Burkina Faso: Selected Issues

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.

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.

Mining Sector and Considerations for a Fiscal Rule in burkina Faso1

Gold mining has developed very rapidly in Burkina Faso, within 5 years accounting for ¾ of exports. Its main channel of impact on the economy is via additional fiscal revenues and associated spending for investment and development. In order to take advantage of this one-time windfall, policymakers need to develop and approve a mining taxation code that ensure fair rent-sharing between the government and international investors, and consider a fiscal rule that can help direct the use of these additional revenues towards growth-enhancing spending over a multi-year context, taking into account capacity constraints and commodity price volatility.

A. Development of Gold Mining

1. Mining growth in Burkina Faso, in particular gold production, has been robust.2 Spurred by new discoveries and a generous taxation code designed to attract international investors, gold mining production grew from negligible in 2007 to almost 39 tonnes in 2013, accounting for 71% of exports, and 16% of fiscal revenues. These official statistics are based on 6 mines currently in operation, and artisanal production sold to export companies and reported to customs. However, there has been a boom in informal artisanal production, which could account for as much as 5–20 additional tonnes (Box 1). Production has accelerated far more rapidly than indicated in mines’ original feasibility studies, mainly due to large increases in international gold prices between 2007–12. Although international gold prices dropped in 2013, leading to lower exports and revenues, the volume of production in metric tonnes continued to increase, albeit at a more moderate pace, partly as a result of expanded operations in two large mines.

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Burkina Faso: Gold Production

(in kilograms)

Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A003

2. Burkina Faso is currently the fourth largest gold producer in Africa, with the third most exploration activity in the continent. Existing mines had estimated reserves of about 260 tonnes, but recent discoveries suggest that untapped reserves are far higher. Currently, Burkina Faso is said to have the largest number of identified deposits that are not yet mined in West Africa. Although the physical characteristics of Burkina Faso’s ore deposits are considered “less than remarkable” (KMPG), with a deposit grade of about 2 g/t (grams per ton), new discoveries (which are further south) appear to be of much higher quality. For example, the Yaramoko project between Ouagadougou and Bobo-Dialosso promises to be a very high profit venture, with one of the highest-grade undeveloped deposits in the world (deposit grade of almost 12 g/t). Moreover, although production costs in Burkina Faso and West Africa are generally about 15 percent higher than the world average, press reports indicate that new sites have lower costs (e.g. Yaramoko has production costs of $590/ounce vs. the average of $756). Thus, mining activity is likely to continue at a robust pace for the next 10–15 years, and the potential revenue gains will be even more substantial if international gold prices recover as expected.

Burkina Faso: Gold Production Statistics and Artisanal Production

In the context of the program, the authorities agreed to set up a committee to harmonize official statistics for gold production, which varied between responsible tax administration entities. The committee’s work was completed by March 2014 (program structural benchmark). The committee found that part of the production had been partly been recorded in different units, consequently official statistics for gold production in 2012 were corrected to 35.56 tonnes (from 42.42 tonnes previously), with similar corrections for 2013.

The authorities have not yet incorporated this change into their official real and external sector statistics, but staff and the authorities have already incorporated it into the macroeconomic framework for the program, since it implies an important change in the relationship between gold production/exports and fiscal revenues. For the purposes of the framework, the change in production and exports in 2012 implies a very large upward revision in the current account deficit, from 0.8 percent of GDP at the time of the 7th review to 4.5 percent currently. Once the official statistics are finalized, there may be further offsetting revisions to other aspects of the balance of payments. For the time being, overall growth has been kept unchanged in the framework, since the contribution of the mining sector is modest.

However, beyond the issue of official statistics, that the amount of gold produced by artisanal mines is very likely underreported. A 2011 report by the Ministry of Environment and Social Affairs, as well as in the CES report, assert that 700,000 persons are directly working in artisanal mines. Recorded artisanal production was only 431 Kg in 2011: using 2011 international gold prices and cautiously assuming 500,000 people and zero input costs, this would represent a monthly income of $5 per person, which is very unrealistic, even in a context of low rural incomes. Indeed, the “gold rush” that has taken place in mining regions the past few years—to an extent that there are anecdotal reports that some regions have too few agricultural works) suggests that the activity pays far better.

Some measures promoted by the G8 transparency initiative should help improve estimates of the gold production of artisanal mines: decentralization of EITI to local sites, translation in local languages and dissemination of EITI reports, study on artisanal mines (financed by UNICEF, UNDP, France), reinforcement of customs’ capacities at the local level. Moreover, the INSD is planning a new survey of informal activity in the context of updating the base year for national accounts; this should also help improve estimates of informal mining activity.

B. Macroeconomic Impacts

Real

3. So far, mining appears to have a relatively limited impact for boosting real activity in Burkina Faso. However, the uncertainty about the size of informal artisanal production makes it difficult to get a clear picture. In the national accounts, mining has a weight of 2.8 percent of real activity, which—according to the Ministry of Environment and Social Affairs—could increase to 4–5 percent if informal artisanal mining were taken into account. Overall direct and indirect activity related to mining is growing modestly, since growing export proceeds have mainly financed higher imports.

4. Estimates show that formal mining employs roughly 9,000 people directly and 27,000 people indirectly. Indirect employment is mainly transportation, although enforcement of repatriation rules in mid-2013 should draw more upon the domestic financial services sector. The Ministry of Environment and Social Affairs estimated in 2011 that informal artisanal mining employed 700,000 people directly, with about 500,000 others indirectly benefitting. Thus, they contend that artisanal mining has already become significant in terms of reducing poverty and income inequality in rural areas, not only as a result of employment but also as a result of infrastructure created by the formal mines (artisanal mining mostly takes place in relatively close proximity to the formal mines).

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Burkina Faso: Contribution to GDP Growth

(1999 base year)

Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A003

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Burkina Faso: Real GDP

(CFAF billions, constant 2000 prices)

Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A003

External

5. Gold production is all exported, and exports had risen from 5% in 2007 to above 75% of exports in 2011–12 (dropping slightly in 2013). However, this is has done little to improve external balances since exports have been matched by rising imports. Official transfers remain the main factor for muting the size of the current account deficit.

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Burkina Faso: Gold Exports

Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A003

6. Prior to mid-2013, a large share of export proceeds was kept in offshore accounts to be used for hard-currency transactions, including imports (an adjustment line was added to the balance of payments to help account for this). In mid-2013, however repatriation requirements were enforced and mining companies were prohibited from using offshore forex accounts for anything other than debt payments to parent companies. Export flows are now being repatriated, but commercial banks did not fully respect WAEMU forex surrender requirements, which, among other factors, caused a drawdown in imputed international reserves in 2013.

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Burkina Faso: Current Account

(US$ millions)

Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A003

Fiscal

7. The main channel by which mining affects the Burkinabe economy is through fiscal revenues and associated spending. The bulk of revenues are accounted for by corporate income taxes (roughly 45 percent) and royalties (roughly 20 percent). The current mining taxation code in force is from 2003, and it is relatively generous compared to those of comparator countries (Table 1), particularly the corporate income tax. Even so, overall fiscal revenues increased by 3 percentage points of GDP from 2009–12: revenues linked to gold production were responsible for about 2/3 of the improvement.

Table 1:

Comparison Elements of Mining Taxation Codes in Africa1

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This table does not show exemption periods for corporate income taxes, and does not include other comparisons such as the quality of minerals and mineral content and costs of production.

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Burkina Faso: Fiscal Revenues from Gold

Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A003

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Burkina Faso: Composition of Fiscal Revenues from Mining, 2010–13

(CFA billions)

Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A003

8. Thus, a first priority is to better align the mining and overall tax codes with international best practice to find an optimal balance that still attracts international investors, but ensures maximum fiscal revenues to the government, that can in turn be invested to meet the broad and urgent development needs of the country. Over the course of 2012–2013, IMF staff provided recommendations to strengthen the existing mining taxation code.3 In late 2013, a draft of the revised mining code was sent to Parliament for approval, but in light of falling gold prices and pressure from international investors, Parliament sent the draft back to the government for further revisions. Currently the authorities are working on the draft Code and anticipate resubmitting it to Parliament in fall 2014. Consistent with the objectives of the program, the authorities have committed to guarantee that the revised draft code is at least comparable with peer countries in the sub-region. In the meantime, until a new mining taxation code is approved, it will be important that new production contracts approved under the 2003 Code do not benefit from so many specific exemptions.

9. The improvement in revenue collection since 2007 has enabled increases in domestically-financed investment spending, maintaining investment spending relatively constant in the range of 11–12 percent of GDP (at the same time, externally financed investment spending has remained constant in nominal terms and dropped in real terms). However, the increase in mining revenues outpaced the increase in domestically-financed investment spending by a large margin.

10. That investment spending did not keep pace with revenue increases is a function of binding capacity constraints on execution, as well as pressure for additional current spending, in particular for the public wage bill and untargeted subsidies supporting fixed energy tariffs and public enterprises.

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Burkina Faso: Investment Spending

(CFAF billions)

Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A003

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Mining Revenues

(in % of domestically financed investment spending)

Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A003

11. Execution capacity constraints are one issue, but the quality of additional spending is at least as important for yielding growth dividends. Externally-financed investment spending, subject to more oversight by donors, has not been scaled up at a similar pace as domestically-financed investment spending. This could be a signal that the quality of additional domestically-financed investment spending may be monitored less rigorously. In any case, if gold prices recover and/or if additional reserve discoveries cause large production increases, there is a high risk is that natural resource revenues will increase faster than they can be spent on high quality growth-enhancing investment. Rather, the revenues could instead be used for current spending, either to support inefficient subsidies or in an effort to avoid fiscal surpluses.

C. Program Objective to Improve Management and Use of Natural Resource Revenues

12. Despite the current more uncertain outlook for gold prices, Burkina Faso has to be prepared in order to manage potentially larger increases in mining revenues. The authorities have taken numerous measures to meet high standards of transparency, including achievement of full EITI compliance in February 2013. A first priority is the aforementioned recalibration of the mining taxation regime to ensure fair rent-sharing between the government and international investors. A final priority will be how these non-renewable resources should be used for public investment that can maximize their growth dividend. Capacity constraints clearly limit what can be spent in a single year and revenues themselves are unpredictable: if the resources are not to be wasted, a multi-year planning horizon with rules for spending in any given year is imperative. The country needs prepare and put in place effective rules now, so it does not waste this one-time windfall. Using the FARI model, staff produced a variety of simulations to consider the range of potential resource revenues in the coming years (Table 1). Using conservative production assumptions from the macroeconomic framework, there are varying price assumptions. One scenario uses baseline price assumptions, but introduces a large increase in production.

D. Considerations for a Fiscal Rule

13. Burkina Faso is part of the West African Economic and Monetary Union (WAEMU), and thus already subject to fiscal rules in the form of fiscal convergence criteria, which are currently under revision. In discussions with staff, the authorities–while not opposed to a specific rule for natural resource revenue use–do insist that such rules would have to be considered at the regional level. At a minimum, fiscal rules for natural resources would need to be consistent with revised WAEMU fiscal convergence criteria.

14. With finite resources and extensive development needs, the objective is to direct the use of natural resource revenues toward public spending for development, in particular investment. Burkina Faso’s natural resource horizon is finite, but of relatively long duration. For such LICs with this profile and scarce capital, the key objectives in considering a fiscal rule should be macro stability and spending for development. In Burkina Faso’s case, macro stability is fairly well-established, but the volatility of international commodity prices adds uncertainty to revenue projections and the sustainability of a given spending path. In more developed economies, longer term fiscal anchors are designed to support intergenerational equity for use of the non-renewable resource. Burkina Faso’s pressing social needs imply that future generations would be best served by frontloading growth-enhancing spending as much as possible while still protecting the quality of marginal spending. Thus, a shorter term fiscal anchor would be more appropriate. Ongoing monitoring of the competitiveness of non-resource export sectors is still warranted. Table 3 summarizes the various types of fiscal rules, country experiences, and specific considerations for Burkina Faso.

Table 2.

Macroeconomic Impact of Gold Sector Under Different Price/Production Scenarios

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The Low and High Scenario results are based on the outputs of the FARI natural resource revenue forecasting model.

Table 3:

Fiscal Rule Options for Burkina Faso

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15. The authorities are opposed to dedicated investment funds, since earmarked funds have not worked well in the past. Keeping a large pool of resources for use outside of normal budget processes would render it extremely vulnerable to political pressure, and would undermine institutional capacity for the normal budgetary planning, execution and monitoring processes. Therefore, a fiscal rule would need to apply to the overall budget, attentive to smoothing spending against a volatile resource base and containing spending within execution capacity, either through limits on spending and/or the fiscal balance. The point would be to build in a margin of countercyclicality such that in times of plenty the fiscal balance is constrained—even allowing a budget surplus—so that some revenues can be saved, to be used in the future in times of need. Additional considerations for a fiscal rule are institutional constraints, the still relatively high level of grants received, and the need for simple rule that can be broadly understood and approved in domestic legislation.

16. Price-based and fiscal balance anchors require frequent decision-making and/or ongoing revenue/GDP projections to determine the annual spending envelope. The non-resource primary balance rule requires objective projections of non-resource revenues and the ability to measure non-resource GDP—both of which would be difficult to do objectively with the current budget planning processes. The current balance rule can help direct resource revenues toward additional investment spending by setting constraints on current spending, but suffers similar problems with the annual budget process. In addition, it requires a clear distinction between current and investment spending that: (1) does not take into account that some development spending is necessarily operational in nature (i.e. teachers, doctors, free school lunches); and (2) lends itself to abuse in practice since spending can be easily re-categorized. A price-based rule requires an independent committee to set a limit on the annual deficit based on anticipated revenues given international price projections. Again, this type of frequent decision making that requires objective forecasting may be vulnerable to political interference. For example, revenue projections in the budget are often increased by parliament, and an automatic price adjustment mechanism for fuel prices is in place, but does not function.

17. On balance, a multi-year expenditure growth rule might be more straightforward, both operationally and intuitively. The point of the rule would be to smooth spending in line with realistic capacity to execute high quality spending, and to protect medium term expenditure planning against pressure from volatile resource revenues. A spending growth rule would be set on a multi-year basis, with a review/readjustment required at regular intervals (every 3 years for example) to account for capacity improvements, structural commodity price trends, and/or higher growth. Such a rule would not direct spending toward investment, per se, so the composition of spending would have to be monitored carefully, but it would avoid ad-hoc spending adjustments in response to volatile revenues (in particular to avoid budget surpluses). It would be important to consider what type of public financial management capacity would be needed to help monitor composition of spending, since the 2014 Fiscal Monitor provides some evidence that the presence of expenditure rules tends to be associated with lower investment in emerging market economies that have less developed public financial management systems. Experience in other countries (Peru and Mongolia) suggests that an expenditure growth rule would be more effective if combined with an overall balance or structural fiscal balance rule: in Burkina Faso’s case existing WAEMU fiscal convergence criteria already provide this.

18. Staff did stylistic simulations to explore how an expenditure growth rule might smooth spending (Table 4). Compared to the “high production” scenario (baseline assumptions for international prices and higher production from new discoveries), positive and negative shocks were introduced and spending was determined by simply holding the fiscal balance constant and by introducing an expenditure growth rule. In the constant fiscal balance scenario, spending is adjusted each year to maintain a deficit of 2.6 percent of GDP, representing a conservative level of external and domestic financing. Given the large variation in resource revenues, spending varies dramatically from year to year to maintain the deficit (a large increase during the positive shock and a decrease during the negative shock). Introducing a fiscal rule that allows spending to grow by 9 percent per year (roughly the same as projected nominal GDP growth), maintains a smooth spending path. Assuming the same level of available financing as under the fixed balance scenario, the implied lower average deficit enables some saving of resources during the positive shock that can be drawn upon later to help finance spending during the negative shock. (Savings over time could take the form of less or negative domestic financing, or some type of resource fund for use for the general budget.) For the sake of simplicity, GDP assumptions and interest costs are assumed to be the same across the scenarios: varying these would enhance the positive aspects of the fiscal rule.

Table 4:

Simulation of an Expenditure Growth Rule

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Impact of a Fiscal Rule with Price Shocks

(% of GDP, higher production + baseline price)

Citation: IMF Staff Country Reports 2014, 230; 10.5089/9781498359467.002.A003

References

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1

Primary contributor was Laure Redifer, with contributions from Gregoire Rota-Graziosi, David Corvino, and Liam O’Sullivan.

2

This paper deals primarily with gold mining, since that accounts for the largest value of mining output. Manganese/zinc are higher in terms of tonnage, but much lower in terms of value.

3

Detailed advice was provided over two AFR program missions and an FAD TA mission in May 2013. Key recommendations concerned ring fencing, minimum capital requirements, international taxes, VAT treatment, and establishing an “arm’s length principle” in the mining code and general tax code (transfer pricing).

Burkina Faso: Selected Issues
Author: International Monetary Fund. African Dept.