Burkina Faso: Sixth Review Under the Three-Year Arrangement Under the Extended Credit Facility, Requests for Extension of the Arrangement, Modification of Continuous Performance Criterion, and Rephasing of Disbursement—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
25 Jul 2013
eISBN:
9781475532456
Language:
English
Keywords:
ISCR; CR; debt; fund; financing; ECF arrangement; fund staff; spending; GDP deflator; debt risk rating; financing needs; grant-equivalent financing; debt accumulation; Stress testing; Public and publicly-guaranteed external debt; West Africa; GDP increase
Download PDF (478.9 KB)

This paper discusses Burkina Faso’s Sixth Review Under the Three-Year Arrangement under the Extended Credit Facility and Requests for Extension of the Arrangement, Modification of Continuous Performance Criterion, and Rephasing of Disbursement. Domestic revenue collection over performed by a significant margin in 2012, and program performance remains good. In 2012, domestic revenues were higher than targeted by 1.7 percentage points of revised GDP. Lower financing needs resulted in government savings in the banking system. The authorities are prioritizing improvements in public investment planning, spending capacity to meet infrastructure, and training needs that constrain growth.

Abstract

This paper discusses Burkina Faso’s Sixth Review Under the Three-Year Arrangement under the Extended Credit Facility and Requests for Extension of the Arrangement, Modification of Continuous Performance Criterion, and Rephasing of Disbursement. Domestic revenue collection over performed by a significant margin in 2012, and program performance remains good. In 2012, domestic revenues were higher than targeted by 1.7 percentage points of revised GDP. Lower financing needs resulted in government savings in the banking system. The authorities are prioritizing improvements in public investment planning, spending capacity to meet infrastructure, and training needs that constrain growth.

Background and Underlying DSA Assumptions

1. Burkina Faso’s nominal stock of debt as of end-2012 was 28.7 percent of GDP, equivalent to around US$3.2 billion (Table 1). A large portion of this debt (81 percent) is external debt while domestic debt which is comprised of government bonds and short term treasury bills is relatively small (19 percent).

Table 1.

Stock of Public Debt 2009–12

article image

2. Table 2 summarizes the main differences in assumptions between the previous DSA and this one. The main changes in underlying assumptions in this DSA compared to the 2012 DSA are: use of end-2012 data; a stronger institutional capacity assessment; lower discount rate; higher gold production; higher domestic revenues; lower gold prices and inclusion of the authorities’ proposal for non-concessional borrowing tied to four projects.

Table 2.

Changes in Assumptions for the April 2013 DSA vs the April 2012 DSA

article image

3. Other basic macroeconomic assumptions (Box 1) remain unchanged from the 2012 DSA. The GDP growth rate is projected at 7 percent and this robust rate relies on continued improvements in the agricultural sector and anticipated growth in the mining sector. A recent drop in food prices and mostly unchanged retail fuel prices has kept inflation low (projected at 2 percent for 2013) while the current account balance is expected to fall to 1.5 percent of GDP in 2015 from the projected 2 percent in 2013.

Burkina Faso: Macroeconomic Assumptions Underlying the DSA

Real GDP growth is projected at 7 percent per year until 2015. Growth for 2012 has been revised upward to 9 percent. The revisions stem from the use of gold production figures from Customs rather than those of the Ministry of Mines. The growth rate in 2012 captures a 30 percent growth in the agricultural sector and a strong growth in gold production (11.5 percent growth). Longer term real growth is averaged slightly above 6 percent to account for a slowdown in the production of gold and the frequency of weather and other shocks.

Inflation in 2012 was 3.8 percent and year-on-year inflation in March 2012 was 3.6 percent. Inflation is expected to converge to an average of 2 percent over the medium-term.

The current account deficit in 2012 was 2.2 percent of GDP and is expected to stay relatively constant through 2015, reflecting higher imports for public investment offset by growing gold exports. Over the longer term, it is projected to increase gradually to 4.7 percent by 2033, as gold exports decelerate but imports remain relatively constant.

Fiscal deficits (including grants) are projected to increase very gradually, from 2.4 percent of GDP in 2013 to around 2.9 percent in 2032. The reliance on grants drops from 5.4 percent of GDP in 2013 to 1.9 percent of GDP over the projection period.

External debt (24.3 percent of GDP in 2013) includes the new anticipated concessional and non-concessional borrowing totaling CFA 292 billion (US$590.6 million) in the baseline scenario.

Domestic debt assumptions have been changed slightly from the 2012 DSA, that is, there is small constant change in the nominal stock of domestic in the medium term, which is gradually increased in the long term to account for development of domestic and regional bond markets.

4. This DSA is based on end-2012 debt data. Also, historical data has also been revised back to 2008 to harmonize with the authorities’ data.

5. Burkina Faso’s three year average CPIA score increased the institutional capacity classification from medium to strong.1 This raised the indicative thresholds for assessing debt distress. Thresholds corresponding to strong policy performers are the highest, indicating good policies and debt accumulation being less risky.

6. The discount rate used for the DSA has been lowered from 4 percent to 3 percent due to the decrease in the U.S. dollar long-term CIRR.2 Although the net present value of the debt stock increases given the decrease in the discount rate, the simultaneous increase in the thresholds due to the CPIA score keeps the debt ratios in the baseline well below the thresholds. The drop in the discount rate (combined with the terms assumed for the anticipated new borrowing) also affects the average grant element for disbursements when compared to the 2012 DSA. In this DSA, the average grant element drops from 43 to 23 percent in the medium term and is an average of 20 percent over the long term.

7. Export projections are lower in the current DSA compared to the 2012 DSA, reflecting lower gold price projections. In fact, projections for the production of gold are larger than those projected in the previous DSA, due to an upward revision in the base series. The historical series was revised due to new information on gold production provided by Customs, which constitutes a significant upward revision (40 percent in 2012).

8. Gold prices have been on a decline over the last six months, with a sharp drop in April. The price of gold used to project exports in the baseline scenario of this DSA assumes a lower figure compared to the 2012 DSA, in line with variations in WEO projections for international gold prices. World Bank projections for gold in the medium term are somewhat lower. Over the medium term, the lower gold price assumptions have a stronger impact on exports than the upward revision in the base for production projections.

9. New anticipated external borrowing totaling CFA 292 billion (US$590.6 million over 4 years) has been included in the baseline scenario (Box 2). New financing for four large development projects is currently being negotiated by the authorities, who continue to seek external financing on the best terms possible. Investment levels are expected to be maintained at relatively high levels close to 13 percent of GDP over the medium term before gradually declining to 11 percent by the end of the projection period. Growth assumptions remain constant, however. In the medium term, the public investment should have some direct impact on growth, but this DSA includes a conservative assumption that longer term growth rates remain unchanged. Of the total amount of anticipated new borrowing, CFA 156.4 billion (US$ 316.1 million) is expected to be borrowed on concessional terms, and CFA 135.9 billion (US$ 274.5 million) on non-concessional terms. For this, the authorities have requested a modification of the ceiling on non-concessional borrowing from zero to CFA 135.9 billion (US$274.5 million, or 2.2 percent of GDP). The baseline assumes that this amount will be disbursed in four equal amounts starting in 2014 through 2017.

Non-concessional Borrowing

The authorities have identified financing needs totaling CFA 402 billion (6.6 percent of the projected 2013 nominal GDP) for the development of infrastructure in: (i) hydro agriculture; and (ii) transportation.

Two-thirds of the amount is expected to be financed by concessional borrowing (CFA 156.4 billion), domestic resources (CFA 45 billion) and public private partnerships (CFA 65 billion). The remainder will be financed by non-concessional borrowing in an amount of CFA 135.9 billion (2.2 percent of projected 2013 nominal GDP). It is assumed that this borrowing will take place over a period of four years.

The hydro agriculture project involves building a canal 53 kilometers downstream from a dam in Samendeni which would help irrigate approximately 1500 hectares in the regions of western Burkina Faso. The estimated cost for this project is CFA 10 billion. The Islamic Development Bank is expected to be the major creditor for this project.

The infrastructure in transportation includes the development of a new airport at Donsin, located 35 kilometers northwest of Ouagadougou. Various feasibility studies have determined that the cost of construction of the new airport and its related access roads will be CFA 306 billion. CFA 91.5 billion is expected to be borrowed on non-concessional terms. Creditors are expected to be the Islamic Development Bank, the West African Development Bank, the ECOWAS Bank for Investment and Development, and the French Development Agency.

Other transportation infrastructure projects include building highways and urban links. The two road projects are estimated to cost CFA 86 billion, with CFA 34 billion to be financed on non-concessional terms. Main creditors are expected to be the West African Development Bank and the Islamic Development Bank.

External Debt DSA Results

10. The 2013 DSA highlights the inclusion of the anticipated new borrowing into the baseline scenario. In the baseline scenario, all debt ratios remain comfortably below the risk thresholds, mainly due to the higher thresholds, but also due to higher gold production and higher domestic revenues. The analysis shows an increase in PV of debt-to-exports, from 65.9 percent in 2013 to 72 percent in 2015 in the short term, followed by a steady increase to a maximum of 144.6 percent in 2033. This is attributed to the worsening of the PV of debt due to the lower discount rate (3 percent), changes in borrowing and the lower projections of exports as compared to the previous DSA (Table 2).

11. Of the two cases where the threshold is breached in the standardized stress tests, the PV of debt of exports is more pronounced and relevant. The stress test showing stricter terms for public sector borrowing breaches the debt distress threshold for PV of debt-to-exports, slightly at the end of the forecast period. This stress test assumes that, over the period of 2013–2033, the interest rate on new borrowing is 2 percentage points higher than in the baseline with the grace and maturity periods remaining the same. There is also a breach of the PV of debt to GDP after 2028 due to a onetime exchange rate depreciation shock—the 1994 CFAF devaluation notwithstanding, application of this stress test in the context of a monetary union with a pegged currency would not be a valid reason to maintain a debt risk rating of “moderate.”

12. In addition, a customized stress test was conducted to test the sensitivity of the analysis to changes in underlying gold production and price assumptions (Figure 1a). The customized stress test was the same one conducted for the 2012 DSA. The effect of this change on export values was approximated by extending the standardized export shock for three further years (2014–18). This would be more consistent with World Bank projections for international gold prices, which show cumulative price declines of around 17 percent over five years. Under this scenario the debt distress threshold with respect to exports is breached.

Figure 1a.
Figure 1a.

Customized Stress Test

Citation: IMF Staff Country Reports 2013, 235; 10.5089/9781475532456.002.A002

13. Finally, an alternative scenario was explored in which long term growth projections are gradually increased as a result of the impact of the government program to scale up investment (Figure 1b). Staff analysis using DSGE models shows that scaling up investment spending in line with the amounts proposed by the authorities (roughly 2 percentage points of GDP) could add as much as 1.5 percentage points to growth after 8 years. In the alternative scenario considered here, it is assumed that growth remains at an average of 7.0 percent through 2015, and then gradually trends upward to 7.5 percent as of 2033 (as opposed to a gradual decline to 6.0 percent under the baseline scenario). This is a more conservative assumption than the DSGE scaling up result, since the full effect on growth rates takes a decade longer to phase in.3 Under this scenario, there are no breaches of the debt distress thresholds, under either the standardized or customized stress tests.4

Figure 1b.
Figure 1b.

Alternative scenario and Stress Test

Citation: IMF Staff Country Reports 2013, 235; 10.5089/9781475532456.002.A002

Total Public Debt DSA Results

14. The inclusion of domestic public debt in the analysis does not significantly alter the dynamics of debt burden indicators (Table 2a, Figure 2). Under the baseline scenario, the PV of total public debt-to-GDP and total public debt-to-revenue (including grants) ratios are projected to increase steadily over time to reach 36.3 and 168.8 percent at the end of the projection period. In this DSA it is assumed that current domestic debt levels are maintained in the medium term and are increased gradually in the long term to allow for development of domestic and regional bond markets. However, as the share of domestic debt isn’t very large, the total public debt is mostly driven by the dynamics of external debt.

Figure 2.
Figure 2.

Burkina Faso: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2013–20331

Citation: IMF Staff Country Reports 2013, 235; 10.5089/9781475532456.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2023. In figure b. it corresponds to a One-time depreciation shock; in c. to a Terms shock; in d. to a One-time depreciation shock; in e. to a Terms shock and in figure f. to a Terms shock

Conclusion

15. The DSA results indicate that Burkina Faso should remain at moderate risk of debt distress. The baseline scenario shows no breach of debt distress thresholds for any of the indicators. However, the thresholds were breached with two plausible stress tests, the standard DSA stress test on borrowing terms and customized stress test that better reflects the high dependency on underlying assumptions about gold exports.

Authorities’ Views

16. The assumptions and conclusions of the DSA were discussed with the authorities, who broadly concurred with staff’s assessment. They questioned the baseline assumption of zero growth impact of scaled up public investment, thus an alternative scenario has been added to show the impact of a gradual increase in growth due to investment scaling up.

Figure 3.
Figure 3.

Burkina Faso: Indicators of Public Debt Under Alternative Scenarios, 2013–20331

Citation: IMF Staff Country Reports 2013, 235; 10.5089/9781475532456.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2023.2/ Revenues are defined inclusive of grants.
Table 1.

Burkina Faso: External Debt Sustainability Framework, Baseline Scenario, 2010-20331

(In percent of GDP, unless otherwise indicated)

article image
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 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.

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: Total Public Sector Debt Sustainability Framework, Baseline Scenario, 2010–2033

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Medium term and long term general government gross debt

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.

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

Table 3.

Burkina Faso: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2013-2033 (in percent)

article image
article image
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 assuming 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.

Table 4.

Burkina Faso: Sensitivity Analysis for Key Indicators of Public Debt 2013-2033

(in percent)

article image
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.