Burkina Faso: Staff Report for the 2014 Article IV Consultation, First Review Under the Three-Year Arrangement Under the Extended Credit Facility, and Request for Waiver and Modification of Performance Criteria—Debt Sustainability Analysis

EXECUTIVE SUMMARYGrowth remains robust, despite slight downward revisions. Growth estimates for 2013 and projections for 2014 were revised to 6.6 and 6.8 percent, respectively, reflecting weather and weaker terms of trade. Inflation is around zero, partly due to subsidized food prices. The revised 2013 current account deficit rose to 7 percent of GDP, with a drawdown of imputed reserves. The 2013 fiscal deficit increased to 3.5 percent of GDP, reflecting weaker revenues and spending for subsidies, partly offset by higher grants.In line with 2011 Article IV recommendations, the authorities maintained a prudent fiscal stance, despite numerous shocks, and implemented structural reforms that have improved the resilience of agriculture, especially cotton. Social transfers have been bolstered to ensure the benefits of growth are better distributed. An updated external stability analysis shows that the exchange rate is broadly in line with fundamentals, and an updated joint debt sustainability analysis maintains a “moderate” risk of debt distress.Program performance has been satisfactory. The authorities are requesting a waiver for a non-observance in the performance criterion for net domestic financing at end-December 2013, with most other quantitative targets met and all structural benchmarks for end-January and end-March met. Program targets differ mainly due to higher budget support projections. The 3 percent fiscal deficit target for the medium term macroeconomic framework remains unchanged, although with a higher share of current spending.Policy discussions focused on composition and quality of spending, transfers to public enterprises, and natural resource revenues. The authorities recently submitted a supplemental budget that increases the share of current spending for a higher wage bill and more social and public enterprise transfers, but remains within program targets as a result of spending offsets and higher budget support. The authorities are proposing an audit of large public enterprises to estimate needs for the medium term, and inform reforms to reduce transfer needs. The National Assembly did not approve a new mining taxation code byend-2013 as expected, rather, the draft code was sent back to the authorities for furtherconsideration of investors’ concerns.

Abstract

EXECUTIVE SUMMARYGrowth remains robust, despite slight downward revisions. Growth estimates for 2013 and projections for 2014 were revised to 6.6 and 6.8 percent, respectively, reflecting weather and weaker terms of trade. Inflation is around zero, partly due to subsidized food prices. The revised 2013 current account deficit rose to 7 percent of GDP, with a drawdown of imputed reserves. The 2013 fiscal deficit increased to 3.5 percent of GDP, reflecting weaker revenues and spending for subsidies, partly offset by higher grants.In line with 2011 Article IV recommendations, the authorities maintained a prudent fiscal stance, despite numerous shocks, and implemented structural reforms that have improved the resilience of agriculture, especially cotton. Social transfers have been bolstered to ensure the benefits of growth are better distributed. An updated external stability analysis shows that the exchange rate is broadly in line with fundamentals, and an updated joint debt sustainability analysis maintains a “moderate” risk of debt distress.Program performance has been satisfactory. The authorities are requesting a waiver for a non-observance in the performance criterion for net domestic financing at end-December 2013, with most other quantitative targets met and all structural benchmarks for end-January and end-March met. Program targets differ mainly due to higher budget support projections. The 3 percent fiscal deficit target for the medium term macroeconomic framework remains unchanged, although with a higher share of current spending.Policy discussions focused on composition and quality of spending, transfers to public enterprises, and natural resource revenues. The authorities recently submitted a supplemental budget that increases the share of current spending for a higher wage bill and more social and public enterprise transfers, but remains within program targets as a result of spending offsets and higher budget support. The authorities are proposing an audit of large public enterprises to estimate needs for the medium term, and inform reforms to reduce transfer needs. The National Assembly did not approve a new mining taxation code byend-2013 as expected, rather, the draft code was sent back to the authorities for furtherconsideration of investors’ concerns.

Background and Underlying dsa Assumptions

1. Burkina Faso’s nominal stock of debt as of end-2013 was 29.1 percent of GDP, equivalent to approximately US$3.6 billion (Table 1). Although up slightly from end-2012, this amount is lower than what had been assumed in the 2013 DSA (US$3.9 billion). The composition of debt shifted slightly more toward domestic debt, reflecting large issuances of government bonds in 2013, delayed donor disbursements, as well as exchange rate appreciation. About 75 percent of the total stock of debt at end-2013 was external debt, down from 81 percent at end-2012.

Table 1.

Stock of Public Debt 2011–13

(CFAF billions)

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2. Table 2 and Box 1 summarize the main differences in macroeconomic assumptions between the previous DSA (July 2013) and this one. The most significant changes are gold price projections and their attendant impacts; retroactive revisions to gold production data by the authorities (Annex III, Box 1); and WEO projections for nominal exchange rate appreciation through the medium term. In the near term, somewhat lower growth is assumed, although this is harmonized with growth over the medium term. Maintaining spending roughly constant at current levels, these assumptions lead to higher fiscal and external deficits over the medium term. Moreover, the current account balance is expected to deteriorate further starting in 2022 when gold production slows, although there is modest improvement in fiscal and external balances in the longer run, as spending levels and imports adjust.

Table 2.

Changes in Assumptions for the April 2014 DSA vs. the July 2013 DSA

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3. This DSA assumes continued modest use of nonconcessional financing over the forecast horizon. The authorities have already signed contracts using about 60 percent of the program continuous PC on nonconcessional external debt, mainly for the Donsin airport project and a road connecting Dedougou to Tougan northwest of the capital. The authorities have requested an upward modifications of the program continuous PC on nonconcessional external debtby approximately 0.2 percent of GDP in order to finance two additional highway projects (Table a. and Box 2).

Table a.

Non-Concessional Borrowing

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4. The DSA includes both already-contracted and anticipated borrowing on a disbursement basis. The authorities have reiterated their ongoing commitment to rely as much as possible on available concessional financing, but in light of limited concessional resources, this DSA includes an assumption that nonconcessional borrowing will be continued, at modest levels, through the DSA horizon. Consistent with this and the conservative assumption of less concessional financing going forward, the grant element of new borrowing is assumed to decrease gradually over the forecast horizon, especially toward the outer years.

Burkina Faso: Macroeconomic Assumptions Underlying the DSA

Gold prices have dropped significantly since the last DSA. WEO projections have dropped as well, by an average of 20 percent over the forecast horizon.

Gold production is expected to rise steadily over the medium term with discovery of new reserves. The DSA assumes reserves will be gradually depleted after 2022.

GDP growth assumptions are lower in the medium term than in the 2013 DSA, based on the 2013 outturn, the near term outlook, and terms of trade projections. The longer term average remains unchanged at around 6 percent.

The overall fiscal deficit (including grants) is based on relatively stable, but higher spending levels, and revenues that fluctuate in line with gold exports. The deficit increases after gold production slows beyond 2022 and expenditures remain unchanged. In the long run, the deficit begins to improve as spending adjusts.

Debt composition: Domestic debt is assumed to increase modestly through the forecast horizon, reflecting the authorities’ efforts to deepen domestic and regional financial markets. The remainder of the deficit is financed via external debt, but on less generous terms to reflect some nonconcessional financing and a more cautious assumption about ability to borrow at concessional terms going forward (the impact on the net present value is partly offset by use of a higher discount rate, as explained in paragraph 4).

The current account deficit is significantly larger throughout the forecast horizon than in the 2013 DSA, due to the authorities’ revisions to gold production data for 2012 and 2013. This, plus gold price projections, render export projections significantly lower in the current DSA compared to the 2013 DSA. The current account deficit forecast mimics that of the fiscal balance, with a deterioration following an assumption of gradual depletion of gold reserves, with a delay in the adjustment of import levels.

Burkina Faso: Nonconcessional Borrowing

The nonconcessional borrowing for which approximately 83.2 bln CFAF has already been signed relates mainly to the Donsin Airport project and the highway project between Dedougou and Tougan. The remaining 64.5 bln CFAF that has not been signed is envisioned for two additional highway projects. Of this 64.5 bln CFAF, 12 billion is upward adjustment requested to the continuous PC on nonconcessional external debt.

The new airport project involves the revamping of the existing one from the city proper to 35 kilometers northwest of Ouagadougou. A World Bank feasibility study determined that the envisioned benefits would outweigh the costs, and supported its construction. Currently, two loans have been signed relating to the project. The first one is by the amount of 50 bln CFAF, financed by the Islamic Development Bank (BID) at an interest rate of 2.5 percent (grant element of 22 percent); this has been ratified by the National Assembly in March of this year. The second loan, in the amount of 5 bln CFAF, financed by ECOWAS, at an interest rate of 3 percent (grant element of 23 percent), is expected to be official soon.

The remaining loans relate to three highway projects that involve the bituminous surface treatment (BST) of existing roads or construction of new roads with BST treatment to improve road access. BST is usually used on low-traffic roads, but also as a type of sealing to rejuvenate an existing asphalt pavement. The first project for which 28.2 bln CFAF has been signed with BID at an interest rate of 2.5 percent (grant element of 20 percent) is a highway connecting Dedougou to Tougan northwest of the capital, approximately 92 km of distance. The loans for the remaining projects are estimated to be 25.7 and 38.8 CFAF bln respectively, but the financing has not yet been secured. The first project is a construction of a new road between Guiba and Garango, south-east of the country. The second is the construction of two connected highways that eventually connect Kantchari, located to the east of Ouagadougou near the Niger Border, to Tansarga, near the Benin border, involving approximately 70 km of paved road.

DSA Results

A. External Debt

5. The 2014 DSA results are broadly unchanged from the 2013 exercise, reflecting a moderate risk of debt distress (Figure 2 and Table 1). The more pessimistic external and fiscal balances are offset by the higher discount rate, lower starting nominal external debt levels than had been assumed in the 2013 exercise, and revised assumptions about the mix of domestic and external financing. In the baseline scenario, all debt ratios continue to remain below the risk thresholds. Even with the less optimistic fiscal and external outlooks and the assumption for continued nonconcessional borrowing, the PV of external debt to exports peaked at 174.4 percent in 2034, still below the 200 percent debt risk threshold.2

Figure 1.
Figure 1.

Alternative Low Growth Scenario

Citation: IMF Staff Country Reports 2014, 215; 10.5089/9781498329361.002.A002

Figure 2.
Figure 2.

Burkina Faso: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2014–341

Citation: IMF Staff Country Reports 2014, 215; 10.5089/9781498329361.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

6. As in the past, the risk threshold for the PV of debt to exports is breached only in the case of one of the standardized stress tests. The breach is similar to that of the 2013 DSA. The stress test reflects a shock to exports, assuming that the growth of exports is reduced by one standard deviation in 2015–16. Indeed, volatility of gold prices remains an important vulnerability to exports. Under this shock scenario, exports 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 imports.

B. Total Public Debt DSA Results

7. The current DSA assumes a continued modest increase in domestic financing, bringing debt levels higher relative to the 2013 DSA, although the debt to GDP ratio remains below the relevant WAEMU convergence criterion. This assumption stems from progress already underway in expanding the domestic bond market, and plans to expand the regional market and develop more secondary markets. Under a fairly conservative assumption, this DSA assumes close to current terms for new domestic financing, which have fixed bid schemes and may be overly generous given the large oversubscription of recent bond issuances. However, the authorities are already considering variable bid schemes and other means to bring down the costs of domestic financing, and allow more precision for the amounts and timing thereof.

C. An Alternate Lower Growth Scenario

8. To challenge the robustness of the macroeconomic framework projections and the DSA results, staff constructed an alternative scenario. Since a gold price shock was explored in the 2012 and 2013 DSAs and is embodied in the standard stress tests, staff constructed an alternative scenario to test the sensitivity of the analysis to a near term shock to growth, stemming from a drought, but without recourse to additional budget support. In effect, this shock simply exaggerates the existing weather/growth patterns seen in the past. The shock is assumed to hit in the second half of 2014, reducing projected growth from 6.7 to 6.0 percent. The larger impact of the shock is felt in 2015, with projected growth slashed to 4.5 percent (from 6.8 percent). Public spending in 2015 would increase sharply to address food security needs and farm gate price subsidies to cotton farmers in addition to other spending aimed at muting the impact of the shock. At the same time, fiscal revenues would be affected by lower growth, causing a sharp increase in the deficit to 5.2 percent of GDP in 2015 (compared to 3.1 percent in the baseline), taking into account offsetting spending adjustment of 0.5 percent of GDP affecting domestically-financed investment.

9. Without additional budget support, the remaining fiscal deficit would be met by higher domestic financing and more expensive external financing. Of the 2.1 percentage points of GDP increase in the deficit, approximately 10 percent would be financed by additional domestic financing, and the rest would be met by additional nonconcessional external financing. Under this scenario, lower investment spending would be assumed to have an impact on growth and the fiscal deficit over the next 3 years, leading to higher accrual of debt. The current account deteriorates less relative to the baseline, as exports are assumed unchanged (with mining unaffected and cotton affected only marginally due to irrigation and GMO seeds) and lower growth and investment is assumed to have a dampening effect on import demand. The use of more nonconcessional external financing was proxied in the DSA framework by reducing the overall grant element of new financing for the medium term down to an approximate average of 10 percent.

10. DSA results under this scenario show a higher risk of debt distress, albeit with the risk rating remaining “moderate.” On its own this scenario causes a near breach in the PV of debt-to-exports and in combining it with standardized stress tests, both PV of debt-to-exports and debt-to-GDP thresholds are breached. These results, even maintaining gold unchanged, indicate a clearer “moderate” risk of debt distress than the baseline, which is on the cusp of “moderate” and “low.” However, all DSA results should be interpreted with caution, particularly given uncertain assumptions about the investment-growth nexus, outdated national account statistics, and balance of payments data still under revision.

Impact on Main Macroeconomic Aggregates of Weather Related Exogenous Shock

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Conclusion

11. The DSA results indicate that Burkina Faso’s risk of debt distress remains “moderate.” The baseline scenario shows no breach of debt distress thresholds for any of the indicators. However, the debt-distress threshold for the PV of debt-to-exports is breached under the standardized stress test of a shock to exports. An alternative low growth scenario combined with the standardized stress tests, shows an earlier breach of this indicator and a breach of the PV of debt-to-GDP.

Authorities’ Views

12. The assumptions and conclusions of the DSA were discussed with the authorities who broadly concurred with the assessment and with maintaining a “moderate” debt risk rating. They thought that the alternative scenario of an impact on growth due to a weather shock was useful for considering realistic risks. On domestic debt issuance, they indicated that the new regional debt issuance entity, “Agence UMOA Titres” has been established, and that domestic debt will be issued on variable-bid schemes going forward. The authorities reaffirmed their commitment to seek concessional financing to the greatest extent possible, but they continue to be concerned about the limited availability of such financing for large investment projects.

Figure 3.
Figure 3.

Burkina Faso: Indicators of Public Debt Under Alternative Scenarios, 2014–341

Citation: IMF Staff Country Reports 2014, 215; 10.5089/9781498329361.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.2/ Revenues are defined inclusive of grants.
Table 3.

Burkian Faso: External Debt Sustainability Framework, Baseline Scenario, 2011–341

(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 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 4.

Burkina Faso: Public Sector Debt Sustainability Framework, Baseline Scenario, 2011–34

(Percent of GDP, unless otherwise indicated)

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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 5.

Burkina Faso: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2014–34

(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 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 6.

Burkina Faso: Sensitivity Analysis for Key Indicators of Public Debt, 2014–34

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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.