Abstract
In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
An Overview of the Cotton Sector in Burkina Faso1
In spite of its small share of GDP and diminishing share of exports, cotton remains a principal source of livelihood for the rural population. However, the sector is vulnerable to a number of factors, such as weather, international prices, and exchange rates. Burkina Faso has put in place reforms to improve the resilience of cotton income against these vulnerabilities while enhancing productivity. While the state-owned cotton ginning company and income and price stabilization schemes do represent contingent fiscal liabilities for the government, compensatory income transfer schemes would be more costly still.
1. Although comprising only 3.5 percent of GDP in real terms, cotton supports a large share of the rural labor force in Burkina Faso, and represents 18 percent of goods exports as of 2013 (down from as high as 60 percent prior to the gold boom). The World Bank estimates that between 15 to 20 percent of the labor force derives its income directly from cotton.2 Thus, cotton effectively plays the role of the social safety net in Burkina Faso. A number of structural reforms (Box 1) contributed to one of the highest growth rates of cotton production in West Africa, a three-fold increase from late 1990s to mid 2000s and more recently outpacing average growth of production in West Africa (Figure 1). Moreover, various public policies, such as the establishment of the stabilization fund and provision of affordable fertilizers, have been introduced to increase the resilience of cotton income against volatility. Despite these successes however, the sector faces various risks, and exposes government to contingent liabilities. The policy challenge is to find solutions that limit the fiscal risks and continue structural reform while appreciating the importance of the sector as a source of livelihood.
Cotton Production
(thousand metric tons)
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Source:National Cotton Council of AmericaCotton Production
(thousand metric tons)
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Source:National Cotton Council of AmericaCotton Production
(thousand metric tons)
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Source:National Cotton Council of AmericaBurkina Faso: Reforms and Productivity
From the second half of the 1990s to early and through mid-2000s, production experienced remarkable growth, an increase of nearly three-fold. Although, expansion of cultivated land can explain a large part of this increase, especially in the earlier years, certain structural reforms deserve mention.
Principle of “free-adhesion” by which farmers could join production groups individually instead of being tied to a village allegiance increased incentive and self-initiative. In addition, responsibility for coordination of the sector passed to an inter-professional association comprised of the national farmers’ and ginners’ associations. These reforms encouraged better market coordination along the value chain and more self-enforcement of contracts; both areas tend to be bottlenecks to performance of cotton industries in the region. At the same time, access to finance and inputs have been facilitated for small farmers, and transportation services are now provided by the private sector. Better training in irrigation and crop rotation, higher quality seeds to farmers in addition to the more efficient application of GMO technology comprise the more recent reform efforts. For example, Burkina Faso has been at the forefront of embracing GMO cotton in Africa, and has successfully reduced the number of required insecticide treatments per seed from eight to two. Hand-picking, combined with higher standard testing and better quality achieved from GMO at cheaper cost has made Burkina Faso one of the premium suppliers of cotton in the world.
On the other hand, expansion of input factors, namely land and labor played an undeniable role in the rise of production, especially in the earlier years. In fact, cultivated land expanded from 74,000 hectares in 1981 to 406,000 hectares in 2003, bringing to relief the issue of long-term land sustainability. However, per hectare production showed improvements in recent years. For example, overall production per hectare increased 4.6 percent in the last two harvests. Some estimate that GMO cotton increased yields by an average of 18.2 percent over the conventional variety (Vitale et. al, 2011) While the two private companies operating alongside SOFITEX, Faso Coton and SOCOMA historically had higher productivity, SOFITEX’s productivity, measured as production per hectare has improved, having risen 14 percent in the last three years to 1000 kg per hectare. This has been partly due to the pressure of competition, but also the fruition of aforementioned reforms.
A. History
2. The history of large-scale cotton production in Burkina Faso goes back to the colonial era when it was managed by the French administration through a combination of coercion and incentive, but with little success that often resulted in subsistence crises. Since then, the sector has witnessed much change and upheaval. Subsequent to independence in 1960, cotton was well integrated into the economy with heavy state involvement. In 1979, Compagnie Francaise pour le Dèveloppement des Fibres Textiles, (CFDT) partnered with the Burkinabé authorities to coordinate production and exportation, eventually culminating in the emergence of SOFITEX, the state-owned ginning company.
3. In 2004, SOFITEX sold some of its ginning capacity and regional production rights to two companies, Faso Coton and SOCOMA, which currently control roughly 20 percent of production. The partial selling occurred mainly as a result of liberalization reforms encouraged by the World Bank. The sale was made more attractive by giving exclusive rights to production zones to the two companies, which are owned by a mix of private investors, both foreign and domestic, as well as quasi-state actors such as the Burkinabé transportation company (SOBA).
4. Between 2006 and 2011, three year moving average of production decreased 17 percent, (Figure 2) even though in the last two years, production made a recovery, outpacing regional growth trends to make Burkina Faso the largest producer in the region. At the same time, weather patterns became more volatile and difficult; there was a severe drought in 2011 that resulted in a 12 percent drop in overall agricultural production. The emergence of gold pushed cotton out of its position as Burkina Faso’s primary export. More recently, there are anecdotal reports that the attractiveness of wages in artisanal gold production has enticed workers away from the cotton sector, although thus far there is no statistical evidence of Dutch-disease effects. Meanwhile, as can be seen in Figure 2, three-year moving average of fertilizer prices have risen significantly between 2006 and 2010, much more so than the rise in cotton price, exposing the sector to a growing difference. The worse scenario would of course be a scissor effect, observed in 2006–07 (that partially led to the difficulties of SOFITEX) where fertilizer prices rise at the same as cotton prices decline. This is a possibility that could arise again, and should be incorporated to a realistic risk analysis facing the sector.
International Prices and Production
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Sources: Burkinabé Authorities, World Economic Outlook and World Bank.International Prices and Production
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Sources: Burkinabé Authorities, World Economic Outlook and World Bank.International Prices and Production
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Sources: Burkinabé Authorities, World Economic Outlook and World Bank.5. To cope with some of these volatilities and trends, with consultation and assistance from donors, the government established various funds to provide support to producers, and stabilize their incomes, namely the Stabilization Fund and the Inputs Fund, discussed below.
B. Economic Structure and Risks
6. The structure of the cotton sector in Burkina Faso is a division of labor between producers and ginning companies. The latter process raw cotton purchased from the producers (farmers grouped in production zones assigned to ginning companies) to manufacture useable lint (ginned cotton not yet spun into thread), 99 percent of which is exported.
Short-term risks
7. Weather, exchange rate, and seasonal volatility of international cotton prices, fuel, and fertilizers comprise the main elements of short-term risk, which the sector partially mitigates through two publicly-managed schemes, the “Stabilization Fund” and the “Input Fund.”
Long-term risks
8. The main long-term risk is a structural downward trend in prices. This is due to an increase in global supplies of cotton in conjunction with waning demand based on the emergence of competing textiles, such as higher quality synthetic fibers and/or cheaper alternatives. Cotton maintained its dominance in the textile market until the beginning of 1990s, and though it was losing relative market share to other products, demand was still increasing in absolute terms until 2008, (ITC, 2013). Thereafter, demand weakened markedly, switching to synthetic fibers. In the meantime, international inventories have been rising. While production is encouraged by a variety of subsidy mechanisms, market absorption rates have been in decline. As can be seen from Figure 3, global exports have not kept pace with fast rising stocks.
Global Demand of Cotton
(thousands of 480-pound bales)
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Source: National Cotton Council of AmericaGlobal Demand of Cotton
(thousands of 480-pound bales)
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Source: National Cotton Council of AmericaGlobal Demand of Cotton
(thousands of 480-pound bales)
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Source: National Cotton Council of AmericaContingent liabilities
9. Both the short and longer term risks give rise to potential liabilities for the government budget. First is SOFITEX’s financial position, and the question of potentially continuing and growing state support going forward, (Box 2). In 2007, SOFITEX underwent major restructuring with an injection of 16.4 billion in capital. Furthermore, the viability of SOFITEX’s business plan assumes relative price stability at high levels in the absence of which further losses would be inevitable.
10. Second is the liability arising from the need to replenish the smoothing fund established to protect farmer income (Box 3). If cotton prices assume a lower trajectory, and there is pressure to maintain the existing levels of the purchase price offered to farmers, this would cause additional pressure for further transfers out of the budget.
Burkina Faso: SOFITEX Building on a Legacy
Following independence, a cotton company (Sociéte Voltaïque des Fibres Textiles) was founded, with 1.1 billion CFAF in capital, divided among the government (55 percent), the CFDT, (44 percent) and domestic private investors (1 percent). In 1981, after a capacity expansion, capital was doubled, and doubled again in 1984, to 4.4 billion, with the government’s share rising to 65 percent. The company was then renamed “SOFITEX” (Burkinabe Society of Textile Fibers). In the early 1990s, state participation scaled back amidst increasing pressure to open up the sector to market reform. Following various structural reforms, the state sold half of its share to producers’ organizations for one symbolic CFAF in 1999.
Subsequent reforms aimed at liberalization while maintaining the benefits of an integrated sector. The monopoly of SOFITEX was broken following the 2004 partial selling of its ginning plants, with two additional players, Faso-Coton and SOCOMA, which split the remaining market share. However, volatility in international cotton prices, rising fertilizer prices, combined with CFAF appreciation caused losses, which resulted in a major restructuring of SOFITEX’s capital in 2007. SOFITEX accumulated serious losses from 2005 to 2008, rising to more than 2 percent of GDP. The situation led to a number of difficulties, including an escalating loss of confidence with creditors, which made operations, especially provision of input credits, increasingly difficult. A new financial restructuring took place in 2012, through: (i) revaluation of SOFITEX’s assets (ii) incorporation of 2010 losses; and (iii) capital injection of 16.4 billion by the government. In 2012, the government provided transfers amounting to CFAF 21 billion to SOFITEX.
SOFITEX is the largest of the three ginning companies, and retains 80 percent of total cotton production in the country. It provides research and other supporting services to the other two companies, and has provided ginning services to them when their yields exceeded their capacity. While the relationship between the three companies is cooperative, SOCOMA and Faso Coton are still seeking to acquire larger market shares from SOFITEX; further redistribution of the regional coverage has been under negotiation for the past two years.
Evolution of Capital Structure
Evolution of Capital Structure
| 1979 | 1981 | 1984 | 1999 | 2007 | 2012 | |
|---|---|---|---|---|---|---|
| Capital (CFAF Bn) | 1.1 | 2.2 | 4.4 | 4.4 | 38.68 | 19.52 |
| Burkinabè State | 55% | 63.66% | 65% | 35% | 65.44% | 94.46% |
| o/w FBDES | 30.28% | 4.85% | ||||
| CFDT | 44% | 35.34% | 34% | 34% | 3.87% | 0.62% |
| Cotton producers | 30% | 30.14% | 4.83% | |||
| Burkinabè private sector | 1% | 1% | 1% | 1% | 0.55% | 0.09% |
Evolution of Capital Structure
| 1979 | 1981 | 1984 | 1999 | 2007 | 2012 | |
|---|---|---|---|---|---|---|
| Capital (CFAF Bn) | 1.1 | 2.2 | 4.4 | 4.4 | 38.68 | 19.52 |
| Burkinabè State | 55% | 63.66% | 65% | 35% | 65.44% | 94.46% |
| o/w FBDES | 30.28% | 4.85% | ||||
| CFDT | 44% | 35.34% | 34% | 34% | 3.87% | 0.62% |
| Cotton producers | 30% | 30.14% | 4.83% | |||
| Burkinabè private sector | 1% | 1% | 1% | 1% | 0.55% | 0.09% |
Challenge for the future: reducing the government share:
The main strategy of SOFITEX is to return to a sustainable financial profile in order to make the company more attractive for divestiture of the state’s ownership while safeguarding the incomes of farmers and extended families that rely on the company. To put the company on a sounder financial footing, the SOFITEX 2012–16 business plan aims at (i) increased productivity; (ii) restoring profitability; and (iii) diversification to other crops. Among other priorities, the plan seeks cost cutting and sounder investment choices. In line with these objectives, the authorities updated the financial projections for 2013–16 underlying the SOFITEX business plan based on financial results for the 2012 fiscal year (program structural benchmark). The revised financial projections foresee a strong increase in profits from 2012 to 2016 on account of lower costs and improved sales. Based on this and other updated projections (international prices, yields, cultivated land, etc.) the authorities are doing a more comprehensive update of their business plan (end-December 2014 structural benchmark). In the lead up to the 2nd review of the ECF arrangement, staff will discuss with the authorities in more detail the updated financial projections, with the intent of better understanding whether they provide a realistic and cautious basis for an updated business plan that can restore the financial sustainability of SOFITEX. Staff have sketched out three possible scenarios going forward based on the updated figures of the 2012–15 business plan:
| Scenario 1 status quo: | Purchases and sales of raw material follow the market trends, other expenses follow the consumer price index (CPI); productivity of operating factors is kept unchanged; income taxes are forgone to the company; and government transfers balance the company’s losses. | Company’s income drops continuously and the government needs to make further transfers to restore balance. |
| Scenario 2: cost cutting (e.g. business plan’s objectives) | Productivity of operating factors (workforce and transportation) improves by 0.5 percent over three years; savings are made on outsourcing and other expenses to an amount of 5 percent yearly; income tax is forgone to the company; and government transfers balance losses. | The company recovers slight net worth, but still needs significant transfers. |
| Scenario 3: cost cutting +more flexibility | In addition to scenario 2, revenue from sales increases by 3 percent the first year and stabilizes afterwards, expenses from purchases follow the market trend, and government transfers stabilize from 2014 onwards. | Company recovers moderate profitability, and starts re-investing. Government transfers stabilize. |
| Scenario 1 status quo: | Purchases and sales of raw material follow the market trends, other expenses follow the consumer price index (CPI); productivity of operating factors is kept unchanged; income taxes are forgone to the company; and government transfers balance the company’s losses. | Company’s income drops continuously and the government needs to make further transfers to restore balance. |
| Scenario 2: cost cutting (e.g. business plan’s objectives) | Productivity of operating factors (workforce and transportation) improves by 0.5 percent over three years; savings are made on outsourcing and other expenses to an amount of 5 percent yearly; income tax is forgone to the company; and government transfers balance losses. | The company recovers slight net worth, but still needs significant transfers. |
| Scenario 3: cost cutting +more flexibility | In addition to scenario 2, revenue from sales increases by 3 percent the first year and stabilizes afterwards, expenses from purchases follow the market trend, and government transfers stabilize from 2014 onwards. | Company recovers moderate profitability, and starts re-investing. Government transfers stabilize. |
Burkina Faso: Stabilization Fund (Fonds de Lissage)
To protect the income received by farmers in light of fluctuating international prices, a smoothing fund was established (Fonds de Lissage) in 2007. It was financed by a 15 million euro loan and 3 million euro grant from the French Development Agency, amounting to an initial capital of 11.8 billion CFAF. The basic concept is that farmers are subsidized in years when prices are low, and the fund is replenished in years when prices are high. In the beginning of the season, the cotton association announces a “floor price” (the same for all the three companies), which is 95 percent of the “Pivot price”, a reference based on the average international price of the fiber in the last three years. This is subject to various adjustments based on the recovery rate of the fiber, export value and farmers’ debt to the ginners. Farmers are paid the adjusted floor at the delivery of the cotton. At the end of the season, the “ex-post” price of cotton is calculated using the average sale price during the season. If the “ex-post” price is between 95 percent and 101 percent of the pivot price, producers receive a refund. If the “ex-post” price is lower than the floor price, ginners receive a compensating payment from the stabilization fund. If the “ex-post” price exceeds 101 percent of the “pivot” price, the exceeding portion goes partly to the “stabilization” fund, partly to the ginners and partly to the producers. The adjusted floor plus any additional amount based on the ex-post price is the final “purchase price” producers receive. In the 2012–13 harvesting year, there was a significant draw down of funds (9.3 billion CFAF, more than 68 percent) from the Fond de Lissage when prices were relatively high, although down significantly from the previous harvest. This begs the question of the medium-term sustainability of the Fund, which is supposed to operate on a counter-cyclical basis, (Figure 5, Table 3). The conversion of the average Factor (in the calculation of the pivot) from 7 years originally to 3 has in fact rendered the model more pro-cyclical due to the bias of recent high prices, (Figures 2 and 3). Preliminary discussions indicated that for the 2013–14 harvest, there was no withdrawal from the Fund.
The Smoothing Fund (Fonds de Lissage)
(in billions of CFAF unless otherwise indicated)
Excludes additional oprations (such as interest received) that bring the current balance to 5.4 billion CFAF.
The Smoothing Fund (Fonds de Lissage)
(in billions of CFAF unless otherwise indicated)
| 2006-07 | 2007-08 | 2008-09 | 2009-10 | 2010-11 | 2011-12 | 2012-13 | 2013-2014 | |
|---|---|---|---|---|---|---|---|---|
| Withdrawal | 8.9 | − | 3.8 | 0 | − | − | 9.3 | 0 |
| Deposit | − | 2.8 | − | 0 | 7.2 | 5.8 | − | 0 |
| Cumulative amount (billions of CFAF) | 2.8 | 5.6 | 1.8 | 1.8 | 7.8 | 13.6 | 4.3 | 4.3* |
| International price (US cens per pound based on Cotton Outlook A Index) | 58 | 63 | 71 | 63 | 104 | 155 | 89 | 90 |
Excludes additional oprations (such as interest received) that bring the current balance to 5.4 billion CFAF.
The Smoothing Fund (Fonds de Lissage)
(in billions of CFAF unless otherwise indicated)
| 2006-07 | 2007-08 | 2008-09 | 2009-10 | 2010-11 | 2011-12 | 2012-13 | 2013-2014 | |
|---|---|---|---|---|---|---|---|---|
| Withdrawal | 8.9 | − | 3.8 | 0 | − | − | 9.3 | 0 |
| Deposit | − | 2.8 | − | 0 | 7.2 | 5.8 | − | 0 |
| Cumulative amount (billions of CFAF) | 2.8 | 5.6 | 1.8 | 1.8 | 7.8 | 13.6 | 4.3 | 4.3* |
| International price (US cens per pound based on Cotton Outlook A Index) | 58 | 63 | 71 | 63 | 104 | 155 | 89 | 90 |
Excludes additional oprations (such as interest received) that bring the current balance to 5.4 billion CFAF.
Prices and Movements in “Fonds de Lissage”
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Source: French Development Agency (AFD).Prices and Movements in “Fonds de Lissage”
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Source: French Development Agency (AFD).Prices and Movements in “Fonds de Lissage”
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Source: French Development Agency (AFD).
Fertilizer Prices (Index, 2007=100) Inputs Fund
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Fertilizer Prices (Index, 2007=100) Inputs Fund
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
Fertilizer Prices (Index, 2007=100) Inputs Fund
Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A002
11. On the other hand, fertilizer and other input costs partially linked to the volatile oil market can put further pressure on the costs of SOFITEX as well as the profitability of the overall sector. An Inputs Fund, (Box 4) has been established, with consultation from the World Bank, to contain these costs for all three companies.
12. However, the less transparent and potentially larger risk would be the increase in social transfers if cotton prices decline more than expected. Since a large cross-section of society depends on the crop for their livelihood, the implied obligation of the government would be to further smooth cotton income (in addition to the explicit mechanism of Fonds de Lissage) in the form of poverty assistance and expansion of social safety nets.
Burkina Faso: Inputs Fund
International fertilizer prices have been volatile while subsidized prices offered to farmers have remained fairly flat to shield the farmer from this volatility, Figure 6. However, this has come with a cost. According to SOFITEX, fertilizer costs comprise roughly half of the end-product value. The Input Fund, established in 2012 (with the formal procedure signed in the summer of 2013), is designed to contain these costs (primarily of fertilizers as well as the costs of other inputs) by serving as collateral specifically backing up input credit lines established by companies in banks that have agreed to provide credits within this framework. The fund works by serving as a guarantee mechanism that enables ginning companies to receive input credit at lower costs and on more flexible, longer terms, potentially allowing better synchronization with the vicissitudes of the harvest. In addition, with more flexible terms, ginning companies can gain information to purchase fertilizers when the international prices are lower in the cycle. All of this would result in lowering the costs of the initial purchase of fertilizers by the companies, enabling them in principle then to sell inputs to the farmers at reduced prices with less distortion from subsidies. Currently, the Fund is capitalized with a 10 billion CFAF capital from the state. Each company is assigned a share of the guarantee (based on the amount of inputs they ordered for the current harvest through their respective banks), which enables them to purchase a minimum of five times their share, but not more than the value of the inputs sold to the farmers, Table 4. Ecobank is retained as the main party responsible for the management of the fund. The mechanism is supposed to begin operations for the 2014–15 campaign, but initial observations by the inter-professional association, AICB, indicate that fertilizer costs for the current harvest have already begun to decline.
Inputs Fund
Inputs Fund
| Amount of guarantee assigned (billions of CFAF) | Percent of share | |
|---|---|---|
| Sofitex | 8 | 78 |
| Socoma | 1.6 | 16 |
| Faso Coton | 6 | 6 |
| Total | 10.2 | 100 |
Inputs Fund
| Amount of guarantee assigned (billions of CFAF) | Percent of share | |
|---|---|---|
| Sofitex | 8 | 78 |
| Socoma | 1.6 | 16 |
| Faso Coton | 6 | 6 |
| Total | 10.2 | 100 |
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Primary contributor was Mehmet Cangul, with contributions by Bamory Ouattara, Jean-Baptiste Le Hen, and Benoit Taiclet.
Kaminski, Jonathan. “Cotton Dependence in Burkina Faso: Constraints and Opportunities for Balanced Growth”, Chapter 6 of “Yes Africa Can: Success Stories from a Dynamic Continent”, World Bank 2011.
