contributed to the rise in the NPL ratio to 9 percent (Text Table 1). Credit to the economy is forecast to increase by 3.2 percent, compared to 14 percent in 2008 (Table 4).

Text Table 1.

Burkina Faso:Financial Soundness Indicators (2007-2009)

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Source: BCEAO and staff estimates

Burkina Faso currenlty has 12 banks