Burkina Faso: Joint IMF/World Bank Debt Sustainability Analysis 2010
Author: International Monetary Fund
Publication Date:
08 Jul 2010
eISBN:
9781455207510
Language:
English
Keywords:
ISCR; CR; debt; real GDP; poverty reduction effort; ECF arrangement; reform agenda; creating flow; debt indicator; sustainability framework; grant financing; service-to-revenue ratio; Public and publicly-guaranteed external debt; Debt sustainability; Debt sustainability analysis
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Performance under the last ECF-supported program was broadly satisfactory. The government has prepared a medium-term policy framework to consolidate recent progress, and enhance growth prospects and poverty reduction efforts. Burkina Faso’s risk of debt distress is high. Executive Directors suggest maintaining prudent borrowing policies. There are risks to the program, mostly linked to the economy’s vulnerability to weather related and terms-of-trade shocks. Burkina Faso has a good track record of policy and reform implementation in areas critical for macroeconomic stability and growth.

Abstract

Performance under the last ECF-supported program was broadly satisfactory. The government has prepared a medium-term policy framework to consolidate recent progress, and enhance growth prospects and poverty reduction efforts. Burkina Faso’s risk of debt distress is high. Executive Directors suggest maintaining prudent borrowing policies. There are risks to the program, mostly linked to the economy’s vulnerability to weather related and terms-of-trade shocks. Burkina Faso has a good track record of policy and reform implementation in areas critical for macroeconomic stability and growth.

I. Background

1. The analysis presented in this document is based on Burkina Faso’s stock of debt at end-2009. Financing from multilateral creditors account for about 80 percent of the stock of debt outstanding at end-2009. Burkina Faso’s loans have long maturities, with an overall grant element of about 40 percent. Furthermore, grants amounted to 64 percent of financing in 2009.

Figure 1.
Figure 1.

External Debt Composition End-2009

Citation: IMF Staff Country Reports 2010, 197; 10.5089/9781455207510.002.A003

2. The government has consistently demonstrated its commitment to stay current on its external payment obligations, including during the pre-HIPC period, when the PV of debt-to-exports ratio was well above 200 percent, and the debt-service-to-exports ratio close to 25 percent. The 35 percent grant element is strictly enforced for all central-government foreign-currency borrowings, and projects are consistently scrutinized by a National Public Debt Committee before negotiations are concluded.

3. The assumptions used for this analysis are broadly comparable to those of the previous joint DSA. They are outlined in Box 2 below. Compared to the macroeconomic assumptions described in the June 2009 document, the main changes relate to: (i) a more positive growth and export outlook; and (ii) stronger fiscal consolidation. The stronger growth and export outlook is driven by the sharp increase in gold mining activities in the near term and, in the medium and long term, by the authorities’ accelerated growth strategy, which will notably focus on infrastructure investments and faster diversification of agricultural output. Stronger fiscal consolidation will stem from the stabilization of expenditures and, on the revenue side, from: (i) the implementation of the recently adopted tax reform strategy; (ii) greater efficiency in revenue collection from the Tax and Customs Directorates; and (iii) continued efforts to enlarge the tax base through census activities that will help reduce the size of the informal sector. Taken together, these changes lead to a moderate improvement in Burkina Faso’s debt indicators over the long run.

Changes from the June 2009 Joint DSA

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Source: Country authorities; and staff estimates and projections.

Underlying Macroeconomic Assumptions

The outlook for growth assumes a return to pre-crisis trends in the medium-term and a clear upward trend for the long term. Because of recent shocks, including drought, higher prices for imported commodities, reduced global demand for cotton, and the 2009 floods, real GDP growth has been lackluster since 2007, averaging about 4 percent annually during the last three years. Projections for the medium-term point to a gradual return to the annual average of 6 percent observed between 1997 and 2006 and an increase to 6.5 percent by 2014. This outlook is supported by the expected increase in mining activities, higher agricultural production, an increase in public investment from 2009 onwards, and further improvement in the business environment. Inflation should remain below 3 during the projection period.

uA03fig02

Composition of exports, 2006—30

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 197; 10.5089/9781455207510.002.A003

Fiscal developments over the medium term reflect the authorities’ commitment to a prudent fiscal policy and macroeconomic stability. Following an increase in expenditure in 2009 and 2010 to cope with the impact of external shocks and support economic recovery, the authorities plan to gradually withdraw the fiscal stimulus and consolidate the fiscal position through revenue-enhancing measures and expenditure restraint. They intend to boost revenue performance through administrative measures that would generate efficiency gains and implementation of the newly adopted tax strategy. Tax revenue is expected to increase from 12.5 percent of GDP in 2009 to 17.0 percent by 2020, and 20.2 percent by 2030. Total expenditure would stabilize around 24 percent of GDP over the long run thanks to a prudent wage policy, a better targeting of investment spending, and enhanced control of non-priority spending.

uA03fig03

Fiscal Developments, 2006—30

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 197; 10.5089/9781455207510.002.A003

The current account deficit is expected to narrow in the medium and long run. Export growth is driven by the projected increase in gold exports from 2010 onwards and, in the long- term by efforts to diversify away from cotton. The authorities have pointed to prospects for exports to neighboring countries for fruits, vegetables, and cereals. The current account deficit (excluding grants) is projected to narrow from about 13 percent of GDP in 2010 to 7 percent in 2020, and 4.5 percent in 2030. A more pronounced improvement in Burkina Faso’s external position could result from faster realization of the country’s mining potential. Exploration activities are under way for zinc and manganese in particular. To maintain prudent assumptions, the potential output from prospective mining activities have not been incorporated into the DSA projections.

uA03fig04

Current Account, Exports, and Imports, 2006—30

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 197; 10.5089/9781455207510.002.A003

Sources: Country authorities and staff estimates and projections.

II. External Debt Sustainability Analysis

4. Under the baseline scenario, all but one of the external debt and debt service ratios remain below the policy-dependent thresholds throughout the projection period (Figure 3). The PV of debt-to-exports ratio breaches the indicative threshold of 150 percent for medium performers, elevating the risk of debt distress for Burkina Faso. The ratio increases over the medium term mainly because of the sustained level of the public investment program, and the decline in the share of grant financing with the final grant disbursement under the Millennium Challenge Account in 2013. It reaches 154 percent in 2015 and peaks at 180 percent in 2022, before declining to 135 percent in 2030 as the improvement in the fiscal position and export diversification efforts start to affect the debt dynamics. Other debt indicators deteriorate in the short and medium term, but stay comfortably below their indicative thresholds.

Figure 2.
Figure 2.

Burkina Faso: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2010, 197; 10.5089/9781455207510.002.A003

Sources: Country authorities; and staff esytimates and projections.a Country Specific Scenario shock; in c. to a Country Specific Scenario shock; in d. to a Country Specific Scenario shock; in e. to a Country Specific Scenario shock and in figure f. to a Country Specific Scenario shock
Figure 3.
Figure 3.

Burkina Faso: Indicators of Public Debt Under Alternative Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2010, 197; 10.5089/9781455207510.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020.2/ Revenues are defined inclusive of grants.

5. The rate of external debt accumulation under the baseline scenario declines steadily over time, in line with fiscal consolidation. 4 While the PV of public external debt increases in the short term, it stabilizes at about 24 percent of GDP in 2015 and declines thereafter, reaching about 17 percent of GDP at the end of the projection period.

6. Stress tests and alternative scenarios show that Burkina Faso’s debt outlook is vulnerable to a large shock to exports and to less favorable financing terms. The main vulnerabilities are linked to: (i) lower exports; (ii) a combination of lower GDP growth and lower net non-debt-creating flows; and (iii) a lower share of grants in external financing. In particular, the PV of debt-to-exports ratio deteriorates significantly if exports growth stays low and below historical levels (Table 2).

Table 1.

Burkina Faso: External Debt Sustainability Framework, Baseline Scenario, 2007-2030 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections, capital transfers are included—in particular project grants and private, non debt-creating capital inflows. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.

Burkina Faso: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010-2030

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

7. Because Burkina Faso’s risk of debt distress is high, and because of weaknesses in debt management capacity, the country does not qualify for nonconcessional borrowing in the context of the new debt limits policy. Consequently, under the new ECF-supported program, the authorities have agreed to refrain from contracting or guaranteeing any loan with a grant element lower than 35percent, and to improve debt management capacity, in the context of a national plan to strengthen public debt management capacity published in September 2009. To support the implementation of this plan, Burkina Faso would benefit from TA from AFRITAC in 2010-11 and from UNCTAD in 2010-14. The authorities also indicated that they plan to request an update of the 2008 World Bank Debt Management Performance Assessment (DeMPA) to assess progress in strengthening debt management capacity and identify priority areas for further improvement.

8. The authorities noted the importance of stabilizing and reducing the stock of external debt, while underscoring that this should not come at the expense of the country’s accelerated growth objectives. They wished to emphasize that what mattered most from their perspective was the efficient use of external financial support for essential infrastructure investments, as these could play a key role in generating faster GDP growth and raising per capita income. In addition, they insisted on the importance of ensuring the predictability of donor disbursements, and of budgetary support in particular, because unexpected shortfalls could lead to the costlier domestic financing of priority expenditures.

9. A country-specific scenario assuming a scaled-up aid points to a significant improvement in Burkina Faso’s debt outlook.5 In particular, the medium performer threshold for the PV of debt-to-exports ratio is no longer breached, as its maximum value in 2020 reaches 146 percent, bringing Burkina Faso’s risk of debt distress to a moderate level (Figure 4). The Burkinabè authorities welcomed the inclusion of this scenario, while underscoring their commitment to achieve debt sustainability through policy-driven factors. They indicated that despite worrisome signals concerning a possible reduction in official development assistance, they would continue to make efforts to secure a higher share of grant financing, including for much-needed infrastructure investments.

10. A continued improvement in policies and strengthening of institutions that would lead to a higher CPIA rating would also move Burkina Faso to a lower risk of debt distress. This would come because of Burkina Faso being considered as a strong performer, with the corresponding threshold for the PV of debt-to-exports ratio increasing to 200 percent. If such a scenario were to materialize in 2012, it is worth emphasizing that IDA and AfDB allocation volumes would only be reduced by 10 percent, rather than 20 percent, as is currently the case.

III. Public Sector Debt Sustainability Analysis

11. The results for the fiscal DSA are similar to those for the external DSA. Notwithstanding an increase in 2009, domestic debt remains low, amounting to approximately 4 percent of GDP at end-2009. Moreover, it is assumed to decline rapidly over the projection period as the authorities seek to contain financing from the regional bond market because of its high cost (Table 3). As a result, public debt dynamics are largely determined by changes in the external debt.

Table 3.

Burkina Faso: Public Sector Debt Sustainability Framework, Baseline Scenario, 2007-2030

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

12. Public debt indicators would considerably worsen in the absence of fiscal consolidation and prudent borrowing policies. The standard sensitivity tests show that public debt outlook is particularly vulnerable to persistent large primary deficits, leading to a significant deterioration in the PV of debt-to-GDP and the PV of debt-to-revenue ratios (Table 4, scenario A2, and Figure 4). Thus, failure to reduce the current level of budget deficits would lead to ever-increasing debt indicators. In this regard, the authorities’ commitment to unwind the fiscal stimulus provided in 2009 and 2010 will contribute to debt sustainability from 2011 onward.

Table 4.

Burkina Faso: Sensitivity Analysis for Key Indicators of Public Debt 2010-2030

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

IV. Conclusion

13. Burkina Faso’s risk of debt distress is high because of its narrow export base, which leads to a breach of the PV of debt-to-exports ratio. All other debt indicators remain well-below their policy-dependent thresholds in the baseline scenario. The high risk of distress underscores the importance of limiting external borrowing to highly concessional loans, maintaining a prudent fiscal policy to limit the accumulation of new debt, including by sustaining the ongoing tax reforms, and making continued efforts to diversify and increase exports. Efforts to secure a higher share of grant financing to reach the same level as in 2009 would lower the risk of debt distress.

1

Prepared by the IMF and World Bank staff, in collaboration with the Burkinabè authorities and staff of the African Development Bank. The previous joint DSA, carried out in June 2009 (IMF Country Report No. 09/222, IDA Report No.48468-BF (Ninth Poverty Reduction Support Grant to Burkina Faso) was updated by IMF staff in November 2009 (IMF Country Report No.10/7).

2

With a three-year backward moving average CPIA (Country Policy and Institutional Assessment) for 2006–2008 of 3.71 that is below the 3.75 benchmark for strong performers. The threshold of the PV of debt-to-exports ratio is 150 percent for medium performers and 200 percent for strong performers.

4

Projections assume that 50 percent of overall financing needs are met through grants. The remaining 50 percent is met through loans that incorporate a grant element of at least 35 percent, growing over time as the relative share of multilateral creditors in the overall stock of outstanding debt increases.

5

The scenario assumes that 60 percent of financing needs are met through grants, which is lower than the 65 percent observed in 2009. Such a level of grant financing still implies that aid per capita for Burkina Faso would remain significantly below the level required to meet Gleneagles commitments. In 2009, aid per capita amounted to US$30.5 in real terms compared with the 2005 target of US$85 by 2010.

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Cover IMF Staff Country Reports
Burkina Faso: Request for a Three-Year Arrangement Under the Extended Credit Facility: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Burkina Faso
Author: International Monetary Fund
Volume/Issue:
Volume 2010: Issue 197
Publisher:
International Monetary Fund
ISBN:
9781455207510
ISSN:
1934-7685
Pages:
92
DOI:
https://doi.org/10.5089/9781455207510.002