Economic performance has been impressive over the past 4 years, but challenges remain. Political normalization, together with supportive fiscal policy and structural reforms to improve the business climate enabled a strong pickup in economic activity. Growth has been accompanied by a modest decline in poverty, but other human development indicators have been slow to improve. The authorities recently adopted a 2016-20 National Development Plan (NDP) that aims to achieve sustained, strong and inclusive growth. Under the NDP, the private sector would play a major role, supported by a continued expansion in public infrastructure and further structural reforms to improve the business climate. Successful NDP implementation will depend on the pace at which structural bottlenecks are tackled and productivity-enhancing reforms are carried out, as well as on financing conditions and how domestic and external risks are addressed.

Abstract

Economic performance has been impressive over the past 4 years, but challenges remain. Political normalization, together with supportive fiscal policy and structural reforms to improve the business climate enabled a strong pickup in economic activity. Growth has been accompanied by a modest decline in poverty, but other human development indicators have been slow to improve. The authorities recently adopted a 2016-20 National Development Plan (NDP) that aims to achieve sustained, strong and inclusive growth. Under the NDP, the private sector would play a major role, supported by a continued expansion in public infrastructure and further structural reforms to improve the business climate. Successful NDP implementation will depend on the pace at which structural bottlenecks are tackled and productivity-enhancing reforms are carried out, as well as on financing conditions and how domestic and external risks are addressed.

Context and Recent Developments

A. Context

1. Over the past 4 years, Côte d’Ivoire’s economic performance has been impressive, in sharp contrast with the preceding 10 years marked by conflicts and economic stagnation. Political normalization, together with supportive fiscal policy, facilitated by the extensive debt relief under the HIPC and MDRI Initiatives, and reforms to strengthen the business climate have enabled a strong pickup in economic activity. Real GDP grew by 9 percent per year on average during 2012–15, driven by investment and consumption, reversing a decade-long fall in per capita income.

Côte d’Ivoire: Selected Economic Indicators, 2000–15

(Annual average)

article image
Sources: Ivoirien authorities; and IMF staff estimates.
A01ufig1

Real GDP Growth, 1990–2015

(Percent)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Source: IMF WEO.
A01ufig2

Côte d’Ivoire: Real GDP Per Capita, 1965–2015

(Thousands of CFAF)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Source: IMF WEO.

2. Growth has been accompanied by a modest decline in poverty, but other human development indicators have been slow to improve. The poverty rate fell to about 46 percent in 2015 from over 51 percent in 2011. Efforts were made during 2012–15 to make growth more inclusive, including by raising the farm price for coffee and cocoa and other agriculture products and improving basic infrastructure in rural areas. However, there remain significant disparities across the country in education attainment, employment and income (Annex I). The 2015 Human Development Report ranked Côte d’Ivoire at 172 out of 188 countries, with an overall Human Development Index below the average for sub-Saharan Africa.

A01ufig3

Human Development Index: Côte d’Ivoire and Comparators, 1980–2014

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Source: UNDP.

3. The authorities broadly implemented the main advice of the 2013 Article IV Consultation. The policy recommendations aimed at building the foundations for strong growth and focused on ensuring long-term fiscal sustainability, strengthening the financial sector, bolstering external stability and improving the business climate, as well as enhancing governance. Overall, significant inroads were made on all these fronts, but progress in public bank restructuring and financial sector development reform has been slow (Annex II).

4. Following last October’s peaceful presidential elections, political uncertainties have abated, paving the way for continued economic progress. President Ouattara was re-elected in October 2015 to a second mandate. The government has recently adopted a new 2016–20 National Development Plan (NDP) aimed at halving poverty and fostering structural transformation (that is, moving to higher domestic value-added products through the local transformation of a larger share of agricultural products). The authorities have expressed an interest in a new Fund arrangement to support the NDP objectives.

5. Overall, Côte d’Ivoire’s macroeconomic performance has benefitted from the previous two Fund-supported programs. An assessment of the last two PRGF/ECF arrangements shows that they were instrumental at reducing macroeconomic imbalances, normalizing relations with external creditors, as well as putting Côte d’Ivoire’s economy back on a solid growth path (Annex III).2 This assessment also offers a few lessons for the design of a future Fund program engagement, including the need to enlarge the scope of fiscal monitoring to public entities, take into account macro-criticality and capacity in setting conditionality, and improve the quality of economic data.

B. Recent Developments

6. Economic activity has remained buoyant. Real GDP growth is estimated at 8.6 percent, driven by strong investment in the electricity, transport, commerce and housing sectors and solid private consumption.3 Reflecting ample domestic food production and imported consumer products, inflation remained subdued at 1.2 percent. The external current account deficit widened slightly in 2015 as higher investment-related imports more than offset improved terms of trade and exports (Figure 1).

Figure 1.
Figure 1.

Côte d’Ivoire: Real and External Sectors, 2010–15

(Percent of GDP, unless indicated otherwise)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Sources: Ivoirien authorities; and IMF staff estimates.
A01ufig4

Oil and Cocoa Beans Prices

(US dollars)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Sources: IMF, WEO Database.
A01ufig5

Exchange Rate Developments

(CFAF per US dollars)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

7. The fiscal deficit has been contained. Total revenue collection exceeded expectations in 2015, thanks to strong fuel and cocoa tax revenues, as well as higher one-off receipts from the sales of telecommunications licenses, which compensated for shortfalls in direct taxes. Spending fell short of the objective, reflecting the under-execution of externally-financed capital spending, even though poverty-related spending was larger than budgeted. As a result, the overall fiscal deficit was limited to 3 percent of GDP in 2015 (2.3 percent of GDP in 2014) compared to a target of 3.7 percent of GDP, and the basic primary deficit was slightly below its target (Figure 2).

Figure 2.
Figure 2.

Côte d’Ivoire: Fiscal Developments, 2010–15

(Percent of GDP, unless indicated otherwise)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Sources: Ivoirien authorities; WEO database and IMF staff estimates.

8. Public sector debt has increased. Total central government debt rose to 49 percent of GDP at end-2015 from 46½ percent of GDP at end-2014, largely because of a rise in external debt of 2.3 percent of GDP. Public enterprise debt also rose in 2015 to about 3.7 percent of GDP from 3 percent of GDP at end-2014, primarily because of a rise in CFAF-denominated debt.4 Non-CFAF denominated debt was broadly stable in terms of GDP, amounting to 1.4 percent of GDP. Public enterprise debt5 amounted to 1 percent of GDP at end-2015, a slight fall from a year earlier. Almost all other debt is owed to domestic banks. Arrears on public enterprise debt (including on loans on-lent by the government) were lower at end-2015 than a year earlier.

9. Credit has continued to grow at a rapid pace. Credit to the economy increased by 29.7 percent in 2015. Since December 2010, credit to the economy has more than doubled, outpacing GDP growth, while inflation remained low. The rapid rise in credit was facilitated by favorable global conditions, an improved domestic business environment, and accommodative monetary policy, as well as the lowering of the prudential transformation ratio and excess liquidity.6

10. Credit is concentrated in the corporate sector. Credit growth was broad-based across economic sectors, but concentrated on private and public corporations, in particular large small and medium-sized enterprises (SMEs) in the services and manufacturing sectors. Credit to public companies is estimated to represent about 15 percent of new credit in 2015, including borrowing by cash-strapped public energy companies (SIR and Petroci). However, the level of household/consumer credit is still low and mortgage lending remains low owing to the absence of long-term funding.

A01ufig6

Credit, GDP, and CPI

(December 2010 = 100)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Sources: Ivoirien authorities; BCEAO; IMF staff estimates.

Credit by Sector, October 2015

(Percent)

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Sources: BCEAO; IMF staff estimates.Note: Credit growth reflects change between October 2014 and October 2015.

11. Banking sector soundness indicators have deteriorated. The average bank capital adequacy ratio fell to 8.3 percent at end-2015, only slightly above the WAEMU norm of 8 percent, as credit grew without a compensating increase in capital buffers. At present, three banks (out of 26) representing four percent of the system’s assets, do not observe the minimum capital adequacy ratio (CAR).7 Capital buffers in the other banks are generally thin.8 At 10.6 percent in 2015, banks’ non-performing loans (NPLs) in relation to their loan portfolio remain high despite the rapid credit growth over the last three years. Credit exposure risk is concentrated among large corporate borrowers (public enterprises, large private companies in the agro-business, telecom and commerce sectors), which account for about a third of banks’ assets and three times their capital.

Financial Stability Indicators, 2015

(Percent)

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Source: Central bank of West African States (BCEAO).

Loans to 5 largest borrowers relative to total performing loans.

Medium-Term Economic Outlook and Risks

12. The recently launched NDP targets an average real GDP growth of almost 9 percent per year over 2016–20. Under the NDP, growth is anticipated to benefit from strong investment especially in transport and power generation, financed in large part through public private partnerships (PPPs), and a strong private sector response. Inflation would remain below the WAEMU norm of 3 percent, while the fiscal deficit would increase to about 4 percent of GDP before declining toward the regional norm of 3 percent of GDP. The current external account deficit would widen to 3.6 percent of GDP on average, because of the increase in domestic demand, and foreign direct investment and external borrowing would largely finance it.

13. While sharing the authorities’ views about the generally strong growth prospects, staff considered the NDP scenario to be overly optimistic given the prevailing structural bottlenecks.9 Despite increased investment in infrastructure over the past four years, significant gaps still exist. In addition, while staff’s analysis of Côte d’Ivoire’s external competitiveness shows that there is no significant sign of real exchange rate misalignment, weaknesses in structural competitiveness remain despite recent progress (Annex IV). Notwithstanding the improvements in Côte d’Ivoire’s global competitiveness ranking among sub-Saharan African frontier markets and its ranking on the World Bank’s Doing Business Indicators, it lags on indicators such as ease of paying taxes and obtaining credit. International trade is hampered by the high cost or delays caused by international transportation and burdensome import procedures. Also, human capital indicators are weaker than comparator countries, and local employers have noted a lack of adequate skilled labor. Staff argued that these bottlenecks would take time to tackle.

A01ufig7

Measures of Infrastructure Access

(Most recent year available)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Sources: Center for International Comparisons (2015), WEO; and IMF staff estimates.Note: Units vary to fit scale. Left hand axis: Public education infrastructure is measured as secondary teachers per 1,000 persons; Electricity production per capita as thousands of kwh per person; Roads per capita as km per 1,000 persons; and Public health infrastructure as hospital beds per 1,000 persons. Right hand axis: Access to treated water is measured as percent of population.

14. The authorities are upbeat about the prospects of achieving the NDP’s high growth scenario. They observed that the efforts already made to improve the business environment augured well for the implementation of the NDP and considered that the infrastructure gaps could be closed speedily. They stressed that the knowhow acquired during the implementation of the 2012–15 NDP, including on large projects, and programs already launched (such as universal access to schooling, health care and electricity) as well as programs envisaged for professional training should help to rapidly ease bottlenecks. They highlighted their plans to double domestic energy generation capacity over the next few years (to 4000 megawatts), which they viewed as critical for domestic electricity penetration and economic expansion, as well as electricity exports for regional development. They noted that Côte d’Ivoire is increasingly being seen as a good prospect for investors in sub-Saharan Africa. Against the background of satisfactory program implementation over the past four years, as well as improvements in macroeconomic aggregates and investor perception of Côte d’Ivoire, the authorities were convinced that they would be able to raise the envisaged financing for their NDP.

15. The staff’s baseline scenario takes into account policies in place and those announced and are likely to be implemented. The baseline also incorporates the impact of the above-noted structural bottlenecks and implementation capacity:

  • Real GDP would grow by about 7.6 percent per year on average during 2016–20 on the back of continued infrastructure efforts especially in the transport10 and energy sectors, higher investment in the agro-business industry (cocoa, cashew processing and rice) and housing, and strong private consumption.

  • Inflation would remain around 2 percent assuming normal rainfall and favorable global food and fuel prices.

  • The overall fiscal deficit is expected to increase to 3.8 percent of GDP on average over 2016–20 from 3 percent in 2015, as the projected revenue increase (0.6 percentage points of GDP over five years reflecting improved efficiency in revenue administration) will be insufficient to offset higher spending (1.2 percentage points of GDP over 2016–20) arising from public investment and security outlays, as well as higher interest payments. Despite the deterioration in the overall fiscal deficit, central government public debt would decline to about 45 percent of GDP in 2020 (from 49 percent of GDP in 2015), reflecting strong projected GDP growth.

  • The external current account deficit is likely to widen to about 2.9 percent of GDP on average, driven by strong domestic demand. An expected rise in FDI inflows would help finance this deficit.

16. This baseline is however subject to considerable downside risks (Annex V). Financial sector vulnerabilities could trigger a shock to the economy or reinforce the impact on the real sector of non-financial shocks, potentially generating self-reinforcing adverse spillover effects on the economy in the absence of countervailing policy action:

  • On the external front, tighter and more volatile global financial conditions could hinder the financing of both the public and private investments by raising funding costs. The domestic capital market could have difficulty filling the gap due to its narrowness and weakness of banks’ equity capital. Sluggishness in the global economic environment, in particular in emerging markets, presents a downside risk for export demand and prices, as well as on the supply of funds and FDI.

  • On the domestic side, near-term fiscal risks stem from (i) two financially troubled public entities—the savings bank (CNCE), slated for restructuring, and the national oil refinery (SIR—see below)11; and (ii) the need to settle extra-budgetary spending from the previous decade.12 Over the medium term, the fiscal account could be exposed to realization of contingent liabilities from the projected large recourse to PPPs in the government’s investment strategy and the weak profitability of state-owned enterprises. Also, a downturn in the credit cycle could raise NPLs and limit banks’ ability to provide credit given the banking system’s overall low capital buffers. In addition, the threat of renewed terrorist attacks in the region could adversely affect FDI and growth.13

17. The possible macroeconomic implications of the materialization of these risks are assessed in an alternative scenario (Figure 3). Under this scenario, growth would be about 1 percentage point of GDP lower on average per year over 2016–20 than in the baseline mainly as a result of a weaker private sector investment. The overall fiscal deficit would average 5½ percent of GDP compared to 3.8 percent of GDP in the baseline on the back of lower revenue, increased interest payments, public entity restructuring outlays and the settlement of past extra-budgetary liabilities.14 Total central government debt would peak at about 50 percent of GDP, or 3 percentage points of GDP higher than under the baseline. By contrast, under the alternative scenario, the external current account balance would improve slightly reflecting lower investment and growth, averaging 2.4 percent of GDP compared to 2.9 in the baseline.

Figure 3.
Figure 3.

Côte d’Ivoire: Medium Term Outlook, 2013–20

(Percent of GDP, unless indicated otherwise)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Sources: Ivoirien authorities; and IMF staff estimatesand projections.

Policy Discussions

Discussions centered on policies needed to (i) engender sustainable and inclusive growth; (ii) ensure fiscal policy is on a sustainable path; and (iii) enhance banking sector stability and financial inclusion.

A. Structural Transformation and Growth

18. Staff considered the strategy underlying the NDP to be broadly appropriate. The emphasis is on improving the infrastructure and the business climate, as well as on increasing investment on human capital, with the aim of allowing rapid development of the private sector. In addition, financial sector reforms, including the public banking sector would improve financial inclusion and access to credit. However, staff argued that the envisaged large increase in public investment was not consistent with implementation capacity, risked displacing the very private sector activity it was seeking to promote, and, as importantly, faced a difficult financing environment.

19. The recent strong growth pickup has been driven primarily by capital accumulation and productivity gains. Staff estimates that more than half of GDP growth during 2012–15 is explained by the growth-accounting residual, which likely reflects a catch-up in pent-up demand and pick-up in capacity utilization, and productivity improvements; the latter thanks to the government’s efforts to narrow the infrastructure gap, improve agriculture productivity15 and strengthen the business climate. Sustaining high growth, especially with a tapering of catch-up effects, would require further supply-side structural reforms to continue improving productivity.16

A01ufig8

Côte d’Ivoire: Growth Accounting, 1970–2015

(Percent)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Source: IMF staff estimates.

20. The authorities shared the staff’s views on the importance of productivity-enhancing reforms, but were more upbeat than staff on their implementation capacity and ability to mobilize financing. They highlighted ongoing reforms to enhance productivity and make growth more inclusive, including raising agriculture productivity and moving up the value added chain under the National Agricultural Investment Program (PNIA), expanding access to education under the universal schooling program, improving professional training, expanding health care access, and closing the infrastructure gap. They also pointed out the priority given in the NDP to land reform is important for enhancing agricultural productivity and financial inclusion. As noted above, the authorities believe that infrastructure bottlenecks are rapidly being tackled, and public investment implementation capacity and their ability to raise financing are adequate.

B. Preserving Fiscal Sustainability

21. With the economy expanding at a rapid clip and non-trivial liabilities still to be addressed, staff advocated a medium-term fiscal strategy focused on building buffers. In particular, staff argued that gradually reducing the overall fiscal deficit to 3 percent by 2019 would still provide ample room to address infrastructure investment needs while leaving adequate space to address fiscal risks that materialize. Also importantly, such a deficit trajectory is needed for consistency with the government’s commitment to the WAEMU convergence criteria and to help safeguard the BCEAO’s reserve coverage at healthy levels.17 Relative to the baseline, such a deficit path could be achieved mainly through higher revenue mobilization (an additional 1 percentage point of GDP by 2020 by rationalizing tax exemptions,18 broadening the tax base, and further efforts to improve tax administration), and somewhat lower spending growth. This would also be more consistent with the government’s current implementation capacity for infrastructure investment, the regional financial market’s capacity to provide financing without undue pressure on borrowing costs as well as helping avoid crowding out of the private sector.

22. The authorities argued in favor of a higher fiscal deficit. While cognizant of the fiscal risks, they estimated that their envisaged larger fiscal deficit would still preserve fiscal space to cope with these risks and support growth, while preserving long-term fiscal sustainability (given high growth). They acknowledged the need to enhance revenue mobilization, and requested additional Fund technical assistance (TA). While open to undertaking a diagnostics of tax exemption system, they expressed concerns regarding the impact of cutting exemptions on Côte d’Ivoire’s investment attractiveness. The authorities were confident that they would have financing access both on the global and regional markets, given improvements in Côte d’Ivoire’s bond ratings.

23. Implementation of a prudent debt management strategy is essential for the conduct of countercyclical fiscal policy and preserving debt sustainability. The most recent debt sustainability analysis (DSA) indicates that Côte d’Ivoire continues to be classified in the “moderate risk of debt distress” category. Staff considers that the pace of the government’s new borrowing, particularly non-concessional external debt, should take into account the risks of increased vulnerability identified in the most recent DSA,19 including those from public enterprise contingent liabilities. In particular, new borrowing should aim to (i) avoid adding to the bunching of maturities in the mid-2020s from existing sovereign bonds and several large-scale project loans, and (ii) minimize rollover and foreign exchange risks, especially from bullet sovereign bonds. Given the risk of tighter and more volatile financial conditions and more constraints on official bilateral financing, staff advised the authorities to deepen and diversify the domestic and regional creditor base. The authorities re-affirmed their commitment to maintaining debt sustainability and agreed on the need to manage debt service bunching, rollover and foreign exchange risks. They also pointed to their ongoing efforts to deepen and diversify the creditor base, citing the successful launch of the Sukuk bond in 2015—which attracted foreign investors from outside the regional market—and their intention to issue another such bond in 2016.

24. Staff also encouraged the authorities to strengthen domestic debt management. The conversion of non-marketable securitized debt into tradable government securities—by improving cash flows, yield and liquidity—would contribute to the development of the domestic bond market and to financial stability. Implementation of the treasury single account and an active management of public liquidity would permit a reduction of excess liquidity and development of the interbank market. The reduction in unfunded liabilities through the restructuring of the state-owned enterprises, including banks, and the strengthening of their management, would contribute significantly to improving the quality of the banking assets, and thus to increasing the funding of private investment. In response to these recommendations, the authorities highlighted ongoing actions to implement the treasury single account and restructure public banks and the national oil company.

25. Strengthening public financial management is critical to preserving fiscal sustainability. To this end, priority should be given to reforms to improve fiscal transparency and strengthen contingent liability management. Staff advised the authorities to:

  • Improve fiscal reporting by strengthening the integration of the budget and treasury IT systems;

  • Further limit recourse to exceptional expenditure procedures;

  • Enhance, in the context of the newly-developed centralized database for public enterprises, the monitoring of the broader public sector by attaching a comprehensive financial analysis of these enterprises to the budget documentation;

  • Complete the reorganization of the Debt Directorate into front, middle, and back offices, and strengthen the role of the National Debt Policy Committee (noting that sound debt management is even more essential at the time when global financing conditions are tighter and more volatile and financing needs larger); and

  • Strenghten public investment management institutions and set up a framework for the comprehensive conduct of fiscal risk analysis of PPP projects.

Côte d’Ivoire: Public Private Partnerships: Opportunities and Risks

While the public sector still dominates the provision of public infrastructure, in light of large infrastructure needs and in the context of the NDP, the authorities are seeking a larger private sector involvement through public-private partnerships (PPPs). The latest portfolio now includes 114 projects for a total amount of approximately CFAF 14,000 billion (about 75 percent of 2015 GDP), mostly in the transportation (e.g., the metro-rail of Abidjan), energy, animal and fishing, and tourism sectors.

For countries like Côte d’Ivoire with infrastructure gaps and facing financing constraints, PPPs offer opportunities that allow risk sharing between the public and the private sector. On the other hand, PPPs also present risks. PPP contracts can include explicit guarantees; for example, agreements for the government to bear some downside risks associated with the projects that usually take the form of state guarantees to incentivize private sector participation. PPP contracts can also contain implicit guarantees; for example, in case of failure of the private contractor and the government has to pursue the project due to its “public goods” nature. The resulting fiscal cost can be significant if risks materialize. A recent example relates to an implicit guarantee that was triggered on the third bridge due to insufficient traffic relative to contract assumptions (CFAF 12 billion in 2015; 0.07 percent of GDP).

Progress has been made on the transparency front: the website (www.ppp.gouv.ci) of the PPP national committee provides relevant information. Medium-term priorities relate to strengthening existing legal and institutional frameworks to (i) plan, review, approve, and monitor PPP projects; and (ii) assess and monitor fiscal risks associated with PPP projects either individually (e.g., if contract assumptions are not met) or all together (e.g., in event of an overall economic shock).

26. The authorities concurred with staff on the need to enhance public finance management. They emphasized progress made on the development of a centralized database for public enterprises, adoption of a medium-term debt management strategy, and significant reduction of exceptional spending procedures. Acknowledging the need for further efforts in these areas, the authorities indicated that the integration of the budget and accounting IT systems is a key priority of their reform agenda, as well as strengthening cash management and requested technical assistance on PPP fiscal risk assessments.

C. Enhancing Banking Sector Stability and Financial Inclusion20

27. The credit and GDP cycles have moved in tandem. Data from 1976 to 2015 show a strong relation between the GDP and credit cycles with a lag of three to four years, indicating that credit growth tends to follow and amplify the economic cycle. A shock-induced downturn in economic growth in Côte d’Ivoire would lower bank’s risk appetite, leading to credit contraction and possible increase in NPLs, thus exacerbating the economic downturn.

A01ufig9

Côte d’Ivoire: Credit and GDP Cycles

(Hodrick-Prescott decomposition, in percent)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Sources: Ivoirien authorities; BCEAO; and IMF staff estimates.

28. Banks in Côte d’Ivoire are exposed to two sources of vulnerabilities:

  • First, corporations have become increasingly leveraged vis-à-vis the local banks. A tightening in credit conditions in case of a weaker economic outlook would lower corporate profits, contributing to increased NPLs, which would, in turn, constrain credit and growth. The currently thin capital buffers would be insufficient to sustain the continuation of credit growth at the current pace.

  • Second, banks in Côte d’Ivoire have increased their exposure to sovereigns in the region. In 2015, these banks (mainly smaller regional ones) doubled their holdings of other WAEMU governments’ securities21 to 38 percent of their securities portfolio, reflecting less issuance by Côte d’Ivoire in the regional market as a result of greater recourse to external financing. In addition, the yield on Ivoirien government securities was slightly lower than that of other sovereigns in the region.

A01ufig10

Côte d’Ivoire: Sovereign Exposure and BCEAO Refinancing, 2015

(Percent of banks assets)

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Source: BCEAO.

29. The financial sector could amplify external and fiscal shocks, particularly through the corporate sector. Deteriorating external conditions (such as terms-of-trade shocks, loss in access to international capital market, and tightening of regional monetary conditions) would lower bank funding and private sector financing. In addition, reduced official access to international financial markets, shortfalls in budget revenues, and unexpected fiscal expenditures would lead to either (i) increased government reliance on domestic financing, which could crowd out private sector credit or (ii) reduced capital spending, which would lower private credit demand. The contraction in credit, including to the corporate sector, would exacerbate the downturn in economic activity triggered by external and fiscal shocks.

30. In response to the above risks, banks should build appropriate capital buffers in order to mitigate any adverse impact of a reversal of the credit cycle. Staff welcomes the BCEAO’s decision to increase banks’ minimum capital requirements and recommends that the authorities support the enforcement of supervisory decisions. Banks that are not able to meet the minimum capital requirement will need to be merged or liquidated, which will require intervention by the public authorities. The authorities concurred with the need to reinforce capital buffers in the banking system and reiterated their commitment to support the regional banking supervision commission by enforcing the commission’s decisions. In addition, the Fund WAEMU surveillance calls for an acceleration of the transposition of Basel II and III norms into the regulatory framework, which would provide the supervisory authority scope to require countercyclical capital buffers. Also, to minimize exposure to sovereign risks, the Fund’s WAEMU surveillance calls for fiscal consolidation and a gradual reduction by the BCEAO of its refinancing operations.

31. Timely restructuring of public banks would be important to strengthen banking sector solvency and minimize budgetary costs. The lack of faster progress on public bank restructuring was one of the weak points of the last two Fund-supported programs. Staff noted that the precarious financial condition of one public bank, coupled with lack of success of past attempts at improving its management, would justify its resolution—in line with the recommendation of the joint World Bank/IMF mission. The authorities noted that, consistent with their financial sector strategy to reduce the public stake in the banking system, they had sold the public minority share in two public banks, liquidated one public bank, and had slated two other public banks for privatization. However, they had decided to maintain the two remaining public banks in their portfolio to support public policies in specific sectors. Stressing the importance of the ailing public saving bank for financial inclusion, the authorities had decided to restructure it with public resources. Staff noted that the assumptions underlying the restructuring of the bank—with respect to NPL recovery and return to profitability—appeared optimistic. Against this backdrop, staff urged the authorities to undertake a realistic assessment of the budgetary cost of the bank’s recapitalization, as well as modernization costs.22 With regard to the second public bank that the authorities intend to keep operating, staff recommended that they repay early the stock of non-marketable sovereign debt held by this bank based on the issuance in the market of marketable debt.

32. Financial inclusion is weak, as shown by several indicators, and this is impeding growth potential and contributing to gender and geographical inequality:23

  • Access to credit by SMEs and the agricultural sector is limited. For instance, the agricultural sector accounts for less than 6 percent of total loans. The bulk of credit goes to commerce and services, with an overall allocation that does not correspond to the structure of the economy and hinders broadening the sources of growth and diversification.

  • The proportion of adults with an account in a financial institution is lower in Côte d’Ivoire than in frontier markets, and this indicator depicts strong gender and regional disparities.

  • The largest microfinance institution is insolvent. This challenging financial situation impairs access to financial services by the poor segment of the population and thus hinders growth inclusiveness. At the same time, the sector has some modern and sound micro-financial institutions that are providing financial services to lower-income consumers.

33. Côte d’Ivoire will benefit from an improvement in financial inclusion.24 There is scope to expand financial services’ availability through different channels, including mobile networks and retail agents. The challenge will be to continue modernizing the regulatory framework to achieve this while strengthening the resources for supervision and consumer protection. Improving the transparency of fees and conditions of digital financial services could improve consumer understanding and awareness, facilitate the use of a wider range of financial services, and lower costs. Measures that the authorities believe would improve financial inclusion and access to finance include: the restructuring of the CNCE along with the improvement of its management; and the entry into operation of the credit bureau. It would also be important to restructure the micro-finance institutions.

A01ufig11

Côte d’Ivoire: Financial Inclusion Indicators

Citation: IMF Staff Country Reports 2016, 147; 10.5089/9781475519662.002.A001

Sources: BCEAO; and World Bank Enterprise Surveys.

Other Issues

34. Data provision is broadly adequate for surveillance, but shortcomings remain. The authorities provide the required statistical indicators to the Fund generally on a timely basis. While there are still weaknesses in national accounts statistics, the authorities are strengthening the National Institute of Statistics (NIS) with technical assistance from the Fund to improve data quality. Staff has adopted the final 2013 national accounts information provided by the NIS. Staff commends the authorities for the preparation of quarterly national accounts. It recommends a timely finalization of the 2014 national accounts, preparation of those for end-2015 quarterly, as well as the publication of quarterly national accounts data and monthly and quarterly fiscal data. In the external sector, efforts are necessary to improve the coverage of services, transfers, and stocks and flows of the private non-bank sector; the IMF’s Statistics Department plans to start later this year a three-year regional project to help countries improve their capacity to produce and disseminate related data.

35. The authorities appreciated the technical assistance (TA) provided by the Fund (Annex VI). Over the past four years, TA aimed at improving the national accounts statistics, enhancing public finance management, increasing domestic fiscal revenues, bolstering debt management, and guiding public bank restructuring. Overall, TA recommendations were implemented satisfactorily by the authorities. Looking ahead, in line with the authorities’ priorities, TA will focus on the national accounts, tax and customs administration, and public finance management, adoption of the e-GDDS, and harmonization of government fiscal operations with regional norms.

36. The 2013 assessment of the WAEMU regional central bank, BCEAO, found a continuing strong control environment. All recommendations from the assessment have been implemented. These include strengthening the external audit arrangements by appointment of an international firm with ISA experience for the audits of FY15–17, reinforcing the capacity of the audit committee with external expertise to oversee the audit and financial reporting processes, and adoption of IFRS starting with the financial year 2015.

Staff Appraisal

37. Côte d’Ivoire’s economy has achieved an impressive turnaround after a decade-long period of stagnation and more efforts are needed to bolster the achievements. Over the last 4 years, economic activity expanded by 9 percent a year on average translating, into an increase in real per capita income of more than 20 percent. The pursuit of a growth-friendly fiscal consolidation and productivity-enhancing reforms, together with favorable global environment and socio-political climate, were instrumental in achieving this strong performance. However, poverty rate, albeit receding, remains relatively high. Notwithstanding the significant achievements over the past 4 years, more efforts are needed to strengthen policy resilience and cement the path for sustainable and inclusive growth.

38. Medium-term prospects are favorable assuming the implementation of policies and structural reforms that support private sector development. Staff welcomes priority given to improvements in physical and human capital, as well as the business climate. It also praises the emphasis placed on raising the productivity in the agricultural sector, including through the resolution of the longstanding land issues. However, it is concerned that the ambitious public investment plan as well as other developments in the public sector may crowd out the private sector.

39. The challenge for medium-term fiscal policy is to build buffers to face potential headwinds to the implementation of the NDP. Staff calls on the authorities to reduce the fiscal deficit to 3 percent by 2019 in order to preserve space for countercyclical policy in the event of adverse shocks to the economy from protracted slower growth in emerging markets, to contain a rapid buildup of debt in case of the realization of contingent liabilities, and to avoid abrupt spending cuts in the face of tighter global financial conditions. Such a deficit trajectory—which would still provide ample room to address infrastructure investment needs—is necessary for consistency with the government’s commitment to the WAEMU convergence criteria and to help safeguard the BCEAO’s reserve coverage at healthy levels. To achieve this objective, it recommends a combination of a more measured increase in spending and further revenue mobilization through streamlining tax exemptions.

40. Efforts to strengthen PFM should continue. The focus of the PFM reform should be on improving the management of contingent liabilities, given the projected increased recourse to PPPs and the buildup of risks within public entities. Staff underlined the importance of putting in place a framework for assessing implicit and explicit PPP-related fiscal risks. Progress in reducing the recourse to exceptional spending procedures and implementing the treasury single account should also continue. Staff encourages the authorities to improve fiscal reporting by integrating the budget and treasury IT systems.

41. Staff encourages the authorities to pursue a prudent debt policy and strengthen debt management. Staff recommends that the pace of the government’s new borrowing take into account of the risks associated with the realization of contingent liabilities. It underlines the need to avoid an additional bunching of the maturities from new borrowing in the mid-2020s, and a sharp increase in the short term of debt service. Staff welcomes the efforts to diversify and broaden the financing base, including through Sukuk-type bonds and the ongoing reforms to develop the secondary market. Given the prospects of tighter global financial conditions, it encourages the authorities to take forceful actions to deepen and unify the regional market. Staff urges the authorities to complete the long-delayed reorganization of the debt department into front-, middle-, and back-offices, and strengthen the National Debt Policy Committee.

42. Public sector financing pressures on the banking sector could hamper private sector development. The projected rapid scaling up of public investment in the NDP, together with the high level of the public sector’s liabilities vis-à-vis the banking sector, could crowd out the private sector. In this respect, staff recommends a less ambitious scaling up of public investment, aligned with implementation capacity, to reduce the government funding pressures on the banking sector. It also encourages the authorities to clear past off-budget liabilities and restructure loss-making public entities to strengthen the capacity of the financial sector to support private sector development.

43. Strengthening the resilience of the banking sector and fostering financial inclusion are essential for strong and inclusive growth. Given Ivoirien banks’ increased exposure to local corporations as well as to sovereigns in the region, coupled with the rapid increase in credit and associated decline in banks’ solvency, staff calls for a buildup of bank capital buffers. To minimize exposure to sovereign risks, the Fund’s WAEMU surveillance calls for fiscal consolidation and a gradual reduction by the BCEAO of its refinancing operations. Staff reiterates the importance of acting forcefully to resolve the troubled public banks and fully reflect the fiscal cost in the budget. It calls on the authorities to enforce the Banking Commission’s decisions, including concerning the minimum capital requirement. Staff underlines that promoting financial inclusion is necessary for inclusive growth. In this respect, it presses the authorities to modernize the regulatory framework to fully take advantage of the opportunities offered by the development of new information and communications technologies. It also urges them to step up efforts to restructure ailing micro-financial institutions.

44. There is a need to upgrade the production and dissemination of quality economic data to better inform decision makers, market players and the public. Staff welcomes the additional resources in the 2016 budget for the production of timely and reliable national accounts, but calls for further efforts. It encourages the authorities to leverage the capacity building assistance being provided by the IMF and other development partners to improve economic statistics. That said, data provision is broadly adequate for standard surveillance.

45. The next Article IV consultation is expected to take place on a 12-month cycle.

Table 1.

Côte d’Ivoire: Selected Economic Indicators, 2012–20

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Sources: Ivoirien authorities; and IMF staff estimates and projections.

Defined as total revenue minus total expenditure, excluding all interest and foreign-financed investment expenditure.

Central government only.

Table 2.

Côte d’Ivoire: Balance of Payments, 2012–20

(Billions of CFA francs, unless otherwise indicated)

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Sources: Ivoirien authorities; and IMF staff estimates and projections.
Table 3a.

Côte d’Ivoire: Fiscal Operations of the Central Government, 2012–20

(Billions of CFA francs, unless otherwise indicated)

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Sources: Ivoirien authorities; and IMF staff estimates and projections.
Table 3b.

Côte d’Ivoire: Fiscal Operations of the Central Government, 2012–20

(Percent of GDP, unless otherwise indicated)

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Sources: Ivoirien authorities; and IMF staff estimates and projections.
Table 4.

Côte d’Ivoire: Monetary Survey, 2012–20

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Sources: Central Bank of West African States (BCEAO); and IMF staff estimates and projections.